Question

These questions refer to the discussions we had in class:

a. explain the product cycle theory and provide your own relevant examples.
b. why does the production of 'more simple products' tend to move to developing countries?

c. explain in this context the concept of value added. Describe the factors that impact the value added contained in product. Why is this so important for a country's economy?

Answer 1

Answer :

Part a) :

Product Life Cycle: The product life cycle is the process a product goes through from when it is first introduced into the market until it declines or is removed from the market. The life cycle has four stages - introduction, growth, maturity and decline.

4 Stages of the Product Life Cycle : Generally, there are four stages to the product life cycle, from the product's development to its decline in value and eventual retirement from the market.

1. Introduction

Once a product has been developed, the first stage is its introduction stage. In this stage, the product is being released into the market. When a new product is released, it is often a high-stakes time in the product's life cycle - although it does not necessarily make or break the product's eventual success.

During the introduction stage, marketing and promotion are at a high - and the company often invests the most in promoting the product and getting it into the hands of consumers. This is perhaps best showcased in Apple's (AAPL) - Get Report famous launch presentations, which highlight the new features of their newly (or soon to be released) products. It is in this stage that the company is first able to get a sense of how consumers respond to the product, if they like it and how successful it may be. However, it is also often a heavy-spending period for the company with no guarantee that the product will pay for itself through sales. Costs are generally very high and there is typically little competition. The principle goals of the introduction stage are to build demand for the product and get it into the hands of consumers, hoping to later cash in on its growing popularity.

2. Growth

By the growth stage, consumers are already taking to the product and increasingly buying it. The product concept is proven and is becoming more popular - and sales are increasing. Other companies become aware of the product and its space in the market, which is beginning to draw attention and increasingly pull in revenue. If competition for the product is especially high, the company may still heavily invest in advertising and promotion of the product to beat out competitors. As a result of the product growing, the market itself tends to expand. The product in the growth stage is typically tweaked to improve functions and features. As the market expands, more competition often drives prices down to make the specific products competitive. However, sales are usually increasing in volume and generating revenue. Marketing in this stage is aimed at increasing the product's market share.

3. Maturity

When a product reaches maturity, its sales tend to slow or even stop - signaling a largely saturated market. At this point, sales can even start to drop. Pricing at this stage can tend to get competitive, signaling margin shrinking as prices begin falling due to the weight of outside pressures like competition or lower demand. Marketing at this point is targeted at fending off competition, and companies will often develop new or altered products to reach different market segments. Given the highly saturated market, it is typically in the maturity stage of a product that less successful competitors are pushed out of competition - often called the "shake-out point." In this stage, saturation is reached and sales volume is maxed out. Companies often begin innovating to maintain or increase their market share, changing or developing their product to meet with new demographics or developing technologies.

4. Decline

Although companies will generally attempt to keep the product alive in the maturity stage as long as possible, decline for every product is inevitable. In the decline stage, product sales drop significantly and consumer behavior changes as there is less demand for the product. The company's product loses more and more market share, and competition tends to cause sales to deteriorate. Marketing in the decline stage is often minimal or targeted at already loyal customers, and prices are reduced. Eventually, the product will be retired out of the market unless it is able to redesign itself to remain relevant or in-demand. For example, products like typewriters, telegrams and muskets are deep in their decline stages (and in fact are almost or completely retired from the market).

Example : VCR

Many of us probably grew up watching or using VCRs (videocassette recorders for any Gen Z readers), but you would likely be hard pressed to find one in anyone's home these days. With the rise of streaming services like Netflix (NFLX) - Get Report and Amazon (AMZN) - Get Report (not to mention the interlude phase of DVDs), VCRs have been effectively phased out and are deep in their decline stage. Once groundbreaking technology, VCRs are now in very low demand (if any) and are assuredly not bringing in the sales they once did.

Part b)

The production of 'more simple products' tend to move to developing countries such as agricultural products. The developing-country shares of the projected growth include 81 per cent for meat, 83 per cent for grains and oilseeds, and 95 per cent for cotton. Furthermore, developing countries' demand for agricultural products is expected to increase faster than their production. As a result, these countries will account for 92 per cent of the total increase in world meat imports, 92 per cent of the increase in total grains and oilseeds imports, and nearly all of the increase in world cotton imports.

Factors behind the rapid increase in developing countries' demand are high rates of population and income growth, accompanied by increased urbanization and an expanding middle class. Populations in developing countries, in contrast to those in high-income countries, tend to be younger and undergoing more rapid urbanization, which generally leads to more diversified diets. These consumption changes are expected to shift import demand from traditional staples toward feedstuffs and high-value food products. Rising import demand by developing countries will provide an opportunity for the United States to expand agricultural exports. However, US exporters will face new challenges as they adapt in response to the import needs of a large number of small but rapidly growing markets.

Lower Labor Costs

A benefit of operating overseas is that many foreign countries offer lower operating costs, particularly reduced labor costs. According to BusinessKnowledgeSource.com, some companies have reported savings as high as 50 percent in salary payments alone. For companies experiencing a shrinking market or loss of business because of an influx of competitors, overseas relocation can make a substantial difference in their bottom line, and perhaps even prevent a business from failing altogether.

Reaching Untapped Markets

Opening an overseas facility helps a company reach a brand-new market where demand for its products and services is high and initial competition is minimal. It also helps the company increase its brand recognition throughout the world. In an increasingly global economy, greater brand awareness may be necessary for companies that want to continue to expand, especially if their current markets have reached their saturation point.

Part c)

• Value-added is the additional features or economic value that a company adds to its products and services before offering them to customers.
• Adding value to a product or service helps companies attract more customers, which can boost revenue and profits.
• Value-added is effectively the difference between a product's price to consumers and the cost of producing it.
• Value can be added in several different ways, such as adding a brand name to a generic product or assembling a product in an innovative way.

Understanding Value-Added

Value-added is the difference between the price of product or service and the cost of producing it. The price is determined by what customers are willing to pay based on their perceived value. Value is added or created in different ways. These may include, for instance, extra or special features added by a company or producer to increase the value of a product or service. The addition of value can thus increase either the product's price that consumers are willing to pay. For example, offering a year of free tech support on a new computer would be a value-added feature. Individuals can also add value to services they perform, such as bringing advanced skills into the workforce.

Consumers now have access to a whole range of products and services when they want them. As a result, companies constantly struggle to find competitive advantages over each other. Discovering what customers truly value is crucial for what the company produces, packages, markets, and how it delivers its products. Bose Corporation, as an example, has successfully shifted its focus from producing speakers to delivering a "sound experience". Or, when a BMW car rolls off the assembly line, it sells for a much higher premium over the cost of production because of its reputation for stellar performance, German engineering, and quality parts. Here, the additional advantage has been created through each brand's symbolic value and years of refinement.

Value-Added in the Economy

The contribution of private industry or government sector to overall gross domestic product (GDP) is the value-added of an industry, also referred to as GDP-by-industry. If all stages of production occurred within a country's borders, the total value added at all stages is what is counted in GDP. The total value added is the market price of the final product or service and only counts production within a specified time period. This is the basis on which value-added tax (VAT) is computed, a system of taxation that's prevalent in Europe.

Economists can in this way determine how much value an industry contributes to a nation's GDP. Value-added in an industry refers to the difference between the total revenue of an industry and the total cost of inputs the sum of labor, materials, and services purchased from other businesses within a reporting period. The total revenue or output of the industry consists of sales and other operating income, commodity taxes, and inventory change. Inputs that could be purchased from other firms to produce a final product include raw materials, semi-finished goods, energy, and services.