All products have a life cycle chart that looks something like Figure 10.8 . In reality the time span may be only a few months or years, as in the case of novelty products and toys, or it may last for more than 100 years, as in the case of products such as binoculars and marmite.
Figure 10.8 shows a product that has a research and development stage prior to the commencement of production in year 4 when revenues begin to be generated. Losses are incurred initially, followed by a profi t that gradually tapers off once the product enters its maturity stage.
Figure 10.9 illustrates a product that has several different life cycles; the original life cycle has been extended because the organisation found new uses for the product. One of the classic examples of this is the manufacture of nylon, which was developed just before the Second World War. Its fi rst use was in parachutes for the armed forces, its next use was in ladies ’ stockings, this was followed by car tyres, carpets and clothes.
Figure 10.10 highlights the danger of product proliferation, when products are updated or superseded too quickly. The product life cycle is cut short so that the product hardly has
sales revenue
profit years
2 4 6 8 10 12 14
£‘000
Figure 10.8 The product life cycle
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time to generate a profi t. The product barely covers the R & D costs before its successor is launched on the market.
There are a number of factors that need to be managed in order to maximise a product’s return over its life cycle. These are:
● maximise the length of the life cycle itself;
● design costs out of the product;
● minimise the time to market;
● manage the product’s cash fl ows.
These factors will be considered in turn.
Maximise the length of the life cycle itself
Generally, the longer the life cycle the greater the profi t that will be generated, assuming that production ceases once the product goes into decline and becomes unprofi table. One way to maximise the life cycle is to get the product to market as quickly as possible to max- imise the time in which the product generates a profi t. This is discussed below. Figure 10.9 illustrates another way of extending a product’s life, by fi nding other uses, or markets, for the product. Other product uses may not be obvious when the product is still in its
sales revenue
profit time
£‘000
Figure 10.10 Product life cycle when product proliferation occurs time
£‘000
Figure 10.9 Extending the product life cycle
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planning stage and need to be planned and managed later on. On the other hand, it may be possible to plan for a staggered entry into different markets at the planning stage. Many organisations stagger the launch of their products in different world markets in order to reduce costs, increase revenue and prolong the overall life of the product. A current exam- ple is the way in which new fi lms are released in the US months before the UK launch.
This is done to build up the enthusiasm for the fi lm and to increase revenues overall.
Other companies may not have the funds to launch world-wide at the same moment and may be forced to stagger it.
Skimming the market is another way to prolong life and to maximise the revenue over the product’s life. This was discussed earlier in this text.
Design costs out of the product
It was stated earlier that between 80 and 90 per cent of a product’s costs were often incurred at the design and development stages of its life. That is, decisions made then committed the organisation to incurring the costs at a later date, because the design of the product determines the number of components, the production method, etc. It is abso- lutely vital therefore that design teams do not work in isolation but as part of a cross- functional team in order to minimise costs over the whole life cycle.
Minimise the time to market
It is vital to get any new product into the market place as quickly as possible. Competitors will monitor each other closely so that they can launch rival products as soon as possible to maintain profi tability. The fi rst organisation will try to launch its product as quickly as possible after the concept has been developed, so that it has as long as possible to establish the product in the market and to make a profi t before the rival’s product is launched.
Often it is not so much costs that reduce profi t as time wasted. A McKinsey study revealed that if a product was launched six months behind schedule 33 per cent of after tax profi t was lost. If on the other hand product development cost 50 per cent more than planned, profi ts reduced by just 3.5 per cent. All new product developments should have a planned time to market and events should be monitored closely to make sure that the planned timing is adhered to. This can be done using Gantt charts. Nowadays simulta- neous engineering is often used in the planning, development and testing stages, which allows for several activities to be performed at the same time rather than sequentially, thus speeding the product on to the market. Alternatively cross-functional development teams, which operate simultaneously, are used to shorten the time to market.
Manage the product’s cash flows
In order to manage the life cycle of their products Hewlett-Packard developed what they termed the return map. House and Price (1991) describe how this was developed in order to minimise the time to market and to maximise the return over the product’s life cycle.
It was developed to help employees focus on the issue of developing products that would make the most profi t in the least time. The return map measures both money and time ( Figure 10.11 ), and plots the cumulative investment, sales and profi t over time. The y-axis is the measurement of money and is normally drawn on a logarithmic scale to capture cumulative sales and investment adequately.
The return map measures several key time periods, the fi rst of which is the time to mar- ket (TM). Other key measures that are shown on the chart in Figure 10.11 are breakeven
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time (BET), breakeven time after release (that is after the product is launched) (BEAR), and return factor (RF), which is the excess of profi t over the investment.
House and Price (1991) recount the history of the ultra-sound machine that had a time to market (TM) of 9 months when the product was proposed. Two months into the project’s development, Hewlett-Packard had a breakthrough in technology that would give clearer pictures. The management decided to incorporate this, and so the TM was extended by 4 months despite the fact that the return map showed that the return factor would reduce slightly ( Table 10.6 ). The actual TM was 15 months and there was also a cost overspend as shown in Table 10.6 .
Table 10.6 shows that the initial proposal was very profi table with a return of $7.3 m in excess of the initial investment one year after the product launch. The modifi cation did not improve profi tability but the company felt that customers would appreciate the improvement and so went ahead. The actual results show that not only was the return seriously reduced but that it began to be received 6 months late, and as a consequence the total earnings life cycle of the project was cut by 6 months resulting in a further loss of earnings.