The only way an organization can continue its existence and growth is by rejuvenating its product mix. This is important because products go through the product life cycle.
Product Life Cycle (PLC)
The idea of a product life cycle (PLC) was introduced by Theodore Levitt in his Harvard Business Review article entitled “Exploit the Product Life Cycle” which was published in November of 1965. Product life cycle is based on the biological life cycle and starts with introduction of the product (introductory stage) which is followed by growth and maturity stages and eventually decline stage.
The duration of the product life cycle depends on the product and can range from few months to few decades and beyond. Understanding of the product life cycle (PLC) assists management in enhanced understanding of what they can expect with regards to product performance based on where it is in the product life cycle and in developing appropriate strategies. Organizations need to ideally introduce new products before the old product reaches its peak stage.
In terms of profits and losses from new products, at the beginning of the introductory phase a loss is usually made. Then, at some point during introductory stage break even occurs. After break even profits generally rise up until its peak which occurs approximately close to the end of the growth stage which is followed by decline in profits.
Organization’s marketing, financial, human resource, purchasing and manufacturing strategies for the product should reflect the stage of the product in the product life cycle.
Stages of Product life cycle
Introductory stage – During this stage a product is developed and introduced to potential customers. Awareness about the product should be created and the market needs to be established. Marketing communication usually focuses on educating potential customers about the new product. If relevant, intellectual property protection should be obtained.
During beginning of the introductory stages losses are usually incurred. This occurs for a number of reasons such as the high costs of advertising involved in introducing a product to the market as well as the high costs of actual development of the product. Then, at some point during the introductory stage, break even occurs. After that point the firm starts making small but increasing profits. E-conferencing is an example of a product in the introductory stage.
Growth stage – Growth stages are characterised by rapid growth in sales and profits. If economies of scale are possible then profits are further accelerated. This is the stage when a company usually invests substantial economic resources to promote the new product and build the brand. Competition in the growth stage is drawn to the market. Market shares of market players tend to stabilize at this stage. Profits continue to rise up until its peak which generally occurs close to the end of the growth stage. This is usually followed by declining profits. Email is an example of a product in the growth stage.
Maturity stage – Maturity stage characterised by acutely increased competition. Intense competition may lead to price wars and concentrated attempts of rivals to differentiate its products. Companies experience decreased margins and some leave the market. Profits of a company generally continue its decline in the maturity stage. However, overall profits of the market for this particular product tend to be the highest at this stage of the product life cycle; although it is heavily splintered amongst many medium size to small players. There are usually 1 or 2 market dominant companies. Credit cards are an example of a product in the maturity stage.
Decline (saturation) stage – At the saturation stage consumers’ interest in the product dramatically declines. This can happen due to the introduction of more superior products to the market or changed consumer tastes.
Profits continue its decline in the saturation stage until profits reach zero (break-even point). The company may try to prolong this stage by finding ways to cut costs. Companies may also try to rejuvenate products by adding new features and looking for other ways in which product can meet customers’ needs. Markets itself tend to shrink at this stage. Eventually the product is withdrawn from the market. Typewriters are an example of a product in the saturation stage.
In conclusion, it is important to note that not all products will go through each stage of the product life cycle. Some products, for example, may experience the decline stage right after the introduction stage. Therefore, product life cycle (PLC) is a useful formal framework which can be used. However, common sense and intuition should also be applied in making product life cycle decisions.