Mgmt 670 Mid-Term Exam Questions

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MGMT 670
Mid-Term Exam

1. Explain Vernon’s product cycle in terms of the global development of the market and production of the personal computer.

The product life-cycle theory is an economic theory that was developed by Raymond Vernon in an effort to explain observed patterns of international trade and the makeup of trade between countries in the world market. Vernon theorized that products, much like living organisms, go through stages of birth, development, growth, maturity, decline and demise. The model demonstrates dynamic comparative advantage. The country that has the comparative advantage in the manufacturing of the product changes from the innovating (developed) country to the developing countries. Vernon's hypothesis was an effort to expand the existing trade theory beyond the static structure of comparative advantage (Ricardo) and other classical economists.

The theory suggests that early in a product's life-cycle all the parts and labor associated with that product come from the geographic area in which it was invented. Advanced countries, which have the capability to innovate, as well as high-income levels and mass consumption, will sell the item first to its domestic market, then will become initial exporters of goods to other technically advance countries. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. The advanced country loses their exports initially to developing countries (who will import and later manufacture these goods) and subsequently to less developed countries. Eventually, the original advanced country (original innovator) will become importers of these goods because they will have begun producing other new products. The duration of each stage of the cycle varies with the product and the type of management supporting it.

Understanding the product life-cycle stages allows a company to fully take advantage of market opportunities by either establishing or protecting a competitive advantage through a long-lasting market presence. The main business reason for extending the product life-cycle would be to increase sales through longer existence in the marketplace. Certain consumers will embrace a product at different stages of the product life cycle so by extending each stage of the cycle, there is a better chance of exposure to the targeted consumer group.

A commonly used example of this is the invention, growth and production of the personal computer.

Stage one is considered the new product stage and this is where domestic production essentially begins. After a period of research and development, a new product is introduced to meet local (or national) needs. The product is created, produced and consumed in the domestic market and virtually no trade takes place. During the introduction phase, the innovating company does not know the extent to which a profitable market exists. For instance in the late 1970’s and into the early 1980’s, during the early stages of the personal computer, IBM and Apple pc’s were produced in the US and aimed for office and small business use. Personal computer use spread quickly throughout the domestic market as more and more households made purchases for increased personal productivity and gaming purposes.

In stage two, the maturing product stage, domestic production peaks as the demand for the product significantly increases since the consumer base begins to acknowledge the product value. This stage is signified by a period of growth as sales and a rise in profits as mass-production techniques are developed and foreign demand expands (developed countries). At this stage the product is now exported to other developed countries and both domestic and foreign competitors emerge. A copy product is produced elsewhere and introduced in the home country (and elsewhere) to capture growth in the home market. Based on production costs, manufacturing moves to other countries.

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