Exploring the Product Life Cycle

Managing the life cycle of a product requires understanding your problem space, careful attention to the business environment, and deliberate decision making
(Post 5)

A great idea is the foundation for many startups. But building a successful enterprise requires investors, and investors like to make a return on their investment. The next few blog chapters will be dedicated to some basic concepts that are critical to further discussions on commercialization. This installment will focus on the Product Life Cycle.

Typically, at this point in working with a client’s development community, I’d immediately plow into a discussion about product life cycles and the various types of roadmaps that need to be managed by a startup enterprise. In rethinking how I present and build understanding around these concepts, I’m going to shift to a discussion around design and process techniques.

Why? Because at some point a startup needs to capture the best estimate of the “how”- that is, how the idea is going to be brought into the world, through analysis, implementation, and productization. And I believe that’s strongly associated with core technology development, sometimes in the lab. Very likely design and performance decisions are being made, because technical people love the “how”, and it’s in the best interest to understand this work.

As a side note, I may return to methods of developing an understanding of the “What”.  While I’ve developed techniques, and implemented them successfully, there are so many people better at teaching these methods.  Perhaps I can get one of the experts to write that chapter.

By industry and service offerings, Product Life Cycles can differ from each other significantly, regarding the requirements associated with moving from one Phase Gate to the next.  Basically, a Phase Gate is a decision point, where the project team, program management, management and/or executive management decide, quantitatively, that a product or service meets all the requirements and resources can be spent on achieving the next phase. 

Generic phases could be summarized as:

Phase I: Refinement of the idea. Initial implementation, initial cost analysis, market exploration.

Phase II: Launch Production. Production implementation including raw material acquisition, tooling/machinery for scale, pricing, and marketing activities for target marketplace acceptance. This is typically a high investment, low return phase.

Phase III: Mature Production. Systems and material sources are in place, product is known in market. Highest efficiency and profitability phase.

Phase IV: Product retirement. New technologies or market forces have overtaken the viability of the product. A controlled exit from the market is imperative before stockpiles and falling prices erase prior profits.

An important concept is one of Intrinsic Cost.  Intrinsic Cost is the cost represents the elemental cost of an assembly at higher volume levels of production, minus the Bill of Material (BOM) cost.  Basically it represented the labor, supply chain overhead, depreciation, and other costs that are regularly absorbed in realizing production.  There are other elements of intrinsic cost in the supply chain, but these are quickly absorbed in earlier PLC phases.  The concept of Intrinsic Cost attempts to represent the cost of realizing production of a product, instead of the designed-in components that are required to make the device performance as advertised. Often the actual cost to produce the product is well above the intrinsic cost until late in Phase II.

Below is a simplified Hard-Tech product life cycle for a typical integrated semiconductor or sensor product.

Simplified Product Life Cycle (PLC): 

Phase I:  Pilot, Pre-production, and Qualification – A high cost, low volume effort to establish design intent, process and design capability (Yields and CpK), and qualification against customer requirements, before the decision must be made to fund increased investment to realize higher production volume potential.  Time to market is the goal of the phase.  The expense and capital consumed during this phase are basically sunk costs and may or may not reflect or represent the final intrinsic product cost. 

Phase II:  Ramping Production – High investment phase, where capacity is being brought on-line and qualified to the original performance baselines from Phase I.  Time to Profit is the goal of this phase.   Economies of scale and process refinements start to drive the cost structure towards the final intrinsic cost.  The designed in yield, labor, and cost targets start to be realized more often than not, and efforts continue to close and eliminate major startup yield issues.

Phase III:  Steady State Volume Production – Demand is being fulfilled, with high efficiency and utilization.  At this point intrinsic cost should be at its minimum.  At the beginning, the net profit margin is highest, and by the end erosion has started.  Sustainable and predictable production and fulfillment is the goal of this phase.  Yields and product costs are basically representative of what the actual designed-in cost and yields are, regardless of models.  The ability to affect change is limited because of the associated risks to customers unless externalities require acute action.

Phase IV:  End of Life (EOL) Production – Because of newer, lower cost, higher performing offerings (or competing technologies), planning is focused on last orders, and minimizing purchases to close out existing commitments.  Margins have eroded to the point of loss, and the goal is to kill the product before a costly quality issue arises because of decreasing emphasis and resources.

Example of Product Life Cycle Normalized Cost and Profit Model

As a company develops a product, the cost of producing a product will go down, while the profit will go up.  That is until the end of life, when demand may diminish because of competition, and selling price is reduced.

We will cover variations of this diagram in later blog chapter, but this set of theoretical curves is illustrative and worth deeper examination. In Phase I, costs (blue) are high, and profits (green) are zero. As the product moves from idea/prototype into market-ready, larger scale production goods, costs drop and profit margins rise, seeing crossover into overall profitability sometime in late Phase II or early Phase III. In Phase IV when market forces have brought about the end-of-life of the product, demand goes down, costs level off (and may even rise as scale is reduced), and profit margins begin to drop, sometimes precipitously.

In the diagram above, Phase IV product retirement is executed before profit margins have been reduced to early Phase II levels, but we can see where the curves are heading: if the exit ramp to product retirement and production halt is missed, costs go way up, profit margins go way down, and the lovely Phase III pile of cash is no longer. It’s easy to coast when you’re on top of the world, but in reality, Phase IV is inevitable and staying attuned to the marketplace, being aware of up-and-coming technologies, and a good dose of humility are the tools needed to achieve graceful and profit margin sparing product retirement.

Remember to solve a real-world problem

The cost/profit margin model above only hold true if the maturation of the product (or service) development process needs to be directed or aimed toward a solution that solves a problem (see Blog Post 4).  The best salespeople are great because they can relate to the pain their customers are experiencing and provide solutions.  The problem is, making sure they have an offering that the customer values as a solution – something that solves a problem they are actually experiencing.

The universe is a big place with infinite options.  When a company is shrewd or sometimes lucky, they create value by providing solutions to problems that consumers are willing to pay money for.  

The point of this blog is to focus a startup on Time to Profit.  But it’s also to allow the startup to master all aspects of running a Hard-Tech start-up.  While the graphical representation of a PLC is often presented as some sort of law of nature, to achieve predictable commercial outcomes, a startup needs to think beyond solving the immediate problems.  The hard-tech startup needs to keep in mind that each Phase will have different constraints, enabling or disabling factors, production volume and performance expectations, and profitability requirements.

In the next chapters we will introduce and demonstrate tools that, when created, will build the foundation for modelling and understanding how your product meet all PLC Phase requirements and accurately predict profitability, while building a knowledge base of critical factors enabling controlled product development and growth.

Communicating dollars and risk

You might ask why I keep emphasizing Time to Profit.  Simple, investors think about startups in turn of Return on Investment (ROI) or in simpler terms, dollars they invested versus how much they’ll make.  A startup CEO and senior management must get used to describing your company’s performance in terms of dollars and risk.  The sooner, the better.  It is your job to convert performance and metrics, regardless of the type, to dollars, so non-technical people can relate them to risk.   Better yet, contrasting your business and operational models to actual performance, while explaining gaps and recovery plans, will build confidence with investors (likely now Board Members).  In my experience, this will keep a Board of Directors from feeling the need to micromanage you.  Use the phases of the product life cycle, and the associated expectations about costs and profit margins, to set expectations. We’ll discuss this more in future chapters.

A later blog post will explore the significance of managing these PLC by understanding design decision thorough the concepts of platform design.