Term Paper Apple iPhone

VILNIUS UNIVERSITY

FACULTY OF ECONOMICS

MARKETING DEPARTMENT

KOSTAS SIRVYDIS

Management and Business Administration, Marketing and Global Business, 3rd year

IMPACT OF A STAGE OF PRUDUCT LIFE CYCLE ON A

COMPANY„S MARKETING DECISIONS

Term paper

Paper supervisor:

Doctor of Social Sciences, Acting Docent, Lecturer Algis Gaižutis

Signature _______________________

Paper submission date _______________

Registration number _______________

Paper evaluation _______________

Vilnius, 2011

Table of contents

1. INTRODUCTION .............................................................................................................................. 3

2. LITERATURE OVERVIEW ............................................................................................................ 5

1. PRODUCT LIFE CYCLE STAGES ........................................................................................................ 5

1. Introduction stage ........................................................................................................................ 6

2. Growth ......................................................................................................................................... 8

3. Maturity ....................................................................................................................................... 8

4. Decline ....................................................................................................................................... 12

2. OTHER FORMS OF LIFE CYCLE ........................................................................................................ 14

3. FORECASTING................................................................................................................................. 15

4. CRITICS TO PRODUCT LIFE CYCLE ................................................................................................. 17

3. APPLE IPHONE .............................................................................................................................. 18

4. ANALYSIS OF THE LIFE CYCLE OF IPHONE ....................................................................... 20

1. LIFE CYCLE OF FIRST THREE GENERATIONS OF IPHONE ................................................................. 21

2. LIFE CYCLE OF THE FOURTH GENERATION IPHONE ........................................................................ 25

3. OUTCOMES OF THE ANALYSIS ........................................................................................................ 26

5. CONCLUSION ................................................................................................................................. 27

6. SANTRAUKA .................................................................................................................................. 28

7. REFERENCES ................................................................................................................................. 29

8. APPENDIX ....................................................................................................................................... 33

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1. Introduction

In today‟s world technologies take a significant part of our lives. Large investments into

Information Technology sector and big interest in technologies from “Generation Y” society

determine fast development of products that quickly become widely used in all over the world.

Due to the fast growth in number of consumer electronic devices and technologies that are

implemented into it, the process of Technology Convergence became present. This means that

instead of carrying multiple devices to perform different tasks – such as making telephone calls,

sending email messages, listening to music or photographing – today‟s society is able to do all

that with one small portable device – smartphone.

More and more smartphones are sold each day and smartphones are taking over the market of

mobile phones – against low-end feature phones. Few companies compete to grab attention of

smartphone lovers – to gain bigger share of the smartphone market – Research in Motion (RIM)

with its BlackBerry product line, HTC, Samsung, Motorola, Sony Ericsson, Palm, Apple and, of

course, Nokia. However, there is only one manufacturer whose products grab the largest

attention of tech-world, media and customers – that one manufacturer is Apple. In 2007 Apple

entered mobile phone industry with a revolutionary mobile device – iPhone. After that, each year,

around the same time – in late June or early July – Apple released a new generation of the

iPhone. Now, there has already been four generations of iPhones.

Many Apple products‟ fans and people who are interested in smartphone industry expected and

waited for the tradition to keep on going – they expected to see a new generation of iPhone in

this year Worldwide Developers Conference (WWDC) event in June, 2011. However, there was

no big buzz from the Apple‟s side about the new iPhone, and just a few days ago – on 31 May

2011 – Apple officially announced the purpose of this year WWDC event, and it did not say

anything about the new hardware devices. This raised questions why the new generation of

iPhone will not be introduced in this June-July period, and when will it be introduced.

The purpose of this paper is to implement product life cycle concept on the product‟s sales

figures in order to validate company‟s marketing decisions considering the introduction of new

product. To achieve this purpose, number of objectives has to be reached first:

1. Analyze the product‟s sales pattern;

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2. Find out internal and external factors that influenced product‟s sales;

3. Analyze life cycles of each generation of the product.

IPhone mobile phone was chosen as the product for implementation of the product life cycle

concept. Only secondary data was used to analyze iPhone‟s sales, product life cycles and

influencing factors. Apple quarterly financial reports from 2007 Q3 till 2011 Q2 were used to

form sales volume and sales revenue curves, and to calculate quarterly changes in sales figures.

Official Apple press releases were used to find out the dates of phones‟ announcement and

launch dates. To find out advantages and disadvantages of the iPhone models, different experts‟

reviews were used.

Since there was no possibility to get official monthly sales results, quarterly results were used.

Due to this, the accuracy of the analysis might not be 100% correct, but the error should not

change the final results of the analysis. For most part of the analysis, sales volume curve was

used to analyze the life cycles, because this curve exposes clearer changes between different

quarters. Meanwhile, sales revenue curve was not forgot and it was used in many cases to

support or neglect various considerations.

The paper is organized in two main parts. Firstly, the product life cycle concept, its usage in

marketing and its influence on marketing decisions is overviewed; forecasting possibilities are

described and critical view to the product life cycle concept is presented. Also, short introduction

into Apple iPhone product is presented. In the second part, thorough analysis of iPhones sales,

life cycles and factors influencing the sales is performed. Moreover, at the end, the results of

analysis and conclusions are presented.

This paper shows the significance of the product life cycle concept when managing old and new

products in the company. It also presents how a product life cycle can be noticed in sales figures

of the product. Finally, it reflects how company‟s marketing decisions are affected by the

product life cycle concept, and how the cycle is affected by marketing decisions and external

forces.

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2. Literature overview

Product Life Cycle concept was first introduced by Conrad Jones in 1957, although, it is believed

that it originated from Joel Dean‟s article “Pricing Policies for New Products” published in 1950

(Muhs). It is a rather narrow subject and despite that it is mentioned in almost every textbook

about marketing, there is no clear analysis and description of it. Many different scholars define

Product Life Cycle concept and it‟s usage in different ways: “The product life cycle portrays

distinct stages in the sales history of a product” (Kotler, 1991); “It [Product life cycle] shows the

trends in sales and profitability of a particular product over its life cycle” (Morden, 1991); “The

product life cycle describes the stages a new product idea goes through from beginning to end”

(McCarthy, Perreault, 1991). These definitions have some things in common: Product Life Cycle

shows how sales figures vary over time; different stages of product entire lifetime can be

distinguished. For this instance, it is possible to deduce one common definition: Product Life

Cycle is a curve displaying the sales of the product throughout its entire lifetime in four

distinguishable stages.

Moreover, there is a difference of opinion about Product Life Cycle application. Kotler and

Keller (2006) claim that “The PLC concept can be used to analyze a product category (liquor), a

product form (white liquor), a product (vodka), or a brand (Smirnoff). In contrast, McCarthy and

Perreault (1991) state “Remember that product life cycles describe industry sales and profits

within a particular product market – not the sales and profits of an individual product or brand.”

Also, they suggest that individual products typically do not follow the general product life cycle

pattern, so it should not be used by marketers to analyze specific product life cycle. However,

applying product life cycle concept only to industry-level sales appears too general and

theoretical, and there are no tangible benefits from this concept for marketers. In this paper,

product life cycle concept is applied for all levels – product category, product form, individual

product and brand.

1. Product Life Cycle stages

Typically product life cycle curve is divided into the following four stages:

1) Introduction;

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2) Growth;

3) Maturity;

4) Decline (or decay).

Figure 3.1 Sales and Profit Life Cycles

Armstrong and Kotler (2011) suggest that product development stage should also be included

into the product life cycle, however, since during this stage sales are non-existent, this paper will

be focused on the four product life cycle stages mentioned above.

1. Introduction stage

Introduction – a period when a new product is just launched. In this stage sales are very low and

grow slowly due to nonexistent or poor distribution system. Consequently, profits are negative or

low. A company which just launched a new product has no or only a few competitors since the

market is not tested and product has not proved its necessity. Price of the product is high due to

high costs and low output, also technological problems in production might occur since there is

no developed excellence in production process, moreover, company sets high margins to cover

heavy promotional expenditures.

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Kotler and Keller (2006) claim that “Companies that plan to introduce a new product must

decide when to enter the market. To be first can be rewarding, but risky and expensive. To come

in later makes sense if the firm can bring superior technology, quality, or brand strength.” Later

scholars present results from studies showing that “products that come out six months late – but

on budget – earned an average 33 percent less profit in their first five years; products that came

out on time but 50 percent over budget cut their profits by only 4 percent.” The main reasons

why market pioneers are performing better are that pioneers shape the market and the product

class, moreover, pioneer company typically aims at the middle of the market and therefore

captures more customers. On the contrary, scholars also present many examples showing how

market pioneers fail and competitors who came later dominate.

Kotler (1991) suggests that in terms of only two marketing mix factors – price and promotion,

management of the company can choose one of the four introduction stage strategies:

A rapid-skimming strategy. A strategy when a new product is launched at a high price

and high promotion level. A firm seeks to recover as much gross profit per unit as

possible and also convince the market of the product‟s benefits.

A slow-skimming strategy. Launching new product at a high price, but low promotion.

Using this strategy a firm seeks to also recover as much gross profit as possible but at the

same time keep the marketing expenses very low. This strategy makes sense when the

market is limited in size and most of the market is aware of the product.

A rapid-penetration strategy. Launching a product at a low price and heavy promotion.

This strategy typically leads to fastest market penetration and the biggest market share.

A slow-penetration strategy. Launching a product at a low price and low promotion level.

The low price will encourage rapid product acceptance in the market, while low

promotion level will let the company to get more net profit. This strategy makes sense

when the market is very large and somewhat aware of the product.

For companies, especially market pioneers, it is important to think about the most suitable

market entrance strategy and not to choose the strategy blindly.

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2. Growth

Growth – a period when early adopters start to like the product. Price of the product remains the

same or falls slightly (Kotler, 1991). Sales start to grow at a high pace; profits increase

throughout the whole period, but at the end of the growth stage, growth turns from accelerating

to a decelerating rate (Kotler, 1991). Another scholar suggests that profits rise but start falling at

the end of the growth stage (McCarty, Perreault, 1991).

Since the product is being accepted by more and more consumers, more companies start to see

the opportunity for great profits and decide to enter the market - competition in the market

increases. New companies enter the market with similar but improved products or simply

copying the most successful existing product (McCarty, Perreault, 1991). Increased competition

also forces companies to keep promotional expenditures at the same or slightly higher level, but

due to larger production volumes, the costs are spread over a larger scale which pulls promotion-

sales ratio down (Kotler, Keller, 2006). Increased production volume also decreases production

costs per unit.

The increased interest in the product and increased number of companies in the market leads to

expansion of distribution system (Kotler, 1991).

In order to keep the product in the growth stage longer, companies use the following strategies:

Improving product quality and adding new product features and improved styling;

Adding new models and flanker products;

Entering new marker segments;

Increasing its distribution coverage and entering new distribution channels;

Shifting from product-awareness advertising to product-preference advertising;

Lowering prices to attract the next layer of price-sensitive buyers. (Kotler, 1991)

3. Maturity

Maturity – a period when sales slow down and level off. Kotler (1991) suggests dividing

maturity stage into three phases: growth, stable and decaying maturity. In the growth maturity

phase growth rate of sales starts to decline since there is no more distribution channels to fill. “In

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the second [stable maturity] phase, sales flatten on a per capita basis because of market saturation.

Most potential consumers have tried the product, and future sales are governed by population

growth and replacement demand” (Kotler, Keller, 2006). The last – decaying maturity – phase

starts when customers are starting to look for product replacements, which forces absolute levels

of sales to decline.

Other scholars (McCarthy, Perreault and Morden) do not divide maturity stage into more detailed

phases. Though, it seems reasonable to distinguish different phases of the maturity stage, since

this stage normally lasts the longest and poses big challenges for marketers (Kotler, Keller, 2006).

Moreover, Morden (1991) suggests that this stage should be prolonged for as long as possible in

order to have stable profitability and cash flows for the company.

Competition in the maturity stage reaches its peak. Some companies try to find niches and avoid

intense competition; other companies try to entrench their position by investing heavily into

research and development to develop product improvements, which would bring competitive

advantage; also, by advertising and promoting sales intensively companies try to attract as much

customers as possible (Kotler, Keller, 2006).

Markdowns in the market become frequent. Although Morden (1991) suggests that competitors

should avoid price competition claiming that in the end generally nobody benefits from it,

companies frequently try to lower prices of their products to attract customers with lower buying

power. Moreover, Kotler (1991) claims that in the period of maturity, competitors fall into two

types: nichers and volume leaders. Nichers – companies which are market specialists, product

specialists or customizing firms. They share a very small part of the total market and gain profits

by selling low volume, but with high margins. Volume leaders – are a few giant companies

which dominate the industry. Typically these companies are differentiated among themselves by

positioning as a quality leader, service leader or price leader. These companies make profits

mainly throughout high volume and low costs.

Looking at practical examples, it can be said, that price can be very important factor in some

markets. Moreover, during the period of crisis, importance of price factor is emphasized even

more. Recent study showed that in 2011 for 53.9 percent of respondents from Lithuania, price

was the most important factor when choosing a mobile telecommunications plan; when choosing

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the mobile handset – price was the most important factor for 47.1 percent (Rinkos tyrimų centras,

2011). Lithuanian telecommunication company “Tele 2” uses a lowest price strategy which

makes it the price leader of the market. Due to its strategy and country‟s economic struggle,

“Tele 2” became a market share leader in the pre-paid and post-paid telecommunication market

in 2011. However, “Tele 2” is only a price leader and its success might be temporary – during

the economic crisis, people tend to look into their basic needs and avoid superior quality features

– “Tele 2” adopts all the new technology later than its competitors, so when people would

recover from a recession and their buying power would increase – they would satisfy not only

their basic needs, but they would likely look at their wants as well (additional services, better

quality, newest mobile handsets, etc.) and “Tele 2” can lose its current market share leader

position.

In the volume leaders‟ zone, products may differ only slightly or not differ at all, so companies

have to advertise and promote sales intensively to attract more customers, therefore companies‟

costs increase significantly and there comes the time when weaker competitors decide to

withdraw their products from the market and only well-entrenched companies remain (Kotler,

Keller, 2006).

According to Morden (1991), maturity stage is the period when customer loyalty to the brand

and the product becomes very important because customer retention can cost few times less than

new customer acquisition. During the maturity stage when the competition is extremely intense

and the products in a market are similar, customers can switch between different companies quite

easily, therefore customer churn is high. A company which would introduce strong loyalty

program and consider the needs of its existing clients can avoid customer acquisition costs and

risk of uncertainty about future cash flows. Part of the customer churn can be affected by how

easily the product can be reached by the customer. Due to this reason, a company has to make

sure, that product distribution and customer access to the product is well maintained (Morden,

1991).

If the company‟s management sees that they possess an aging product, they should not passively

defend it, bud should systematically consider strategies of market, product, and marketing-mix

modification (Kotler, 1991) to boost the product‟s sales.

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1. Market modification. Sales volume consists of two factors:

Volume = number of brand users × usage rate per user

So in order to expand the market for its brand, a company can choose to increase the

number of brand users by converting nonusers, entering new market segments, or

winning competitors‟ customers; or a company may increase the annual usage of the

brand per user by encouraging customers to use the product more frequently, use more of

the product per one occasion, or introduce new ways of usage of the product.

2. Product modification is another strategy used to increase sales. This strategy incorporates

modifying product‟s characteristics in various forms:

a. Quality improvement – a strategy when the functional performance of the product

is improved; that can be in terms of durability, reliability, speed, taste, etc. This

strategy is effective when there is a sufficient amount of customers who want the

better quality and when the quality improvements will be accepted by the

customers.

b. Feature improvement – a strategy when new features are added in order to

“expand the product‟s versatility, safety, or convenience” (Kotler, 1991). Adding

new features helps the company to build customers loyalty, shows that company

is progressive; also it might attract publishers‟ attention, so free publicity comes

as the bonus.

c. Style improvement – a strategy when an aesthetic appeal of the product is

increased; this includes redesign of the product, redesign of the package, color

and texture variations. This strategy shows some novelty of the company,

however, there is a risk of non-acceptance of the new style from part of the

customers and therefore they can be dissatisfied.

3. Marketing-mix modification. A strategy when the one or more elements of marketing-

mix are reconsidered and modified. If adopting this strategy, a company‟s managers

should think about pricing modifications and what effect it will have on the sales and

company‟s image; how distribution channels have to be modified or if there is a prospect

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to introduce a product to new distribution channels; how budget, message and planning of

advertising can be modified to make greater effect; is sales-promotion necessary; and etc.

4. Decline

Decline – a period when sales and profitability decline. “Sales decline for a number of reasons,

including technological advances, shifts in consumer tastes, and increased domestic and foreign

competition” (Kotler, Keller, 2006). Here it is worth noticing that different reasons affect

different life cycles, i.e. when cassette was replaced by compact disc, the product category – data

storage device – was not declining; the product format – cassette – became technologically

outdated so it went to rapid decline and was replace by another product form – compact disc.

There was no shift in consumer tastes – if consumers had an ability to get the same material on

either cassette or compact disc, they would choose technologically more advanced product –

compact disc.

The decline may be slow or rapid depending on the market and the reasons for decline. Typically

prices decline and profits erode during the decline stage. One of the biggest challenges to the

management is to identify if the product is really in the decline stage. This requires thorough

analysis and contribution from company‟s marketing, research and development, manufacturing

and finance departments. Large amounts of date about market size, market share, prices, costs

and profits have to be processed using computer software. And considering all this information,

managers have to propose later company‟s strategy. Scholars agree on three strategies for

companies in the decline stage: maintaining, harvesting or dropping the product.

Depending on the presence and height of the exit barriers in the market, some firms may

abandon the declining market earlier than the others. On one hand, lower barriers encourage

some firms to exit and avoid costs of maintaining not profitable products, on the other hand,

exiting firms encourage the remaining firms to stay and attract withdrawing firms‟ customers

(Kotler, Keller, 2006). When management decides to maintain the product, it can choose to

increase the firm‟s investment in order to strengthen its position in the market; it can choose to

maintain the same level of investment until uncertainties about the industry are resolved; or it

can reposition the investments selectively in order to drop unprofitable customer groups, but

strengthening its position in more lucrative niches (Kotler, 1991).

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The most appropriate product maintenance strategy depends on the industry‟s attractiveness and

the company‟s competitive strength. “A company that is in an unattractive industry but possesses

competitive strength should consider shrinking selectively. A company that is in an attractive

industry and has competitive strength should consider strengthening its investment.” (Kotler,

Keller, 2006)

The first and the third product‟s maintenance strategy, suggested by Kotler, seem as logical,

proactive and certain moves; however the second strategy – keeping the same investment‟s level

until clearer view is visible – appears to be a move of a laggard company. Waiting for the

uncertainties to be resolved might become a very costly experience for the company, as it can

miss opportunities to strengthen its position in total or niche markets, or exit until it is too late.

Nonetheless, this strategy might be adopted by the company which has a strong financial base

and big market share.

A company may also choose to harvest the product, meaning that it would reduce the costs to the

minimum expecting the sales to hold for some time and bring profits in the short term. Cutting

the costs would include minimizing research and development spend, plant and equipment

investment, the company might even reduce “product quality, sales force size, marginal services,

and advertising expenditures” (Kotler, Keller, 2006). Kotler also states that this strategy has to be

implemented without letting customers, competitors and employees know about it, which makes

it really difficult, but if carried out successfully – harvesting can substantially increase the

company‟s current cash flow.

Finally, a company may choose to drop the product, and if so, then the firm can look for another

company which would want to buy its product‟s rights, or, if buyer is not found or company

chooses not to sell, the product can simply be eliminated from the market. The elimination can

be quick or slow.

Company‟s management has to carefully think and analyze whether there is a need of

maintaining the declining product and does the company have enough competitive advantage and

attractiveness to do that. Maintaining a weak product is very costly to the firm, because it not

only might bring no profits, but also consume much of marketers‟, production employees‟, sales

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staff‟s and managers‟ time, which could be spent more effectively on other – strong – products

(Kotler, Keller, 2006).

2. Other forms of life cycle

However, not all products and markets follow the same life cycle pattern. Three common

alternate patterns are:

a) Growth-slump-maturity pattern (Figure 3.2 (a)). Sales grow rapidly after the product is

introduced, then fall slightly to a “petrified” level which is sustained by late adopters that

buy the product for the first time; and early adopters that buy the product repeatedly

(Kotler, Keller, 2006);

b) Cycle-recycle pattern (Figure 3.2 (b)). A common cycle for pharmaceutical drugs. When

product is first introduced, company aggressively promotes it and sales grow rapidly

(primary cycle), later sales decline, but the company promotes aggressively again and it

gives the product another growth wave (recycle), however, later cycles usually last

shorter and grow less;

c) Scalloped Pattern (Figure 3.2 (c)). “Here sales pass through a succession of life cycles

based on the discovery of new-product characteristics, uses, or users” (Kotler, Keller,

2006).

Figure 3.2 Common Product Life Cycle Patterns

Other special categories of product life cycles that are worth to be distinguished are styles,

fashions and fads.

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Figure 3.3 Style, Fashion, and Fad Life Cycles

A style shows a cycle which has several periods of renewed interest. It can last for a very long

period, going in and out of vogue. A fashion “is a currently accepted or popular style in a given

field” (Kotler, 1991). Fashions, according to Kotler (1991), have their own four distinguishable

stages. Firstly, it is distinctiveness stage – similar to introduction stage in a typical product life

cycle – in this stage some consumers get interested into something new which usually sets them

apart from the others. Products typically are custom made or sold in very low volume. Secondly,

it is emulation stage, when other consumers follow fashion leaders and start to show interest in

the product; during this stage more manufacturers begin to produce the product and in higher

volume. Thirdly, it is mass-fashion stage, where fashion becomes extremely popular and

manufacturers produce very high volumes of the product. And finally – the decline stage, when

consumers start moving toward other fashions.

Fads are fashion that has very short acceptance cycle and attract only a limited number of

customers. Fads peak and decline very fast, they usually explain life cycle of products that are

appealing to people who are searching for excitement, or who want to distinguish themselves, or

have something to talk about to others. “Fads do not survive because they do not normally satisfy

a strong need or do not satisfy it well. It is difficult to predict whether something will be only a

fad, or how long it will last – a few days, weeks, or months” (Kotler, 1991).

3. Forecasting

During the whole life cycle of the product, the management of any firm has to deal with different

tasks. Each stage presents new challenges and new marketing strategies have to be used in order

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to keep the product profitable. Each new stage in the product life cycle also means new planning

of the marketing budget, of human resources, of time. It would be beneficial to be able to see

what stage for the company‟s product is coming next and, more importantly, when is it coming

as accurate as possible. It would be beneficial in terms of planning ahead – how a company

should gradually pass from one marketing strategy to another; what the total product life time is

and therefore how the cash flow from the product will change over time. Thus, there is a high

importance on the issue of forecasting product life cycle.

Goldman and Muller (1982) presented some observations of how a firm launching a new product

should forecast the product life cycle shape based on factors that influence the length of each

stage.

The development stage is shorter and less costly for routine products that for high-tech

products;

Introduction and growth stages get shorter when there is no need to build new

infrastructure of distribution channels, transportation, services, and communication; when

consumers have an interest in the product, and therefore are willing to adopt it early, and

give it a favorable word of mouth. McCarthy and Perreault (1991) add that the product

with greater comparative advantage is more likely to show rapid growth in sales.

Typically, these conditions apply to more routine products. For high-tech products

introduction and growth stages are tend to last longer;

Maturity stage will last long if the consumers‟ tastes and product technology remain

stable. Also, company‟s ability to maintain leadership in the market would prolong the

maturity stage.

“The decline time is long if consumer tastes and product technology change only slowly.

The more brand loyal the consumers, the slower the rate of decline. The lower the exit

barriers, the faster some firms will exit, and this will slow down the rate of decline for the

remaining firms” (Goldman, Muller, 1982).

However, these observations are very theoretical and they do not provide clear guides of the

duration and magnitude of the product life cycle stages. Thus, there has been quite significant

number of scholars, who created models for the projection of future sales of the product.

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Huang and Tzeng (2007) developed a forecast methodology which accurately projected product

life time and non-linear product life cycle, based upon a two-stage, fuzzy, piecewise regression

analysis model. A generation-based approach was applied in the methodology, which led to

accurately predicting the 16 megabits (Mb) dynamic random-access memory (DRAM) life time

to be twelve years, and successfully predicting the change points of the 16 Mb DRAM product

life cycles, by deriving 12 regression lines based on historical data on multiple earlier-generation

DRAMs.

Still, reliance only on the technological forecasting methodologies - sales figures of the prior

generations of the product, or sales figures of the past sales of the same product - cannot develop

a universal product life cycle forecasting model, because these methodologies do not take into

account such factors as changes in consumers‟ taste, conditions of a distribution infrastructure of

a product, etc. Moreover, new products might not have any prior generations and therefore the

model proposed by Huang and Tzeng cannot be applied.

In each case of different product‟s life cycle, management has to look for a specific forecasting

methodology.

4. Critics to Product Life Cycle

Although, product life cycle is being discussed in many textbooks and research papers as an

important and valid marketing concept, it also has its‟ share of critics. Baker et al. (1983) claims

that product life cycle concept is “interesting but irrelevant” meaning that theoretically the

concept‟s ideas are correct, but they do not have much of practical implementation.

While McCarthy and Perreault argues with Kotler in terms of to what extent the product life

cycle concept can be applied – to the overall market only or to product‟s category, form, and

even a brand – Dhalla and Yuspeh (1976) objects the product life cycle concept‟s applicability to

any extent. They claim that the concept has little validity and that in some examples the concept

made more harm than brought benefits. They also underscore that product life cycle is not an

independent variable for marketers to follow, but rather it is a dependant variable determined by

the firm‟s marketing actions. It can be party agreed that product life cycle is not a independent

variable, however, it is more likely that marketing actions and product life cycle are

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interdependent variables. For instance, a company‟s management can influence its product

brand‟s position in the product life cycle easily, but if the product category market is saturated

than the effects on the product category life cycle will be insignificant.

To sum up the product life cycle concept, it can be said that product life cycle is a basic concept

with limited use in planning and forecasting, but it can be useful in a descriptive and general

sense. Despite any applying conditions, product life cycle reminds about three main things

(Marklew, 1985):

Products have a limited life;

Sales and profit performance of products tend to vary over a period of time;

Products require different marketing programmes as they proceed through the life cycle.

3. Apple iPhone

Apple iPhone was first announced on January 9, 2007 at “Macworld” event in San Francisco,

USA. It was described as a one device combining three products – a revolutionary mobile phone,

a widescreen iPod, and a breakthrough Internet communications device. On that day Apple‟s

CEO Steve Jobs said: “iPhone is a revolutionary and magical product that is literally five years

ahead of any other mobile phone”. The product was launched almost half of the year later - on

June 29, 2007 and it instantly grabbed as much attention as no other Apple product or any other

consumer electronics device.

Popular web magazine covering articles and reviews about new gadgets and consumer electronic

devices – Engadget.com – in its first official iPhone review said: “the iPhone has the most

beautiful industrial design of any cell phone we've ever seen”, “the iPhone features the most

attractive display we've ever seen on a portable device of this size”, and “it's totally clear that

with the iPhone, Apple raised the bar not only for the cell phone, but for portable media players

and multifunction convergence devices in general”. Of course, iPhone was not perfect and

consumers quickly noted that the Apple‟s new product lacks such features as 3G network

compatibility, global positioning system (GPS) and multimedia messaging service (MMS), but

these shortcomings did not stop iPhone from becoming a successful product.

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iPhone product line now consists of products of four generations and with several slightly

different models in terms of storage space and the phone‟s color. By the end of 2010 iPhone

managed to pull in around 50 percent of total profits that global mobile phone sales generate,

while grabbing only around 4 percent of market share (The Economist, 2011). By the end of

March 2011 Apple sold over 108 million iPhones worldwide.

20

4. Analysis of the life cycle of iPhone

Sales of the iPhone product line have been having ups and downs since it was launched (see

figure 5.1). Sales curve shows that there is a growing trend of sales. However, if looking at the

sales figures in units, it is possible to notice that iPhone sales curve has three cycles between four

launches of different iPhone generations (see figure 5.2). These cycles expose growth, some

level of plateau, and decline of sales. Each of the cycle lasts around one year and prior cycle ends

– new cycle begins with a release of new generation of iPhone. Thus, this sales curve implies

that there is a very nice and theory-proving practical example of product life cycle concept.

However, cycles differ from one another slightly and therefore deeper analysis of Apple‟s

internal actions and external forces causing this kind of sales variation is presented in this paper.

Figure 5.1 iPhone sales revenue over its lifetime ($, million)

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iPhone sales revenue ($million)

21

Figure 5.2 iPhone worldwide sales through its lifetime (units, thousands)

1. Life cycle of first three generations of iPhone

Apple iPhone was first launched in the United States on June 29, 2007 and within 3 months

Apple sold over a million of these products. Two models - 4GB iPhone and 8GB iPhone – were

offered to the U.S. market. Theoretically, after the launch, a new product should be in

introduction stage of the product life cycle, and a million sales in only one market is a quite good

achievement for a high technology product. However, the overall smartphones market was not in

the introduction stage; the first phone ever labeled as a smartphone was introduced in 1997 by

Ericsson (Geek.com), and since then more manufacturers had been building up the smartphone

market – Nokia, Research in Motion (RIM), and Palm.

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iPhone sales (units, thousands)

iPhone (1G)

iPhone 3G (2G)

iPhone 3GS (3G)

iPhone 4 (4G)

22

In November of 2007 iPhone was officially released in Europe – UK, Germany and France.

From the quarterly financial reports from Apple it is visible that during the second quarter of

iPhone‟s lifetime the launch of iPhone in Europe accelerated total sales of iPhone and it would

be safe to say that at this point iPhone was in the growth stage of the product life cycle.

After showing solid sales in the first quarter of fiscal year (FY) of 2008 when Apple sold over

2,3 million units, second quarter showed that sales started to decline. During the second quarter

of FY 2008, Apple sold around 1,7 million units meaning that there was a decline of 26,44%.

Even though an additional 16GB version of iPhone was introduced, and Austrian and Irish

markets were officially entered, it did not stop iPhone from declining. It appears that at this point

Apple could not keep the sales growing due to limitations in distribution – Apple had exclusive

deals with largest mobile telecommunication carriers in the U.S., UK, France, Germany, Austria,

and Ireland but customers of other carriers could not get the same offers and therefore could not

use iPhone to its full potential. Moreover, distribution channels of iPhone were very few and

customers outside of U.S., UK, France, Germany, Austria or Ireland could only buy iPhone from

second market sellers which definitely slowed the sales down. Finally, lack of the 3G and GPS

technologies pushed some consumers to either purchase competitors‟ products or wait for a new

generation of iPhone.

Third quarter of FY 2008 showed even higher decline in sales – around 0.7 million units (-57.9%

from the previous quarter). The rate of decline accelerated and it became safe to say that iPhone

entered the decline stage. However, at the end of FY 2008 third quarter – on June 9 2008 – after

almost one year from the launch of the iPhone, Apple announced the new generation of iPhone –

iPhone 3G, which would be launched on 11 July 2008. On one hand, it seems that there was an

anniversary of the iPhone and therefore it was a nice opportunity to announce a new – follow-up

– model of iPhone, moreover – then – the market had already been waiting for the new, upgraded

model to come. But on the other hand, it appears that the life cycle of the first generation of

iPhone lasted exactly one year and Apple waited to get all the sales possible until the product

reached the decline stage, and only then decided to launch the iPhone 3G, in order to regain the

growth of sales. To see if the launch of the new generation iPhone after almost exactly one year

from the previous generation was a coincidence or it was a smart and intentional decision by

Apple‟s management, the further analysis of sales curve has to be done.

23

After releasing the iPhone 3G, Apple experienced astonishing growth in sales – the next cycle

began (see figure 5.2). During the fourth quarter of FY 2008 Apple sold almost 6.9 million units,

which made an 861.23 percent growth from the previous quarter. The amazing growth can be

explained by the fact that the new generation iPhone included the features which the first iPhone

lacked – 3G network support and GPS – so the new device attracted more of the customers who

were skeptical about the first generation product. Moreover, while the first generation iPhone

was initially released only in the U.S., the iPhone 3G was released in 22 countries on the same

day – 11 July 2008, and was introduced to other 48 countries later that year. This means that a

large part of the growth was influenced by the improved distribution system. Furthermore, the

price of the iPhone 3G was much lower than the price of the first generation model - $199 and

$599 in the U.S. respectively; meaning that wider part of the market was able to afford the new

iPhone. Combining all these factors, it is fair to say that with the new generation of iPhone,

Apple was able to recycle the first generation‟s product life cycle. However, around the end of

the fourth FY 2008 quarter, economic crisis struck the whole world and there was a significant

uncertainty about the future. Apple‟s CEO Steve Jobs in the press release of the fourth FY 2008

quarter said: “We don‟t yet know how this economic downturn will affect Apple. But we‟re

armed with the strongest product line in our history, the most talented employees and the best

customers in our industry. And $25 billion of cash safely in the bank with zero debt.”

First quarter of FY 2009 showed that sales of the iPhone dropped by 36.6%. Apple was

significantly influenced by the economic recession in a way that consumers were forced to limit

their spending and less people were willing to buy the iPhone. However, looking at sales revenue

figures, it appears that Apple managed to increase its revenue by 54.71 percent while the sales in

units were going down.

Another external factor causing the drop in sales might be the launch of the first mobile phone

running on Android operating system (OS) (owned by Google). In October 2008, HTC launched

a new mobile phone – HTC Dream (also called T-Mobile G1). With this happening, iPhone was

presented with a strong competitor, which had high quality hardware, but, more importantly, was

built to deliver supreme user interface – the factor that iPhone was famous for. Android OS was

different from iPhone‟s iOS in a way that it was an open source operating system – meaning that

any software developer could see the programming behind the Android OS and build

24

applications in order to improve user experience even more. The launch of HTC Dream was not

an instant success and instant threat to Apple, but it certainly marked the beginning of

competition for the same target audience.

The second quarter of FY 2009 presented another drop in sales volume - -13.06 percent from the

previous quarter. And this fact shows that, although declining rate decelerated, the product was

surely in the decline stage. This is mostly due to the recession and increasing competition in the

smartphone market. But, surprisingly, Apple managed to again maintain the revenue from the

iPhone from declining – iPhone‟s sales revenue increased by 0.32 percent from the last quarter.

Looking at the sales revenue curve, it is fair to say that iPhone‟s sales revenue decelerated –

meaning that the product reached the maturity stage. Decline stage - from the sales volume curve,

and maturity stage from the sales revenue curve; these factors suggest that iPhone‟s current life

cycle was about to end and in order to bounce back and make sure that more revenue would be

generated, Apple needed to do the same as it did when first generation iPhone reached the

decline stage – launch a new generation of iPhone.

Only two and a half months after the second quarter of FY 2009 results – on June 8, 2009 – at

the annual Worldwide Developers Conference, Apple announced the new generation iPhone –

iPhone 3GS. The new model was very similar to its predecessor, the design almost had not

changed, price stayed the same, but Apple emphasized that the new model was made to be fast –

and that is why it was called iPhone 3GS, where “S” stands for “Speed”. New iPhone, combining

faster hardware and few new software features, led the way for iPhones life cycle to be reversed

once again. iPhone 3GS was released on June 19, 2009 and within only two days, million units

were sold, and third quarter of FY 2009 report showed that iPhone sales are growing again. Sales

volume and sales revenue increased by 37.31% and 35.01% respectively.

By looking at iPhone‟s sales volume curve (figure 5.2) it is visible that after the launch of iPhone

3GS, the product went onto a very well-formed life cycle. After the short introduction stage

between the launch of the new generation iPhone and the end of the third quarter, the product‟s

sales accelerated – showing that it entered the growth stage, which lasted for two quarters – until

the end of the first FY 2010 quarter.

25

After the fourth quarter of FY 2009 and into a first quarter of FY 2010, sales volume of the

iPhone decelerated but the sales revenue accelerated significantly and the growth of sales

revenue in the first FY 2010 quarter reached 142.84% comparing with the previous quarter. In

the second quarter of FY 2010 sales volume and sales revenue curves leveled off showing 0.17%

increase and 2.38% decrease respectively. So it is possible to say that after the end of first FY

2010 quarter, iPhone entered maturity stage which also lasted for two quarters – until the end of

third quarter of FY 2010, when sales volume and sales revenue declined by 4.04% and 2.04%

respectively. Moreover, this maturity stage is interesting, because it shows distinct phases of

maturity stage, which were presented by Kotler and Keller (2006) and mentioned in the literature

overview of this paper. Stable maturity is visible between first and second quarters of FY 2010;

declining maturity occurred between second and third quarters of FY 2010; growth maturity is

not visible in this curve, but that might be due to the frequency of sales reports from Apple – if it

would be possible to receive monthly sales figures, there is a high chance that growth maturity

would be clearly visible.

2. Life cycle of the fourth generation iPhone

Declining maturity usually means that a product is facing the entrance of decline stage, therefore,

Apple needed to again launch a new generation of iPhone and recycle the product‟s life. On June

24, 2010 Apple did exactly that by launching the iPhone 4. iPhone 4 included the most

completely new features from all the iPhones, there was a new design, new hardware, new

display, cameras, applications etc. And despite the antenna bug which was present in every

iPhone and the signal reception would be gone if the bottom left corner is covered with a

person‟s hand, iPhone 4 was a huge success.

In the fourth quarter of FY 2010 sales volume and revenue grew enormously – by 67.92% and

65.39% respectively. The first quarter of FY 2011 showed the deceleration of growth rate, but

the second quarter – last quarter of Apple announced – showed that growth rate accelerated again.

There was a volume increase of 15.13%, and revenue increase of 18.66% in the first quarter;

14.68% and 17.48% respectively in the second quarter. From these figures it is visible, that

differently from any prior life cycle of previous iPhone generations, iPhone 4 has a much longer

26

growth stage which already lasts for three quarters. This implies that differently from the prior

life cycle, the current cycle is longer than approximately one year.

3. Outcomes of the analysis

On June 6, 2011 there will be an annual Worldwide Developers Conference (WWDC) held by

Apple taking place in San Francisco. Historically, Apple used to announce and present the new

generation of iPhone in this event. In the beginning of the year there have been rumors of the

next generation iPhone release this June or July – like every year (CrunchGear.com), however,

Apple officially announced on March 28, 2011, that this year‟s WWDC event will be focused on

new operating systems and no hardware devices will be unveiled. This caused another wave of

guesses why a new generation of iPhone launch is postponed from the traditional June-July

period. Some analysts claim that this is due to the reason that Apple wants to include new

technologies (LTE chipset) into the fifth generation of iPhone and this requires more time to

fully develop a product (TechCrunch.com).

According to the research of this paper, each generation of iPhone passes through whole life

cycle – at least some level of introduction, growth, maturity and decline – and the new

generation of iPhone is only introduced when prior generation enters the decline (or declining

maturity) stage. A present life cycle stage of the iPhone is still growth stage, so, according to

prior generations‟ life cycles, iPhone 4 will start declining at least after two quarters, but given

the fact that growth stage is longer than typically, decline might come even later. It is unlikely

that Apple will introduce a new iPhone before the sales of existing iPhone 4 start to decrease;

there is no need to put a successful, strong and profitable product into the shadow of the new

product, because it would cannibalize the first product‟s sales. Therefore, the most likely date for

the launch of the fifth generation iPhone, according to pattern of the sales, would be the end of

first quarter of FY 2012 – January 2012.

27

5. Conclusion

The paper presented solutions to the drawn objectives and to the main purpose.

1. Product life cycle concept was used to outline and explain what changes the product went

through, and what marketing decisions and how they influenced these changes.

2. A decision of Apple company to keep a new generation of the iPhone for later – not

introduce it this June-July – can be explained by considering product life cycle theory.

Current product on the market is still in the growth stage, therefore there is no need to

launch a new product. From the analysis it is visible that Apple company uses product

life cycle concept to make decisions when to introduce new generation of iPhone. The

company waits for the product to reach decline stage and then recycles the product‟s sales

by introducing new model.

3. According to current product growth stage length and prior cycles‟ length, it can be

predicted that the new generation of the iPhone will come after at least half of the year –

in January, 2012.

This type of analysis can be done to get an insight of what is happening on the market, what are

competitors doing and are planning to do, and for company‟s internal purposes – new product

launch strategy. However, it is very important to have accurate sales figures, and in order to have

more precise analysis‟ results, sales figures of shorter periods – months, weeks etc. – should be

used.

Finally, on one hand, Apple‟s decision to put forward the launch of the next iPhone is very smart

and logical. It enables the company to yield the maximum revenue from the current product and

use the full potential of it. On the other hand, it is very likely that Apple already has most of the

technology and design ready to be implemented into the new iPhone, but it is waiting for the

right time to come and therefore, customers and the overall market loses, meaning that they have

to use old products, while new technologies are ready.

Author‟s signature ________________________

28

6. SANTRAUKA

Kostas Sirvydis

PRODUKTO GYVAVIMO CIKLO ETAPO POVEIKIS KOMPANIJOS

MARKETING SPRENDIMAMS

Vadyba ir Verslo Administravimas, 3-iasis kursas

Vilniaus Universitetas, Ekonomikos Fakultetas, Marketingo Katedra

Darbo vadovas – Socialinių Mokslų Daktaras, Einantis Pareigas Docentas, Dėstytojas Algis

Gaižutis

Darbas parengtas – 2011 m., birželį, Vilniuje

Darbo apimtis – 32 puslapiai

Lentelių skaičius – 0

Paveikslų skaičius – 5

Šio darbo tikslas yra, remiantis produkto gyvavimo ciklo teorija, išsiaiškinti ir pagrįsti įmonės

marketingo sprendimus apie naujo produkto paleidimą į rinką. Kad pasiekti numatytą tikslą,

užsibrėžiami uždaviniai: (1) išanalizuoti pardavimų rodiklių struktūrą; (2) išsiaiškinti vidinius ir

išorinius produkto pardavimus lemiančius veiksnius; ir (3) išanalizuoti kiekvienos produkto

kartos gyvavimo ciklus. Analizė atliekama pasirenkant Apple iPhone produktą; naudojami

antriniai duomenys – oficialūs Apple įmonės veiklos ataskaitų raštai.

Išanalizavus iPhone produkto pardavimų rodiklius remiantis produkto gyvavimo ciklo teorija,

buvo gauti rezultatai, kad Apple kompanija priima sprendimą paleisti naują iPhone modelį tik

tuomet, kai ankstesnysis modelis įžengia į smukimo stadiją. Iki ketvirtosios iPhone kartos

paleidimo, iPhone modelio gyvavimo ciklas trukdavo apytiksliai metus; produktui pasiekus

smukimo stadiją, į rinką buvo paleidžiamas naujos kartos iPhone modelis taip susigrąžinant

pardavimų augimą; tačiau po ketvirtosios kartos iPhone paleidimo, produktas jau tris ketvirčius

yra augimo stadijoje ir dar nepasiekė brandos, todėl nėra prasmės į rinką įvesti šio produkto

pakaitalo. O sprendžiant iš ankstesnių gyvavimo ciklų, galima teigti, kad naujojo iPhone modelio

paleidimas įvyks ne anksčiau kaip po pusės metų.

29

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30







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31

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32

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33

8. Appendix

1) Price sensitivity. Rinkos tyrimų centras, April 2011.

Term Paper Apple iPhone

Documents

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