RAYMOND VERNON’S PRODUCT LIFE CYCLE THEORY: UNDER INTERNATIONAL TRADE LAW
Author: Disha Negi, pursuing B.A.,LL.B. from Delhi Metropolitan Education, Noida
In 1960, Raymond Vernon, an American economist, developed an economic theory known as the Product Life cycle theory. He came up with this theory in retaliation to the Heckscher Ohlin theory.This theory is a capital-intensive theory because it focuses on more export and the product are for the high-income groups. It can be implemented only in a developed nation. Through the article, we will study the four different types of stages under the product life cycle theory and how a product goes through these stages. Advantages and disadvantages of this theory have also been discussed in this article
As the name suggests, this theory talks about a product that goes through different stages. This theory only focuses on the developed nation, not on the developing nation.According to this theory, when a product is in its early life cycle stage, all the raw material and the labor used in making and producing that product belong to the place where the product has been inventedor produced. But when that new product is introduced in the world market, then its area of origin shifts to different places.[i]
When its origin shifts to different countries, there can also be cases where the country that had invented that product is now importing it from another country. The most common example of this is personal computers. The United States invented computers as a new product. Then this new product enters the world market and its place of origin shifted to different countries. Now the country where the personal computer was first invented i.e the USA, is importing it from China, Canada, etc.
PRODUCT LIFE CYCLE
On the basis that how a product operates in the market ofInternational Trade, Raymond Vernon had divided the “Product” into 3 categories which are as follows:
Product Standardization and Streamlining of Manufacturing Product
A new product is produced or invented by a developed country at the first stage. At this stage, the product is not exported to other countries and is consumed domestically. In the second stage, which is the maturity stage, the product enters the world market because its foreign demand increases, and the product is now exported to different developed countries. At the stage of product standardization and streamlining of manufacturing the competitiveness of the product, decrease the demand for the original product, and the production moves to a new nation where the average income is low, i.e., the developing countries.
Explaining this with help of an example of personal computers.In the year 1970, the personal computer was introduced as a new product in the world market.During 1980, it reaches the stage of a mature product. And currently, the personal computer is at this stage of product standardization and streamlining of manufacturing. Now the manufacturing of personal computers is done in developing countries like Asia. This has shown us how a new product is shipped from developed countries to developing countries.[ii]
This theory illustrates the concept of comparative advantage. Comparative advantage means the ability of the producer to produce goods and services at an opportunity cost that is lower than other trading partners. In 1960, this theory was widely appreciated and adopted by different developed countries, including the USA.
Two assumptions have to be kept in mind while studying this Product Lifecycle Theory by Raymond Vernon.
1. This theory is only applicable to developed countries and not to developing countries.
2. It was assumed that the new product will only be produced in the country where it was first invented.
4 STAGES OF THIS THEORY
Product Life Cycle theory talks about 4 stages:
The stages of the product life cycle theory always begin with the introduction of a new product bythe developed nation in the world market. Whenever a product with new features, enters the domestic market, most people are heedless of it, which indicates that in the beginning, the sales of the product will be comparatively low.So,to create demand for the product, the producer has to promote it in the world market, which will then brace up the sale of the new product.The promotion of the product can be done through the distribution channels,and the producer has to ascertain the best way the sale the product in the market. A good amount of discount should be given to the dealers who will help in targeting a good number of customers. If the producer feels that there is any deficiency in their product, its improvement should be their main focus.
Considering that it is the first stage of the product life cycle, the profit will be low, but when the demand for the product increases, the profit will also increasesimultaneously. Since the demand for the product is increased, it will automatically enter the next stage of the product life cycle.[i]
For example, the United States produces a new product for its domestic market. First, the product will be promoted to make the customer aware of the new product. The producer will closely watch the market, to analyze the demand and response for the product. As the demand for the product increased, the profit will also increase. At this stage, there is no international trade.
During this stage, the demand for the product started increasing. The sales were expanding at a higher rate.Due to this, the cost of production decreases, and the rate of profit increases.Because of this mass growth, the product started gaining popularity. At this phase,the competitors will start entering the market. Due to the product’s popularity, the competitors will start producing and releasing the same product with their version in the market. It is that point of time when the original producer or the developer of the product has to spend a large amount of money on promotion to attract as many customers as possible, due to the increased competition in the market.
Increased competition can lead to a reduction in the price. Availability of the product came into question to ensure that every customer can get that product.To maintain this growth, customer satisfaction should be the number one priority of the producers.
The 3rd stage of the product life cycle is the maturity stage. At this stage, the product is so popular that many consumers already own it. The sale of the product is still there, but at a diminishing rate because of the absence of potential customers.At the majority stage, the original producer of the product has to spend a lot of money to sustain their productas a market leader. They have to focus on the sale and prevent it from dropping off. This can be done by decreasing the price and maintaining the market share. Since the product is already popular, so the.The cost of promotion and development decreases during this stage. The profit margin also decreases, but the volume of sales is still high. Some level of saturation can also be seen at thisstagebecause the consumer will now have different competitors. To choose from makes the marketplace saturated.[ii] The producer will have to differentiate its product from the others and should create brand awareness.The producer aims to provide more and more benefits to the customers. This can be done by changing the packaging of the product or extending the product’s warranty period. Adding new features and adopting new technology will help in intensifying the product quality.
Since the product is made only to satisfy the need of the developed countries, its demand increases in the developed country only.
By the name of this theory,we can suggest that the sale is going down during this stage. It is that stage where the consumer is very well versed with the product and the producer. The sale started declining in such a manner that neither the promotion nor the marketing can maintain it. The product has become very old, so, naturally, the consumer will start losing interest in it. There is no point in producing more of these products because revenue has been dropped because of the declining sales. The cost of producing the goods becomes higher than the sale of the goods which eventually means that the level of profit will drop.
The two options which are left with the producer are either to discontinue the product from the market or sell their product to the other company.So, in this stage of the product lifecycle, the production will transfer to the developing countries. After transferring the product to the developing countries, the developed countries start producing other productswith unique and different features and technology.[iii]
Talking about revenues, when the demand for a product is high than the cost of the production, the life of the product is more. But when the demand for the productdeclines and the cost of production increases, then it is not possible for a product to sustain itself in the market and the only option left to the producers is to withdraw their product. This is known as the declining stage of the product lifecycle, bear buy. The product has been removed from the market because of low sales and low-profitmargins. This is where the product lifecycle stage ends. Then a new product will be produced by a developed country and the same cycle will be repeated.
ADVANTAGES OF PRODUCT LIFE CYCLE THEORY
A few advantages of the product lifecycle are as follows:
Help in setting strategies: The product life cycle helpsthe producer in creating and setting many strategies throughout the life cycle stage. Explaining it through an example like in a growth phase, it is very well-known to the producer that advertisement is very necessary at this stage to keep their sales high, so in this case, with the help of strategy, they can set their advertisement and investment level.
Prior estimation of sales: It is one of the most important advantages of the product life cycle. Since the producer already knows how his new product will go to the market, because of his previous experiences. It will become very easy for him to forecast the sales. For example: Whenever Apple launches a new phone model in the market, it isvery well known to them that the sale of that mobile will be very high from one to two months. Then after 6 months, the sale will reach the stage of maturity and then decline.
High-quality products: When the product is at the maturity stage, the producer needs to maintain their sales, and for this, the producers increase the quality of the products. This can be done by changing the packaging of the product or extending the product’s warranty period. Adding new features and adopting new technology will help in intensifying the product quality.[iv]
DISADVANTAGES OF PRODUCT LIFE CYCLE THEORY
Following are the disadvantages of the product life cycle:
Diversified market conditions: Due to diversified market conditions, the sale of the goods can also be diversified in different regions. This means that it can be possible that the sale of the product is high in one region and low, in another region.
Product sales fluctuations: One of the most crucial disadvantages of the product life cycle theory is, that it is completely dependent on the sales data, which means that if there is any fluctuation in the market or the sales data, then the graph is of no use because now it cannot determine the overall rise and decline of the product.
Delay in determining sales: Delay occurs while examining and determining the sales of the product. This means that to determine the sale of the product, we have to wait for the products, two moves from one stage to the other. This movement of the product from one stage of the product life cycle to the other is called actual movement which occurs after two to three months. This shows us that there is a delay in lies in the sales.
So, throughout the article,we studied that whenever a developed country produces a product in this domestic market, it goes through the “Product Life Cycle”. This cycle has been divided into four different stages.The producer must develop strategies to increase their sales. Through the product life cycle stages, the producer will get to know when his product will perform well and when his product will decline. The producer knows that during the maturity stage, they need to start focusing on the advertisement policies. During the declining state, they need to start focusing on making the new product that can replace the product that will exit the market very soon.
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