Investment Strategies: Product Life Cycle

January 9, 2019. Manila. One of the factors that investors should take into consideration in making decisions in their portfolios is the Company´s Product Life Cycle. Understanding where the Product of a company is positioned in the Product Life Cycle will help investor understand where the company is heading. Not understanding the product life cycle for a company can bring disaster to a company and their investors. Companies that do not adjust their strategies to the change of the position of their product within the Life Cycle usually ends up with a stock price that is crashing or low. Companies should continue to do their Research and Develop new Products in order to survive.

Examples of Companies that used to have a high flying stock but end up at the bottom because they were not able to understand their product lifecycle: Lotus 123, Nokia, Motorola, Black Berry.

There are four stages of the Product Life Cycle:
(1) QUESTIONMARK STAGE (Innovation/Introduction) – The question mark stage is when a new invention or product has just been invented. Why Question mark? Because at this stage we do not know if the product will be a success or a failure. At this stage there are no competition yet because the product has just been invented. Innovation Stages, Low Sales, Product can demand High Price per customer. Financial Losses to companies who enter the new market due to innovation costs. Competition is few.

(2) STAR STAGE (GROWTH) – at this stage of the product life cycle, the product´s market share starts to increase, the product is gaining recognition and acceptance of use from the consumer market. At this point of the lifecycle also, a small amount of competition is starting to enter the market and trying to play catch up with the leader. The leaders in the industry continue to profit at this stage of the product life cycle. Sales is increasing. Cost in making the product decreases. Number of customers are increasing. More competitors enter the market. This product life cycle should be clearly understood. Investors should make sure if they are at the EARLY STAR STAGE or at a LATER STAR STAGE.

(3) CASH COW (MATURITY STAGE) – As the product enters the maturity stage, the Demand of the product continues to be strong but competition starts to increase. The increase in competition starts to pressure the price of the product thus pushing the price of the product down. This in turn decreases profit margins of the companies. Because of the decrease in profit margin well run companies tend to be innovative with their products, develop their marketing strategies, and adapt to the competitive market. Sales Peek, Cost to customers is at it´s lowest. Mass production occurs. Stable Number of competitors. Why Cash Cow? You continue to feed the cow (Continue to put investment in) but you also continue to Milk the Cow (Still get some Returns on your investment).

(4) DOG STAGE (DECLINE) – As the product enters the Dog Stage, Sales starts to fall due to too much competition. There are too much company players in the industry. Or the product has become obsolete. Cost per customer is low. Profit of companies Fall. Some companies try to survive and might end up with customer base contracts. Some companies starts to exit the market, thus competition falls. NOTE: That if the product is not an obsolete product and still has ample demand, once competitors exit the market and competitors goes back at the proper sustainable level, the product might go back the CASH COW STAGE. Why do we call it the Dog Stage? It is because we continue to feed (Invest in the company) the dog, but the dog does not give back milk, unlike the Cow. At this stage investors should be attentive wether the product is obsolete. If the product is obsolete, make sure the company has a replacement product or new innovative inventions/product.

The PRODUCT LIFE CYCLE can be used by companies with multiple product portfolio. Understanding the position of a product in a Product Life Cycle, can help companies plan their product pipelines. Example of these companies that may be using this Product Life Cycle Analysis are Pharmaceutical Companies. Well Managed Pharmaceuticals continue to invent (add new products into their product line) and innovate (Finding new medical applications) their product portfolios so that they can continue to be competitive in the market.

Investors can use the Product Life Cycle when they are performing their Industry Analysis. Product Life Cycle is part of the Analysis when we maintain our portfolios.

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