Strategy, Product Life-Cycle, and Cash Flow Burke Company manufactures various electronic assemblies that it sells primarily to computer manufacturers. Burke has built its reputation on qual- ity, timely delivery, and products that are consistently on the cutting edge of technology. Burke’s business is fast paced: a typical product has a short life; the product is in development for about a year and in the growth stage, with spectacular growth sometimes, for about a year. Each product then experiences a rapid decline in sales as new products become available.
Burke has just hired a new vice-president of finance, Devin Ward. Shortly after reporting for work at Burke, he had a conversation with Andrew Newhouse, Burke’s president. A portion of the conversation follows.
Andrew: The thing that fascinates me about this business is that change is its central ingredient.
We knew when we started out that a reliable stream of new products was one of our key variables, in fact, the only way to cope with the threat of product obsolescence. You see, our products go through only the ﬁrst half of the traditional product life-cycle—the development stage and then the growth stage. Our products never reach the traditional mature product stage or the declining product stage. Toward the end of the growth stage, products die as new ones are introduced.
Devin: I suppose your other key variables are cost controls and efﬁcient production scheduling?
Andrew: Getting the product to market on schedule, whether efﬁciently or not, is important.
Some ﬁrms in this business announce a new product in March to be delivered in June, and they make the ﬁrst shipment in October, or a year from March, or sometimes, never. Our reputation for delivering on schedule could account for our success as much as anything.
Devin: Where I previously worked, we also recognized the importance of on-time deliveries.
Our goal was a 93 percent on-time rate.
Andrew: The key variable that is your responsibility is cash management. It took us a while to recognize that. At ﬁrst, we thought that proﬁt was the key and that cash would naturally follow. But now we know that cash is the key and the proﬁts naturally follow. Still, we don’t manage cash well. Improving our cash management is the main thing we expect from you.Required
Discuss the cash-generating and cash-usage characteristics of products in general in each of the four stages of the product life cycle—development, growth, maturity, and decline.
Describe the cash-management problems confronting Burke Company.
Suggest techniques that Devin might implement to cope with Burke Company’s cash-management problems.