Vernon product lifecycle
The term product life cycle according to Vernon refers to a theory by Raymond Vernon about the course of investments based on the product life cycle , which was first described in his article International Investment and International Trade in the Product Cycle in the Quarterly Journal of Economics, May, 1966 . The basic statement of Vernon's hypothesis is that as the product life cycle progresses, production is shifted further and further from the inventor country to the developing country.
In business administration , the product life cycle is divided into the 4 phases of introduction, growth, maturity and degeneration. In the context of the hypothesis, Vernon only refers to the first 3 phases, he ignores the degeneration phase in his consideration. Furthermore, it divides all countries into 3 categories, the inventor country, developed countries and developing countries. The inventor country and the developed countries are characterized by high technology standards and high personnel costs. However, the staff is highly qualified and can also carry out difficult productions.
The phases
In the following, the phases considered by Vernon are considered individually, with the general facts of the respective phase being discussed first and then the specific examination of Vernon's hypothesis in this phase.
Introductory phase (innovation phase)
General
When considering the phases of the product life cycle, the introductory phase, as the name suggests, represents the market launch and the early market phase. In this phase, the product is usually still due to a negative contribution margin, especially due to high investments in machines and in research and development but also caused in marketing.
Furthermore, there is a predominantly negative free cash flow . The advantage in this early phase is that the market usually has a strong tendency towards monopoly, since the product is still very new on the market and therefore the competition is still very low.
Product life cycle hypothesis
The product is introduced in the country of the inventors (high-tech country), as the state of development is far advanced here and very highly qualified personnel are available for complex production. In this phase, the quality advantage outweighs the high labor and production costs.
In this phase, the country of the inventors exports the product to all other markets, as the manufacturing company has a monopoly on the world market and in-house production is not possible in other developed and developing countries due to a lack of qualified personnel and insufficient technology.
Growth phase (maturation phase)
General
In the growth phase, the product has a rapidly growing sales volume . Ultimately, this also leads to an improvement in free cash flow , although this does not necessarily have to be strongly positive in the growth phase. Rather, this phase is due to expansion investments to expand the existing capacities so that we can continue to participate in the growing sales. Marketing expenses traditionally remain at a very high level during this phase, while research and development expenses decrease. This does not mean, however, that nothing more is done in terms of research and development (R&D).
Product life cycle hypothesis
The product is increasingly also being produced by the other developed countries, which take over the developed product from the inventor country. However, the inventor country is still exporting with an increasing tendency, since it can take advantage of the experience curve effect and thus its piece production costs are lower than those of the other developed countries.
In this phase, new production facilities are opened as part of the direct investment abroad, provided that the advantage in the form of transport cost savings outweighs the cost of the new investment. If this is not the case, the capacity in the inventor country is preferably increased and the export rate continues to rise.
Maturity phase (standardization phase)
General
The ripening phase is the most productive phase of the product. The expenses for marketing and research and development are greatly reduced, investments are mainly in the form of replacement investments and the free cash flow is therefore very positive.
However, this phase must also be viewed critically. Because after the ripeness comes the degeneration and in this phase the yield of the product decreases. Therefore, when a product has reached this phase, the successor product must already be in the introductory phase, otherwise the company is at risk in the long term.
Product life cycle hypothesis
The standardization of the product and, above all, of the production techniques are increasing rapidly, so that not so highly qualified workers are required. This shifts the competitive advantage to the developing countries, which have advantages through low wage costs, which significantly lowers the unit production costs. As a result, companies are relocating their production abroad. This shift can take place in three ways. Consideration from the point of view of the inventor:
- Foreign companies produce the products with their own resources
- Domestic companies invest in local companies (indirect investment)
- Domestic companies invest in their own subsidiaries (direct investment)
Graphic clarification
Fig. 1: Land of inventors
Fig. 2: Developed countries
Fig. 3: Developing countries
Practical example
Shoes from Adidas are an example of Vernon's hypothesis . At first they were only made in Germany (inventor country). Later productions followed in the USA and Canada (developed countries) and finally also in Asia (developing countries / emerging countries). Today, a large part of the production (97% for shoes (according to Adidas Group Management Report 2016)) takes place in Asia.
References
literature
- Raymond Vernon: International Investment and International Trade in the Product Cycle. in: Quarterly Journal of Economics, 1966, No. 2 (May), pp. 190-207. ISSN 0033-5533
- Simon Renaud: Exercise Foreign Trade Policy. ( Memento from June 10, 2007 in the Internet Archive ) Jena 2005–2007. (Powerpoint presentation)
- G. Buerke, G. Beibst: Marketing compact. University of Applied Sciences Jena 2007.
Web link
- Adidas, Group Management Report 2016 (PDF file; 3.5 MB)
Footnotes
- ↑ a b c Simon Renaud: Exercise foreign trade policy. Chapter 2.4 ( page no longer available , search in web archives ) Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. University of Jena 2005, based on Raymond Vernon: International Investment and International Trade in the Product Cycle. In: Quarterly Journal of Economics. May 1966, p. 199, Figure I.
