Product Life Cycle and Other Theories of International

BusinessInternational Trade Theories

The theories

• Mercantilism

• The mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade.

• Absolute Advantage

• Based on Adam Smith’s “The Wealth of Nation”

• A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.

The theories (contd..)

• Comparative Advantage

• According to David Ricardo’s theory of comparative advantage it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the gods that it produces less efficiently from other countries.

• Heckscher-Ohlin Theory

• The theory of factor endowment.

• Factor endowment means the extent to which a country is endowed with such resources as land, labor and capital.

Product Life Cycle Theory

• Raymod Vernon’s Theory

• A product develops in a developed nation and the demand of product is high in the nation but over time the pressure for cost reduction grows.

• The limited initial demand in other advanced countries does not make it worthwhile for firms in those countries to start producing the new product, but it does necessiate some exports from the country of development

Product Life Cycle Theory (contd..)• Over time, demand for the new product grows

in other advanced countries.

• It becomes worthwhile for foreign producers to begin producing for their home markets.

• As the market in these foreign market start to mature, the product becomes more standardized and price remains the only competitive weapon.

• This results in the developing countries to acquire a production advantage over advanced countries.

PLC (contd..)

• Product life cycle is the course that a product’s sales and profits take over its lifetime. It has following distinct stages

• Introduction

• This is a period of slow sales growth as the product is introduced in the market.

• Profits are nonexistent in this stage because of the heavy expenses of product.

• The strategy is to create wide spread awareness.

PLC (contd..)

• Costs are incurred in building distribution and increasing awareness through heavy promotion.

• Growth

• Reaping off the benefit of promotion during the introduction stage.

• This is a period of rapid market acceptance and increasing profit.

• Strategy might be cost based, differentiation or niche market focus.

PLC (contd..)

• Unit manufacturing costs begin to fall as fixed costs are spread over more production units and workers move down the learning curve.

• Maturity

• A period of slowdown in sales growth because the product has achieved acceptance by most potential buyers.

• Profits level off or decline because of increased marketing outlays to defend the product against competition.

PLC (contd..)

• Decline

• A period when sales fall off and profits drop.

• The firm may continue to market the product hoping that competitors will discontinue their products.

• Strategies are to maximize profit by eliminating as many product costs as possible as sales slow, or else to eliminate the product altogether.

Case Ford Mustang

• Introduction: 1964

• Performance increased with the addition of the 428 CobraJet in 1968

• Mach I styling in 1969

• High performance Boss 351 addition in 1971.

• Fuel efficient redesign as Mustang II in 1974

• Fourth generation Mustang in 1994

Elements in PLC

• Design engineering, process engineering, product marketing, and production recurs at each stage of PLC.

• End of life of the product should be handled with care as the product reaches its obsolescence.

Design Engineering

• Design engineering can occur at any stage (multiple times in each stage).

• The process is extensive, elaborate during the introduction stage but “might” be less extensive at later stages.

• Idea validation occurs first, they check their ideas, concept with the market. E.g. if they have conceptualized a new product or service, they check if the concept has viability in the market.

• Technology, manufacturing capabilities, competition, and potential revenues are analyzed in this stage.

Design Engineering (contd..)• The second stage is the conceptual design

where the initial investigations are made into product pricing, performance and styling in a feasibility analysis.

• Specification and design are the third. This is the stage the look and feel of the product and service is developed.

• Prototyping is one of the popular method as constant changes can be done will lesser cost.

• In case of prototyping involves development of a product representing the subtype of the main product and is further enhanced.

Design Engineering (contd..)• Under pilot project concept the product or

service is launched in a test environment and on the basis of the response, modifications is done.

• The final stage is commercialization.

• The chief concern is obtaining the desired level of manufacturing capacity as soon as possible while meeting quality specifications.

• The purpose of any new product introduction is to place a quality product in the market, in desired amounts, at the producing firm’s lowest possible cost.

Design Engineering (contd..)• Constant changes in the product often leads to

the creation of an entirely new product.

• Changes made to the product typically result in markedly higher quality, new features that increase the product’s utility value, and/or improvements in the attractiveness of the product through styling.

• Specification and design are the third. This is the stage the look and feel of the product and service is developed. E.g. Caterpiller’s high-drive crawler tractors, windows operating system.

Process Engineering

• The focus of the process engineering is on the production system (product), delivery and development (service).

• It defines the functions, system, equipment, tooling, layout, and flow used in manufacturing or service operations.

• Bill of materials is a list of separate parts that make up a product/service and gives an idea of the parts that make up the product and the process that shall be followed.

Process Engineering (contd..)

• Laufer’s three basic types of process structures:

• Intermittent operations found in custom firms or job shops in which end item or service specifications are provided by the customer.

• Batch operations found in more standardized products to be produced in higher quantities. The production run is longer.

• Continuous operations with highly standardized product with limited variety and high output.

Process Engineering (contd..)

• Just in time approach.

• Automation requirement

• Maintenance decision

Production

• Production as obvious is when the product or service is developed for delivery.

• It requires standard processes, required resources and trained manpower.

• The quality, quantity specifications must be met during the production stage.

• As sales increase production process speeds up, overhead per-unit costs decrease and direct costs increase.

Production (contd..)

• Manufacturing activity is moderate during initial stage, leaps through growth, peaks at time when demand is highest and falls during decline.

Relationships

• This is where the linkages between the different stages is studied and analysed.

• The first step is design engineering, followed by process engineering, production, marketing and end of life. This is known as the over-the-wall method of product design and development, with each stage separate from the next.

Product Marketing

• Marketing elements (the 4 Ps) Product Price Place Promotion

• High advertising budgets

• The focus can be on “Entire market” or the “niche”

• Once the product becomes established, fewer advertising cost incurs.

Product Marketing (contd..)

• Sales promotion to stimulate awareness and stock clearance.

• “Sales promotion consists of short-term incentives to encourage purchase or sales of a product or service. Whereas advertising offers reasons to buy a product or service, sales promotion offers reason to buy now.”

» (Kotler and Armstrong, 1991)