Product Decisions (AQA A-Level Business): Revision Notes
Product decisions
Influences on and the value of new product development
Several factors influence how businesses develop new products and services. Understanding these influences helps businesses make strategic decisions about which products to create and how to bring them to market.
Technology
Technological developments are central to many new products that enter the market. When technology advances, businesses can use these improvements as the foundation for creating innovative products that better meet customer needs.
Example: Battery Technology in Electric Vehicles
Improvements in battery technology have enabled manufacturers to develop more efficient electric cars. Companies analyse technological breakthroughs and use them to design products that consumers want and need.
The advancement in lithium-ion batteries has:
- Increased driving range from 100 miles to over 300 miles
- Reduced charging times significantly
- Made electric vehicles more practical for everyday use
Competitors' actions
When a competitor launches a new product, it can motivate rival businesses to develop something equally good or even better. This competitive pressure drives innovation across industries.
Hotels have enhanced their services by offering guests a choice of different pillow types to improve comfort. When one hotel introduces this feature, others often follow to remain competitive. This demonstrates how competitor actions create a ripple effect throughout an industry.
The entrepreneurial skills of managers and owners
One crucial talent that successful entrepreneurs possess is creativity. When managers and owners can think imaginatively about new ideas for goods and services, this leads to the development of many innovative products.
Entrepreneurial thinking involves identifying gaps in the market and developing products that genuinely fit customer needs. This creative approach to business drives new product development forward.
Exam tip: For questions about factors influencing new product development, try to think about small and medium-sized businesses, not just large corporations. Consider how each factor applies differently depending on business size.
The importance of unique selling points
Businesses frequently add value by creating a unique selling point or proposition (USP) for their products. A USP is a distinctive feature or benefit that differentiates a business's products from those of competitors in the market.
Having a strong USP helps the business in several important ways:
- Advertising advantage: The business can build its advertising campaigns around the real or perceived differences between its product and rival offerings
- Brand loyalty: A USP encourages customers to remain loyal to the brand, giving them a compelling reason to continue purchasing that particular business's product
- Premium pricing: A USP commonly allows the firm to charge a higher price for the product, as customers perceive greater value
When customers recognise what makes a product special or different, they are more likely to choose it over alternatives, even if it costs slightly more. This customer perception of uniqueness is often more valuable than the actual product features themselves.
The product life cycle
The product life cycle is a theory suggesting that all products follow a similar pattern throughout their existence. Different products take varying amounts of time to pass through these stages.
For example, the Mars Bar was launched in the 1920s and continues selling strongly today. In contrast, modern motor cars typically have a life cycle of approximately 10 years.
Understanding where a product sits in its life cycle helps managers make informed decisions about pricing, promotion, and investment.
Stage 1: Development
During the development stage, firms undertake research and development work to create new products that will become their future best sellers. This stage involves designing, testing, and refining products before launch.
Key characteristics:
- Many products fail during development because they do not meet consumer demands
- This stage can be very expensive
- Cash flow is expected to be negative because the business is spending money on development without generating any sales revenue yet
The development stage requires significant investment with no guarantee of success. Many businesses fail to adequately budget for the length and cost of this stage, leading to cash flow problems before the product even launches.
Stage 2: Introduction
The introduction stage begins when the product first appears on the market. At this point, the business starts to see whether consumers will accept the new product.
Key characteristics:
- Sales are initially zero and then begin to rise slowly
- The product has a negative cash flow initially
- Costs remain high relative to revenue
- The failure rate for new products is significant, ranging from 60% to 90%
- Promotion can be expensive as the business works to build awareness
- Prices may be set high to recover the substantial initial launch costs
This is a critical stage where many products fail to gain traction in the marketplace. The high failure rate of 60-90% means that most new products never make it beyond this stage.
Stage 3: Growth
During the growth stage, sales increase rapidly and the firm's cash flow improves considerably. The business starts to see returns on its investment.
Key characteristics:
- The business's profits per unit sold are likely to be at a maximum
- Firms often charge a high price at this stage, particularly if the product is innovative
- Businesses with technically superior products may use price skimming strategies
- The growth stage is critical to a product's survival
- Success depends on how competitors respond to the product
If competitors don't react strongly or if the product has clear advantages, growth can be substantial and sustained. This stage represents the best opportunity for businesses to capitalise on their innovation and establish market dominance.
Stage 4: Maturity
During the maturity stage, the sales curve reaches its peak and then begins to decline. Both cash flow and profits also start to fall.
Key characteristics:
- Intense competition with other brands characterises this stage
- Competitors focus on making improvements and highlighting differences in their versions of the product
- Consumers know a great deal about the product by this stage
- Specialist deals are required to attract customer interest
- Market saturation means most potential customers already own the product
At maturity, businesses must work harder to maintain sales and differentiate their offering from competitors.
Stage 5: Decline
During the decline stage, sales fall rapidly. This downturn may result from new technology making the product obsolete or from newer products entering the market.
Key characteristics:
- Product sales decline sharply
- Marketing managers often consider eliminating unprofitable products
- Promotional efforts will be cut significantly to reduce costs
- The product may be withdrawn from the market entirely
When decline sets in, businesses must decide whether to invest in extension strategies or accept the product's end of life. This decision should be based on careful analysis of whether the product can be revitalised or whether resources would be better invested elsewhere.
Exam tip: For major theories like the product life cycle, you should be able to assess both strengths and weaknesses. This demonstrates evaluative thinking and confirms your understanding of the concept.
Extension strategies
Businesses may attempt to prolong the life of a product as it enters the decline stage by implementing extension strategies. These techniques can delay or even reverse declining sales.
Common extension strategies include:
Finding new markets for existing products
Some companies successfully sell products that have reached maturity in one country by targeting economically developing countries where the product is still novel. This gives the product a new lease of life in a different market.
Example: Market Expansion Strategy
A product that has saturated the UK market might find strong demand in emerging markets where consumers haven't had access to it before. For instance, many consumer electronics and household appliances follow this pattern, finding new growth in Asian and African markets after reaching maturity in Western countries.
Changing the appearance or packaging
Motor manufacturers sometimes produce older models of cars with new colours or additional features. These cosmetic changes can extend the product's appeal and attract customers looking for something fresh.
Updating packaging design can also make an existing product feel new and relevant again, encouraging both new purchases and repeat purchases from existing customers.
The product mix
A well-organised business will plan its product range strategically to ensure it has products at each of the major stages of the life cycle. This approach is called managing the product mix.
The concept works like this: as one product reaches decline, replacement products are entering the growth and maturity stages of their lives. This staggered approach means there will be a constant flow of income from products in the mature phase, which finances the development of new products.
Benefits of a balanced product mix:
- Steady income stream from mature products
- Funding for innovation through established product revenues
- Risk reduction by not depending on a single product
- Market resilience if one product fails or declines
A healthy product mix ensures business sustainability and growth over the long term.
The Boston matrix
The Boston matrix was developed by the Boston Consulting Group. This matrix provides a framework for businesses to analyse their product portfolio based on two key factors: the product's market growth rate and its market share.
The matrix divides products into four categories, each with distinct characteristics and strategic implications.
Star products
Stars are products that have a dominant share of the market and good prospects for growth. These are typically the business's most successful products.
Characteristics of Star Products:
- Market leaders in their category
- Fast growing sales
- Generate substantial profits
- Require significant investment to finance continued growth
- High potential but also high resource requirements
Stars represent the future of the business and deserve substantial investment to maintain their market position.
Cash cows
Cash cows are products with a dominant share of the market but low prospects for growth. The market itself is mature and not expanding significantly.
Characteristics of Cash Cow Products:
- Profitable products that generate steady income
- Generate more cash than needed to maintain market share
- Operate in mature, stable markets
- Low growth potential but reliable performance
Cash cows are vital because they fund the development of other products. The surplus cash they generate should be invested in developing stars and problem children.
Dogs
Dogs are products that have a low share of the market and no prospects for growth. These products operate in declining or stagnant markets.
Characteristics of Dog Products:
- Greatest number of products typically fall into this category
- Markets are not growing, offering little new business opportunity
- Operate at a cost disadvantage compared to competitors
- May drain resources without offering returns
While businesses often want to avoid having too many dogs, some dogs may still be worth keeping if they contribute to the overall product range or have loyal niche customers.
Problem children
Problem children (sometimes called question marks) are products that have a small share of a growing market. They represent both an opportunity and a risk.
Characteristics of Problem Child Products:
- Operate in rapidly growing markets
- Currently have poor profit margins
- Create enormous demand for cash to fund growth and compete effectively
- Uncertain future - they may become stars or may fail
Businesses need to monitor problem children carefully, as they may become tomorrow's cash cows but require significant investment now.
Conclusions from the Boston matrix
Businesses can draw several strategic insights from analysing their product portfolio using the Boston matrix:
Avoid concentration in any single category: Firms should not have too many products in any one category. Having too many dogs is problematic, but businesses also need to avoid having excessive stars and problem children, both of which demand substantial investment.
Products in growth markets need investment: Products in the top half of the chart (stars and problem children) are in the early stages of their life cycle. They operate in growing markets, but the costs of developing and promoting them will not yet have been recovered.
Cash cows fund development: Continuing production of cash cows provides the necessary cash to develop newer products. These reliable earners are essential for funding innovation and growth elsewhere in the portfolio.
Problem children require monitoring: Firms must pay close attention to problem child products, as they may evolve into tomorrow's cash cows. Deciding which problem children to invest in and which to abandon is a critical strategic decision.
A balanced portfolio should include:
- Cash cows to generate funds
- Stars to secure future growth
- A limited number of problem children as potential future stars
- Minimal dogs that should be phased out or repositioned
Key Points to Remember:
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New product development is influenced by technology, competitors' actions, and entrepreneurial creativity
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A unique selling point (USP) differentiates products from competitors and enables premium pricing
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The product life cycle has five stages: development, introduction, growth, maturity, and decline, each with different cash flow and strategic implications
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Extension strategies like finding new markets or changing packaging can prolong a product's life
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The Boston matrix categorises products as stars, cash cows, dogs, or problem children based on market share and market growth, helping businesses manage their product portfolio strategically