Life cycle analysis relies on the belief that there are predictable relationships among the stages of business unit life cycles on one hand, and certain elements of strategy on the other.
The typical business life cycle curve is analogous to the life cycle of products. During pre-introduction and introduction, the firm is investing heavily to build sales growth through product awareness and refinement, with emphasis on the latter. Thus profit margin is negative until growth begins to occur. If sales growth proceeds at a high enough rate, then unit profit margin will swing positive during the growth phase. Typically the firm’s emphasis is shifted from product refinement to building market share, thus increasing the length and slope of the curve during this phase. As more and more competitors enter the market, however, share is whittled away. Consequently the product’s growth rate begins to level off and the product enters the maturity stage. During growth ever-increasing sales volume can drive unit profit margin higher and higher. As competitive pressures mount, though, profit margin is eaten away. Emphasis shifts to production efficiency as management attempts to maintain profit margin during the maturity phase. Finally, as sales decline sets in, attention is concentrated on maintaining cash flow. Often a policy is in place that makes product discontinuance a function of the magnitude of net cash flow.
In multiproduct firms attention is focused on the net effect on sales, profit margins, and cash generation of the performance of the firm’s stable of products. Overall sales performance is a function of the balance of separate products’ performance.
Multi-business firms, that is, conglomerates or holding companies, can be viewed as a collection of multi-product firms. Of course, the life cycle curves of the separate strategic business units (SBUs) would not line up as neatly as they do in the diagram, but rather would be superimposed on each other in a complex network of curves. However, corporate-level management is concerned with balancing the performance of a collection of SBUs. Overall conglomerate sales can be influenced by the addition or deletion of SBUs or by altering the performance of them.
Strategic Implications of Life Cycle Curves
Life cycle curves can be useful devices for explaining the relationships among sales and profit attributes of separate products, collections of products in a business, and collections of businesses in a conglomerate or holding company. Life cycle analysis has been suggested by some of its advocates as a basis for selecting appropriate strategy characteristics at all levels. It also may be viewed as a guide for business-level strategy implementation since it helps in selection of functional-level strategies.
Preintroduction and Introduction Strategic Implications
During the early stages of the life cycle, marketing strategy should focus on correcting product problems in design, features, and positioning so as to establish a competitive advantage and develop product awareness through advertising, promotion, and personal sales techniques. At the same time, personnel strategy could focus on planning and recruiting new human resource needed for the business operations and dealing with trade union requirements. Also, one would expect the nature of research and development strategy to shift from a technical research orientation during preintroduction to more of a development orientation during actual introduction. Financial strategy would be likely to address primarily sources of funds needed to fuel R&D and marketing efforts as well as the capital requirements of later production facilities.Capital budgeting decisions would be outlined during these early stages so that capacity would be adequate to serve growth needs when sales volume began to accelerate.
Growth Stage Strategy Implications
During the growth stage, strategic emphases change relative to introduction. Marketing strategy is concerned with quickly carving out a niche for the product or firm and for its distribution capabilities, even when doing so might involve taking risks with overcapacity. Too often, firms have unadvisedly accepted quality shortfalls as a necessary cost of rapid growth. Widening profit margins during growth may even permit certain functional inefficiencies and risk taking. Communication strategy is directed toward establishing brand preference through heavy media use, sampling programs, and promotion programs, and strategy should emphasize (1) resource acquisition to maintain strength and (2) development of ways to continue growth when it begins to slow. Personnel strategy may focus on developing loyalty, commitment, and expertise. Training and development programs and various communication systems are established to build management and employee teams that can deal successfully with the demands of impending tight competition among firms during the maturity phase.
Maturity-Stage Strategy Implications
Efficiency and profit-generating ability become major concerns as products enter the maturity stage. Competition grows as more firms enter the market and the implication is that only the most productive firms with established niches and competent people will survive. Marketing efforts concentrate on maintaining customer loyalty and in strengthening this with distributors personally selling to dealers, sales promotions, and publicity. Production strategy concentrates on efficiency and, at the same time, sharpens the ability to meet delivery schedules and minimize defective products. Cost control systems are often put in place. Personnel strategy may focus on various incentive systems to produce manufacturing efficiency. Advancements and transfers are used and some firms try to fit management positions to managers who have personalities more attuned to the belt-tightening needs of products and SBUs at the maturity stage.
Decline-Stage Strategy Implications
When a product reaches the point where its markets are saturated, an effort is often made to modify it so that its life cycle is either started anew or its maturity stage extended. When falling sales of a product cannot be reversed and it enters the decline stage, management’s emphasis may switch to milking it dry of all profit. Advertising and promotion expenditures are reduced to a minimum. People are transferred to new positions where their experience can be brought to bear on products in earlier growth stages (if management was skillful enough to have created such products).
Various strategies have been suggested for products that have entered the decline stage. Hofer and Schendel suggest four choices when sales are less than 5 percent of those of the industry leaders: (1) concentration on a small market segment and reduction of the firm’s asset base to the minimum levels needed for survival (2) acquisition of several similar firms so as to raise sales to 15 percent of the leaders’ sales; (3) selling out to a buyer with sufficient cash resources and the willingness to use them to effect a turnaround; and (4) liquidation.
Credit: Strategic Management-MGU KTM