A product life cycle for international trade

A Product Life Cycle for International Trade?
LOUIS T. WELLS, JR.
lowering of barriers to international trade has resulted in many opportunities for American companies to profit from exports. Clearly, the businessman needs ways of analyzing the potential exportability of his products and, equally important, tools for predicting which products are likely to be threatened by import competition. Until recently, the manager was dependent on the explanations of trade offered by the classical and neo-classical economists. Their reasoning generally led to the conclusion that each country will concentrate on exporting those products which make the most use of the country's abundant production factors. The economic theory is elegant—it can be stated mathematically or geometrically and it can be manipulated to yield, under certain assumptions, answers to questions such as what is the value of free trade to a country, or what are the costs and benefits of certain restrictions. So long as the problems posed are of a very broad nature, the theory provides a useful way of analyzing them. However, when the theory is applied to the detailed problems facing the businessman it becomes of limited value.
Journal of Marketing. VoL 32 (July, 1968), pp. 1-6.
Jourrufl of Marketing, July, 1968 products follow a cycle of international trade similar to the one which the model describes. According to the trade cycle concept, many products follow a pattern which could be divided into four stages: Phase I: U.S. export strength Phase II: Foreign production starts Phase III: Foreign production competitive in export markets Phase IV: Import competition begins A brief look at the reasoning underlying each of these stages will give some clues which will help the businessman to identify the stage in which particular products may be. The concept can then be an aid in predicting the product trade performance to come and in understanding what actions the manager can take to modify the pattern for certain products and to profit from different stages of the cycle. Phase I: US. export strength What kinds of new products are likely to be introduced first in the United States? It can be assumed that American entrepreneurs have no particular monopoly on scientific know-how or on very basic technical ability. What they do have, however, is a great deal of knowledge about a very special market —one which is unique in having a large body of very high-income consumers. Products which satisfy the special demands of these customers are especially likely to be introduced in the United States. Moreover, due to a monopoly position of the United States as a supplier of the new products which satisfy these unique demands, they offer the best opportunities for export. Empirical studies have failed to show a very simple relationship between demand and invention. However, there can be little doubt that certain products are simply more likely to be developed in America. Automatic transmissions for automobiles promised to be pretty expensive additions to cars. If an inventor considers the chances of his brainchild's being purchased by -consumers, a U. S. inventor would be more likely to pursue an automatic transmission than a European. The European inventor would more probably concern himself with ideas suitable to European demands. He might respond to high fuel taxes and taxes on engine displacement by developing engines which produce more horsepower per cubic inch. He might develop better handling suspensions in response to the road conditions. An inventor usually comes up with products suitable to his own market. It is even more likely that the final product development leading to commercial production will be achieved by an entrepreneur responding to his own national demand. Even if an American is most likely to be the first to produce a high-income product, why does he not set up his first plant abroad where labor is cheaper? Certainly for many products the cost of materials and of capital is not sufficiently higher in Europe to offset the advantages offered by cheaper labor. Moreover, the burden of tariffs and freight are light enough now for many items. And the uncertainties of manufacture abroad are diminishing as more American companies gain experience. There are, though, very rational reasons why the American entrepreneur might prefer to start manufacture at home. At the early stages of a product's life, design is often in a constant state of flux. There is a real advantage which accrues to a manufacturer who is close to the market for his products so that he can rapidly translate demands for design changes into more suitable products. Moreover, these changes often require the availability of close communication with specialized suppliers. Hence, the instability of product design for new products argues for a location in the United States—near to the market and close to a wide range of specialized suppliers."• The entrepreneur is less likely to be concerned with small cost differences for very new products. The existence of a monopoly or the significant product differentiation at the early stage of the product life cycle reduces the importance of costs to the manufacturer. The multitude of designs and the lack of standard performance specifications make it very difficult for the consumer to compare prices. Also, in the early stage of the product life cycle the consumer is frequently not very concerned with price. Success comes to the manufacturer who can quickly adjust both his product design and marketing strategy to consumers' needs which are just beginning to be well identified. At this point, the American manufacturers have a virtual monopoly for the new product in the world market. Foreigners who want the good must order it from the United States. In fact, wealthy consumers abroad, foreigners with particular needs for the product, and Americans living abroad seem to hear about it very quickly. Unsolicited orders begin to appear from overseas. U. S. exports start to grow —initially from the trickle created by these early orders—to a steady stream as active export programs are established in the American firms. Same reference as footnote 3.