What is the importance of the product life cycle for business planning and budgeting?

Principles and Practice of Management notes and Revision questions and answers

The Implications for business Planning and budgeting. (combine the explanation for each stage with the implications)

• At the introductory stage, pricing can be geared at least to the recovery of costs, and possibly to what the market will bear.
• From the budgeting point of view, target for sales and profits shouldn’t be set too high at the introductory stage. But there is need to set a demanding level for the subsequent stage of growth. There should be a large budget for advertising and promotion.
• At the growth stage, production needs to be planned at peak levels to meet increasing sales. Distribution needs to be geared up to moving goods to the point of sale. From the planning point of view, this is the period of peak activity to ensure that the product realizes the benefits of maximum competition.
• As sales increase and competition begins to appear, it is time to take advantage of flexibility of pricing by reducing prices just when competitors are beginning to bear their own development costs.

• During maturity, competition is at its highest, a lot of advertising and further price reductions are necessary. Budgets for both sales and profits will also need to be put at a lower level.
• At saturation stage, as sales begin to stagnate, efforts can be directed towards a variety of sales promotion activities to demoralize competitors. Earnings from the growth period can be used to support some of the costs incurred in subsidizing sales. Profit targets should be set but at a minimal level. Production resources should be curtailed considerably in the face of slow-down sales.
• As the decline stage approaches, budget costs should be set at the lowest possible levels, as the whole product cycle begins to wind down for good. Replacement goods should be underway and another cycle about to begin.

Principles and Practice of Management notes and Revision

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