The Stages of the Product Cycle

Product cycle theory is both supply-side (cost of production) and demand-side (income levels of consumers) in its orientation. Each of these three stages that Vernon described combines differing elements of each.

Stage I: The New Product

Innovation requires highly skilled labor and large quantities of capital for research and development. The product will normally be most effectively designed and initially manufactured near the parent firm and therefore in a highly industrialized market due to the need for proximity to information and the need for communication among the many different skilled-labor components required.

In this development stage, the product is nonstandardized. The production process requires a high degree of flexibility (meaning continued use of highly skilled labor). Costs of production are therefore quite high. The innovator at this stage is a monopolist and therefore enjoys all of the benefits of monopoly power, including the high profit margins required to repay the high development costs and expensive production process. Price elasticity of demand at this stage is low; high-income consumers buy it regardless of cost.

Stage II: The Maturing Product

As production expands, its process becomes increasingly standardized. The need for flexibility in design and manufacturing declines, therefore the demand for highly skilled labor declines. The innovating country increases its sales to other countries. Competitors with slight variations develop, putting downward pressure on prices and profit margins. Production costs are an increasing concern.

As competitors increase, as well as their pressure on price. The innovating firm faces critical decisions on how to maintain market share. Vernon argues that the firm faces a critical decision at this stage—either to lose market share to foreign-based manufacturers using lower-cost labor or to invest abroad to maintain its market share by exploiting the comparative advantages of factors costs in other countries. This is one of the first theoretical explanations of how trade and investment become increasingly intertwined.

Stage III: The Standardized Product

In this final stage, the product is completely standardized in its manufacture. Thus, with access to capital on world capital markets, the country of production is simply the one with the cheapest unskilled labor. Profit margins are thin, and competition is fierce. The product has largely run its course in terms of profitability for the innovating firm.

The country of comparative advantage has therefore shifted as the technology of the product’s manufacture has matured. The same product shifts in its location of production. The country possessing the product during that stage enjoys the benefit of net trade surpluses. But such advantages are fleeting, according to Vernon. As knowledge and technology continually change, so does the country of that production comparative advantage.

Why Utilize Trade Shows?

Trade shows or fairs are a long-standing European tradition and one of the most significant cost items in a global marketing budget. A trade show is typically an event at which manufacturers, distributors, and other vendors display their products or describe their services to customers, prospects, suppliers, industry associates, and the trade press. Whether or not the company should participate depends on the type of business relationships desired within a particular country. When looking only for one-time or short-term sales, the expense might not be worth it. But if the goal is a long-term investment, it is probably worth the cost.

Companies participate in trade shows because:

  • They provide an excellent opportunity for introducing, promoting, and demonstrating new products to many people efficiently.
  • Appearing at shows helps generate goodwill and face-to-face customer contact.
  • It provides an opportunity for “[waving] the company flag” in front of the competition.
  • Participating helps boost sales force and distributor’s  morale.
  • It is a cost-effective way to meet with and screen potential intermediaries in a new-to-the-company-market.
  • Attending a show is an excellent way to meet government officials and decision-makers. In fact, the host government of the Chinese Export Commodities Fair held twice a year expects exporters to participate.
  • They offer potential for market research and gathering competitive intelligence because rivals are participating in shows, too.
  • There are opportunities to obtain data that helps marketers evaluate the effectiveness of a promotional campaign.
  • They can reach a large number of sales prospects in a brief period of time at a reasonable cost per contact. Some 82 percent of all attendees of the average trade fair have the power to recommend or making final purchasing decisions. In addition, people are there because they have a specific interest in the exhibits.
  • It can be a good place to find suppliers.

Capitalize on trade show participation by inviting key prospects to visit the booth or even better, the company’s hospitality suite where there is more privacy for negotiations. Use incentives to attract people to the booth; have systems in place to track leads generated and to evaluate show performance.

This is an excerpt from Dr. Czinkota’s book Global Business: Positioning Ventures Ahead, co-authored by Dr. Ilkka Ronkainen.

Michael R Czinkota and Ilkka A Ronkainen, Global Business: Positioning Ventures Ahead (New York: Routledge, 2011), pg. 130-132.

 

Let us know what YOU think about trade shows, leave a comment below…

A NEW ERA FOR UNIVERSITIES

Michael R. Czinkota and Andreas Pinkwart

Universities and their internationalization are important. Traditional knowledge exporters, such as the United States, Germany, France and England, aim to maintain their high share in the growing international academic market. They recognize the economic benefits of educating students who, when back home, will decide about purchases for infrastructure, engineering and other economic goals.

Exporting higher education generates income for universities and encourages them to become global entrepreneurs. The market is growing. Higher education students have increased by 53% since 2000 to more than 150 Million in 2007. In Australia and New Zealand, education is the third and fourth ranking services export. In the United States, international students and their dependents contributed $ 18.8 billion to the economy during the 2009-2010 academic year.

Universities shift their role from a provider of human resources to an innovation engine and entrepreneurial hub. Academic knowledge is transferred to new products and processes. Due to its ability to integrate international students and researchers, academia can commercialize knowledge and research in ways that companies cannot replicate.

Traditional internationalization within universities was a bottom-up activity, based on personal connections by an individual faculty member or by research teams. Increasingly, however, leading universities grow internationally as part of a top-down activity driven by institutional directives. Several key reasons account for this shift: A scientific approach demands awareness of and interaction with international work in order to benchmark one’s own competence. Internationalization is also part of becoming a competitive enterprise and contributes to capacity utilization. As part of their mission, universities need to provide a global social infrastructure and networks for their graduates. They also can assume new roles as incubators and connectors for emerging ideas and innovations. Asian countries in particular undertake major efforts to enhance the position of their universities.

For centuries, universities were leaders in international activities. They exported and imported students and faculty members by either admitting them or by sending them abroad. Latin as the ‘lingua franca’ facilitated exchanges of personnel. New locations were sought out, and international partnerships helped expansion, or were a means to escape poor conditions. For example, Georgetown University, a Jesuit school in Washington D.C., was left in legal limbo in the late 18th century, when pope Clement XIV suppressed the Jesuit order. However, by working with Jesuits in Byelorussia, the order continued to be recognized by Czarina Katherine the Great. For several decades, the Georgetown Jesuits were members of the Russian Province. Universities also raised funds on an international scale. They ensured international quality control, when in 1233 A.D. a papal bull ordered that those admitted as teachers in Toulouse, had the right to teach anywhere without further examinations.

Today, companies are the international leaders. They differentiate their international activities into investments (inflow and outflow) and trade (imports and exports). They shift entry approaches based on market needs. To some markets they export. Global sourcing and offshoring is used in others. Firms conduct franchising or licensing and often recruit their staff from around the globe. They make investments, either as sole owners or in joint ventures, and shift venues whenever necessary.
Universities have limited their response to globalization. Typically, they do not translate their experience into an institutional strategy. Many exchange programs do not outlive their faculty founders. International hiring decisions are mostly made in isolation rather than as part of a planned direction. Research collaborations tend to be temporary and international investments have been very limited – be it due to budget or risk constraints.

Since the 1980’s, globalization has moved university activities towards the market. Though universities are the prototype of knowledge institutions, there is only a very limited body of internationalization research in this important service sector. Experience is insufficiently recorded and not remembered. Insights tend to be peer reviewed based on academic criteria, with scant links to constituency needs. In consequence the knowledge and guideposts on internationalization is thin, and constitutes for many universities merely a search for student markets or respect among colleagues. International partnerships often only are intriguing wallpaper for a university president’s office. University implementation of international strategy often remains at the level of international business activities by smaller and medium sized businesses: limited, ad-hoc, unsystematic and frequently inconsistent.

Universities need to demonstrate the international benefits they can offer. The Roman Empire mainly expanded by offering market places, roads, language, laws, and linkages. Outsiders joined because affiliation offered the opportunity to live better. Universities need to achieve such voluntary interest as well. Given their knowledge base, their human talent and their cross-disciplinary capabilities, universities need to make the cost of non-collaboration so high that firms seek them out as knowledge source and partner. In addition to funding, universities need freedom. Just as universities helped define the openness and knowledge of principalities and kingdoms, today they can help define global society, competitiveness and influence.

In developing content, universities should concentrate on specific aspects in which to become multidisciplinary experts. Specialization has worked for firms, and will allow universities to provide more value to society. It will also be important to provide the connectivity between business, research and policy. Profits alone are insufficient for societal prosperity. Religion, family, culture, security are only a few of the components which universities can incorporate a systemic perspective. This will set their thinking apart and let their educational efforts become the transmission belt for the internationalization of their economy.

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Michael Czinkota czinkotm@georgetown.edu is a Professor of International Marketing and Business at Georgetown University and the University of Birmingham in the UK. He served in the Reagan and Bush administrations in international trade positions.
Andreas Pinkwart pinkresearch@gmx.de is Professor of Entrepreneurship and the President of the Handelshochschule Leipzig. He served as Minister for Innovation, Research and Science in Northrhein Westfalia and as Deputy Chair of the Free Democratic Party in Germany.

How to Develop Global Products

Global product development is similar to domestic product development. It starts with ideas. While in the past these ideas might have come strictly from people in the home market, global product thinking draws on input from intermediaries, franchisees, and overseas competitors. Examine competitive concepts from abroad with an eye toward modifying and improving them to meet the needs of another market – even the domestic market.

For a number of companies, especially those that manufacture industrial goods, customers are their best idea sources. Chat rooms and comments on social networking sites have become increasingly interesting sources of fresh thinking, as customers talk to each other about how they use products or about features they would like to see added. Government procurement requests can trigger ideas for product modifications that will make it possible to apply for a contract.

With a list of products in mind, screen them on market, technical, and financial criteria just as the company would domestically. Is the market large enough? Can it be penetrated? Can the product be mass produced? Can the company produce and market it profitably? Sometimes, a company can achieve the same goals by adjusting its view of the existing product line. For example, cereal manufacturers still sell their products in countries where people do not eat breakfast simply by repositioning their products as snack foods. Do not toss ideas that are not feasible at the moment – keep them in a searchable idea database because they might be marketable later.

All development phases – idea generation, screening, product and process development, scale-up, and commercialization – should be global in nature with input from all affected markets. Original product designs can be adapted for individual markets easily and inexpensively later on if necessary. Computer–aided design facilitates this by making it possible for companies to design products so that they meet most standards and requirements around the world, with only minor modifications on a country-by-country basis. Consider assigning product development to the part of the organization that has special market and technical knowledge. When a major U.S. copier company was losing ground in Europe because of competition from Japanese products, its market-savvy Japanese subsidiary assumed responsibility for developing an addition to the company’s product line.

Managing the Global Product Portfolio

Most companies have a considerable number of items in their product portfolios or groupings. In expanding markets, any company not growing rapidly risks falling behind for good, so the focus is on bringing out new items or lines or adjusting existing products. A portfolio’s options include expanding geographically to new markets or segments and adding to existing market operations through new product lines. The goal is a balanced product and market portfolio – an appropriate mix of new, growing, and mature products that provide a sustainable competitive advantage in multiple markets. Many marketers assess their portfolio and its opportunities by using a quadrant model that lets them analyze the products in the mix according to growth rates and market share positions.

Another approach used to assess a product portfolio is the market-product-business model. This approach helps uncover interconnections in common target markets, shared R&D objectives, similar technologies, and shared marekting experiences. By exploring interlinkages between these three areas across global markets, it is possible to exploit increasing market similarities by setting up appropriate strategic business units or standardizing product lines, products, and marketing programs.