Unit-2 Lecture-5(International Product life Cycles Theory)

(KMB-302)Unit-2 Lecture-5(International Product life Cycles Theory)

1. Branch - MBA International Business Management DR. APJ ABDUL KALAM TECHNICAL UNIVERSITY By Dr. B. B.Tiwari Professor Department of Management Shri Ramswaroop Memorial Group of Professional Colleges, Lucknow Unit-2: Lecture – 5 International Trade Theories: International Product life Cycles Theory

2. Origin of the theory: Introduction The product life-cycle theory was put forward by Raymond Vernon in the mid 1960s. According to the PLC theory of trade, the production location for many products moves from one country to another depending on the stage in the product’s life cycle. It was based on the observation that most of twentieth century a large proportion of world’s new products had been developed by US firms are sold in US markets first (e.g. mass-produced automobiles, televisions, instant cameras, photocopiers, PCs and semiconductor chips). Vernon argued that wealth and size of U.S Market gave U.S firms a strong incentive to develop new products.

3. Product Life-Cycle Stages 1.Innovation : Innovation in response to observed need Exporting by the innovative country Evolving product characteristics 2.Growth: Increase in exports by the innovating country More competition Increased capital intensity Some foreign production (outsourcing)

4. Cont…… 3.Maturity: Decline in exports from the innovating country More product standardization More capital intensity Production start-ups in emerging economies 4.Decline: Concentration of production in emerging economies (The term of “Rising South”) Innovating country becoming net importer

5. Stage 1: Introduction Innovation, Production, and Sales in Same Country Products are developed because there is a nearby observed need and market for them. Once a firm has created a new product theoretically it can manufacture that product anywhere in the world. However early production occurs domestically to obtain rapid feedback and to reduce transportation cost . Location and Importance of Technology Companies use technology to create new products and new ways to produce old products, both of which can give them competitive advantage. 50 companies worldwide that spend most on R&D are all headquartered in industrial countries. (R&D Scoreboard, Financial Times, June 25,1998) Dominant position of industrial countries is due to competition, demanding consumers, the availability of scientists and engineers and high incomes .

6. Cont… In developed nations like U.S.A which are more focused on research and development innovates a new product for the market. This is the stage for the product when the product is in available in the domestic market only , during this time it has very low market , low competition and low sales margin . This is the time when the product need lots of advertising and promotion to capture market share and this is called innovation / introductory stage. EXAMPLE :- The bulb was invented in USA by Thomas Alva Edison in November 1879 after 3000 test designs the bulb was invented and received the patents rights 4 Jan 1879. This was the innovation stage of bulb.

7. Stage 2: GROWTH As sales of the new product grow, competitors enter the market. Demand grows substantially in foreign markets, particularly in other industrial countries. Demand may be sufficient to justify producing in some foreign markets to reduce or eliminate transportation charges. Rapid sales growth at home and abroad compels firms to develop process technology. The original producing country will increase its exports in this stage but lose certain key exports markets in which competitors commence local production.

8. Cont… Production Stage: A production stage can be too referred as the stage when the product is ready to be launched in the market. In this stage the main target is to meet the target demand to reach scale of economies. EXAMPLE :- After the innovation of the bulb the production was started by Edison Electric illuminating Company of New York in 1880. The demand was huge in the local market .

9. Stage 3: MATURITY At the maturity stage, worldwide demand begins to level off, although it may be growing in some countries and declining in others. Product models become highly standardized, making cost an important competitive weapon. There are incentives to begin moving plants to emerging markets where unskilled, inexpensive labor is efficient for standardized processes. It reduces per unit cost for their output. The lower per unit cost creates demand in emerging markets. Exports decrease from the innovating country as foreign production displaces it.

10. Cont… Export Stage: After reaching the economies of scale or saturating the local market the product will be exported to those country where this product has not launched yet. EXAMPLE :- After capturing the whole market in USA the Addison electric illuminating company exported their product in the regions where bulb was not yet launched.

11. Stage 4: DECLINE As a product moves to the decline stage, those factors occurring during the mature stage continue to evolve. The markets in industrial countries decline more rapidly than those in emerging markets as rich customers demand ever-newer products. The country in which the innovation first emerged and exported from, becomes the importer.

12. Cont… Import Stage : After targeting the global market the companies of the developed nations start transferring their manufacturing units to a developing countries as it gives them more market to tap and low manufacturing cost. EXAMPLE :- After capturing the global market of bulb the edision electric company merged with Thomas Houston electric company and formed GENERAL ELECTRIC and start the production in developing countries like china in 1908.

13. Graphical Interpretation

14. Verification of PLC Theory along: Examples The PLC theory holds that the location of production to serve world markets shifts as the production move through their life cycle. Products such as ballpoint pens and portable calculators have followed this pattern. They were first produced in a single industrial country and sold at high price. Then production shifted to multiple industrial country locations to serve those local markets. Finally, most production is in emerging markets, and prices have declined

15. Limitations of PLC Theory Why shift in production location do not take place for some products? Products that, because of very rapid innovation, have extremely short life cycles, which make it impossible to achieve cost reduction by moving production from one country to another. For example product obsolescence occurs so rapidly for many electronic products. Luxury products for which cost is of little concern to the consumer. Products for which a company can use a differentiation strategy, perhaps though advertising, to maintain consumer demand without competing on the basis of price. Products that require specialized technical labor to evolve into their next generation. This seems to explain the long term U.S. dominance of medical equipment production and German dominance in rotary printing press.

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