Unit 3 Building a Business Product Life Cycle 21 October 2013 Learning objectives Understand the four phases of the product life cycle. (D) Appreciate what is meant by an extension strategy. (c) Understand the link between cash flow and the product life cycle.(c) Understand product portfolio analysis using the Boston Matrix (B) Key terms Product life cycle: the stages through which a product passes from its development to being withdrawn from sale; the phases are research & development, launching the product, growth, maturity, saturation and decline. Research and development: the process of scientific and technological research and then development of the findings of that research before a product is launched. Extension strategy: method used to increase the life cycle of a product and prevent it failing into decline Product portfolio or product mix: the combination or range of products that a business sells Product portfolio analysis: investigation of combination of products sold by a business Boston Matrix: a model which analyses a product portfolio according to the growth rate of the whole market and the relative market of a product within the market; a product is placed in one of four categories-STAR,CASH COW,PROBLEM CHILD OR DOG Starter Products have a limited life. List the factors that may affect the length of a product's life: New technology Inventions Changes in taste Changes in fashion Main-Theory The product life cycle shows the stages through which a product passes. The product life cycle Case study example -MINI Development stage : MINI first started at this stage in 1957, Sir Leonard Lord chairman of British Motor cars (BMC) ordered workers to create a new design for a small car. Research and development : Took three years to carry out for the designer , Sir Alec Issigonis and his team. Launching product : After promotion /advertising (newspaper & specialist car magazines) the MINI came into the market in August 1959. Models of the MINI placed in showrooms for customers to trial. Cont. The growth phase: the sales and profits rise. For the MINI in the first full year of production in 1960,116,677 MINIS were produced. Then a further £157,059, an increase in the number of customer who wanted to test drive car. Product maturity : at this stage the product reaches it’s peak in sales, breaking even (costs being paid). The product is profitable, and enough to be financing the development of new products. Customer royalty and repeat purchase is now established . Continued…. For MINI maturity stage lasted between 1960 and early 1970. Also at this stage the manufacturer tries to extend the maturity stage by introducing extension strategies. Introducing slight Changes and a fresh appeal to the target market, but allowing it to appeal to a new segment of the market. Producing a new product would mean start up costs again. How the MINI changed 1961-the MINI COOPER version (powerful engine) 1964- MINI MOKE- Jeep type version 1967-MARK II MINIS-facelift of MINI range. 2002- 150,000 MINI’s produced 2006-200,00 MINI’s produced 2001-2008 luxury car market growing strongly. A best seller within the market. Invested heavily in production facilities in Oxford. Saturation and decline Towards the end of maturity stage market become saturated. Competitors bring products, taking away sales. Consumers have plenty of choices of products making it difficult for sales to grow. Saturation for MINI occurred in 1970, when other car manufacturers bought out other small cars. They had advantage of being small but also had more features than the MINI, therefore taking away the sales. Decline: when there is a huge fall in sales the product goes into decline. 1994 the German luxury car manufacturer, BMW bought the MINI car brand. BMW decided to produce a completely new MINI, which was launched in 2001. Then in 2007, BMW launched a new version of this car. (extension strategy) Stages of product life cycle http://www.businessstudiesonline.co.uk/live/i ndex.php?option=com_content&view=article &id=2&Itemid=8 Sales and profit http://www.businessstudiesonline.co.uk/Gcse Business/Activities/Module3/Product/Product LifeCycleProfitvSales/frame.htm Product portfolio analysis Businesses sell a range of products, for example BMW makes a range of cars mini is just one of them. This range of products represents the Product mix or product portfolio. Businesses need to manage their product portfolios. In order to keep up with overall sales, new products are launched everyday. When existing products decline-new products launched and grow. New products make up for declining sales of older products. The product portfolio analysis questions: helps provide answers for the following 1. Which products are doing well? 2. Which are likely to do better in the future? 3. Should a product be withdrawn from the market? 4. Will increased advertising improve sales/ The Boston Matrix devised by the Boston Consultancy Group is a technique used in this planning.02 The Boston Matrix.pdf BOSTON MATRIX Boston Matrix STARS A product whose market is growing fast. High market share, sales and profits will be growing. Big profit earners in the future Net cash flow – small (disposable income) Money coming in matched by costs of production and extra investment. Business will be spending on new equipment and machinery to make extra output. Cash Cows Product with strong market share In maturity phase of product life cycle Market growth is low Sales may be declining Less growth for future sales Good level of profit Popular products with market High customer loyalty (repeat purchase) Little need for new investment in production facilities (sales not growing very quickly) Strong positive net cash flows for the business Net cash flow can be used to update product portfolio Extension strategies help keep sales and profits high. Problem child/ Question mark Low market share in a fast growing market. Business unclear about what needs to be done about the product. Unsuccessful in its own market May have some promise-not quite ready to take off Net cash flow small Questions to be asked-should we get rid of it? Or should we invest more to turn it into a star? (spending on promotions or bring out a new version of the product) Dogs Low market share in low growth market. Product unsuccessful in its own market and prospects for whole market are poor. Little point of investing in it. However if it generates some net cash flow could stay on sale. The product when negative in cash flow and unprofitable should be withdrawn from sale. Independent activity Target grade (c) Using your notes draw and label the product life cycle of the MINI. Draw and label the BOSTON MATRIX Identify which category you think the MINI was in between 2001 and 2008. Test yourself Target grade (c) 1. List the phases of the product life cycle. (1) 2. What is meant by the term ‘extension strategy’? (2) 3. Identify two possible extension strategies that a breakfast cereal manufacturer might use? (2) 4. Explain how one of the strategies you identified would extend the product life of the new cereal? (An explain question must have three linked sentences- make sure you relate answer to the breakfast cereal) (3) Guide to answering question 4: Explain how the strategy would change the product or the operations of the business Explain how this would affect consumers and the market Explain how it would affect sales. Self-assessment –Mark your answers 1) Development, launch, growth, maturity, saturation and decline (1) 2) Extension strategies are methods used by businesses to increase the life of a product, to prevent it falling into decline by maintaining it’s sales. (2) 3)Promotional offers or discounts, lower prices, Improve the product, advertise, increase number of distribution outlets, changing product (flavour, variety, design etc.) (2) 4) Introducing new flavours, market for cereal will be bigger, attractive a lot more customers and thus increasing sales. (3) Plenary Key Terms Mix and Match Boston Matrix : Product life cycle: : Target Grade (c) Investigation of combination of products sold by a business Method used to increase the life cycle of a product and prevent it failing into decline Research and development: The combination or range of products that a business sells Extension strategy: The stages through which a product passes from its development to being withdrawn from sale; the phases are research & development, launching the product, growth, maturity, saturation and decline. Product portfolio or product mix A model which analyses a product portfolio according to the growth rate of the whole market and the relative market of a product within that market; a product is placed in one of four categories- star, cash cow, problem child, dog Product portfolio analysis: The process of scientific and technological research and then development of the findings of that research before a product is launched. Review learning outcomes Understand the four phases of the product life cycle. (D) Describe the four phases of the Product Life Cycle Appreciate what is meant by an extension strategy.(C) Explain the term extension strategy and provide an example Understand the link between Identify how cash flow and product cash flow and the product life cycle. (C) life cycle are related Understand product portfolio analysis using the Boston Matrix (B ) Identify the four categories and explain them. Give one example. Summarise topic Homework/Extension • Fill out self –assessment chart for unit 3 Topic Product Life Cycle (in note books). • Over to you case study and results plus pp.22-23 Extension/homework: Case study Bistro history answer questions 2 & 3 Product life cycle and online fashion.