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Fundamental of the PLC concept

The PLC concept has two key elements. First, product sales are said to go through a sequence of stages at varying speeds. Second as a result of the changing character of market competition, profits also have a cyclical curve, but one which tends to start descending while the sales curve is still rising. The primary economic conclusion from these patterns is that management must develop new products to fill the «gap» and sustain sales and profit growth.

The four stages classically distinguished are characterised as follows:

1. Introduction: Sales of new products usually rise slowly at first. Depending uponthe degree of product newness, retarding factors are:

(i) a small number of innovative customers; most cannot afford the new product(e.g. the prices of the first colour TV sets and electronic calculators were veryhigh) or prefer the security of tried brands;

(ii) difficulties in building up effective distribution;

(iii) technical problems of assuring product quality and reliability characterise theintroductory stage; and

(iv) production capacity is limited.

Profits are negative or low despite little competition so far. This is due to high unit costs resulting from low output rates, and heavy promotional investments incurred to stimulate growth. The introductory stage may last from a few months to a year for consumer goods and generally longer for industrial products (Baker, 1975).

2. Growth: If the product is successful, growth usually accelerates at some point,often catching the innovator by surprise. The acceleration results from four

factors:

the larger pool of imitators or conventional consumers begin to follow the lead of the innovators;

the market is broadened by market segmentation, product differentiation and higher levels of promotion as competitors increasingly seek to jump on the «band wagon»;

product improvements take place;

the number of distributors increase and the consequent filling up of thedistribution pipelines causes an exaggerated jump in factory sales.

Profit margins peak during this stage as «experience curve» effects lower unit costs faster than prices decline (Doyle 1975) and promotion costs are spread over a larger volume.

3. Maturity: This stage begins after sales cease to rise exponentially. The causes of the declining percentage growth rate are market saturation. Eventually most potential customers have tried the product and sales settle at a rate governed by population growth and the replacement rate of satisfied buyers. E.g. the market for black and white TV sets matured long before the introduction of colour because by 1965, nearly 90 per cent of households owned one. In addition there are no new distribution channels to fill. This is usually the longest stage in the cycle and most existing products are in this stage. The period over which sales are maintained depends upon the firm’s ability to stretch the cycle by means of market segmentation and finding new uses for it.

Profits decline in this stage because of:

(i) the increasing number of competitive products;

(ii) the innovators find market leadership under growing pressure (e.g. fewremember that the first electronic calculators were made by the Bell PunchCompany in London in 1963);

(iii) potential cost economies are used up;

(iv) prices begin to soften as smaller competitors struggle to obtain market sharein an increasingly saturated market;

3. Decline: eventually most products and brands enter a period of declining sales. This may be caused by:

(i) technical advances leading to product substitution;

(ii) fashion and changing tastes;

(iii) exogenous cost factors (e.g. Far Eastern production on Lancashire textiles).

Declining sales are accompanied by eroding profit margins. The overcapacity caused by too many competitors converging on the original growth opportunity becomes more acute. This frequently leads to price competition and an industry shake out with many marginal competitors going out of the industry. Surviving firms eventually face the question of product elimination and putting resources to more profitable use elsewhere.

The causal elements in the classical PLC are of two types: supply factors and demand factors. Supply factors include:

(i) production capacity which initially constrains growth but eventually becomes

(ii)excessive; distribution changes which have an early accelerator effect on growth;

(iii) competition; an army of imitators who try to capitalise on the growthopportunity leading initially to faster market expansion but eventually toovercapacity and eroding margins;

(iv) substitute products created by technical progress, changing tastes or costfactors which finally lead to the decline stage.

The demand element is the pattern of consumer buying. Strengths and weaknesses of the PLC concept.

It is not sufficient to simply show that products pass through various stages between birth and death. If the PLC is to be of value for decision making, researchers must prove that the cycle is sufficiently regular to predict three events:

the current position of product in the cycle, j&s when turning points will occur

and at what sales levels these will occur.

This implies demonstrating either that the PLC is a highly regular time-dependent phenomenon or that sales can be predicted from a few past or current performance parameters (e.g. level of penetration or rate of repeat buying).

Two definitional problems need to be clarified in collecting such evidence. First one must distinguish between product class (e.g. cigarettes) product form (e.g. filter cigarettes) and brand (e.g. Embassy filter). There is often little similarity between cycles at different levels of aggregation. Second, to assess PLC characteristics, one should adjust sales data for seasonal and erratic movements (e.g. the effects of HP regulations on TV sales), inflation and population growth. During the 1970s inflation rates, products with revenues increasing at under 20 per cent a year were in the decline stage of the cycle!

The conclusions of several empirical studies can be summarised as follows:

Sales of most, though not all products broadly follow the PLC pattern.

The characteristics of competition and unit profits tend to follow that postulated above, i.e. profits peak during the rapid growth phase and problems of competition and excess capacity become more acute as the cycle advances.

The average length of the PLC is tending to shorten as a result of economic, technological and social change. Products make profits for shorter periods.

There is no regularity across products in the length of the stages in the PLC. For some it can be decades (e.g. whisky) for others it can be less than a year (e.g. hula hoop). In particular the maturity stage of a brand can be extended for many years by innovative marketing. Similarly, aggregate product decline can be postponed for generations in the absence of major technological breakthroughs (e.g. cigarettes, cars).

Often the PLC can be temporarily «bent» by heavy promotional expenditures in the decline stage.

Characteristics of The Four PLC Stages, and Appropriate Strategic Responses to These.

	Introduction	Growth	Maturity	Decline
CHARACTERISTICS
SALES	Low	Fast Growth	Slov growth	Decline
PROFITS	Negligible	Peak Levels	Declining	Low or zero
CASH FLOW	Negative	Moderate	High	Low
CUSTOMERS	Innovative	Mass market	Mass market	Laggards
COMPEIMORS	Few	Growing	Many rivals	Declining number
RESPONSES
STRATEGIC FOCUS	Expand market	Market penetration	Defend share	Productivity
MKG. Expenditures	High	High (declining %)	Falling	Low
MKG. Emphasis	Product awareness	Brand preference	Brand loyalty	Selective
DISTRIBUTION	Patchy	Intensive	Intensive	Selective
PRICE	High	Lower	Lowest	Rising
PRODUCT	Basic	Improved	Differentiated	Rationalised

The introductory phase calls for substantial net investment in plant and promotion to expand the new market. With such investment the firm builds up a strong market position before competitors enter and develops valuable experience and scale economies. During the growth stage the task should change from one of building market share through increasing the usage rats of the brand and pre-empting competitors’ customers. As the market matures strategy switches to defending brand share against the inroads of increasing competition. At the same time, the company will want to maintain margins and cash flow by cost control and avoiding price wars. When the decline stage appears unavoidable, emphasis must switch to preventing a cash drain into products without a future. Tactics include eliminating discretionary costs (e.g. advertising), raising prices and eliminating non contributors from the product line.

The choice of strategic focus also has financial implications. The focus on volume is resource hungry, implying for new products often negative cash flows.The focus on productivity, by contrast, emphasises positive cash flows even at the expense of sales volume. For this reason, a company with a balanced product portfolio has products at different stages in the PLC, the mature products generating the cash needed for investment in the new.

When products reach the decline phase of the PLC, management should not passively wait for its ensuing death, but should aggressively seek ways to revitalise its performance. The literature is replete with successful examples of products being rejuvenated out of a decline.

However, in expending resources on indefinitely extending the life of old products, there lies a hidden danger: marketing resources may be misdirected in defending the past, rather than in investing in new opportunities where the returns to marketing efforts are more significant. This danger is well expounded by:

A final consideration in the PLC is the question of extending the concept to an international level: the International Product Life Cycle (IPLC) concept. This concept relates the movement of products through the classical PLC stages to movement through different countries or international regions.

By way of a small case study the illustration below outlines the PLC concept as it relates to batteries. Battery Lifecycle

It is important to realise that product lifecycles are but one input to a situation analysis. This can be illustrated with reference to the market for batteries where to an extent the traditional lifecycle concept can be applied. Zinc carbon batteries have been dominating the market since before the 1920s and growth in the 1950s and 1060s as more types of small appliances and toys needed portable electric power. Growth rates slackened in the 1970s, indicating that maturity had been reached, and by the early 1980s sales had reached a plateau. However, a fuller analysis would need to take account of substantial development in technology, changes in competition and in consumer behaviour.

Ever Ready has held about three-quarters of the zinc carbon market. But its commanding position in the overall battery market has been eroded by the rapid growth of the long life alkaline products in which Duracell has more than an 80 per cent share. Ever Ready had maintained its position because it was well down the experience curve and had low unit costs. It also had an intensive distribution strategy with two-thirds of sales being made by 28O vans wich call regularly at. retail outlets. By the late 1970s and early 1980s grocery stores had taken a quarter of all sales, but the chain grocers would not deal with direct shop deliveries; most preferred deliveries to their central warehouses. Along with this shift there was a change in buyer behaviour: more women were buying batteries.

Against this background the competition stiffened and advertising budgets multiplied. Ever Ready responded by launching an alkaline battery in 1979 under the brand name Super Plus, which was sold alongside its three zinc carbon products called SP, HP and PP. Confusion that consumers might have had about alkaline and zinc carbon was thus compounded by seemingly meaningless brand names. Attempts to retrieve the position led Ever Ready to another launch in 1984 and the introduction of Gold, Silver and blue seals. Gold is the alkaline and the other two are zinc carbon.

This market therefore shows lifecycle studies to be of some use but the fortunes of Ever Ready have been much more influenced by environmental factors and by its own strategic choices

It is also instructive in this case to examine again the meaning and the definition of a product. From a marketing viewpoint the only definition is that which the consumer makes, and that is a function of the benefits derived. Thus consumers do not buy batteries they buy the benefits of portable power, and that should influence the way that products are explained to consumers. Infinitely more complex products are bought by consumers, often with no mention of the technicalities.

Tagged as: Basis of Marketing