Unit- 3: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-3: Lecture – 5
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?
1. 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.
2. Luxury products for which cost is of little concern to the consumer.
3. Products for which a company can use a differentiation strategy, perhaps though
advertising, to maintain consumer demand without competing on the basis of price.
4. 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.

16. THANK YOU