THEORY OF INTERNATIONAL PRODUCT LIFE CYCLE (IPLC)

The international product life cycle theory, developed
and verified by economists to explain trade in
a context of comparative advantage, describes the
diffusion process of an innovation across national
boundaries. The life cycle begins when a developed
country, having a new product to satisfy consumer
needs, wants to exploit its technological breakthrough
by selling abroad. Other advanced nations
soon start up their own production facilities, and
before long less developed countries do the
same. Efficiency/comparative advantage shifts from
developed countries to developing nations. Finally,
advanced nations, no longer cost-effective, import
products from their former customers. The moral of this process could be that an advanced nation
becomes a victim of its own creation.
IPLC theory has the potential to be a valuable
framework for marketing planning on a multinational
basis. In this section, the IPLC is examined
from the marketing perspective, and marketing
implications for both innovators and initiators are
discussed.

Stages and characteristics

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There are five distinct stages (Stage 0 through Stage
4) in the IPLC.Table 10.1 shows the major characteristics
of the IPLC stages, with the USA as the
developer of innovation in question. Figure 10.1
shows three life cycle curves for the same innovation
one for the initiating country (i.e., the USA in
this instance), one for other advanced nations, and
one for LDCs (less developed countries). For each
curve, net export results when the curve is above
the horizontal line; if under the horizontal line, net
import results for that particular country. As the
innovation moves through time, directions of all
three curves change. Time is relative, because the
time needed for a cycle to be completed varies from
one kind of product to another. In addition, the time
interval also varies from one stage to the next.

IPLC stages and characteristics (for the initiating country)
Stage Import/export Target market Competitors Production costs
(0) Local innovation None USA Few: Local firms Initially high
(1) Overseas Increasing USA and Few: local firms Decline due to
innovation export advanced nations economies of scale
(2) Maturity Stable export Advanced nations Advanced nations Stable
and LDCs
(3) Worldwide Declining export LDCs Advanced nations Increase due to to lower
imitation economies of scale
(4) Reversal Increasing USA Advanced nations Increase due to
import and LDCs comparative disadvantage

Stage 0, depicted as time 0 on the left of the vertical
importing/exporting axis, represents a regular
and highly familiar product life cycle in operation
within its original market. Innovations are most
likely to occur in highly developed countries
because consumers in such countries are affluent
and have relatively unlimited wants. From the
supply side, firms in advanced nations have both the
technological know-how and abundant capital to
develop new products.
Many of the products found in the world’s
markets were originally created in the USA before
being introduced and refined in other countries. In
most instances, regardless of whether a product or
not is intended for later export, an innovation is
designed initially with an eye to capture the US
market, the largest consumer nation.

As soon as the new product is well developed, its
original market well cultivated, and local demands
adequately supplied, the innovating firm will look
to overseas markets in order to expand its sales and
profit. Thus this stage is known as a “pioneering” or
“international introduction” stage. The technological
gap is first noticed in other advanced nations
because of their similar needs and high income
levels. Not surprisingly, English-speaking countries
such as the United Kingdom, Canada, and Australia
account for about half of the sales of US innovations
when first introduced to overseas countries with
similar cultures, and economic conditions are often
perceived by exporters as posing less risk and thus
are approached first before proceeding to less
familiar territories.
Competition in this stage usually comes from US
firms, since firms in other countries may not have
much knowledge about the innovation. Production
cost tends to be decreasing at this stage because by
this time the innovating firm will normally have
improved the production process. Supported by
overseas sales, aggregate production costs tend to
decline further due to increased economies of scale.
A low introductory price overseas is usually not
necessary because of the technological breakthrough;
a low price is not desirable due to the
heavy and costly marketing effort needed in order
to educate consumers in other countries about the
new product. In any case, as the product penetrates
the market during this stage, there will be more
exports from the USA and, correspondingly, an
increase in imports by other developed countries.

Growing demand in advanced nations provides an
impetus for firms there to commit themselves to
starting local production, often with the help of
their governments’ protective measures to preserve
infant industries. Thus these firms can survive and
thrive in spite of relative inefficiency.
Development of competition does not mean that
the initiating country’s export level will immediGrowing demand in advanced nations provides an
impetus for firms there to commit themselves to
starting local production, often with the help of
their governments’ protective measures to preserve
infant industries. Thus these firms can survive and
thrive in spite of relative inefficiency.
Development of competition does not mean that
the initiating country’s export level will immediately
suffer. The innovating firm’s sales and export
volumes are kept stable because LDCs are now
beginning to generate a need for the product.
Introduction of the product in LDCs helps offset any
reduction in export sales to advanced countries.

This stage means tough times for the innovating
nation because of its continuous decline in exports.
There is no more new demand anywhere to cultivate.
The decline will inevitably affect the US innovating
firm’s economies of scale, and its production
costs thus begin to rise again. Consequently, firms in
other advanced nations use their lower prices (coupled
with product differentiation techniques) to gain
more consumer acceptance abroad at the expense of
the US firm. As the product becomes more and
more widely disseminated, imitation picks up at a
faster pace.Toward the end of this stage, US export
dwindles almost to nothing, and any US production
still remaining is basically for local consumption.
The US automobile industry is a good example of
this phenomenon. There are about thirty different
companies selling cars in the USA, with several on
the rise. Of these, only two (General Motors and
Ford) are US firms, with the rest being from
Western Europe, Japan, South Korea, and others

Not only must all good things end, but misfortune
frequently accompanies the end of a favorable
situation. The major functional characteristics of
this stage are product standardization and comparative
disadvantage. This innovating country’s comparative
advantage has disappeared, and what is
left is comparative disadvantage. This disadvantage
is brought about because the product is no
longer capital-intensive or technology-intensive
but instead has become labor-intensive – a strong
advantage possessed by LDCs.Thus LDCs – the last
imitators – establish sufficient productive facilities
to satisfy their own domestic needs as well as to
produce for the biggest market in the world, the
USA. US firms are now undersold in their own
country. Black-and-white TV sets, for example, are
no longer manufactured in the USA because many
Asian firms can produce them much less expensively
than any US firm. Likewise, the USA hardly
produces color TV sets either. Consumers’ price
sensitivity exacerbates this problem for the initiating
country.