Why do profitable, mature businesses die away?
One of the most obvious reasons mature businesses die away – when we look in the rear view mirror – is that they did not spend to renew their product or service when newer entrants into the business arrived with better products and services built upon newer technology.
Should be an easy fix for companies making annual net profit. Right? Not so much, as our rear view mirror makes obvious.
The life cycle of any product
There is a life cycle for any product, and it is much shorter on average today than five years ago, especially in the technology world.
Companies that are successful with their first product must begin thinking about the costs of additional products or of that product’s replacement well before any evidence of a peak in sales is noticed.
The R&D “tax”
[Email readers, continue here…] There are rules of thumb for various industries in creating a reserve for research and development. To attempt to find an average number, companies should “tax” themselves by reserving some percentage – say ten percent of their net revenues or two percent of sales – for research and new product development.
Wouldn’t you rather obsolete yourself than watch helplessly as someone else does that for you?
It is a certainty that even with patent protection, a successful product will be challenged, duplicated, even exceeded by competitors, and within increasingly shortened time periods. It is a difficult concept, but a necessity of the modern age, to plan to obsolete your own successful products before someone else does that for you.