© 2000 John Petroff
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© 2000 John Petroff |
Once consumers have heard about a new product and recognize what it is and what it does, there is a potential for sales to grow very rapidly because early adopters now start buying. Sales growth also accelerates because missing support services are now arranged by the company or by newly created firms: this may involve service after sale, maintenance, repair, auxiliary and complementary products. For the airline industry, expansion could not begin until airports had been build. For e-commerce, expansion requires internet service providers to offer fast and cheap access. In addition, promotion of the product is not only pushed by the company itself, but by the media as well: the still new product is talked about on TV and written about in newspapers. But, the most important awareness of product benefits comes from the few first buyers who tell about their positive experience.
If we return to Graph G-14.2, Graph G-14.4 and Graph G-14.6, we see that total sales volumes are taking off after the slow and/or chaotic starts. In a rather short period of time, 12 years for aircraft (1956-1968), 15 years for photocopying equipment (1965-1980), and less than ten years for computers (1990-1997) the bulk of sales expansion is completed. This is confirmed by sizable and sustained growth rates shown in graphs Graph G-14.3, Graph G-14.5 and Graph G-14.7. But these growth rates are actually less in that period than what they were in the introductory phase. Also, computers continue to shine with a much smoother performance than aircraft and photocopying equipment.
If the rapid growth is convincingly predicted by the media, the stock is no longer looked upon as speculative, but as high growth. This attracts new investors. Some of this interest can come from competitors, major suppliers or owners of distribution channels. For instance, a merger frenzy is observed in the software and internet sectors in the late 1990's. Venture capital for these mergers is not just coming from outside investors but from companies in the industry such as the chip manufacturer Intel. Consolidation was also experienced by the automobile companies that numbered only 76 by 1917 from the initial 485. The outstanding automobile merger strategist was Billy Durant of General Motors. Because of this merger activity, this phase is sometimes referred to as the consolidation phase by stock market analysts.
Depending on the nature of product and the type of customers, a firm has a critical decision to make: how much to lower price from what it was in the introductory phase. If the product is aimed at a large consumers population, lowering the price substantially is imperative to achieve immediately high sales growth. An extreme example of such strategy was the gutsy but genial lowering of price for the Model T by Henry Ford to $550 when competitors charges three times that much. But it should be noted that Henry Ford had failed twice with up-market cars before. Lowering price also keeps potential new competitors out of the market. But the negative consequence is a continuation of losses. Costs are coming down, gross profit margins are improving, but there is still not enough revenue volume to cover overhead. Only if sales growth is promising, losses no longer deter investors. This may be the time for an initial public offering as can be observed by IPO's of e-commerce firms in 1999. The capital injection is needed to give the firm its critical mass in order to seek further growth, and avoid more costly and controlling venture capital investors. (However, in many countries, floating shares of companies that have experienced losses in the past three years is not permitted, as for instance in India.) The liquidity picture of companies improves considerably when compared with the difficulty of the introductory phase, but not enough for much bank financing.
Firms that pull through the introductory phase on their own (without loosing control to venture capital investors or other acquiring interests) and serve a specialized clientele with the protection of patents or other trade secrets, may want not to lower their price. The high price is justified by the technology in the product, for which outlays have to be recouped and by the technological leadership that attracts customers. In this case, the company liquidity picture can become quickly much brighter, and banks will not turn down applications for credit, especially if it is short term. But the major benefit of high price is to generate profits that can fuel internal financing. This internal financing may not be sufficient if expansion of manufacturing facilities is needed immediately. An IPO is an option. Another option is a private placement with a large investor (i.e. investment bank or insurance company) because of the position of strength of a technology leader.
Companies that can't achieve this strength, face a struggle. If sales fail to continue to expand rapidly, for instance because of entry of new competitors in the industry, or because of product defects encountered by customers, investors and lenders may lose patience with the losses of a company that lowered its price. Product improvement is imperative to correct the causes of threats to sales growth. Failure to improve products adequately may spell the end of a company.
See review questions Q-14B3.1 through Q-14B3.11.
See research assignments R-14B3.1 through R-14B3.3.
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