International Business Environment - Essay Example

International Business Environment International Product Life cycle theory Raymon Vernon in 1966 had proposed the International Product Life Cycle (IPLC) theory in order to extend the international trade theory beyond the static models of comparative advantage, which was developed by David Ricardo explaining that it is beneficial for a country to trade in goods that provides with a comparative advantage in the production process. Ricardo had proposed that a company would benefit by allowing the labour force to specialise in the production of those goods that entail a comparative advantage. Raymond Vernon, however, focused on the dynamics of comparative advantage so as to better analyse the life cycle of a product and the patterns of changes in trade over a period of time. He had based his observation on the assumption that most products are produced and sold first in the US. Televisions, photocopiers, personal computers and cameras are few examples of such products. He argued that owing to the huge wealth and resources of the US, newer products are always being produced. The firms also devise innovative cost saving methods in order to balance the huge labour cost in the US (Vernon, 1966). Stages of IPLC When a product is first introduced, there is high unsatisfied market demand. Owing to this demand, the product experiences huge sales. When the product has catered to the market demand, the sales and demand level falls, thereby leading to product replacement and introduction of new low cost versions by other companies. The stages of IPLC can be explained as follows. Growth The first stage of IPLC depicts the growth phase of an innovative product when a firm makes a technological breakthrough. Such markets are more common in the developed countries as purchasing power of the individuals is higher therein and they are more inclined towards experimenting with new products. The initial stage of a product is characterized by wide promotion and high prices, leading to high profits. Competition is noted to be low. Hereafter, the product is exported to various industrial countries, implying the stage end and a downward descent of the experience curve of the product. Maturity The exports made to other advanced countries marks beginning of the second stage of IPLC. The product design and process becomes more stable with greater investment in the production plants, which drives down the labour and transportation costs. The production process is shifted offshore in order to cater to the local markets. Reduction in the profit margins is noticed; nevertheless, attractiveness of the business does not decline as the market demand persists (Vernon, 1966). Decline This phase may witness a dwindling in a product’s sales volume in the original market and many products get phased out. The follower markets have introduced imitations of the product that are as good as the original. In this phase, the original manufacturer no longer has the exclusive rights and is forced to sell off the remaining products at a discounted price. (Source: WordPress, 2009) Strengths of IPLC The model helps start-up organisations aiming for international expansion to gain a better understanding of changes occurring in the pattern of trade, besides planning out the production process. Product development requires a high initial investment as well as a ready market. It is generally easier in the developed countries with high per capita incomes. Manufacturers belonging to less developed or developing nations should focus on incorporating variations and improvements of the existing products. This model explains the reasons for migration of industries across borders and also the logic behind capital intensive countries exporting labour intensive goods. The model enables the manufacturers to realize the time to move the production off shore and maximise the profits. In this context, the managers often tend to wait until there is a threatening competition from a local producer or an increase in the trade tariffs. The best applicability of the model is found in products that had made technological breakthroughs so as to ignore the cost considerations (Head, 2007). Weaknesses The basic assumption of Vernon’s model is that new products are developed in the US. In the present world of globalisation, there is a dispersed production of goods and countries such as, Japan, are one of the major manufacturers of advanced technological products. Multinational corporations (MNCs) have set up a wide network of production facilities in different countries and consequently, the assumption of slow diffusion of technological knowhow across borders has become faulty and dysfunctional. Another assumption of the model was that production is initially conducted in one particular nation; and with maturity of the market, it is exported to other nations. The dynamics of world trade has vastly changed since 1960s and become less US-centric. The trade-off between foreign direct investment and export was analysed in a very simplistic manner, ignoring the other options of entering a market. Furthermore, the model had stressed on three distinct consecutive phases. Certain research findings have proved that companies that make huge investments in R&D and have major technological back-ups are often able to improvise upon the existing product in such a manner that the product is re-posited at the initial growth stage. The marketing strategies are designed such that the product does not lose market share. The simplistic nature of the model acts as a deterrent for predicting changes in the pattern of trade in the light of globalisation. There are numerous factors that affect the life cycle of a product and judging only the superficial factors leads to a wrong analysis. Also, the model takes into account the supply side of a product, implying the production process of an organisation. It overlooks the fact that there are stricter anti-dumping laws that prohibit selling obsolete technologies in the developing nations. There is no consideration of the global consumer segments and technological transformations like, internet, which render information readily available to the world (Reap, et al., 2008). For example, when JVC launched its first cassettes, it had gained popularity in the developing countries only after becoming obsolete in the developed ones. The mobile phone industry is also a valid example, where a new technology is firstly launched in the developed countries. Apple launches its products initially in the developed countries and only when those markets become saturated, they are exported in the developing or less developed nations. First mover Advantage Theory Paul Robin Krugman had proposed the First Mover Advantage Theory, which stated that a firm benefits the most and can tap the market potential, when it is the first to enter a market. The firm is able to gain competitive advantage over its potential and present rivals, which holds true when a firm is aiming to capture new demographic or geographic markets or new segments for existing products. The concept of first mover advantage is also used in military training and is depicted as “defensible ground” (Hughes, 2011). By way of entering the market first, the firm is at an advantage of capturing market share more easily owing to absence of competition from rivals. Moreover, the early entrants are able to make a lasting impression on the consumers, thereby earning strong brand recognition. The buyers are at the risk of facing higher switching costs, if they shift purchases to a later entrant. Hence, a high demand premium is accrued by the pioneers, which is directly attributable to the timing of entry. Even with the arrival of rivals, the firm still has an advantage in the ensuing competition because of brand loyalty of customers, familiar products, better retail outlets, functioning distribution channels, favourable supplier relationships and better market position. Therefore, a firm competes more effectively once its market position has been consolidated, by not just defending the previous market share, but also expanding the same (Markides and Geroski, 2005; Markides and Sosa, 2013). Technological Leadership The companies are able to gain a leadership in technological advancement. Such development is explained with the help of the learning or experience curve. In the standard model of learning curve, there is a fall in unit production costs with cumulative output. So, there is a considerable cost advantage for the early entrant, if the learning experience is kept exclusive to the firm. Firms that desire entering the market initially offer lower costs in order to achieve a long-term cost advantage. Such competition brings about sharp reduction in profits (Poulsen, 2007). R&D and Patents In case where technological advancements are a function of R&D expenditures, the technological knowhow should be patented so that the pioneers have an advantage over competitors (Thijssen, 2010). For example, Kentucky Fried Chicken (KFC) has maintained the secret of its recipe so far and is it considered as one of the best kept trade secrets. Even in the pharmaceutical industry, patents play an important role in ensuring trade secrets and providing with long-term benefits. Xerox also utilised patents as an entry barrier. In addition to the process of xerography, the company also patented a range of other alternative technologies, thereby keeping away potential competitors for a long period of time. However, other firms had challenged this act of patenting on moral grounds. Sony In the modern times, an example of first mover is Sony, a Japanese electronics firm. Following the Second World War, the company was set up on the moral of “doing things that no one else was willing to do”. Sony functioned based on the theory that it must manufacture and introduce products of the highest quality into the market before any other company. This strategy helped to gain competitive advantage over the competitors and to amass market share in the electronics industry (Zhao, et al., 2012; Lieberman and Montgomery, 2002). Evaluation The theory of first mover advantage has its share of drawbacks. In order to be a pioneer in the field, the company has to undertake considerable research and development activities, thereby incurring huge costs. The company has to invest heavily in the R&D department for the research to continue. After an invention is made, it has to be patented, which again entails high costs. In addition, distribution channels have to be set up, supplier relations built and a market developed for the product. Such developments require large amount of investments on the firm’s part. For later entrants, acquiring the knowledge required is cheaper as they need not make huge investments on R&D. Also, the infrastructure is already set up. Hence, a firm saves on several costs by making a late entry into the market. New entrants sometimes also hire employees from the old firms in order to learn the trade secrets. This is a major disadvantage for the first mover firm. The first movers always have to learn intricacies of the market first hand and are at a risk of failing. The market might not respond well to the new product. The second entrants are, thus, at an advantage of learning from mistakes of the first firm and accordingly position the product offerings. In China, when the “open door policy” was introduced, many US firms chose to rush in aiming to capitalise on the first mover advantage and faced numerous problems. Nonetheless, there were certain firms who chose to wait and capitalise on lessons that the first movers learnt (Frynas, Mellahi and Pigman, 2006). Furthermore, the concept of first mover does not always guarantee of success. There are many companies who have entered the market first, yet failed to sustain. The failure can be attributed to a firm’s inability to gauge the market demand and specificities. The firm, hence, invests more resource than that is necessary and ends up losing the profits. If the technology is not very difficult to grasp and can be learnt by reverse engineering the product, then other firms start entering the market and capturing market share, even before the first firm has an opportunity to consolidate its position. For example, Sony was a pioneer in the development of its Betamax video recorder system. Then again, it was soon driven out of the market by Video Home System (Chen and Pereira, 1999). Porter’s Diamond Model The model helps a nation analyse its competitive position in the global market. It also explains the competitive advantage that certain groups or nations might possess owing to special endowments that are exclusive to them. The model attempts to examine inherent reasons that would render a country or group competitive than the others at an international level. The four parts of the model are explained below. Factor Conditions The natural resources that companies take advantage of in order to build its market position are factor conditions of the nation. These factors are considered advantageous to industrial growth as these can be exploited and used by the companies to build upon. The disadvantages such as, shortage of labour, can also be seen as an advantage that can strengthen market position to a large extent by way of forcing a company to adopt automation process and zero defects manufacturing procedure. Several Japanese companies have excelled in implementation of the zero defects manufacturing procedure. Swiss watches are also an example of automated engineering as Switzerland had faced labour shortages. Few examples of factor conditions are abundance of raw materials, skilled labour, educated youth and high demand in the market. Demand Conditions In a case where there is high demand in the home market for a certain commodity and the market demand also requires improvements, the local company is more dedicated towards developing the product than foreign companies. This is because it is easier for the local company to consolidate its position in the home turf compared to a foreign company, thereby increasing global competitiveness of the local companies. So, demand in the home market can be considered a driver of growth for the local companies. This theory partly explains the reason behind Japan’s phenomenal success in the electronics industry. The Japanese people are very demanding regarding quality of electronic goods, which has been a driver for growth in the Japanese industry. Related and Supporting Industries With development of the main industry, there is a growth in ancillary firms as well. The local supporting industries need to be competitive in order for the principal firm to succeed. The entire system becomes more cost efficient and good quality parts available at the supporting industries helps the principal industry to flourish (Barragan, 2005). For example, the Italian shoe business owes its success and global fame to competitive nature of the highly efficient and competent supporting industries. Firm Strategy, Structure, and Rivalry A firm’s management system and organisational structure are often instrumental in deciding its competitiveness. It is seen that German firms are typically hierarchical in nature and have been able to excel in the engineering industry, attaining a world class reputation for its engineered products. Also, if there is fierce rivalry among the different firms in a market, then there are chances that each firm would develop unique capabilities so as to manage the stiff competition. This development in turn increases the global competitiveness of such firms. Lack of rivalry in the home market can, hence, be considered as counter-productive as it might lead the firms to become less active and consequently restrict innovations and further development. Advantages The Porter’s Model allows the firms to gain a better understanding of competitive factors that would support business in the long run. The resources of a country must be exploited in a proper manner in order for a firm to gain competitive advantage as per global standards. The model also helps the firms to decide whether the home market can support the internationalisation procedure and whether resources of the home country can create competitive advantages on a global scale. As a result, the business heads can become aware of the potential of each country, take rational decisions regarding investments and assess the potential of countries to sustain business growth and developments (Sledge, 2005). Evaluation Even though the Porter’s Diamond model has several advantages, there are certain issues that the model does not address. According to some researchers, the inward FDI renders the firm unable to defend their market share and in turn causes a sharp decline in market shares, as opposed to outward FDI that creates competitive advantage (Smit, 2010). Moreover, the Porter’s model stresses on the national diamond implying a strong national base, ignoring the case of small economies where a strong home front is missing. The demand is generated from foreign countries. Hence, Porter’s Diamond Model fails to analyse a country’s dependence on foreign trade. For example, Canada is a country that does not have a very strong domestic demand; rather the demand is generated from the US. In some countries, the industries are essentially linked with that of the foreign counterparts. Additionally, globalisation has facilitated international trade between countries and thus, the dynamics of trade has changed over last few decades that are not accounted for in the model. Porter’s model has considered a Utopian scenario, where all four strategic advantages are available in one country. It is often not the case. The model considers that it is best for the host country if the MNC shifts the home base therein and also states that the role played by MNCs in development of a country is minimal. Nevertheless, ample evidences show that MNCs have a significant role in advancement of the developing country. MNCs often shift the home base to a host country so as to utilize the strategic advantages available therein. Reference List Barragan, S., 2005. Assessing the power of Porters diamond model in the automobile industry in Mexico after ten years of NAFTA. [pdf] Salvador Barragán. Available at: [Accessed 9 August 2014]. Chen, H. C. and Pereira, A., 1999. Product entry in international markets: the effect of country of-origin on first-mover advantage. Journal of Product & Brand Management, 8(3), pp. 218-231. Frynas, J. G., Mellahi, K. and Pigman, G.A., 2006. First mover advantages in international Business and firm-specific political Resources. Strategic Management Journal, 27, 321-345. Head, K., 2007. Elements of multinational strategy. Berlin: Springer. Hughes, B., 2011. Shell and first mover advantage. [online] Available at: [Accessed 9 August 2014]. Lieberman, M. B. and Montgomery, D. B., 2002. First-mover advantages. Strategic management Journal, 9, pp. 41-58. Markides, C. and Geroski, P., 2005. Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets. San Francisco: John Wiley and Sons. Markides, C. and Sosa, L., 2013. Pioneering and First Mover Advantages: The Importance of Business Models. Long Range Planning, 46, pp. 325-334. Poulsen, A. U., 2007. Information and endogenous first mover advantages in the ultimatum game: An evolutionary approach. Journal of Economic Behaviour & Organization, 64, pp. 129-143. Reap, J., Roman, F., Duncan, S. and Bras, B., 2008. A survey of unresolved problems in life cycle assessment. The International Journal of Life Cycle Assessment, 13(5), pp. 374-388. Sledge, S., 2005. Does Porters diamond hold in the global automotive industry? Advances in Competitiveness Research, 13(1), 22. Smit, A. J., 2010. The Competitive Advantage of Nations: is Porters Diamond Framework a new theory that explains the international competitiveness of countries? Southern African Business Review, 14(1), pp. 105-130. Thijssen, J. J. J., 2010. Pre-emption in a real option game with a first mover advantage and player-specific uncertainty. Journal of Economic Theory, 145, pp. 2448-2462. Vernon, R., 1966. International investment and international trade in the product cycle. The Quarterly Journal of Economics, pp. 190-207. WordPress, 2009. Product Life Cycle (PLC). [online] Available at: [Accessed 9 August 2014]. Zhao, Y. L., Erekson, H., Wang, T. and Song, M., 2012. Pioneering Advantages and Entrepreneurs’ First-mover Decisions: An Empirical Investigation for the United States and China. Journal of Product Innovation Management, 29, pp. 190-210. Read More