2.1.1. Life cycle as a concept

“The earliest reference to S-shaped curve similar to product life cycle was detected 1922-23 by Prescott, who proposed an equation that fit the growth of the automotive industry from 1900 to 1920 very well”. “The product life cycle concept is almost certainly one of the best-known if not most important concepts in marketing”. “Product life cycle is an almost inexhaustible concept because it touches on nearly every facet of marketing and drives many elements of corporate strategy, finance and production”. These statements are excerpts from Gardner’s literature review of about 130 references. Gardner summarizes his findings by concluding that there is much agreement among the writers concerning the life cycle concept as a descriptive variable, but it does not fulfil the criteria of being a theory. At the end of his review, Gardner suggests that “future work should be tied, not only to increase our understanding of the phenomenon, but also increase our predictive ability.” (Gardner 1987.)

Life cycle analysis studies the phases of life, the repeated patterns that occur during life, and the causes and effects of incidences, aiming at something that can be recognized and learned from the earlier life cycles of the items under study. In everyday language, life cycle analysis is often associated with environmental discussion and green values.

Uusi-Rauva et al. (1994) define life cycle as “the period of a product in the market”. This interpretation emphasizes the marketing point of view and revenue planning, but excludes the impacts of product creation and disposal for life cycle profitability. Life cycle analysis should consider the period between birth and decease. Even the definition of CAM-I excludes the period between withdrawal from the market and decease. “The period that starts with the initial product specification and ends with the withdrawal of the product from the marketplace. A product life cycle is characterized by certain defined stages, including research, development, introduction, maturity, decline and abandonment.” (CAM-I 1991.)

There are actually more than one definition of product life cycle. The definition may pivot on a customer view, an enterprise view or the product itself:

• Enterprise view - when the product ceases to be produced or supported.

• Customer view - when the product ceases to be used and is disposed of.

• Product - type of product, market segment and whether a single product or part of a range. (CAM-I 1991.)

The definition of the moment of birth and death of a product is not self-evident. The very first idea of a product is not the date of birth – though that might seem to be so. Ideas and thoughts are too vague and difficult to register, and they are sometimes forgotten for years or decades. Even if there are some draft drawings, they may be hard to trace. The first functional prototype or pilot may be the first materialization of a new product and also an example of systematic work and effort before reaching the point.

In this thesis, we start counting the life cycle from the day when the systematic (i.e. organized and planned) effort to create the product was started. From the system point of view, this is also quite clear - when we are able to input the product specification into the system, there is the first real sign of life. This definition is also in line with the Product Creation process of the telecommunications case company.

Burstein (1988) points out that life cycle costing becomes more and more crucial when the technology changes rapidly and the product life cycles become shorter. In addition, he enhances the concept by the customer view of the consuming life cycle. The idea presented in Fig. 11 applies especially to durable goods, such as cars.

The literature also makes an important distinction between product’s life cycle costs and its whole life costs. Life cycle costs refer to all the costs that the producer will incur and whole life cycle costs also include the costs that consumers incur, i.e. installation, operation, maintenance, revitalization and disposal. (Shields & Young 1991.)

The product’s life cycle does not end when its manufacturing or sales are discontinued. There are several products still in use, and some of them may be used tens of years after shutting down the sales. A typical example of this is the old cars, and a less typical example is the cellular radio base stations, which have a very long operating time even after the product version is no longer on sale. As long as the company still provides or manufactures spare parts, the product’s life cycle continues. Consumer products typically last for only a certain period, if used regularly, and are ultimately scrapped or thrown away.

This thesis deals with electronic products - both consumer and commodity products. From the company’s point of view, a suitable definition of the end of a product’s life cycle is the end of after sales support date. This date marks the end of the company’s commitment to support the product in any form. This means first closing down manufacturing, selling off the stock and quitting to provide spare parts. Companies sometimes make agreements with their customers to maintain the product for a fixed period. The company must prepare an estimated spare part inventory or save the tools for possible need. From the information system point of view, it is quite easy to detect when the product life cycle ends – there are no relevant data to update into the system, i.e. there is no sign of life.

2.1.2. Life cycle management

Rink & Swan presented PLC patterns, as illustrated in Fig. 12. Although not all of these PLC shapes have been empirically confirmed, this gives an opportunity to discuss the possibility to influence the shape of the curve.

Three ideas implicit in this literature review have influenced the structure of this thesis:

1. A critical problem for a multiproduct company is to determine how its limited resources will be allocated to various products in an optimum fashion. The product life cycle concept is a superior basis for optimizing the allocation of the firm’s resources.

2. The literature also suggests a multidimensional approach for conceptualizing future PLC research.

3. Use of PLC in business planning. (Rink & Swan 1979.)

The life cycle concept is also recommended by Barksdale & Harris to optimize the allocation of resources and guide strategic decisions of business units in multiproduct companies. They consider this important while the concept recognizes the life span of products and emphasizes the changes of opportunities associated with different stages of growth (Barksdale & Harris 1982). The list of dimensions of product life cycle analysis is illustrated in Table 1. The list is not intented to be exhaustive, but rather to serve as a starting point for further conceptualization. Most of the variables in Table 1 characterize the company and illustrate the multivariable nature of the life cycle concept and analysis. (Rink & Swan 1979.)

The Logistics Management Institute of the USA has defined life cycle costing (LCC) as follows: “It is the total cost of ownership of a system during its operational life. It embraces all costs associated with the feasibility studies, research, development, production, maintenance, replacement and disposal as well as support, training and operating costs generated by acquisition of the equipment” (Harvey 1976). Another similar definition is presented by Corrie. “The life cycle cost of an asset is defined as the total cost of the asset over its operating life, including initial acquisition costs and subsequent running costs” (Corrie & Atkins 1991).

Until 1975, LCC was mostly used for military applications in the USA. Harvey reviewed the LCC methods and suggested the following general procedure:

1. Define the cost elements of interest.

2. Define the cost structure to be used.

3. Establish the cost estimating relationships.

4. Establish the method of life-cycle cost formulation.

The general cost elements, i.e. direct costs and overheads, are regarded as insufficient, and a more detailed breakdown is favored. A three-part structure of the calculation is suggested: R&D, investment, and operations & support.

Harvey also reported a couple of methods for the development of cost estimating relationships:

1. Statistical correlation of history data.

2. Linear or multiple regression.

3. The cost of an item or activity as a function of one or more independent variables

What all these methods have in common is that data collection is started at the early phases of product design. Today, more than 20 years after the publication of this paper, it seems evident that these methods were mostly applied manually case by case, since no applicable automatic data processing systems existed to enable flexible reporting. Harvey concludes his review by stating that “LCC systems should be regarded as an important part of management planning, forecasting and control.” (Harvey 1976.)

Haworth simplified the definition of life cycle costing as follows: “an analytical process which considers all cost (and revenues) impacts directly attributable to a decision over the life cycle of that decision”. He condenses the benefits of life cycle costing into four basic principles:

1. Life cycle costing should be applied at all decision levels throughout the design process.

2. Life cycle costing should include the costs of functional operation within a facility.

3. The analytical process should accommodate all decision-related factors.

4. The analytical procedures and results should be compatible with the financial planning and control systems.

The main concern seems to be how to integrate decisions in the planning, programs and budgeting system. There have been practical organizational problems. Nevertheless, this would be a significant step towards integrated financial planning. (Haworth 1975.)

Czyzewski & Hull (1991) define planning, control and motivation as three essential and interdependent functions of budgeting. Concentration on only one of these would lead to a disaster, which means that a correct balance between the three functions must be found. Based on this assumption, an example of a company, Lear Siegler, is presented as an application of product life cycle costing in budgeting. Seven years after the introduction of PLC, a survey was conducted among the top managers of the company. The managers were asked to make decisions, based on the information provided, concerning given combinations of budget functions at a given PLC stage, i.e. start-up, growth, maturity or harvest.

Although the managers agreed that planning, control and motivation are important, they did not all place the same importance on a given budget function at a particular stage. The case study suggests that most managers’ budget as if they were in the maturity stage all the time and suggest training as a remedy. Balanced combinations of the three functions at the different stages are presented in Fig. 13.

It is obvious that budgeting is here limited to product program budgeting, since life cycles are treated the way they are. In functional organization budgeting, product life cycles are mixed and it not so easy to figure out what products and which phases should be considered. This problem is not discussed in the paper (Czyzewski & Hull 1991).

Critical decisions are made repeatedly during the design phase of the product life cycle, as illustrated in Fig. 14. An engineer has to figure out the general configuration of an engine against the performance targets given. Do we need a 4- or 6-cylinder concept? How many valves per cylinder should there be, etc.? These decisions have direct impacts on the material and manufacturing costs. The decisions concerning materials also have a tremendous impact on the manufacturing processes that can be used in, for example, aluminum or ceramic construction. As an example, Burstein reports a car engine rocker cover & cap assembly design, where a 70% reduction in part count led to a 20% reduction in material costs and a 52% reduction in assembly costs. (Burstein 1988).

It is commonly known that the overhead expenses may cause real problems, especially when a new manufacturing technology is adopted. What is the investment planning process like in the firm, and how is it linked to product design? Without life cycle thinking, there is no clear link. In life cycle costing, we try to project the costs that are going to be down the line. Early decisions concerning the product concept, materials and tools actually define what machinery we will have to use, giving us an opportunity to estimate the costs of future investments (Burstein 1988).

Adamany & Gonsalves (1994) suggest a method for investment management, which consists of 4 management theories: life cycle model, performance measurement, advanced costing system and portfolio theory. They divide life cycle into 7 stages:

1. Analysis: Assessment of the idea and effects of the investment.

2. Startup: Prototyping, dedication of the manufacturing facilities, and practical assessment of the effects of the investment.

3. Entry: Market entry with a new product or service.

4. Growth: Return on investment is received as sales revenues

5. Maturity: Profit harvesting.

6. Decline: Sales begin to decrease. Alternatively proceed to the next stage or revitalize the product.

7. Withdrawal: The company withdraws from the market.

The importance of key information at the different stages of the life cycle is also well highlighted, as shown in Table 2. Attention to all the parameters is necessary in each phase, but the table points out the critical parameters in each particular phase. The life cycle concept introduces an integrated approach to planning and budgeting. Managers can use the same criteria for planning and judging the success of the investments. (Adamany & Gonsalves 1994.)

2.1.3. Product life cycle and profitability

Susman (1989) has presented a framework for estimating life cycle revenue and costs and discusses the correlation between the product life cycle concept and long-term corporate profits. He presents the results of a study of several cases at different stages of the product life cycle, market entry strategies, company market position, scales of economy, etc. The study points out many interesting and fundamental aspects relevant to the present research:

• It is important to distinguish between product life cycles and industry life cycles. Industry life cycles can last for decades, but the life cycle of particular products can be very short. These are also product classes (e.g., automotives) and product forms (e.g., convertibles) and product brands (e.g. Pontiacs). All these have different life cycles.

• It is important to clarify for whom product life cycles are managed: producers, consumers or society. Producers are interested in maximizing profit, consumers are primarily interested in product performance in a given price range, and society is interested in safety, health and environmental issues.

• Minimizing cost and maximizing the revenue at every stage of a product’s life cycle do not necessarily lead to maximum profits over the entire life of the products. For example, selling products at high prices to enhance revenues can lead competitors to enter the market and drive prices down.

• The pursuit of the life cycle profits requires producers to think continuously about a product’s life cycle from both the marketing and production perspectives. Strategic objectives and expense indicators change at different stages of the life cycle.

• Market share appears to be positively correlated with return on investment (ROI). However, this does not imply that a company that fails to gain a large market share should simply give up and leave the industry. There are many examples of companies that have low market shares but still earn above-average profits.

• Steady sales volume does neither quarantee product’s profitability. Product profitability usually declines before sales volume, so product profitability is a better measure of product performance. Using product profitability as a basis for a decision to abandon a product is still a bit risky because product cost allocation may vary considerably in different companies and is often questionable. (Susman 1989.)

Susman’s main contribution is the integration of the two perspectives of the life cycle concept: the marketing (revenue generation) and the engineering (cost reduction) perspectives, into a single framework. The main actions from both perspectives have been illustrated in Table 3.

Susman also mentions that some cost and revenue-estimating methods have been published, but he does not quote or name specific articles. However, the benefits of such estimations are promoted as important tools to enhance the company’s profitability analysis. (Susman 1989.)

Shields & Young (1991) have defined the guidelines for Product Life Cycle Cost Management (PLCCM) based on information from the literature and nine US high-tech companies, drawing the following conclusions: There are at least four components to effective product life cycle cost management:

1. Life cycle costing.

2. Product life cycle management.

3. Organizational structure.

4. Cost reduction methods.

The goal of a PLCCM system is for the employees to make decisions and to take actions that cause a product to be designed, manufactured, marketed, distributed, operated, maintained, serviced and disposed of in a way that creates and increases long-term competitive advantage for the firm. This is accomplished by appropriately balancing the critical features of the product, including the whole life cost, the method of delivery, innovativeness and quality. The dimensions of quality are performance, features, reliability, conformance, durability, serviceability, esthetics and perceived quality. Shields also mentions two important principles and 10 guidelines for designing, implementing and managing PLCCM.

The following list is a summary of the ten design guidelines (Shields & Young 1991):

1. The structure and process of a firm must create a human integrated enterprise.

2. Long-term success with consumers requires low expected whole life costs - not only low production costs.

3. Use only the whole life costs of a product that are relevant to a particular decision.

4. Invest more in pre-manufacturing assets and in people skills to increase the probability of low cost, higher quality and innovation.

5. Use more resources in the early phases of a product life cycle.

6. Target costing is the key to establishing cost goals for a product.

7. Cost reduction, not cost control.

8. Performance evaluation and compensation systems should reinforce a whole life cycle cost perspective.

9. All sources of organizational resistance to PLCCM must be dealt with in implementing a culture of cost consciousness and continuous improvement.

10. Continuous education.

Visits to nine US high-tech companies revealed two general sources of resistance to PLCCM: the employees who were to adopt views that were contrary to their professional training and the employees who were to abandon their functional perspectives and to adopt a product perspective. Especially the following examples of resistance against PLCCM were interesting:

• Cost accountants who are reluctant to use parametric models for product life cycle cost estimation.

• Design engineers who lack cost consciousness.

• Engineers who develop private cost systems in response to what they believe are inaccurate systems operated by cost accountants.

• Top managers who are unwilling to invest in product cost systems that report accurate whole life costs.

• Top managers and marketers who focus excessively on the sales price of a product rather than on its whole life.

To avoid resistance, all employees should be involved in the design and implementation of the PLCCM system. (Shields & Young 1991.)

2.1.4. Criticism and benefits

Life cycle analysis is widely used in many applications, although it has also been thoroughly criticized. Life cycle costing has had considerable theoretical development, but few practical applications (Adamany & Gonsalves 1994).

Most of the criticism against the life cycle concept concerns its use in marketing. “Forget the product life cycle!” (Dhalla & Yuspeh 1976). The opponents criticize mainly the use of the bell-shaped sales curve as a default or self-evident behavior of product sales. They demonstrate their point by illustrating the poor fitting of the curves using some empirical examples of product class, product form or brand. On the other hand, Barksdale and Harris have later presented evidence showing that the bell-shaped curve is a reasonable model of the sales record for many types of product. (Gardner 1987.)

One thing that seems to block the implementation of the life cycle concept is the disproportionate distribution of benefits to the functional groups. One department may invest to generate more revenue or to reduce costs, but may not be appropriately rewarded for the increase of profit due to this action. Substantial training of the functional group members has been suggested to overcome this constraint. (Susman 1989.)

The benefits of life cycle concepts are summarized as follows:

• The life cycle concept results in earlier actions to generate revenue or to lower costs than otherwise might be considered.

• Better decisions should follow from a more accurate and realistic assessment of revenues and costs, at least within a particular life cycle stage.

• Life cycle thinking can promote long-term rewarding in contrast to short-term profitability rewarding.

• The life cycle concept helps managers to understand acquisition costs vs. operating and support costs, i.e. to find a correct balance between investment costs vs. operating expenses. (Susman 1989.)

Many articles also deal with the complexity of modeling the product sales behavior and using the model to predict the phases of product life (Lambkin & Day 1989).

There are some quite commonly agreed features (Gardner 1987):

1. Products have a limited life.

2. Their sales history follows an S-shaped curve until the annual sales level off, when penetration of the potential market has been achieved, and eventually decline.

3. The inflection points in the sales history identify the stages known as introduction, growth, maturity, and decline. Some life cycles add more stages, including a period of shakeout or competitive turbulence once growth has begun to slow down.

4. Finding new uses or new users or getting the present users to increase their consumption may extend the life of the product.

5. The average profitability per unit rises and then falls as products move sequentially and inevitably through the stages.

Concerning the question of whether concept is more important than theory, Gardner agrees with some earlier writers stating that “life cycle is not a theory because a theory must contain a systematically related set of statements, including some law-like generalizations, that is empirically testable.” (Gardner 1987.)