PCL THEORY

The product life-cycle theory is an economic theory that was developed by Raymond Vernon in response to the failure of the Heckscher-Ohlin model to explain the observed pattern of international trade. The theory suggests that early in a product's life-cycle all the parts and labor associated with that product come from the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. In some situations, the product becomes an item that is imported by its original country of invention.[1] A commonly used example of this is the invention, growth and production of the personal computer with respect to the United States. The model applies to labor-saving and capital using products that (at least at first) cater to highincome groups. 3 stages: New product stage: The product is produced and consumed in the US. No trade takes place. Maturing product stage: mass-production techniques are developed and foreign demand (in developed countries) expands. At this stage the US exports the product to other developed countries. Standardized product stage: Production moves to developing countries, which then export the product to developed countries. The model demonstrates dynamic comparative advantage. The country that has the comparative advantage in the production of the product changes from the innovating (developed) country to the developing countries.

Product life-cycle
There are four stages in a product's life cycle:
y y y y

introduction growth maturity decline

The location of production depends on the stage of the cycle.

Introduction
This is the stage where a product is conceptualized and first brought to market. The goal of any new product introduction is to meet consumer's needs with a quality product at the lowest possible cost in order to return the highest level of profit. The introduction of a new product can be broken down into five distinct parts:

y y

Idea validation, which is when a company studies a market, looks for areas where needs are not being met by current products, and tries to think of new products that could meet that need. The company's marketing department is responsible for identifying market opportunities and defining who will buy the product, what the primary benefits of the product will be, and how the product will be used. Conceptual design occurs when an idea has been approved and begins to take shape. The company has studied available materials, technology, and manufacturing capability and determined that the new product can be created. Once that is done, more thorough specifications are developed, including price and style. Marketing is responsible for minimum and maximum sales estimates, competition review, and market share estimates. Specification and design is when the product is nearing release. Final design questions are answered and final product specs are determined so that a prototype can be created. Prototype and testing occurs when the first version of a product is created and tested by engineers and by customers. A pilot production run might be made to ensure that engineering decisions made earlier in the process were correct, and to establish quality control. The marketing department is extremely important at this point. It is responsible for developing packaging for the product, conducting the consumer tests through focus groups and other feedback methods, and tracking customer responses to the product. Manufacturing ramp-up is the final stage of new product introduction. This is also known as commercialization. This is when the product goes into full production for release to the market. Final checks are made on product reliability and variability.

In the introduction phase, sales may be slow as the company builds awareness of its product among potential customers. Advertising is crucial at this stage, so the marketing budget is often substantial. The type of advertising depends on the product. If the product is intended to reach a mass audience, than an advertising campaign built around one theme may be in order. If a product is specialized, or if a company's resources are limited, than smaller advertising campaigns can be used that target very specific audiences. As a product matures, the advertising budget associated with it will most likely shrink since audiences are already aware of the product. Author Philip Kotler has found that marketing departments can choose from four strategies at the commercialization stage. The first is known as "rapid skimming." The rapid refers to the speed with which the company recovers its development costs on the productthe strategy calls for the new product to be launched at a high price and high promotion level. High prices mean high initial profits (provided the product is purchased at acceptable levels of course), and high promotion means high market recognition. This works best when the new product is unknown in the marketplace. The opposite method, "slow skimming," entails releasing the product at high price but with low promotion level. Again, the high price is designed to recover costs quickly, while the low promotion level keeps new costs down. This works best in a market that is made up of few major players or productsthe small market means everyone already knows about the product when it is released.

The other two strategies involve low prices. The first is known as rapid penetration and involves low price combined with high promotion. This works best in large markets where competition is strong and consumers are price-conscious. The second is called slow penetration, and involves low price and low promotion. This would work in markets where price was an issue but the market was well-defined. Besides the above marketing techniques, sales promotion is another important consideration when the product is in the introductory phase. According to Kotler and Armstrong in Principles of Marketing, "Sales promotion consists of short-term incentives to encourage purchase or sales of a product or service. Whereas advertising offers reasons to buy a product or service, sales promotion offers reason to buy now." Promotions can include free samples, rebates, and coupons.

Growth
The growth phase occurs when a product has survived its introduction and is beginning to be noticed in the marketplace. At this stage, a company can decide if it wants to go for increased market share or increased profitability. This is the boom time for any product. Production increases, leading to lower unit costs. Sales momentum builds as advertising campaigns target mass media audiences instead of specialized markets (if the product merits this). Competition grows as awareness of the product builds. Minor changes are made as more feedback is gathered or as new markets are targeted. The goal for any company is to stay in this phase as long as possible. It is possible that the product will not succeed at this stage and move immediately past decline and straight to cancellation. That is a call the marketing staff has to make. It needs to evaluate just what costs the company can bear and what the product's chances for survival are. Tough choices need to be madesticking with a losing product can be disastrous. If the product is doing well and killing it is out of the question, then the marketing department has other responsibilities. Instead of just building awareness of the product, the goal is to build brand loyalty by adding first-time buyers and retaining repeat buyers. Sales, discounts, and advertising all play an important role in that process. For products that are well-established and further along in the growth phase, marketing options include creating variations of the initial product that appeal to additional audiences.

Maturity
At the maturity stage, sales growth has started to slow and is approaching the point where the inevitable decline will begin. Defending market share becomes the chief concern, as marketing staffs have to spend more and more on promotion to entice customers to buy the product. Additionally, more competitors have stepped forward to challenge the product at this stage, some of which may offer a higher quality version of the product at a lower price. This can touch off price wars, and lower prices mean lower profits, which will cause some companies to drop out of the market for that product altogether. The maturity stage is usually the longest of the four life cycle stages, and it is not uncommon for a product to be in the mature stage for several decades.

A savvy company will seek to lower unit costs as much as possible at the maturity stage so that profits can be maximized. The money earned from the mature products should then be used in research and development to come up with new product ideas to replace the maturing products. Operations should be streamlined, cost efficiencies sought, and hard decisions made. From a marketing standpoint, experts argue that the right promotion can make more of an impact at this stage than at any other. One popular theory postulates that there are two primary marketing strategies to utilize at this stageoffensive and defensive. Defensive strategies consist of special sales, promotions, cosmetic product changes, and other means of shoring up market share. It can also mean quite literally defending the quality and integrity of your product versus your competition. Marketing offensively means looking beyond current markets and attempting to gain brand new buyers. Relaunching the product is one option. Other offensive tactics include changing the price of a product (either higher or lower) to appeal to an entirely new audience or finding new applications for a product.

Decline
This occurs when the product peaks in the maturity stage and then begins a downward slide in sales. Eventually, revenues will drop to the point where it is no longer economically feasible to continue making the product. Investment is minimized. The product can simply be discontinued, or it can be sold to another company. A third option that combines those elements is also sometimes seen as viable, but comes to fruition only rarely. Under this scenario, the product is discontinued and stock is allowed to dwindle to zero, but the company sells the rights to supporting the product to another company, which then becomes responsible for servicing and maintaining the product.

Problems With the Product Life Cycle Theory

While the product life cycle theory is widely accepted, it does have critics who say that the theory has so many exceptions and so few rules that it is meaningless. Among the holes in the theory that these critics highlight:
y

y y

There is no set amount of time that a product must stay in any stage; each product is different and moves through the stages at different times. Also, the four stages are not the same time period in length, which is often overlooked. There is no real proof that all products must die. Some products have been seen to go from maturity back to a period of rapid growth thanks to some improvement or re-design. Some argue that by saying in advance that a product must reach the end of life stage, it becomes a self-fulfilling prophecy that companies subscribe to. Critics say that some businesses interpret the first downturn in sales to mean that a product has reached decline and should be killed, thus terminating some still-viable products prematurely. The theory can lead to an over-emphasis on new product releases at the expense of mature products, when in fact the greater profits could possibly be derived from the mature product if a little work was done on revamping the product. The theory emphasizes individual products instead of taking larger brands into account. The theory does not adequately account for product redesign and/or reinvention

COMPETITIVE ADVANTAGE THEORY

Competitive advantage is a position a firm occupies against its competitors. According to Michael Porter, the three methods for creating a sustainable competitive advantage are through cost leadership, differentiation or focus. Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost. Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors. They are collectively known as positional advantages because they denote the firm's position in its industry as a leader in either superior services or cost. Many forms of competitive advantage cannot be sustained indefinitely because the promise of economic rents invites competitors to duplicate the competitive advantage held by any one firm. A firm possesses a sustainable competitive advantage when its value-creating processes and position have not been able to be duplicated or imitated by other firms,. Sustainable competitive advantage results, according to the resource-based view theory in the creation of above-normal (or supranormal) rents in the long run. Analysis of competitive advantage is the subject of numerous theories of strategy, including the five forces model pioneered by Michael Porter of the Harvard Business School. The primary factors of competitive advantage are innovation, reputation and relationships.

Porter's Strategic Theory

The context within which SIS theory emerged was the competitive strategy framework put forward by Porter (1980, 1985), which was based on industrial organisation economics. For developments along that path, see Kaufmann 1966, Kantrow 1980, Pyburn 1981, Parsons 1983, EDP Analyzer 1984a, 1984b, McFarlan 1984, Benjamin et al 1984, Wiseman & Macmillan 1984, Ives & Learmonth 1984, Cash & Konsynski 1985, Porter & Millar 1985, Keen 1986, King 1986). Strategic information systems theory will then be shown to be concerned with the use of information technology to support or sharpen an enterprise's competitive strategy. Competitive strategy is an enterprise's plan for achieving sustainable competitive advantage over, or reducing the edge of, its adversaries. In Porter's view, the performance of individual corporations is determined by the extent to which they cope with, and manipulate, the five key 'forces' which make up the industry structure: y y y y the bargaining power of suppliers; the bargaining power of buyer; the threat of new entrants; the threat of substitute products; and

rivalry among existing firms.

There are two basic strategic stances that enterprises can adopt:
y y

low cost; and Product differentiation.

In the long run, firms succeed relative to their competitors if they possess sustainable competitive advantage in either of these two, subject to reaching some threshold of adequacy in the other. Somogyi & Galliers (1987) provide examples of applications of information technology which are consistent with these two strategic stances, mapped against the particular enterprise activities to which they contribute. Another important consideration in positioning is 'competitive scope', or the breadth of the enterprise's target markets within its industry, i.e. the range of product varieties it offers, the distribution channels it employs, the types of buyers it serves, the geographic areas in which it sells, and the array of related industries in which it competes. Under Porter's framework, enterprises have four generic strategies available to them whereby they can attain above-average performance. They are:
y y y y

cost leadership; differentiation; cost focus; and Focused differentiation.

According to Porter, competitive advantage grows out of the way an enterprise organises and performs discrete activities. The operations of any enterprise can be divided into a series of activities such as salespeople making sales calls, service technicians performing repairs, scientists in the laboratory designing products or processes, and treasurers raising capital. By performing these activities, enterprises create value for their customers. The ultimate value an enterprise creates is measured by the amount customers are willing to pay for its product or services. A firm is profitable if this value exceeds the collective cost of performing all of the required activities. To gain competitive advantage over its rivals, a firm must either provide comparable value to the customer, but perform activities more efficiently than its competitors (lower cost), or perform activities in a unique way that creates greater buyer value and commands a premium price (differentiation).

Porters

Four

Generic

Strategies

(Porters1980)

Many differentiation bases exist, classified into four major groups (Borden 1964, quoted in Wiseman 1988):
y y y y

product (quality, features, options, style, brand name, packaging, sizes, services, warranties, returns); price (list, discounts, allowances, payment period, credit terms); place (channels, coverage, locations, inventory, transport); and Promotion (advertising, personal selling, sales promotion, publicity).

Porters diamond
Porter studied 100 industries in 10 nations y y postulated determinants of competitive advantage of a nation based on four major attributes Factor endowments:- A nations position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry 1. Basic factor endowments Basic factors: Factors present in a country y y y y Natural resources Climate Geographic location Demographics

While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success

2. Advanced factor endowments Advanced factors: Are the result of investment by people, companies, government and are more likely to lead to competitive advantage. If a country has no basic factors, it must invest in advanced factors y y y y y Communications Skilled labor Research Technology Education

3. Demand conditions Demand y y y Creates capabilities Creates sophisticated and demanding consumers Demand impacts quality and innovation

4. Related and supporting industries y y Creates clusters of supporting industries that are internationally competitive Must also meet requirements of other parts of the Country

5. Firm strategy, structure and rivalry y y y Long term corporate vision is a determinant of success Management ideology and structure of the firm can either help or hurt you Presence of domestic rivalry improves a companys competitiveness.