International Product Life Cycle -- Raymond Vernon
About 30 years ago, Vernon put forward the International Product Life Cycle Theory. It is very worth considering as an explanation of who produces what and why. It is simple and persuasive. It seems to be consistent with the real-world experience of at least some industries, for examples pocket calculators and televisions. The "ordinary" marketing life cycle (which identifies specific stages, from introduction to decline) is similar, but should not be confused with Vernon's theory .
Vernon's theory has it that new products tend to follow a three part life cycle.
The initial phase is the New Product phase. The product is developed and introduced in an advanced country. Research and development capability is one reason why. Also,the market is believed to exist for it in that country, and in other similar countries. Most sales will be domestic and exports will be limited. The product is, to a degree, experimental -- customer acceptance is uncertain and specific product features are not yet completely identified. Production is not yet carried out on a large scale, pending answers to the above questions. The price is initially high. Xerox and Apple are two companies/products which could be used as examples.
The middle stage is the Maturing Stage. Here the product demand grows tremendously, and export sales become important. Profits are substantial and competition, both domestic and foreign appears. Greater emphasis is placed on efficient production, and product characteristics and consumer preferences become more settled. The price is still comparatively high.
In the Standardized Product Stage the design of the product is well understood and the product starts to resemble a commodity. The emphasis is on mass production using efficient techniques and low cost labor. The number of producing firms multiplies and competition becomes very vigorous. The product will be imported into the originating country from elsewhere, especially areas suited to low-cost production (Korea, Taiwan, Mexico, Indonesia). Domestic production in the originating country will slump and may halt altogether. Firms may take up overseas production in order to remain competitive.
The impact of the theory is tosuggest that advanced countries must rely on a stream of high-tech products. They must depend on research and development and innovation. With high labor costs, they can not compete head to head with less developed nations when it comes to "cookie cutter" production -- stamping them out by the millions. Advanced nations must cash in while prices are high. In short their high standard of living and high labor costs can best be supported under quasi-monopoly conditions -- but where the uniqueness of their products and the lack of competition can be expected to last a relatively short while.