Talk:Product life-cycle theory

THE PRODUCT LIFE CYCLE (Raymond Vernon, 1966) The logic here is straight forward --there are four stages in a product's life cycle:

• introduction,
• growth,
• maturity, and
• decline,

and the location of production depends on the stage of the cycle. Stage 1: Introduction New products are introduced to meet local (i.e., national) needs, and new products are first exported to similar countries, i.e., countries with similar needs, preferences, and incomes.. If we also presume similar evolutionary patterns for all countries, then products are introduced in the most advanced nations. (E.g., the IBM PCs were produced in the US and spread quickly throughout the industrialized countries.) Stage 2: Growth A copy product is produced elsewhere and introduced in the home country (and elsewhere) to capture growth in the home market. This moves production to other countries, usually on the basis of cost of production. (E.g., the clones of the early IBM PCs were not produced in the US.) Stage 3: Maturity The industry contracts and concentrates -- the lowest cost producer wins here. (E.g., the many clones of the PC are made almost entirely in lowest cost locations.) Stage 4: Decline Poor countries constitute the only markets for the product. Therefore almost all declining products are produced in LDCs. (E.g., PCs are a very poor example here, mainly because there is weak demand for computers in LDCs. A better example is textiles.) Note that a particular firm or industry (in a country) stay in a market by adapting what they make and sell, i.e., by riding the waves. For example, approximately 80% of the revenues of H-P are from products they did not sell five years ago. Graphically, we have the following: The down arrows represent the introduction of a new model based on new technology. Note that this strategy keeps the firm in the high growth and high profit zone. time DETERMINATION OF TRADING PARTNERS Country Differences Theory = "The greater the differences the greater the amount of trade." Differences are due to various factors, including climate, factor endowments, and innovative capabilities. This theory is too simple. For example, the similarity of demand in two countries might induce trade. Therefore, we have the Country Similarity Theory = "The greater the similarities the greater the amount of trade." This is a small leaps theory. If a product is developed in one country, the next best place to sell it is the most similar country. For example, the largest trading partner for the US is Canada, and vice versa. These two countries are strikingly similar. INDEPENDENCE, INTERDEPENDENCE, AND DEPENDENCE Independence - a country alone and apart with respect to trade. (E.g., recently we had Albania, in the past China and Japan.) Interdependence - network of mutual trade exchanges. The generally agreed upon view is that interdependence diminishes the likelihood of both economic and conventional war. (This is the heart of the argument, advanced by Jean Monnet of France, that led to founding of what has become the European Union.) Dependence - there are two kinds of one-way dependence

• Monopolist = single supplier.

(Others will find a substitute.)

• Monopsonist = single buyer.

(Others may lose interest in producing the good.) Dependence is dangerous because the dependent player is vulnerable, i.e., has no diversification for safety. WHY COMPANIES TRADE Companies trade so as to increase revenues, reduce costs, and/or mitigate risk. To use excess capacity, companies seek to increase (world) market share. To reduce costs, companies seek to increase production and sales, and thereby reduce the per unit cost. If you price at the marginal cost of the last item produced, then you get remarkable growth in revenue and market share if marginal cost is dropping. You also gamble that these revenues will cover costs. The best example is DRAM chips--a great strategy for a while; then the market was flooded. Companies increase profitability through international sales because the same item often fetches a higher profit elsewhere, due to differences in life cycle (e.g., cosmetics) or demographics (e.g., baby food). Companies reduce risk through international sales by diversification. Future growth - firms must adapt to changing markets and maturing products. Long term growth is often a reason to enter a foreign market. For example, many large firms are attempting to enter Eastern Europe (particularly Poland and Hungary), or have entered Russia and China in anticipation of the coming changes. Similarly, many have entered Spain and Ireland in an effort to gain relatively low cost entry to the European Union. Finally, many US and European reclamation companies have entered the Eastern European market because it provides a vast number of opportunities. In sum, c o m p a n i e s t r a d e s o a s t o i n c r e a s e r e v e n u e s , r e d u c e c o s t s , a n d / o r m i t ig a t e r i s k , i.e., to increase the expected utility of profit.

Differentiation

There is now a product lifecycle management article, a product life-cycle management (marketing) article and now this product life-cycle theory article. Do you think that there is some redundancy? --Arbraxan (talk) 10:26, 27 March 2013 (UTC)

Dr. Frenken's comment on this article

Dr. Frenken has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

The product lifecycle theory is not only a trade theory as it is depicted here, but also a theory in Industrial organization, in particular, with the early writing by Utterback and Abernathy (1975, Omega), Abernathy an Utterback (1978, Technology review) and Gort and Klepper (1982, Economic Journal).

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Frenken has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : M. Capasso & E. Cefis & K. Frenken, 2010. "Spatial Differentiation In Industrial Dynamics: A Core-Periphery Analysis Based On The Pavitt-Miozzo-Soete Taxonomy," Working Papers 10-21, Utrecht School of Economics.

ExpertIdeasBot (talk) 16:19, 11 July 2016 (UTC)