3.

THEORY OF INTERNATIONAL PRODUCT LIFE CYCLE (IPLC) The International Product Life Cycle (IPLC) theory explains trade in a context of comparative advantage, describes the diffusion process of an innovation across national boundaries. The life cycle begins when a developed country, having a new product to satisfy consumer needs, wants to exploit its technological breakthrough by selling abroad. Other advanced nations soon start up their own production facilities and before long LDCs do the same. Efficiency shifts from developed countries to developing nations. Finally, advanced nations, no longer costeffective, import products from their former customers. The advanced nation becomes a victim of its own creation. Stages and characteristics There are 5 distinct stages in the IPLC stage 0 through 4. The given below table shows the major characteristics of the IPLC stages, with the US as the developer of the innovation in question. The next exhibit shows three life-cycle curves for the same innovation: One for the initiating country, one for the other advanced countries and one for LDCs. For each curve, net export results when the curve is above the horizontal line; if under the horizontal line, net import results for that particular country. As the innovation moves through time, directions of all three curves change. Time is relative, as the time needed for a cycle to be completed varies from one kind of product to another. IPLC stages and characteristics for the initiating country STAGE IMP / EXP TARGET MARKET COMPETITORS PRDTN COST (1) Local Innovation None USA Few: Local Firms Initially High (2) Overseas innovation Increasing export USA & Advanced Nations Few: Local Firms Decline owing to economies of scale (3) Maturity Stable export Advanced Nations & LDCs Advanced Nations Stable (4) Worldwide imitation Decline export LDCs Advanced nations Increase owing to lower eco. Of scale. (5) Reversal Increasing import USA Advanced nations & LDCs Increase owing to comparative disadvantage Stage 1 Local Innovation: Stage 1, on the left of the vertical importing / exporting axis, represents a regular and highly familiar product life cycle in operation within its original market. Innovations are most likely to occur in highly developed countries because consumers in such countries are affluent and have relatively unlimited want. From the supply side, firms in advanced nations have both the technological know-how and abundant capital to develop new products. Stage 2 Overseas Innovation: As soon as the new product is well developed, its original market well cultivated, and local demands adequately supplied, the innovating firm will look to overseas markets in order to expand its sales and profit. Thus, this stage is known as a Pioneering or International Introduction stage. The technological gap is first noticed in other advanced

nations because of their similar needs and high-income levels. Competition in this stage comes from usually US Firms, since firms in other countries may not have much knowledge about innovation. Production cost tends to be decreasing at this stage because by this time the innovating firm will normally have improved the production process. Supported by overseas sales, aggregate production costs tend to decline further because of increased economies of scales. A low introductory price is not necessary because of the technological breakthrough; a low price is not desirable because of heavy and costly marketing effort needed to educate consumers in other countries about the new products. Stage 3 Maturity: Growing demand in advanced nations provide a movement for firms there to commit themselves to starting local production, often with the help of their governments protective measures to preserve infant industries. Thus, these firms can survive and succeed in spite of relative inefficiency. Development in competition does not mean that the initiating countrys export level will immediately suffer. The innovating firms sales and export volumes are kept stable because LDCs are now beginning to generate a need for the product. Introduction of the product in LDCs help offset any reduction in export sales to advanced countries. Stage 4 Worldwide imitation: This stage means tough times for the innovating nation because of its continuous decline in exports. There is no more new demand anywhere to cultivate. The decline will certainly affect the US innovating firms economies of scale, and its production cost thus begin to rise again. Consequently, firms in other advanced nations use their lower prices to gain more consumer acceptance abroad at the expenses of the US firm. As the product becomes more and more widely aware, imitation picks up at a faster pace. Towards the end of this stage, US export declines to nothing and any US production still remaining is basically for local consumption. Stage 5 Reversal: The major characteristics of this stage are product standardization and comparative disadvantage. The innovating countrys comparative advantage has disappeared and what is left is comparative disadvantage. This disadvantage is brought about because the product is no more capital-intensive or technology-intensive but instead has become labor-intensive for LDCs. LDCs now can establish sufficient productive facilities to satisfy their own domestic needs as well as to produce for biggest market in the world. For e.g. the black and white televisions are now no more manufactured in USA as many Asian firms can produce them much less expensively than any US firms. VALIDITY OF THE IPLC Several products have conformed to the characteristics described by the IPLC. For e.g. at one time the US used to be an exporter of typewriters, cash registers, B/W Televisions etc. but with passage of time, these simple machines are now being imported, while US firms exports only the sophisticated, electronic version of such machines. Marketing Strategies: For industries suffering the imitation stage or maturity stage things are likely to get worse rather

than better. Companies can understand the implications of the IPLC and adjust marketing strategies accordingly. I. Product Policy: I. a. Automation: The IPLC emphasizes the importance of cost advantage. If for innovating firms it is difficult to match labor costs in low-wage nations (it happens generally with countries like US where labor cost is too high) the firms can cut labor costs through automation and robotics. For e.g. IBM has converted its Kentucky plant into one of the most automated plants thereby cutting labor costs. I. b. Outsourcing: Another way to cut the cost of product is to outsource the product. Outsourcing is the practice of buying the parts or whole product from other manufacturers while allowing a buyer to maintain its own brand name. Another modified version of outsourcing is having various components produced under contract in different countries. That way, a firm takes advantage of the most abundant factor of production in each country before assembling components into final products for worldwide distribution. IBMs PC system consists of components made in low-cost countries-monochrome monitor in South Korea; Floppy disk drives in Singapore, and printer, keyboard, power supply in Japan. The final assembly takes place in USA. I. c. manufacturing in other country: the innovator may use local manufacturing in other countries as an entry strategy. The company not only can minimize transportation costs but can also slow down potential local competition. I. d. New Technology: Once in the maturity stage, the innovators comparative advantage is gone; the firm should switch from producing simple versions to producing new technologies in order to remove itself from cutthroat competition. II. Pricing Policy: Stage 1: At this stage, firm can afford to behave as a monopolist, charging a premium price for its innovation. But this price must be adjusted downward in the second and third stage of IPLC to discourage potential new comers and to maintain market share. For e.g. IBM was slow in reducing prices for its PC models. They believed that the IBM PC was too complex for Asian imitators. This proved to be a costly error as the basic PC hardly changed for several years. As a result other Asian companies came out with their own brands. Stage 4: In the last stage, it is not practical for the innovating firm to maintain low price due to competitors cost advantage. But the firms above-the-market price is feasible only if it is accompanied by top-quality product. III Promotion Policy: Promotion and pricing are highly related in IPLC. In the starting, the marketer must plan for a non-priced promotional strategy such as providing technical support, or offering after-sales-service or giving warranty for a particular period after the product is offered.

The concentration should be towards meeting consumers demand. Positioning is another important point at the beginning. The marketer should try to position the product as a highquality product having good reputation. One thing the company must never do is to allow its product to become a commodity item with prices as the only buying motive as such products can easily be duplicated by other firms. Through out four stages product differentiation, not price is most important for protecting a company from the crowded, low-profit market segment. IV Place: A strong dealer network can provide the innovating firm with a good defensive strategy. Because of its monopoly situation at the beginning, the firm is in a good position to be able to select only the most qualified agents and the network should be expanded further as the product becomes more diffused. GMs old policy of limiting its dealer from carrying several GM brands inadvertently encouraged those dealers to start carrying imports, there by creating alternative channel for GM which threatened the existing channel. Once a product is in the final stage of its life cycle, the innovating firm should strive to become a specialist not a generalist, by concentrating its efforts in carefully selected market segments, where it can distinguish itself from foreign competitors. To achieve distinction in product, the innovating firm can add product features or offer more service.