One of the most important features of innovations is their dynamism.
The process aspect is leading in the management of innovation and finds expression in the structuring of the innovation process in several successive phases: the creation of ideas for innovation; finding a scientific solution; implementation of the technology or product; diffusion of the new technology or product.
Irreversibility and inertia require innovative decisions to be made based on reliable forecasts and analyzes of demand, the level of competition in the industry, technological development in the industry, etc.
In any case of investment and innovation, there is some degree of uncertainty about the expected future results, ie. there is a risk.
The risk of innovation can be divided into two types.
The first type of risk is related to the probability that the innovative idea will not pass the test of the successive phases of the process and will not lead to the introduction of the product or technology in mass production. Reference: “What is Product Innovation”, https://mpmu.org/what-is-product-innovation/
The second type of risk is related to the probability that the expected results will not be obtained after the introduction of the innovation in the production and the market.
The main goal of company innovations is to increase the welfare of shareholders.
The management of company innovations is based on the following principles: renewal and investment in the interest of the owners; the complexity of innovation and investment management; coherence of decisions; optimality; economy; return on investment; compliance with the risk of renovation and investment; innovation management as a continuous process and standards management.
Life cycle concept
The life cycle concept is used in the management of product and technological innovation.
According to the concept of the life cycle, products, technologies, demand, companies, and industries go through certain successive phases.
The evolution of a product is divided into four phases, usually in terms of sales volume, namely: introduction, increase, maturity, decrease.
The elements of the product life cycle are the following:
Line of conduct – it expresses the volume of sales over time. The traditional line of behavior may have a different appearance depending on the other elements of the life cycle;
Inflection point – this is the point of saturation of demand, which shows the largest volume of sales in the cycle;
Intensity angle – it expresses the dynamics of sales volume at the stage of introduction of the product on the market and is locked between the abscissa and the line of conduct. The angle of intensity shows how well consumers accept the product when it appears on the market;
Life cycle limits express not only its duration as a whole but also the duration of each of the stages.
For each product, there is a sequence of events from its introduction to its removal from the market.
The process reflects the result of the influence of competitive market forces on the sales volume of the company. In addition to sales volume, the life cycle is directly related to the growth rate.
In many cases, the different phases of the life cycle are also characterized from other points of view: profit, necessary investments, risk.
The phase of product introduction is characterized by a small number of competing companies, slow growth in sales volume, high unit price of production. The product is not widely known. Its high price makes it attractive only to small buyers who agree to buy an untested product for some atypical reasons.
The growth phase
The growth phase is characterized by rapid sales growth and significant profits. The cash flows to the company are large and growing. The investments made during this phase have a good return and a positive NPV. The company’s liquidity position has improved, even though financial leverage is of high value. Market growth attracts competing companies and competition increases.
Product maturity phase
The maturity phase is characterized by a declining rate of return due to reduced demand and reduced unit price of the product. The liquidity position of the company has significantly improved. Financial leverage is reduced due to equity financing instead of bonds and loans. The cash flows to the company are large and positive. Investments are small and mainly replaceable. Sales are slowly declining.
The decline phase of the product
The decline phase is characterized by declining prices, declining profitability, and declining sales. Although liquidity and financial leverage are at a good level, cash flows to the company are small and insufficient for future investments. The market is approaching full saturation and is supported only by substitute demand.
It is believed that the curve of the evolutionary change in sales revenue during the first three phases is most accurately described using logistic curves.
For example, if the first phase of slow growth is followed by rapid growth, the Pearl-Reed development curve can be used. Models based on exponential functions and describing development processes with a certain level of saturation are also offered.
The concept of the product life cycle is important for the management of innovation and investment in many areas. Reference: “What is the Product Life Cycle and what are its phases and cycles. Strategies for the stages of the product life cycle”, https://bvop.org/journal/product-life-cycle/
The initial success depends on the company’s ability to introduce innovative products.
Life cycle forecasting helps to determine when a new product is most likely to appear, at what rate it will conquer the market when is the right time to enter the market with a competitive product, and so on.
Hence, the requirements to the size of the investment budget and to the way of development of the new product are determined.
The concept of the life cycle is used in identifying the need for innovation and developing innovative strategies for both multi-product and single-product companies.
Тhe requirements for a company that must ensure profit growth by combining different strategies: short-term development of the existing product; life cycle extension and postponement of the decline phase; early introduction of the new product on the market; late entry into the market as a follower; long-term development of a third-generation product.
The concept of the life cycle can also be used to clarify the dynamics of the development of technology. In this case, too, the life cycle is considered to cover four phases: birth, growth, maturity, and aging.
A significant problem is finding an indicator to express the development of technology over time. Another problem is the definition of the scope of the markets under study: national; regional; world.
If the chosen market is limited and saturated with interchangeable products produced by competing technologies, the technology will be characterized by weak growth.
If the products produced with this technology have no substitutes and the products have no substitutes and are sold in growing markets, the duration of the phases and the characteristics of the technology will be different. Attempts to build the life cycle of technology would help.
The life cycle of demand, which has a certain relationship with those of technology and products, covers the following phases:
1. Origin – the beginning of meeting a public need for goods or services, the emergence of a new industry, sub-industry, or production, strong competition between several companies to take a leadership position.
2. Accelerating growth – demand grows and outpaces supply, the winning companies receive significant economic benefits from their favorable market position.
3. Slowdown in growth – the first signs of meeting demand appear, supply begins to outpace demand
4. Maturity – demand is met, there is significant excess capacity
5. Decline in demand – decrease in demand due to changes in demographic and economic conditions, obsolescence of the product, etc.
The slowdown in growth and maturity in the life cycle of demand is not accidental, but a natural consequence of economic development. Therefore, in each of the strategic areas of work, the company inevitably faces events that characterize the slow growth of demand, the satisfaction of demand, the emergence of excess capacity, etc.
The other conclusion is that the consistent product renewal based on one technology has a limit, after which non-competitive production is simply replicated.
This requires forecasting the development of the used technologies and choosing the most appropriate moment for their replacement with new technologies.
In addition, if the company’s management wants to maintain liquidate continuous growth, it must strive to add new areas of activity and eliminate those of existing activities that are not consistent with the growth strategy.
The management of the company should anticipate the change of phases and review the strategy used.
The shortening of the terms of replacement of the old with new products on the market is meant by the concept of shrinking of the market cycle. At the same time, the degree of novelty and complexity of the products increases, which prolongs the terms of development and assimilation of new products.
This phenomenon is referred to as extending the cycle of creating new products.
When we observe the behavior of a pioneer company and a follower company in shrinking the market cycle and extending the cycle of creating new products, it is noticed that the competitive position of the follower company significantly weakens.
It remains a very small part of the market, as its product enters the market during the maturity phase of the product life of the pioneer company. The rapid decline in demand does not allow the follower company to use the full potential of the product.
At the same time, the pioneer company has been in a monopoly position on the market for some time and has the opportunity to reduce its production costs based on the experience gained.
The experience curve
The concept of the experience curve is based primarily on research from the Boston Consulting Group. According to these and other studies, the following dependence has been found in many industries: unit production costs, measured in fixed currencies, fall by a constant percentage with each duplication of the accumulated volume of production units.
The experience curve represents the relationship between the volume of production accumulated up to a certain point and the changes in total production costs.
It is borne in mind that as the volume of production increases, experience grows, and costs decrease.
It is believed that this effect is manifested when working in competitive conditions.
The accumulated production volume covers all units produced from the beginning of the production of the respective product and should not be confused with the annual production volume.
By definition, the effect of experience refers to the cost of value-added in the company.
Costs are defined not as specific to the production function, but as total from the point of view of the company as a whole. Or the effect of experience is sought not only in production but also in supply, distribution, etc.
Distribution is a basic process through which, on the one hand, individuals and groups of people get what they need and want to meet the needs, and on the other hand, companies receive timely material resources and position themselves in the market.
Distribution policy plays an integrative role in the marketing policy of companies.
It is a system of organizational, economic, and administrative actions and measures of commodity forecasting, which provide a package of consumer values to meet the needs of society.
The activities performed by the individual units in the distribution process are reduced to management of the entire distribution process; research and development work; management and organization of physical distribution; organization of document flow; financing; harmonization of international treaties with local legislation; taking and sharing the risk, obligations, and responsibilities of the participants; legal services of all units and management of the territorial location of the distribution networks.
In addition, the achievement of the company’s global goals and business decisions largely depends on the construction of an effective distribution network.
Distribution planning, in turn, is a systematic process of developing long-term strategies to achieve the set goals for the distribution of the company’s products.
Physical distribution is a set of activities covering: order processing; material processing; storage; unification of goods; inventory management and customer service.
There is a parameter called the “80% experience curve”, as costs fall by 20% when doubling the accumulated output. The relationship between cost and volume can also be represented as a straight line if the parameters of the experimental curve are presented on a logarithmic scale.
The cost reduction is a result of the influence of the following factors:
effect of training.
Continuous performance of the same work tasks leads to greater productivity of the workforce. In addition, production experience helps to better design the organization of production and labor and thus reduce costs.
The larger accumulated volume of production allows the introduction of new production processes and equipment that are more productive and economical and reduce the company’s costs.
Improvements are made in the design of the product, which facilitates its production.
Technological improvements can be made not only in production but also in process logistics, distribution, and other areas.
scale effect on the amount of investment.
The effect of scale is manifested if the added production capacity reduces the cost per unit of output produced.
This concept is known as the “60% – 80%” rule, which means that if production capacity is doubled, the investment needed for this purpose will increase by only 2exr (n).
The value of n is between 60% and 80%. For example, with a 100% increase in capacity, the increase in investment will be between 52% and 74%.
The effect of scale in the broadest sense of the word (saving current and one-off costs) is a direct result of the existence of efficient mass production processes, the need to introduce large-scale production due to the indivisibility of resources and the integration of economic activities, which is justified only for large series operations.
Many experts believe that the effect of experience should not be confused with the effect of scale, which depends on the volume of production over some time, rather than on the accumulated volume of production. In practice, both effects occur simultaneously and are very difficult to separate from each other.
The effect of the experience, presented as a percentage reduction of unit costs when doubling the accumulated volume of production, depends on the industry, the type of market, the speed with which experience is gained, etc.
The concept of the “experience curve” is important for the analysis of the competitive position of the company and the choice of means for its maintenance and improvement.
Knowing the experience curve can help a new entrant to implement an aggressive entry strategy.
Using the concept of the experience curve requires answering several questions of strategic importance to the company:
- Can a significant effect of the experience be obtained in the industry in which the company operates?
- What is the significance of the effect of the attempt to achieve low costs, large market share, and advantageous competitive position?
- How can the company counteract competitors who get a significant effect from the experience?
Industries differ in the importance of possible competitive advantages and in how these advantages are achieved and maintained.
A cost advantage based on the effect of experience is most likely to be seen in mass production industries with a perfectly competitive market organization. In specialized industries, with low concentration and traditional declining industries, it is difficult to achieve a competitive advantage based on the effect of experience.
If a company uses the effect of experience as the main means of achieving a cost advantage, it is necessary to constantly invest in areas that ensure the receipt of this effect, namely: technological improvements in processes and equipment; maintenance and expansion of production facilities; improving the organization of labor and production.
If competitors have achieved a significant cost advantage by using the effect of experience, the company at a disadvantage can counteract them by product innovation; product differentiation, which allows achieving a higher price; technological advancement; seeking advantages in supply and distribution, etc.
Therefore, it is understood that the concept of the experience curve is important for the development of the overall strategy of the company, and though it affects both innovation and investment strategy.