Total Life-cycle Concept
All products, whether cars, fast-moving consumer goods, or high-value capital goods, have their own individual life cycles. When falling sales indicate that a product life cycle is nearing its end, the company has to go back to the drawing board and either modify the product to bring it back into line with customer requirements, or put a completely new product on the market.
Before a product is launched, it has to be developed and market tested. The total life-cycle concept attempts to describe the collaboration with suppliers from the time of the product's market launch. A product goes through five typical life-cycle phases, each of a different length:
Introduction phase: Sales rise slowly, depending on the marketing push. However, no profit is earned at this stage due to previously incurred product development costs and ongoing spending on communication. The introduction phase decides whether and how well the product is accepted by the market , and ends when break-even is reached.
Growth phase: Profits are made for the first time. This phase is characterized by rapid growth that is accelerated by further intense marketing activity, and ends as soon as the sales curve becomes digressive.
Maturity phase: As the product no longer requires intense advertising, and economies of scale are able to take effect, the highest profits can now be recorded. Later in this phase, however, profits decline because of increasing competition. However, this is when the product has the highest market share.
Saturation phase: Begins as soon as market growth ceases. Both sales revenue and profits decline. This phase can be extended through modifications and product re-launching.
Degeneration phase: The market shrinks. It is no longer possible to stem the fall in sales revenue, and market share is inevitably lost. Profits also fall, and the time has come to readjust the product portfolio.
To earn high sales revenue and profits for as long as possible with one product generation, the product's attractiveness needs to be improved periodically. In the auto industry, the terms “major product upgrade” or “facelift” are used. In both cases, the basic technical structure of the product remains largely unchanged. Usually only those components subject to short innovation cycles (for example, electronics) or fashion trends are replaced.
To ensure that product upgrades can be carried out on reasonable economic terms, the milestones of the product life cycle are defined in advance with suppliers. The total life-cycle concept then determines in detail how sales revenue, and in particular the costs for upgrades, are shared between the company and suppliers over the complete product life cycle.