Product Life Cycle and Cost Recovery Performance - Literature review Example

PRODUCT LIFE CYCLE AND COST RECOVERY PERFORMANCE By Product Life Cycle and Cost Recovery Performance Nowadays, in order to survive the challenges imposed by the current economic scenario and market situation, many companies are introducing innovations in their products in order to add more value to and operate profitably at each stage of production. Every product has a certain lifetime. And these products pass through different stages of introduction, growth, maturity and decline. These stages are known as the Product Life Cycle (PLC). The inputs and processes that each functional department of a business such as the financial, human resource, manufacturing, marketing and the Supply chain departments, varies at each different stage of the Product Life Cycle (Kotler et al, 2006). The product life cycle consists of 4 phases. The first is the introduction stage, when a product is launched into the market to address the consumers’ unsatisfied needs. The main tool for competition is the Unique Selling Proposition of the product and prices are usually set low. However the pricing depends on the type of product. If the product is a technological one, market skimming price strategy would be used in order to exploit as much profit from the initial market as possible. After the introduction, the product starts to growth in the market until reaches the maturity point and finally declines. Thus, businesses should start doing research and development to improve its existing products or develop the new products in the markets in order to extend the lifecycle. This may be done through Brand Revitalization or Revamping of the whole Brand which would involve Repositioning it in the market through a different USP. Therefore, business should manage and monitor their products carefully so as to determine at what stage of its life the product stands in order to develop its strategies accordingly (Kotler et al, (2009). The very first stage of the product life cycle, that is the introduction (development) stage, substantial costs are incurred on research and development backed by continuous market research to gauge where the brand positioning is going. Product development costs and test runs in the market means exorbitant. The business tests the market by making prototypes, and making the sample of potential customers experience the product before it is launched. There are no profits made in this stage as the product launch costs, trial runs and costs of marketing activities (such as brand activation, Below the Line Activities, Trade Marketing Initiatives, Above the Line advertisement) are incurred to launch the product. This initial stage is marked by negative profitability as almost no sales are made and the firm only injects more capital into the product launch (Kotler et al, 2004). The Growth stage comes after launching the new product into the markets. Businesses monitor their strategies carefully to try to raise the profits and sales owing to all the marketing activities. After the launch, the marketing budget has to be increased as the competitors could start noticing the presence of a new product that might hit their sales. As the competitors also start with their Pull strategies, marketing efforts have to be doubled in order to continue to grow and beat competition. According to Kotler and Armstrong in Principles of Marketing, "Sales promotion consists of short-term incentives to encourage purchase or sales of a product or service”. “As such, firms must make careful choices over their marketing strategies; in particular, their pricing, promotional and placement decisions” (Porter, 1980; 1985; Kotler et al., 1996; Blackwell et al., 2001; Kotler et al, 2004). Costs at this stage would again be higher as more marketing efforts and promotional schemes would have to be run. However, later in this stage, businesses can expect the start of a good steady return on their investments as their product would start catching up in the market. Marketing costs can be expected to start being recovered in the growth stage as the product would experience growing sales and growing profits (Kotler et al, (2004). At the third or The Maturity stage, most of the business reaches at a point where rivalry is most intense and firms compete merely on the basis of price. Market start to become saturated and marketing efforts are reduced and there is a most likely switch from Consumer Marketing to Trade Marketing. Businesses now have to face both marketing and financial challenges. Marketing activities of competing firms have to be carefully monitored as the imitation of product features of the product may have been started by the rivals. At this stage, profits continue to be earned by the market as a whole. Research and development activity takes a new turn and is steered by and large towards better production methods to give more efficiency and quality (Haslam et al, 2009). As the product moves to its Decline stage, it loses the attention and preference of the consumers to new established products in the market. This happen when the product becomes too saturated and stops appealing to the changing needs of the consumers. The marketing activities shrink and so do the sales and profits of the company. However, a decline is not always inevitable. Through Research and Development, the product can be revamped and Re-launched and leveraged in the market with a new USP and other Extension Strategies. For example, Microsoft switch from Window3X to window 95 and 98 generation and then to Windows XP and now to Windows Vista very quickly. (Haslam et al, 2009). This is done to prolong the lifecycle of the product. To avoid the decline stage, the product can also be launched in different markets. For example, Sony launches Hi-Tech electronics in Europe and the U.S first. Then when the product reaches maturity, the same product is launched in the third world countries (Stegenga, (1982). Here again, all the costs of launching a product, marketing, monitoring etc would have to be incurred affecting the company’s cost recovery (Porter, 1980; 1985; Kotler et al., 1996; Kotler et al, 2004; Grant, 2002). As far as the full cost recovery is concerned, the product in its first stage would not give any return as a lot of the cost would spent on it for it to be introduced in the market. However, if the product nature is a specialized one and that it would give a first-mover advantage to the company, Market Skimming price can be used as a strategy. This would enable the company to exploit as much profit it can from the high end market. Then as the product starts to reach its decline stage in that market it can be launched in the mass market with reduced prices. This way, the product would be most profitable in its initial stages and return on investment can be obtained at an earlier stage than a normal FMCG would. However as far as FMCGs are concerned, price elasticity, Unique selling point (USP) could be considered to extend the life of the Product. Changing the Unique selling proposition (USP) of the product and revamping the package design, brand image and hence creating a different point of parity from its competitors would extend the life cycle of the products (Melser et al, 2008; Sheth et al, (1989). All businesses will expect a highest rate of return on capital employed to have a competitive advantage over its rivals. The product in its growth stage would again consume a large chunk of the budget however; companies can expect a steady income for the business as the product becomes popular amongst the consumers. Moreover, as the product has a rising demand, the production will have to be increased. This would compliment in cost reductions as the company would achieve economies of scale as it increases its production to meet the demand. Furthermore, in its maturity stage, more efficient ways of production process will be researched on, helping further to cut down the costs or reduce the wastage from the production process. These lower costs of production can be translated into lower prices and hence more sales turnover leading the company into a rapid cost recovery. In its growth and maturity stage, the business can rely on market-led growth and productive-led to try to increase sales and reduce the costs (Taylor et al, 1998). However, a setback which the companies might face from relying on the growth and low-cost production methods is the aggressive price competition and other revamping activities which firms might undertake. Even during the growing stage of the product, the rate at which the market of a product expands tends to fall because of fierce competition and maturity/stagnation of the market. Hence, the total revenue base of the firm tends to decline as it starts to reach to maturity because of intense competition. Apart from that, a mature market with competitive pricing would also restrain the cost recovery of a firm. This shows that the growth and maturity stage would actually prevent the firm from recovering its costs if the marketing activities fail to generate enough pull in the market. It would be on the reputation of the brand which is built that would translate into an increase in revenue and hence cost recovery performance such as the example of Coca-Cola which can outsource its productions to bottlers to sell its products and like other premium brands like BMW, Monte Blanc, Rolex who can sell at premium prices without discounting like the mass manufacturers do to attract consumer on the basis of the pricing strategies (Haslam et al, 2009). All in all, product life cycle helps gauge sales forecasts and analyzes the firm’s product portfolio that on what stages they are at and assist in the devising of marketing strategies accordingly. References HASLAM, C., NEALE, A. & JOHAL, S. (2009) Chapter 5: Restructuring, Financialisation and Competitive Advantage, page: 46-52, 115-120. KOTLER, P. & ARMSTRONG, G. (2004) Principles of Marketing, 10th edition. Upper Saddle River, NJ: Pearson Prentice Hall. KOTLER, P. & KELLER, K.L. (2006) Marketing Management, 12th edition. Upper Saddle River, NJ: Pearson Prentice Hall. KOTLER, P., & KELLER, K. L. (2009). A framework for marketing management. Upper Saddle River, N.J., Pearson Prentice Hall. MELSER, D., & SYED, I. (2008). Prices over the product life cycle an empirical analysis. Sydney, School of Economics University of New South Wales. PORTER, M.E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press. SHETH, J. N., & ESHGHI, A. (1989). Global marketing perspectives. Cincinnati, South-Western Pub. Co. STEGENGA, J. J. (1982). Product life cycle usage in domestic and international marketing. Thesis (M.B.A.)--San Diego State University, 1982 TAYLOR & FRANCIS (1998). Product life cycle cost analysis: state of the art review. International Journal of Production Research. 36, 883-908. Read More