The product life cycle
The product life cycle shows how sales of a product change over time.
Each product has its own life cycle. It will be “born”, it will “develop”, it will “grow old” and, eventually, it will “die”.
Some products, like Kellogg”s Corn Flakes, have retained their market position for a long time. Others may have
their success undermined by falling market share or by competitors.
The five typical stages of the life cycle are shown on a graph. However, perhaps the most important stage of a
product life cycle happens before this graph starts, namely the research and development (R&D) stage. Here the
company designs a product to meet a need in the market. The costs of market research - to identify a gap in the
market and of product development to ensure that the product meets the needs of that gap - are called “sunk” or
start-up costs.
Nutri-Grain was originally designed to meet the needs of busy people who had missed breakfast. It aimed to
provide a healthy cereal breakfast in a portable and convenient format.
1. Launch - Many products do well when they are first brought out and Nutri-Grain was no exception. From launch
(the first stage on the diagram) in 1997 it was immediately successful, gaining almost 50% share of the growing
cereal bar market in just two years.
2. Growth - Nutri-Grain”s sales steadily increased as the product was promoted and became well known. It
maintained growth in sales until 2002 through expanding the original product with new developments of flavour
and format. This is good for the business, as it does not have to spend money on new machines or equipment for
production. The market position ofNutri-Grain also subtly changed from a “missed breakfast” product to an “allday” healthy snack.
3. Maturity - Successful products attract other competitor businesses to start selling similar products. This
indicates the third stage of the life cycle - maturity. This is the time of maximum profitability, when profits can be
used to continue to build the brand. However, competitor brands from both Kellogg's itself (e.g. All Bran bars) and
other manufacturers (e.g. Alpenbars) offered the same benefits and this slowed down sales and chipped away
at Nutri-Grain”s market position. Kellogg's continued to support the development of the brand but some products
(such as Minis and Twists), struggled in a crowded market. Although Elevenses continued to succeed, this was
not enough to offset the overall sales decline.
Not all products follow these stages precisely and time periods for each stage will vary widely. Growth, for
example, may take place over a few months or, as in the case of Nutri-Grain, over several years.
4. Saturation- This is the fourth stage of the life cycle and the point when the market is “full”. Most people have the
product and there are other, better or cheaper competitor products. This is called market saturation and is when
sales start to fall. By mid-2004 Nutri-Grain found its sales declining whilst the market continued to grow at a rate
of 15%.
5. Decline - Clearly, at this point, Kellogg's had to make a key business decision. Sales were falling, the product
was in decline and losing its position. Should Kellogg's let the product “die”, i.e. withdraw it from the market, or
should it try to extend its life?
Strategic use of the product life cycle
When a company recognizes that a product has gone into decline or is not performing as well as it should, it has
to decide what to do. The decision needs to be made within the context of the overall aims of the business.
Strategically, Kellogg's had a strong position in the market for both healthy foods and convenience foods. NutriGrain fitted well with its main aims and objectives and therefore was a product and a brand worth rescuing.
Kellogg”s aims included the development of great brands, great brand value and the promotion of healthy living.
Kellogg's decided to try to extend the life of the product rather than withdraw it from the market. This meant
developing an extension strategy for the product. Ansoff”s matrix is a tool that helps analyse which strategy is
appropriate. It shows both market-orientated and product-orientated possibilities.
Joint Products and Joint Product Cost:
Definition and Explanation of Joint Products:
Joint products are produced simultaneously by a common process or series
of processes, with each product processing more than a nominal value in the form in
which it is produced. The definition emphasizes the point that
the manufacturing process creates products in a definite quantitative relationship. An
increase in one product's output will bring about an increase in the quantity of the other
products, or vice versa, but not necessarily in the same proportion.
Definition and explanation of Joint Product Cost:
A joint product cost cay be defined as that cost which arises from the common
processing ormanufacturing of products produced from a common raw material.
Whenever two or more different products are created from a single cost factor, a joint
product cost results. A joint cost is incurred prior to the point at which separately
identifiable products emerge from the same process.
Example:
For example, the production of coke, for which coal is the original raw material. In
addition to coke as its major product, the process produces sulfate of ammonia, light oil,
crude tar and gas. The greater quantity of gas is not sold but is used to fire the coke
ovens and the boilers in the power plant. The coke ovens are the split-off point for cost
assignments. The cost of each product consists of a pro rata share of the joint cost plus
any separable or subsequent costs incurred in order to put the products into saleable
condition.
COKE AND ITS ASSOCIATED PRODUCTS
→
COAL
(ORIGINAL RAW
MATERIAL)
→
(MAJOR PRODUCT)
→
SULFATE OF
AMMONIA
→
LIGHT OIL
→
CRUDE TAR
→
COKE OVEN GAS
COKE OVEN
(SPLIT-OFF
POINT)
COKE
Plus Separable cost
→
COKE
Plus Separable cost
SULFATE OF
AMMONIA
→
Plus Separable cost
→
BENZOL
Plus Separable cost
→
TAR
Plus Separable cost
→
GAS
By-Products and Main Products:
Definition and Explanation of By Products:
The term "by product" is generally used to denote one or more products of relatively
small total value that are produced simultaneously with a product of greater total value.
The product with the greater value, commonly called the "main product", is usually
produced in greater quantities than the by products. Ordinarily, the manufacturer has
only limited control over the quantity of the by product that comes into existence.
However, the introduction of more advanced engineering methods, such as in the
petroleum industry, has permitted greater control over the quantity of residual products.
In fact, one company, which formerly paid a trucker to haul away and dump certain
waste materials, discovered that the waste was valuable as fertilizer, and this by product
is now an additional source of income for the entire industry.
Nature of By-Products:
The accounting treatment of by-products necessitates a reasonably complete
knowledge of the technological factors underlying their manufacture, since the origins of
by products may vary. By-products arising from the cleansing of the main product, such
as gas and tar from coke manufacture, generally have a residual value. In some cases,
the by product is left over scrap or waste, such as sawdust in lumber mills. In other
cases, the by product may not be the result of any manufacturing process but may arise
from preparing raw materials before they are used in the manufacture of the main
product. The separation of cotton seed from cotton, cores and seeds from apples, and
shells from coca beans are examples of this type of product.
By product can be classified into the following two groups according to their
marketable condition at the split-off point:
1.
2.
Those sold in their original form without need of further processing.
Those which require further processing in order to be saleable.
Joint Products and Joint Product Cost:
Definition and Explanation of Joint Products:
Joint products are produced simultaneously by a common process or series
of processes, with each product processing more than a nominal value in the form in
which it is produced. The definition emphasizes the point that
the manufacturing process creates products in a definite quantitative relationship. An
increase in one product's output will bring about an increase in the quantity of the other
products, or vice versa, but not necessarily in the same proportion.
Definition and explanation of Joint Product Cost:
A joint product cost cay be defined as that cost which arises from the common
processing ormanufacturing of products produced from a common raw material.
Whenever two or more different products are created from a single cost factor, a joint
product cost results. A joint cost is incurred prior to the point at which separately
identifiable products emerge from the same process.
Example:
For example, the production of coke, for which coal is the original raw material. In
addition to coke as its major product, the process produces sulfate of ammonia, light oil,
crude tar and gas. The greater quantity of gas is not sold but is used to fire the coke
ovens and the boilers in the power plant. The coke ovens are the split-off point for cost
assignments. The cost of each product consists of a pro rata share of the joint cost plus
any separable or subsequent costs incurred in order to put the products into saleable
condition.
COKE AND ITS ASSOCIATED PRODUCTS
→
COAL
(ORIGINAL RAW
MATERIAL)
→
(MAJOR PRODUCT)
→
SULFATE OF
AMMONIA
→
LIGHT OIL
→
CRUDE TAR
→
COKE OVEN GAS
COKE OVEN
(SPLIT-OFF
POINT)
COKE
Plus Separable cost
→
COKE
Plus Separable cost
SULFATE OF
AMMONIA
→
Plus Separable cost
→
BENZOL
Plus Separable cost
→
TAR
Plus Separable cost
→
GAS
By-Products and Main Products:
Definition and Explanation of By Products:
The term "by product" is generally used to denote one or more products of relatively
small total value that are produced simultaneously with a product of greater total value.
The product with the greater value, commonly called the "main product", is usually
produced in greater quantities than the by products. Ordinarily, the manufacturer has
only limited control over the quantity of the by product that comes into existence.
However, the introduction of more advanced engineering methods, such as in the
petroleum industry, has permitted greater control over the quantity of residual products.
In fact, one company, which formerly paid a trucker to haul away and dump certain
waste materials, discovered that the waste was valuable as fertilizer, and this by product
is now an additional source of income for the entire industry.
Nature of By-Products:
The accounting treatment of by-products necessitates a reasonably complete
knowledge of the technological factors underlying their manufacture, since the origins of
by products may vary. By-products arising from the cleansing of the main product, such
as gas and tar from coke manufacture, generally have a residual value. In some cases,
the by product is left over scrap or waste, such as sawdust in lumber mills. In other
cases, the by product may not be the result of any manufacturing process but may arise
from preparing raw materials before they are used in the manufacture of the main
product. The separation of cotton seed from cotton, cores and seeds from apples, and
shells from coca beans are examples of this type of product.
By product can be classified into the following two groups according to their
marketable condition at the split-off point:
1.
2.
Those sold in their original form without need of further processing.
Those which require further processing in order to be saleable.