4/5/15, 7:29 PMProduct life-cycle theory - Wikipedia, the free encyclopedia

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Product life-cycle theoryFrom Wikipedia, the free encyclopedia

The product life-cycle theory is an economic theory that was developed by Raymond Vernon in response tothe failure of the Heckscher-Ohlin model to explain the observed pattern of international trade. The theorysuggests that early in a product's life-cycle all the parts and labor associated with that product come from thearea in which it was invented. After the product becomes adopted and used in the world markets, productiongradually moves away from the point of origin. In some situations, the product becomes an item that isimported by its original country of invention.[1] A commonly used example of this is the invention, growthand production of the personal computer with respect to the United States.

The model applies to labor-saving and capital-using products that (at least at first) cater to high-incomegroups.

In the new product stage, the product is produced and consumed in the US; no export trade occurs. In thematuring product stage, mass-production techniques are developed and foreign demand (in developedcountries) expands; the US now exports the product to other developed countries. In the standardizedproduct stage, production moves to developing countries, which then export the product to developedcountries.

The model demonstrates dynamic comparative advantage. The country that has the comparative advantagein the production of the product changes from the innovating (developed) country to the developingcountries.

Contents1 Product life-cycle

1.1 Stage 1: Introduction1.2 Stage 2: Growth1.3 Stage 3: Maturity1.4 Stage 4: Saturation1.5 Stage 5: Decline

2 References3 Further reading

Product life-cycleThere are five stages in a product's life cycle:

Introduction

4/5/15, 7:29 PMProduct life-cycle theory - Wikipedia, the free encyclopedia

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GrowthsMaturitySaturationDecline

The location of production depends on the stage of the cycle.

Stage 1: IntroductionNew products are introduced to meet local (i.e., national) needs, and new products are first exported tosimilar countries, countries with similar needs, preferences, and incomes. If we also presume similarevolutionary patterns for all countries, then products are introduced in the most advanced nations. (E.g., theIBM PCs were produced in the US and spread quickly throughout the industrialized countries.)

Stage 2: GrowthA copy product is produced elsewhere and introduced in the home country (and elsewhere) to capturegrowth in the home market. This moves production to other countries, usually on the basis of cost ofproduction. (E.g., the clones of the early IBM PCs were not produced in the US.) The Period till theMaturity Stage is known as the Growth Period.

Stage 3: MaturityThe industry contracts and concentratesthe lowest cost producer wins here. (E.g., the many clones of thePC are made almost entirely in lowest cost locations.)

Stage 4: SaturationThis is a period of stability. The sales of the product reach the peak and there is no further possibility toincrease it. This stage is characterized by:

Saturation of sales (at the early part of this stage sales remain stable then it starts falling).It continues until substitutes enter into the market.Marketer must try to develop new and alternative uses of product.

Stage 5: DeclinePoor countries constitute the only markets for the product. Therefore almost all declining products areproduced in developing countries. (PCs are a very poor example here, mainly because there is weak demandfor computers in developing countries. A better example is textiles.)

Note that a particular firm or industry (in a country) stays 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 didnot sell five years ago. The profits go back to the host old country.

4/5/15, 7:29 PMProduct life-cycle theory - Wikipedia, the free encyclopedia

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References1. Hill, Charles (2007). International Business Competing in the Global Marketplace 6th ed. McGraw-Hill. p. 168.

ISBN 978-0-07-310255-9.

Further readingAppleyard, Dennis R. Alfred J. Field Jr., Steven L. Cobb. International Economics. Boston: McGraw-Hill, 2006.

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Categories: Economics models Stage theories

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