PRODUCT LIFE CYCLE THEORY BY RAYMOND VERMON
It is the economic theory that was developed by Raymond Vermon and it was in response because of the failure of the Heckscher-Ohlin theory which explains closely the pattern of international trade. This theory tells us about the early in a product cycle theory which relates to all labor cost and the products related to it, from where does it come, and originated. Once the product is adopted and used in the world’s market, where the products gradually move from the point of origin. Thus once the product is invented it becomes an item.
This theory applies to labor-saving and capital-using products. When the product comes it comes in the primary stage, where the product is consumed in the U.S. where no export trade occurs. In the maturing product stage, the mass production techniques are developed and foreign demand expands, then the U.S. exports the to other developed countries.
The model demonstrates dynamic comparative advantage. Where the country that has the comparative advantage in the production of the product changes from the innovating (developed) country to the developing countries. 1960 is the year when the model is developed for developing countries and it’s largely accepted by the US and other developed countries.
- Introduction Stage: This is the first stage where the product is been introduced to the market. Here the customers are unaware of the product, and demands are been produced by the promoters that stimulate sales.
- Growth: In this stage, the products start to grow, where the product increases sales. Here, production costs decrease and profits are high. Then, the product is known widely and competitors enter the market with their creative ideas, so as to attract many customers in the market as soon as possible.
- Maturity: Here the products reach the maturity stage where the product is widely known by the customers and many customers own it. Sales volumes increase at a slower rate. Several competitors enter this stage and the original supplier may reduce the price so to maintain its product in the market. So, profits margins are decreased, but the business remains attractive because the volume is high and costs, such as for development and promotion, are also lower. In addition, foreign demand for the product grows, but it is associated particularly with other developed countries since the product is catering to high-income demands.
- Saturation: It is a stage in which there is neither increase nor decrease in the volume of sales. Modification is needed to attract new customers. Competitors’ products at this stage would have started gaining their market share.
- Decline: At this stage, the product starts to decline, where the product prices are well known and the product becomes familiar to consumers, and the production process to producers. The product can simply be discontinued, or it can be sold to another company. Production may shift to developing countries. Labor costs again play an important role, and the developed countries are busy introducing other products. For instance, the trade pattern shows that the United States and other developed countries have now started importing the product from the developing countries.