Strategic Review

 
 

As markets are becoming more and more competitive, firms must devise new strategies to preserve their advantageous market position. Making decisions from a product lifecycle perspective has become a popular means to advance companies' missions and achieve a better position in the market. According to Ameri and Dutta (2005), "Product Lifecycle Management is a business solution which aims to streamline the flow of information about the product and related processes throughout the product's lifecycle" (p.577). The Forio simulation provides a unique opportunity to test and analyze financial and market decisions, depending on the product lifecycle stage. The results of the strategic review suggest that, depending on the stage of lifecycle management, Research and Development (R&D) costs and prices should be adjusted to meet the changing needs of customers. An effective product lifecycle management strategy can increase total revenues and profits, and secure the firm from product and marketing failures in the long-term perspective.

A Review of the Products, Lifecycles, Price and Performance

Clipboard Tablet, Co. is a firm, which primarily develops and sells tablets. The current product portfolio comprises of three major products: X5, X6, and X7, accordingly. X5 has been in the market for three years and, at present, its price is much more important to consumers than its performance. In 2011, the product found itself in the growth stage of the product lifecycle, which is characterized by the companies' striving to build stronger brand recognition and create new distribution channels to ensure that more customers accept the product (Quick MBA, 2010). At that stage, the number of first-time customers still exceeded the number of the returning ones (882,729 vs. 86,250), and the price was fixed at $285 per unit. Sales were the highest among the three company products, and 33% of the R&D budget was allocated for X5.

X6 is another product, which has been in the market since 2009. It attracts customers because of its outstanding performance and makes them forget about the price. The price of X6 at the beginning of 2011 was $430 per unit. However, X6 was claimed to display better performance than similar products in its price segment. 34% of the company's R&D budget was allocated for X6. The product was in the growth phase of its lifecycle, when the analysis started.

Finally, X7 is the newest of all company's products and, probably, the most challenging its endeavor. In 2011, the product was only 1 year old, and its price was $190 per unit. 33% of the R&D budget were allocated for X7, and it was created for the customers, who cared both for the quality of its performance and its price. In the introduction phase of the product lifecycle, X7's brand identity was still being established; distribution was selective, until consumers would start accepting it (Quick MBA, 2010). Its performance was closer to that of X6. X7 held a promise to become a better alternative to most products in the market, but it was still new and unknown to most customers.

Financial Review and Market Review

It should be noted that, since 2011, the prices and R&D decisions have been the same for all three products. Nevertheless, they displayed different sales and market results during the period of 2011-2015.

X5

As it was already mentioned, the price for an X5 unit was $285. Between 2011 and 2015, the amount of R&D resources spent to improve the product did not change and was fixed at $7,920,000 annually. Sales kept increasing steadily, from $968,979 in 2011 to $1,853,177 in 2014. However, when the product reached the maturity stage of its product lifecycle in 2014, its sales decreased by almost 50% and accounted for only $963,776 in 2015. Profitability also fell from 32% in 2014 to 17% in 2015, although it was still higher than in 2011 (16%). By 2015, the market saturation for the product reached a maximum of 94%, and the prevailing majority of consumers were those, who wanted to replace or upgrade their older gadgets (387,919 first-time consumers against 575,856 repeat sales). No decision to discontinue or upgrade the product in technological terms was ever made.

X6

In 2011, the product was in the growth stage of its lifecycle. Its sales increased greatly during 2011-2014 and fell sharply in 2015. Compared to only $562,961 in sales in 2011, in 2014, X6 sales achieved an unprecedented level of $2,364,061, followed by a rapid decrease to $1,118,142 in 2015. Revenues showed the same tendency, increasing between 2011 and 2014 and falling in 2015 ($480,801,048 in 2015 compared to $1,016,546,240 in 2014). Meanwhile, the amount of R&D resources spent on the product stayed at the same level - $8,160,000 per year. Profitability increased from 16% in 2011 to 32% in 2014, but then fell to 27% in 2015. The product reached the stage of maturity, and its market saturation reached 93% in 2015. The number of first-time customers started to decrease and was only 488,152 compared to 629,990 repeat sales in 2015.

X7

X7 is the newest of all three products offered by Clipboard Tablet, Co. In 2011, it was in the introduction stage of the product lifecycle. Before 2011, it was present for only 1 year in the market. The price for it was the lowest of all three products, $190 per unit, and it has not changed until present time. Between 2011 and 2015, the sales for X7 rose from $165,586 to $479,827. In terms of sales and revenues, X7 was the most successful of the three products offered by the company during the abovementioned period. Revenues increased from $31,461,253 to $91,167,056. R&D investments in the products were the same - $7,920,000 per year. From -73% in profitability, the profit margin for X7 increased to 21% in 2015. The rates of market saturation for X7 have never been high and ranged between 3 and 5 percent in 2011-2015. At the same time, the number of first-time customers increased two-fold from 202,513 in 2013 to 407,920 in 2015, followed by the similar increases in repeat sales.

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It should be noted that, in all three products, the concept of the product lifecycle predetermines the trends and changes in their prices, sales, demand, profitability, and revenues. The product lifecycle concept remains one of the most fundamental in marketing (Vashisht, 2005). It has profound implications for the company's survival (Vashisht, 2005). For Clipboard Tablet, Co., the transition from growth to maturity stage of the product lifecycle has become a turning point in the evolution of the two products - X5 and X6. Both products reached the maturity stage in 2014, which was accompanied by a sharp decrease in sales and revenues. Apparently, the amount of R&D investments in each of the three products would vary, depending on the stage of the product lifecycle, but the patterns of R&D budget allocations did not change during 2011-2015 (Lin & Saggi, 2002). An alternative strategy could have been developed to account for the shifts in product development and popularity in the market; however, the firm chose to keep prices and R&D investments at the same level, generating the total revenue of $846,644,152, total profit of $194,198,305, and total profitability of 30% by the end of 2015.

Proposing an Alternate Strategy

The firm would have been operating much better, if its management had known how the product lifecycle concept influenced budget allocations for each product. In addition, the price of each product would have to be changed, depending on the market conjuncture and products' financial and technical performance. The end of 2011 showed that the price of X7 had to be lowered, given the dramatically low profitability of the new product and its relatively low popularity due to novelty. At the same time, R&D allocations would also need to be changed, since both X6 and X7 showed lower performance than similar products offered by competitors. In result, by the end of 2013, the total profits would increase to $854,746,514, while the total revenues would keep increasing.

Based on the results of 2013, more R&D investments would be made in X5 to improve its performance, while the price for X6 would be lowered to match the general price trends in the market for similar products. By the end of 2014, the total profits would be $1,259,638,269. In 2014, X7 would enter the growth stage of its product lifecycle, while X5 would become mature and saturated. This is where a decision regarding future R&D investments would have to be made. It appears that customers are extremely heterogeneous in their willingness to pay for the quality improvements made through R&D (Saha, 1999). Consequently, not all of them will be willing to pay for the mature but improved X5.

Most likely, any increase of R&D investments in X5 would lead to a rapid decline in sales and, by the end of 2015, the product would have to be discontinued. At the same time, the prices for X6 and X7 would slightly decrease, in order to make the products more attractive to customers. The proposed strategy would eventually result in a total profit of $1,348,533,233, compared to only $194,198,305 with the decisions implemented by the former manager. Price and R&D flexibility against changes in the product lifecycle would ensure greater responsiveness and sensitivity to the economic and marketing shifts in the company's strategy and environment.

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