Product Life Cycle:
PRODUCT life-cycle is the movement of a product through the various stages of development, growth, expansion, maturity, saturation and decline. Not all products go through such a cycle; for instance, paper clips, nails, knives and pencils. Most new products, however, seem to exhibit such a cycle; for example, computers and black and white TVs.

Product life-cycle begins with the initial product specification and ends with the withdrawal from the market of both the product and its support. There are defined stages in a product's life-cycle; these include research and development, introduction, maturity, decline and abandonment.

The nature of risk changes over the life of a product - risk is highest at the development stage, decreases slightly during the growth stage and decreases appreciably during the maturity and decline stages. The matrix (see Chart) shows the effect, on profit, of the various stages of the product life-cycle, depending on whether it is a new product or a new but growing product or a well established/old product.

Sales are likely to be relatively small, especially if it is a completely new product but it will be possible to charge a premium price for the product. The risk of failure is high due to lack of awareness amongst consumers for the product. Also, at this stage, costs will be high owing to low production volumes coupled with a heavy outlay on product launch.

In the launch stage, a discounted cash flow (DCF) adjusted for risk, should be prepared for the evaluation of the project. Immediately after the launch of the product, physical goals and benchmarks should be established to measure the initial success of the new product. The aspects which should be monitored are:

This is the stage when the returns from the product will be significantly high. There is also likely to be competition and the consequent erosion of profits through price-cutting and, also, newer entrants in the market could result in the shrinking of market-share.

In the growth stage, a pre-determined rate of growth in sales volume and value should be compared with the actual performance during this crucial stage in the life of the product.

Although risks will be reduced at this stage, the effect of existing competition will reduce the level of profits.

During maturity, the overall success of the product since its launch to-date can be assessed by evaluating the return on investment and while considering this measure, the profit margins and the operating cash flows should also be taken into consideration.

The life of the product starts declining as there are substitutes available and, also, changes in consumers tastes could bring about a lack of interest for the product.

During the decline of the product, the cash flows arising from the sale of the product should be assessed, and as long as these are still positive, a phased exit for the product may be planned bearing in mind the extent of investment sunk in the original development and launching of the product.

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