Corporate Failure and Life Cycle Issues: Products, Organisations and Long-Term Survival

A Nigerian brewer launches a new premium beer. In its first year the price is high and the volume is small, because the plant is new and few people know the brand. In the second year rivals launch their own versions, the price comes down and volume climbs, and the cost of each bottle falls as the plant fills.

By the fourth year the market is full, the price is stable and growth has stopped. In the sixth year sales fall and the brand loses money. Nothing here is a mistake: it is the pattern most products follow. A business that has only one product, or a company whose products all reach decline at the same time, may not survive.

This topic explains how product life cycles and organisational life cycles bear on long-term survival, what happens to price, unit cost and profit at each stage, how life cycle thinking shows when a product should be changed or withdrawn, and how corporate failure relates to the stage a business has reached. It links to the earlier topics on life cycle costing and on target costing. The next topic covers the Altman Z-score and quantitative failure models.

The product life cycle and its pricing and cost pattern

Most products sold in large quantity pass through development, introduction, growth, maturity, decline and withdrawal. At each stage, selling prices, costs, capital investment and advertising and marketing spending change. The life cycle matters for a business as a whole because its mix of products at different stages decides its future cash flow and whether it has new products coming to replace the old.

• Development. No sales. Spending on research and development, design and testing, which is large and must be recovered later. Target costing and life cycle costing apply here, because most of the product’s lifetime cost is committed at this stage.
• Introduction. Low volume, high unit cost because the plant is not full and marketing spend is heavy. If the product is new and unique, a skimming price gives a high unit profit; a penetration price aims at share. Profit is often small or negative overall.
• Growth. Sales rise quickly. Unit selling price tends to fall because the product becomes less unique as rivals copy it, the firm may cut price to deter entry, and a lower price attracts customers in further market segments. Unit production cost tends to fall: materials are bought in larger quantities at better prices, direct labour becomes more efficient through the learning curve, and fixed costs are spread over more units. Profit grows because volume rises faster than price falls.
• Maturity. Sales growth slows and stops. Unit price is usually stable, with occasional offers, because the product is established. Unit costs are fairly constant: material prices may even rise as purchase quantities stop growing, labour learning gains have ended and staff may turn to the next product, and overhead is steady because batch sizes are settled. This stage often gives the most total profit and cash.
• Decline. Sales fall as customers move on. Price may fall to hold volume, volume and contribution fall, and fixed costs are spread over fewer units. The business must decide whether to harvest, rejuvenate (for example by a redesign) or withdraw.

The costs to recover over the life of a product include research and development, training, machinery, production, distribution and selling, marketing, working capital, and retirement and disposal costs. A price must cover them over the whole life, not just in one stage.

Life cycle issues for products and for organisations

Product issues. Reaching the target audience and adapting to changing tastes; innovation and design problems in development; production, quality, cost and supply of materials; and environmental effects of manufacture, use and disposal.

Organisational life cycle. A business moves through start-up, growth, maturity, decline and exit. The main issues are:

• funding and investment (securing start-up funds, managing debt, attracting investors)
• leadership and management (a founder who cannot delegate, structure that no longer fits)
• market issues (competition, changing trends and customers)

Start-ups fail for lack of funds and market, growing firms for overtrading and weak controls, mature firms for complacency, and declining firms because they did not renew their products.

Life cycle assessment, survival and failure

Life cycle assessment is the regular review of where each product and the business stand in their life cycles. It serves long-term survival by helping management to:

• keep products relevant and the business continuing and sustainable;
• sustain demand and profitability, and maintain operational efficiency and service quality;
• deal with environmental drawbacks and compare options better;
• see at which stage extra investment or innovation is needed, and what strategy extends the life;
• know when to curtail a product or an organisation, especially when there are symptoms of failure; and
• know when to correct a design or product error.

Corporate failure is the end of a company’s operations because it cannot earn sufficient returns or meet its obligations, usually after weak governance, management incompetence and bad investment. Its symptoms are low profitability, high gearing, low liquidity, falling sales and market share, and rising expenditure. It can be assessed with quantitative models such as the Z-score and qualitative models such as the Argenti A-score.

A business whose products are all in maturity or decline, with nothing in development, is showing a failure risk long before its ratios do.

Decisions in decline

• Withdraw if the contribution no longer covers the costs that can be avoided, remembering end-of-life costs such as redundancy and disposal.
• Harvest: cut marketing and investment and take cash while sales last.
• Rejuvenate: redesign, new uses or new markets to start a new cycle.
• Consider non-financial effects: customers who also buy other products, staff, reputation and the supply of spares.

Layouts for life cycle calculations

1. Unit profit at a stage. Selling price − unit cost.
2. Stage profit. Unit profit × units sold in the stage.
3. Margin %. Unit profit ÷ selling price × 100.
4. Lifetime profit. Sum of the stage profits − development and other one-off costs.
5. Decline decision. Contribution − avoidable fixed costs for the stage; compare with withdrawing now (end-of-life costs and lost contribution).

Money is in ₦ million to one decimal place unless stated, margins to one decimal place, and each answer is rounded once, at the end.

Worked examples

1. Introduction.
   (12,000 − 9,000) × 2,000 = ₦6.0m
   margin 3,000 ÷ 12,000 = 25.0%.
2. Growth.
   (9,500 − 6,800) × 8,000 = ₦21.6m
   margin 2,700 ÷ 9,500 = 28.4%.
3. Maturity.
   (9,000 − 6,500) × 12,000 = ₦30.0m
   margin 2,500 ÷ 9,000 = 27.8%.
4. Decline.
   (8,000 − 6,600) × 4,000 = ₦5.6m
   margin 1,400 ÷ 8,000 = 17.5%.
5. Lifetime profit.
   6.0 + 21.6 + 30.0 + 5.6 = ₦63.2m
   less development 20.0 = ₦43.2m.
6. Comment. Unit profit is highest at introduction but total profit is highest in maturity, because of volume. Price fell by ₦2,500 from introduction to growth and unit cost fell by ₦2,200, so the margin held up. The company should plan the next product before the decline.

1. Contribution.
   (9,500 − 6,200) × 2,500 = ₦8.25m.
2. Result for the stage.
   8.25 − 12.00 = −₦3.75m, a loss.
3. Withdraw now. Avoids the loss of 3.75 but costs 3.00: a net gain of ₦0.75m.
4. Advice. Withdrawing is marginally better on cost, but the gain is small. Management should check whether customers will move to other products, whether spares must still be supplied, and whether a redesign could restart the cycle.

Expect variants: unit costs with a learning effect, a skimming launch price, or a question that asks only for the changes in price and cost at one stage.

Life cycle costs in standard terms

Life cycle costing, also called whole-life costing, identifies the total cost of owning an asset so that the purchase decision reflects it, because the decision at acquisition locks in many later costs.

Costs fall into three groups:

• acquisition, set-up or market entry costs (one-off items such as capital expenditure, staff training, documentation and reporting systems)
• operational or running costs (regular and recurring, often rising as the asset ages, as with the maintenance of lifts in a building)
• end-of-life costs (withdrawing a product or demolishing an asset)

A large share of the total is committed early, when the decision to develop the product or build the asset is taken. Buyers also weigh reliability, servicing time and maintenance cost, not price alone.

Illustration. Printer A costs ₦90,000 and each of 12 cartridges over its life costs ₦15,000: total ₦90,000 + 180,000 = ₦270,000. Printer B costs ₦140,000 with cartridges at ₦9,000: ₦140,000 + 108,000 = ₦248,000. B is dearer to buy but cheaper to own, by ₦22,000 (8.1%).

Common mistakes

• Saying price rises in growth. It usually falls, and cost falls too.
• Treating maturity as decline. Maturity is the stage of highest total profit.
• Ignoring development costs when calculating lifetime profit.
• Withdrawing on accounting loss alone. Compare avoidable costs, end-of-life costs and other effects.
• Forgetting the organisational cycle. A business has a life cycle as well as its products.
• Answering outside the stage asked. If the question gives two stages, discuss only those.

Quick revision

• Stages: development, introduction, growth, maturity, decline, withdrawal.
• Growth: price falls (less unique, deter entry, wider segments); unit cost falls (bulk buying, learning, fixed costs shared).
• Maturity: price and cost steady. Decline: price, volume and margin fall.
• Organisation: start-up, growth, maturity, decline, exit; funding, leadership, markets.
• Assessment shows when to invest, innovate or curtail. Failure: cannot earn enough or meet obligations.

How the marks are earned

• Explain price and cost changes: each change with its reason, about one mark per developed point.
• Calculate: stage profits, lifetime profit and margins with the layout.
• Advise on decline: contribution against avoidable cost, end-of-life cost and non-financial factors.

Practice questions

These are original questions, written in the style of the Skills examination. Work each one before you open the answer.

Recall check: multiple choice

Section B style: written questions

Model answers

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