GOKARAJU RANGARAJU INSTITUTE OF ENGINEERING AND TECHNOLOGY DEPARTMENT OF MANAGEMENT STUDIES MBA III SEMESTER STRATEGIC MANAGEMENT MANUAL-09

(for private circulation only) UNIT II TOOLS AND TECHNIQUES FOR STRATEGIC ANALYSIS

I Product Life Cycle model

1. Background
THE idea of the Product Life Cycle was first developed in 1965 by Theodore Levitt in an article entitled Exploit the Product Life Cycle published in the Harvard Business Review on 1 November 1965.

2. Benefit of the Product Life Cycle model

For a business, having a growing and sustainable revenue stream from product sales is important for the stability and success of its operations. The Product Life Cycle model can be used by consultants and managers to analyse the maturity stage of products and industries. Understanding which stage a product is in provides information about expected future sales growth, and the kinds of strategies that should be implemented.

3. Product Life Cycle model

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The Product Life Cycle is the name given to the stages through which a product passes over time. The classic Product Life Cycle has four stages: 1. 2. 3. 4. Introduction, Growth, Maturity, and Decline.

3.1 Introduction
At the market introduction stage the size of the market, sales volumes and sales growth are small. A product will also normally be subject to little or no competition. The primary goal in the introduction stage is to establish a market and build consumer demand for the product. There may be substantial costs incurred in getting a product to the market introduction stage. Substantial research and development costs may have been incurred, for example, thinking of the product idea, developing the technology, determining the product features and quality level, establishing sufficient manufacturing capacity, preparing the product branding, ensuring trade mark protection, etc. Marketing costs may be high in order to test the market, launch and promote the product, develop a market for the product, and set up distribution channels. The market introduction stage is likely to be a period of low or negative profits. As such, it is important that products are carefully monitored to ensure that sales volumes start to grow. If a product fails to become profitable it may need to be abandoned. Some of the considerations in the introduction stage include:

Product development: research and development of the basic technology and product concept, determining the product features and quality level. Pricing: should penetration pricing or a skimming price strategy be used? A skimming price strategy might be appropriate where there are very few competitors. Distribution: distribution might be quite selective until consumer acceptance of the product can be achieved. Promotion: marketing efforts are aimed at early adopters, and seek to build product awareness and to educate potential consumers about the product.

3.2 Growth
If the public gains awareness of a product and consumers come to understand the benefits of the product and accept it then a company can expect a period of rapid sales growth, enter the Growth Stage. In the Growth Stage, a company will try to build brand loyalty and increase market share. Profits are driven by increased sales volume (due to growth in market share as well as an increase in the size of the overall market). Profits might also be driven by cost reductions gained from economies of scale, and perhaps more favourable market prices. Competition in the Growth
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Stage remains low, although new competitors are expected to enter the market. When competitors enter the market a company might be subject to price competition and increase its marketing expenditure. Some of the considerations in the Growth Stage include:

Product improvement: product quality might be improved, additional features and support services added, and packaging updated. Pricing: if consumer demand is high the price might be maintained at a high level. Distribution: distribution channels might be added as consumer demand increases. Promotion: promotion is aimed at a broader audience. A company might spend a lot of resources on promotion during the Growth Stage to build brand loyalty.

3.3 Maturity
When a product reaches maturity, sales growth slows and sales volume eventually peaks and stabilises. This is the stage during which the market as a whole makes the most profit. A companys primary objective at this point is to defend market share while maximising profit. In this stage, prices tend to drop due to increased competition. A companys fixed costs are low because it is has well established production and distribution. Since brand awareness is strong, marketing expenditure might be reduced, although increased marketing expenditure might be needed to retain market share and fight increasing competition. Expenditure on research and development is likely to be restricted to product modification and improvement, and perhaps research into improved production efficiency and product quality. Some considerations for the mature product market include:

Product differentiation: increased competition in the mature product market means that a company must find ways to differentiate its product from that of competitors. Strong branding is one way to do this. Pricing: prices may be reduced because of increased competition. Firms in the market should be careful not to start a price war. Distribution: distribution intensifies and incentives may be offered to encourage preference to be given over competing products. Promotion: promotion will focus on emphasising product differences and creating/maintaining a strong brand.

3.4 Decline
A product enters into decline when sales and profits start to fall. The market for that product shrinks which reduces the amount of profit available to the firms in the industry. A decline might occur because the market has become saturated, the product has become obsolete, or customer tastes have changed.

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A company might try to stimulate growth by changing their pricing strategy, but ultimately the product will have to be re-designed, or replaced. High-cost and low market share firms will be forced to exit the industry. As sales decline, a company has three strategy options:

Hold: maintain production and add new features and find new uses for the product. Reduce the cost of manufacturing (e.g. move manufacturing to a low cost jurisdiction). Consider whether there are new markets in which the product might be sold. Harvest: continue to offer the product, reduce marketing expenditure, and sell possibly to a loyal niche segment of the market. Divest: Discontinue production, and liquidate the remaining inventory or sell the product to another firm.

Some considerations for a declining market include:

Product consolidation: the number of products may be reduced, and surviving products rejuvenated. Price: prices may be lowered to liquidate inventory, or maintained for continued products. Distribution: distribution becomes more selective. Channels that are no longer profitable are phased out. Promotion: Expenditure on promotion is reduced for products subject to the Harvest and Divest strategies.

4. Criticisms
The Product Life Cycle is useful for monitoring sales results over time and comparing them to products with a similar life cycle. However, the Product Life Cycle model is by no means a perfect tool. Products often do not follow a defined life cycle, not all products go through each stage, and it is not always easy to tell which stage a product is in at any one time. Consequently, the life cycle concept is not well-suited for the forecasting of product sales. The length of each stage will vary depending on the product and the marketing strategies employed. A Product Life Cycle may be as short as a few months for a fad or as long as a century or more for a product like petrol cars. In many markets the product life cycle is longer than the planning cycle of the organisations involved. Major products often hold their position for several decades or more, indeed, Coca-Cola was introduced in 1886 and is still the leading brand of cola. The Product Life Cycle is only one of many considerations that a company must bear in mind. The product life cycle of many modern products is shrinking, while the operating life for many of these products is lengthening. For example, the operating life of durable goods like household appliances has increased substantially. As a result, a company that produces these products must take their market life and service life into account when planning.
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Some critics have argued that the Product Life Cycle may become self-fulfilling. For example, if sales peak and then decline a manager may conclude that a product is on the decline and cut back on marketing, thus precipitating a further decline.

II. Impact Matrix

The impact matrix approach involves testing sub-components of a strategic action against a series of sustainability/environmental indicators. It was originally developed for use with land use plans, which typically consist of a series of statements (policies) on e.g. location of housing, recreation etc. The matrix has indictors in the columns and policies in the rows. One person or ideally a team of several people with complementary skills fills in the matrix cell by cell. For each cell, the team asks is the impact of the policy on that indicator basically positive, negative or neutral? and puts the relevant symbol/colour in the cell. However this is only the starting point for further discussion, possibly leading to re-writing of the policy, including:

is the policy clearly written? what it will look like on the ground? does it say what it should say? if the policy is likely to have a negative impact, can this be minimised/mitigated? if the policy is likely to have a negative impact that cannot be mitigated, are other aspects of the policy so important that they override this negative impact? If so, the policy needs to be justified accordingly. If not, the policy may need to be deleted or given a major overhaul. can positive impacts of the policy be enhanced? where the impacts of the policy depend on how the policy is implemented, the symbol D (for depends) may be added, along with a note about what would need to be done to ensure that the implementation is done right.

Changes resulting from the appraisal are noted in the comments column. The point of the appraisal is NOT to fill in the matrix, but rather to ensure that the policies are as good as possible. Example: The matrix below uses two different approaches to filling in the cells indicators (impacts of policy on) quality of air land use safety life, pollution comfort comments P+R land fewer clarify what to better in fewer take; but vehicles on promote means city vehicle better than city roads aim to build P+R centre, movements providing should on previously worse in built-up more speed up developed land outside areas parking in journeys provide highPage 5

policy to promote Park-andRide at edge of city

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for all: can QoL for P+R users be particularly improved?

speed bus lanes from P+R to city centre

to increase parking charges in city centre

reduce charges for disabled people use extra revenue for public transport improvements

Advantages: Easy to use, does not require specialist knowledge Transparent Can be used as a technique to involve the public One of the few ways of appraising policies] Incoporates perceived impacts Disadvantages: Subjective: the involvement of different people can lead to different results Involving several people (good practice) can make the process long-winded

III. Barriers to entry and exit

Analyst first argues that Business Analytics should be more prevalent than it is. Two types of barrier prevent organisations from experimenting with and adopting it as they otherwise might. Barriers to entry prevent Business Analytics initiatives from getting started. Barriers to exit prevent them from adapting once they have started by making it difficult or impossible for them to learn from experience. Common barriers to entry include:

Cost: If Business Analytics is immediately associated with specialised commercial software, particularly enterprise software, then getting an initiative off the ground will come with a price tag. Complexity: If cost drives up the initiating budget then invariably the business case for Business Analytics will increase in complexity, gather more stakeholders and hangers-on, and most likely attract competing and/or mutually exclusive needs and agendas.
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Compliance: A higher budget, higher profile, technically intensive Business Analytics initiative will mean more demanding compliance requirements with internal Procurement, IT, and Finance regimes and processes.

Barriers to exit are all forms of unwanted dependency:

Capture: Software and technology lock-in, compliance lock-in (once internal compliance requirements have been met they will need to stay met), and skills lock-in. The latter often translates into an over-reliance on single individuals. This is typically presented as a risk for the organisation but it is also undesirable from the point of the individual because it hampers role mobility. Commitment: Pre-disposition to a particular outcome or application. Committing to more accurate forecasts which will reduce inventory costs or to better customer targeting which will increase retention is unwise. Business Analytics will probably be able to provide forecasting and customer insights, but it cant guarantee contingent operational outcomes. Capital: Both sunk financial costs and, more importantly, the political capital expended. A sponsor who gets behind a particular Business Analytics initiative in a high profile way (as is usually required if its costs are significant) becomes politically exposed. The sponsors political capital becomes tethered to the perceived success or failure of that initiative. The more complex and committed that initiative, the higher the risk of perceived or actual failure.

Analyst First argues that each of these barriers can be either avoided altogether or greatly reduced and made manageable. Software cost is best managed through exhausting the capabilities of commodity and open source tools. These also mitigate against complexity (they may be already familiar), compliance (they are in many cases already accepted and available), and capture (many of them are ubiquitous, open, or both). Capital and commitment prejudice against learning as an outcome. Both of these can be better managed through effective upfront framing. The inherently probabilistic nature of analytics results and their deep dependence on data (and not on fiat, will, assumption or authority) needs to be built in to the way a Business Analytics function manages and presents itself. Further to this, starting with operational analytics is, perhaps counter-intuitively, harder than going with strategic analytics first. Strategic analytics is about searching for insights as opposed to implementing systems design to deliver gains at existing operational margins (operational analytics). If the primary job of a Business Analytics function is strategic to enable the datadriven exploration and discovery of insights and intelligence then the operational implementation of particular results becomes at most a secondary consideration. There is a more complex value chain involved in operational analytics incorporating systemisation, automation, process re-engineering and change management and therefore much more which can go wrong. The considerable challenges of operational implementation, many of which are not within the control of a Business Analytics function, need not and should not represent single points of actual or perceived failure for that function.

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