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Product Lifecycle

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This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go …

This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go here:
http://flevy.com/browse/business-document/product-lifecycle-227

Product Lifecycle Analysis is an invaluable tool for developing a robust product marketing strategy. Marketers and strategists can
use this analysis to predict sales growth,
associated customer and competitor behaviors,
and, in turn, devise the appropriate product
marketing strategy.

The Product Lifecycle itself it divided into 4
stages of development:
*Introduction
*Growth
*Maturity (and Saturation)
*Decline (and Termination)

The length of each period varies tremendously. Some products have very short cycles, whereas others can take decades or even centuries to go through the cycle. The lifecycle can be mapped against the consumer adoption curve, where the peak of the curve generally occurs in the Maturity stage of the Product Lifecycle.

This document details a 5-phase approach to proper Product Lifecycle Analysis and draws out key strategic insights at each stage of the lifecycle. Additional concepts discussed include:
*Consumer Adoption Curve
*Bass Diffusion Model
*Lifecycle-Performance Factor Matrix
*Strategic Positioning
*Substitution Analysis

Published in: Business, Technology

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  • 1. Business Framework Product Lifecycle Analysis Product Lifecycle Analysis is an invaluable tool for developing a robust product marketing strategy. This document details a 5-phase approach to proper Product Lifecycle Analysis and draws out key strategic insights at each stage of the lifecycle. Additional concepts discussed include Consumer Adoption Curve, Bass Diffusion Model, Lifecycle-Performance Factor Matrix, Strategic Positioning, and Substitution Analysis. Innovators (2.5%) Early Adopters (13.5%) Early Majority (34%) Late Majority (34%) Laggards (16%) STAGE 1 INTRO STAGE 2 GROWTH STAGE 3 MATURITY STAGE 4 DECLINE Time / Adoption Saturation/Sales Compactor Dishwasher Color TV Room A/C Automatic Washers Freezers Refrigerators Ranges & Ovens B&W TV Wringer Find our other documents at http://flevy.com/seller/learnppt
  • 2. 3 Contents • Overview - Consumer Adoption Curve - Product Profitability - Product Lifecycle Stages - Strategic Purposes - Drawbacks • Product Lifecycle Analysis - Areas of Analysis - 5 Phases - Bass Diffusion Model • Strategic Insights - Stage-based Strategies - Strategic Positioning Matrix
  • 3. 5 “CrossingtheChasm” The Product Lifecycle is typically mapped against the Consumer Adoption Curve to draw out key marketing and competitive insights Product Lifecycle – Consumer Adoption Curve It is useful to map all products within an industry or product category against the Adoption Curve—to visualize dynamics among products (e.g. substitution, complements). Innovators (2.5%) Early Adopters (13.5%) Early Majority (34%) Late Majority (34%) Laggards (16%) STAGE 1 INTRODUCTION STAGE 2 GROWTH STAGE 3 MATURITY STAGE 4 DECLINE Source: Hax and Majluf, 1984
  • 4. 7 The lifecycle concept is also closely related to Substitution Analysis Relation to Substitution Analysis • As a product moves through its lifecycle, the likelihood of customers switching to a replacement—or substitute—product increases • This trend is referred to as the Technology S-curve - As the diffusion rate of new technology generally follows an S-shaped curve • Since substitution estimates the adoption rate, the focus is only on the early stages of the Product Lifecycle (i.e. Introduction, Growth, Early Maturity)
  • 5. 9 The appropriate strategy for a business depends on the stage of lifecycle for the related industry Product Lifecycle Stages INTRODUCTION Typified by slow growth rate • Heavy expenditures across the areas of advertising, selling, sampling, promotion, distribution to stimulate awareness of and demand for the product • Initial market awareness is minimal, so the focus is on educating the customer to encourage a trial usage (net cash flow and profitability are negative during this stage) DETAILED CHARACTERTIZATION GROWTH Signaled by a significant increase in sales growth and profitability • Expenditures remain relatively high, but the focus shifts toward building and holding loyal customers (e.g. product variation increases as more competitors enter market) • The increase in volume sold more than compensates for the decrease in pricing (driven by competitive pressures and experience curve effects), causing cash flows and profitability to increase PRIMARY CHARACTERIZATIONSTAGE MATURITY Defined by the reduction in the rate of sales growth and a further reduction in unit costs • As the growth rate of the market slows, weaker competitors are forced out— we see larger players consolidating and acquiring smaller players, and excess capacity drives down prices • Customer preferences and expectations begin to stabilize, driving up competitive rivalry as companies compete for customer loyalty and satisfaction • By the end of the maturity stage, units sales, cash flows, and profitability all decline DECLINE See a continuation of decline in unit sales, cash flows, and profitability • Customers switch to new and/or better products—private labels take an increasing market share • Some competitors maintain profitability by being the focus, niche player with specialized products—however, long term prospects for these small players are unlikely
  • 6. 11 With all the strategic benefits of Product Lifecycle Analysis, it is important to note this framework’s drawbacks Drawbacks of Product Lifecycle Analysis Lifecycle Analysis is based entirely on time. • This framework assumes all industries/products move through a predictable growth pattern as time passes • This is a limited point of view is and does no consider the structural economics in an industry that might impact sales and profitability - E.g., not all industries follow an S-shaped sales growth pattern—some industries skip the Introduction stage, others skip Maturity and begin to decline immediately (e.g. due to a disruptive technology) - Companies can be impact the shape of the sales growth curve through product innovation or strategic market repositioning The actual timing of the lifecycle stages different from industry-to- industry and product-to-product. • To use Lifecycle Analysis as a forecasting tool, we must make broad assumptions regarding the stage of the product’s life - Resultantly, sales forecasts are typically incorrect - E.g., a slump in sales could be mistakenly be interpreted as that a product has reached the Maturity or Decline stage, when other factors may be at play From a strategic perspective, there is no clear relation between the nature of competition in an industry and its current lifecycle stage. • To illustrate this point, some industry remains highly concentrated throughout the lifecycle—others main highly fragmented • The nature of competition is more dependent on the underlying economics of the business, rather than the lifecycle concept—and over-reliance on this framework may provide misleading conclusions DRAWBACK DETAILS Lifecycle Analysis should be used as a starting point to developing strategic hypotheses— underlying economics should be further analyzed before specific action is recommended.
  • 7. 13 Contents • Overview - Consumer Adoption Curve - Product Profitability - Product Lifecycle Stages - Strategic Purposes - Drawbacks • Product Lifecycle Analysis - Areas of Analysis - 5 Phases - Bass Diffusion Model • Strategic Insights - Stage-based Strategies - Strategic Positioning Matrix
  • 8. 15 There are 5 phases to conducting Lifecycle Analysis Product Lifecycle Analysis Approach Define the industry/ scope of analysis Determine the level of lifecycle performance metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5 • Be clear about your industry, as this drives the scope of your analysis • Determine the SIC code to focus on • Evaluate product performance against 7 external factors • Develop a Lifecycle- Performance Factor Matrix • Validate the lifecycle stage against generic performance metrics • Estimate sales by the lifecycle stage • Utilize the Bass Diffusion Model for new technology or product innovation • Draw strategic recommendations based on knowledge of the select lifecycle stage
  • 9. 17 Phase 2 Determine the level of lifecycle performance metrics Business and product performance across seven external factors must be assessed.  There are 7 external performance factors that must be evaluated, which are:  Relative growth rate  Market industry potential  Breadth of the product lines  Number of competitors  Distribution/stability of market share among competitors  Barriers to entry  Technology innovation  The levels of these metrics should be identified through focus interviews and secondary research (e.g. trade association publications, analyst reports, annual reports, SEC filings, business journals) Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
  • 10. 19 This is a typical Lifecycle-Performance Factor Matrix Lifecycle-Performance Factor Matrix The matrix above is true to most industry and product lifecycles, but many exceptions exist. INTRODUCTION GROWTH MATURITY DECLINE Relative Growth Rate Positive, increasing Positive, increasing Positive, decreasing Negative, increasing Market Industry Potential Uncertain Strong Moderate Weak Breadth of Product Lines Narrow Increasing Wide, private label emerging Decreasing Number of Competitors Few Increasing Several, consolidation occurring Decreasing Distribution/Stability of Market Share Unstable Stabilizing Stable, strong loyalty Stable, customers loyal Barriers to Entry Low Increasing High High Technology Innovation High Stable Stable Low EXTERNAL PERFORMANCE FACTOR LIFECYCLE STAGE Source: Hax and Majluf, 1984 Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
  • 11. 21 In addition to validation, these generic performance metrics can provide strategic insight Generic Performance Metrics by Lifecycle Stage (2 of 2) INTRODUCTION GROWTH MATURITY DECLINE Foreign Trade  Some exports  Significant exports  Few imports  Falling exports  Significant imports  No exports  Significant imports Competition  Few competitors  Entry high, many competitors  Increasing mergers  Price competition  Industry shake out  Increase in private brands  Exist  Few competitors Risk  High risk  Growth covers risk taking behavior  Cyclicality Margins and Profits  High prices and margins  Low profits  Price elasticity low  High profits, fairly high prices  Recession resistant  High P/E ratios  Good acquisition climate  Falling prices, lower profits and margins  Lower dealer margins  Increase market share stability  Poor acquisition climate, tough to sell companies  Low prices and margins  Price may rise in late decline Overall Strategy  Best period to increase share  R&D and engineering are key functions  Practical to change price or quality image  Marketing is key function  Bad time to increase share, change price, or quality image  Competitive cost structure key  Marketing effectiveness is key  Cost management is key PERFORMANCE FACTOR Source: Michael Porter, Competitive Strategy Use these metrics and trends to develop strategic insight into the market dynamics. Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
  • 12. 23 Apply product knowledge and insight when using Product Lifecycle for forecasting Implications on Sales Growth  If we determine the product to be in the Growth stage of its lifecycle, the sales growth would be expected to be grow at a slower rate  We should recognize that the product will eventually reach maturity, at which point the sales growth rate will begin to decline  This insight should be incorporated into the sale forecasts  For forecasting purposes, the timing of these stages and subsequent changes to the sales growth rate should be estimated by reviewing the sales histories of comparable products or industries Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
  • 13. 25 Here is the Bass Model Diffusion Equation Bass Diffusion Model – Equation The Bass Model approximate the S-curve using the following adoption equation: Where: Pt probability of a purchase at time t, given that no purchase has yet been made p coefficient of innovation, initial probability of adoption (from comparable products) q coefficient of imitation, measure of the ―word of mouth‖ effect (from comparable products) yt-1 cumulative sales prior to period t (i.e. including period t-1) m market potential / potential sales volume (determined from market research) (yt-1/m) fraction of the Total Available Market (TAM) who have tried the new technology • Using this probability estimate, sales volume resulting from new adopters in any period would be equal to the remaining potential sales multiplied by Pt • Mathematically, sales volume in any period would be given by:    S p m q p y q m yt t t      1 1 2 P p q y m t t          1 Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
  • 14. 27 Phase 5 Develop strategic hypotheses and action steps The results of the Lifecycle Analysis should be drive strategic hypotheses  The lifecycle stage has implications for strategic and tactics selected by your organization  These implications are based on generalizations across several industries  They may be used to drive strategic hypotheses, but should be rigorously analyzed prior to recommendation or implementation Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5 Stage specific strategies are detailed in the next section
  • 15. 29 In the Introduction stage, get your pricing strategy right Introduction Stage Strategies INTRO GROWTH MATURITY DECLINE  Invest heavily in advertising, selling, sampling, promotion, and distribution to stimulate diffusion of the new product to earn new customers  Experiment with production processes to ensure continuous improvement and innovation  Monitor competitors and adjust positioning to preempt competitive moves  Pricing should receive special attention in the Introduction stage  There are two general pricing strategies in the Introduction stage: 1) set prices high to ―skim the market,‖ or 2) set prices low to maximize ―market penetration‖ – decision on strategy depends on level of competition  By setting prices high, margins will be maximized—minimizing consumer surplus with innovator/early adopter markets  Competitors will enter the market, pushing prices down, unless the incumbent has a cost advantage (e.g. economy of scale, experience, investment required)  If prices are set low, initial investment in the product may not be recovered  Although competitors will be less likely enter the market, a technological innovation may make the current product obsolete  Thus, the pricing decision must be made by weighing the benefits and risks of potential market demand (size and growth), competitive entry, and technological development
  • 16. 31 The Maturity stage leads to 3 strategic options Maturity Stage Strategies INTRO GROWTH MATURITY DECLINE  Based on the competitive dynamics in the industry, there are 3 strategies we should follow to extend the profitability and duration of the Maturity stage  Maintenance  Employed when the threat from competitive entry or technology innovation are minimal  Maintain the market position/profitability through advertising, promotion, and pricing  Monitor competitive positioning, product development activities, and general business and macro-environmental trends  Defense  Employed when new or current competitors are altering the status quo by changing their marketing mix (i.e. product, pricing, promotion, placement)  Adjust advertising and promotion, improve their product performance, modify pricing, and alter distribution spending to maintain profitability  Innovation  Employed to expand the market, fill customer needs, and preempt competition  Develop product innovation through ―flankers‖ (E.g. new flavors, colors, sizes, new uses and users (e.g. Arm & Hammer’s baking soda to deodorize refrigerator smells), or significant product innovation (e.g. cannibalization, introduction of new models)  In addition to these generic strategies, we should identify and exploit core competencies and competitive advantages to survive the industry shake-out/massive consolidation at the end of the Maturity stage (e.g. brand equity, cost advantages, channel dominance/partnerships)
  • 17. 33 Product Lifecycle Analysis can be extended and applied to the BCG Growth-Share Matrix Competitive Positioning Categories The strategic actions implied by Lifecycle Analysis depend on both the current stage, as well as the competitive positioning of the business or product in the market. The competitive position of our business or product can be estimated based on a set of qualitative and quantitative criteria for each the 6 competitive categories below: DOMINANT STRONG FAVORABLE TENABLE WEAK NONVIABLE Results from quasi-monopoly or a strongly protective technical leadership Can usually follow strategies of their choice, irrespective of competitors Fragment industries, with no competitor clearly standing out Can usually be maintained profitably through specialization in the niche Can be too small to survive independently and remain profitable in the long-term, given the competitive economics of the industry; can be a large firm suffering from past mistakes Market is too small, product is not differentiated, costs are too high to be competitive
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