Product Cycle Theory: Vernons Premises Vernon uses two technology-based propositions: Technical innovations, leading to new and profitable products, require large quantities of capital and skilled labor The product and the methods for manufacture go through different stages of maturation. Phase II: Production is perfected in the innovating country and increases rapidly to accommodate rising demand at home and abroad. The innovating nation has a monopoly in both the home and export markets.
Phase III: The product becomes more or less standardized and the innovating firm may find it profitable to license other domestic and foreign firms to manufacture the products.
Thus the imitating country starts producing the product for domestic consumption Phase IV: The imitating country begins to undersell the innovating country in third markets, and production of the product in the innovating country declines Phase V: The imitating country starts underselling the innovating country in the latter's markets as well, and production of the product in the innovating country declines rapidly or collapses Production moves to low cost production locations.
International Product Life-Cycle Most new products initially conceived and produced in the US in 20th century US firms kept production close to the market Minimize risk of new product introductions Demand not based on price yet; production cost not an issue.
Limited initial demand in other advanced countries Exports more attractive than production there initially. With demand expansion elsewhere Product becomes standardized production moves to low production cost areas Product now imported to US and to advanced countries.
The Product Cycle and Trade Implications Explains the competitive evolution of a product, shifting location of production and export to other countries Same firm moving production locations Changing pattern of trade is due to shifting location of production Therefore, country of comparative advantage would change Explains international investment recognizing the mobility of capital factor mobility across countries Limitations Most appropriate for technology-based products Some products not easily characterized by stages of maturity.
Why does a nation achieve success internationally in a particular industry? Why are firms based in a particular nation able to create and sustain competitive advantage against its global competitors in a particular field? Overview Introduced by Michael Porter, a famous Harvard business professor in Conducted a comprehensive study of industries in 10 nations to learn what leads to success Believes the standard classical theories on comparative advantage provides only a partial explanation They do not say why these countries are more productive compared to others A nation attains competitive advantage if its firms are competitive And, firms become competitive through innovations Innovation either technical improvements to the product or to the production process.
Factor Conditions 2. Demand Conditions 3. Related and Supporting Industries. Factor Conditions Key factors of production or specialized or advanced factors like skilled labour, capital and infrastructure are created, not inherited They are difficult to duplicate, and create competitive advantage.
Non-key factors basic factors like unskilled labour can be obtained by any firm and do not generate sustained competitive advantage Lack of resources actually helps countries to become competitive Eg: Switzerland, Japan, Sweden. Demand Conditions Sophisticated domestic market is an important element in producing competitiveness. Helps the firm to be competitive in the global market Example: French Wine industry.
Related and Supporting Industries A set of strong related and supporting industries is important to the competitiveness of firms. Advantages of such clustering or agglomeration: Potential technology knowledge spillovers. Disadvantages: Potential poaching of your employees by rival companies Increase in competition, decreasing profit margin Ex: Detroit and Silicon Valley in U.
Firm Strategy, Structure and Rivalry Strategy Investment plans, use of labour force all depends on the countrys capital market and labour market i. Structure Management styles But, there is no single managerial, ownership or operational strategy universally appropriate. Rivalry Intense competition spurs innovation Example: Japanese automobile and electronics industries.
Determinants of National Competitive Advantage: Porters Diamond Firm strategy, structure, and rivalry Factor endowments Related and supporting industries Demand conditions. So What for business? First mover implications invest to be first, particularly in global industries or in markets which can support a few firms. Location of production is a key variable Government Policy implications Govt. Educational policies affecting labour skills Enforcement of standards.
Including factor conditions as a cost component, demand conditions as a motivator of firm actions, and competitiveness all combine to include the elements of classical, factor proportions, product cycle, and imperfect competition theories in a pragmatic approach to the challenges that the global markets of the 21st century present to the firms of today Cyinkota, et al.
References International investment and international trade in the product cycle, Raymond Vernon, Quarterly Journal of Economics, , pp. Grant, Strategic Management Journal, Vol. International Business, Michael R. Czinkota, Ilkka A. Ronkainen, Michael H. Moffett, pp. References 1. Chapters 5, International Business by Charles W. Hill and Arun K. Jain, Tata McGraw Hill publication. Open navigation menu.
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