Marketing Decisions

The blog of LHL Partners, LLC. The blogger is (often) Rick Lightburn, Chief Knowledge Officer of LHL Partners, with his observations about marketing. Our main page is at http://www.lhlpartners.com

Monday, November 12, 2007

The Product Space

There's a very interesting research article in the July 27 issue of Science (Vol. 317. no. 5837, pp. 482 - 487; fulltext not available online, abtract here) written by one professor from the physics department at Notre Dame University and three International Development professors from the Kennedy School of Government called The Product Space Conditions the Development of Nations, which caught my eye because of this graphic. (It's a very large PDF file, but it's very cool.)

It's unusual that physics or international economics professors would write something of interest to marketing analysts and the biweekly publication from the American Association for the Advancement of Science is not something that you keep up with (and may not even be aware of). But innovative ideas for a field usually come from outside, so I usually look afield. The article's abstract was enough to catch my eye:
Economies grow by upgrading the products they produce and export. The technology, capital, institutions and skills needed to make newer products are more easily adapted from some products than from others. Here, we study this network of related products, or "product space," finding that more-sophisticated products are located in a densely connected core whereas less-sophisticated producted occupy a less-connected periphery. Empirically, countries move through the product space by developing goods close to those they currently produce. Most countries can reach the core only by traversing empirically infrequent distances, which may help explain why poor countries have trouble developing more competitive exports and fail to converge to the income levels of rich countries.
In my mind, I read this as:
Businesses grow by upgrading the products they produce and sell. The technology, capital, and skills needed to make new products are more easily adapted from some products than from others. This leads us to the study of "product space"which is a conceptualization of the similarity of product categories as distances: the closer two products are to each other, the more easily the necessary skills are transferred from one to the other. Countries with an expertise in a centrally located category in this product space can move to another more easily than those who are not.

What this could mean for firms is that firms whose expertise is in a centrally located area are more likely to grow than others, or at least able to grow at lower cost than others. It would be interesting to see if the "Product Space" for firms within a national economy is anything like the "Product Space" for different national economies.

(Some of the ideas in this paper seem to be presaged by, if not more simply explained, by the work of urban theorist Jane Jacobs and import replacement, as discussed in her The Economy of Cities and her Cities and the Wealth of Nations.

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