What is a harvest strategy?
A harvesting strategy implies a reduction or a cessation of investments in a product, a range of products or a branch of activity so that the entities involved can reap – or, reap – the maximum profit. A harvest strategy is generally used towards the end of a product’s life cycle when it is determined that additional investment will no longer increase the income of the product.
Key points to remember
- A harvesting strategy is to reduce spending on an established product to maximize profits.
- Expired products are often the subject of harvesting strategies, because the profits are reinvested in new models or new technologies.
- Strategies that allow venture capitalists to exit successful investments are also called harvesting strategies.
Understanding the harvesting strategy
Products have lifecycles, and when the item approaches the end of its lifecycle, it will generally not benefit from additional investment and marketing efforts. This stage of the product is called the cash cow stage, and it is when the asset is repaid and requires no additional investment. Therefore, using a harvest strategy will allow companies to reap the maximum benefit or benefit before the item reaches its decline stage. Companies often use the product of the final article to finance the development and distribution of new products. The funds can also be used to promote existing products with high growth potential.
For example, a soft drink company may stop investing in its established carbonated product to reallocate funds to its new line of energy drinks. Companies have several harvesting strategy options. Often, they rely on brand loyalty to drive sales, thereby reducing or eliminating marketing expenses for new products. During the harvest, the company can limit or eliminate capital costs, such as purchasing new equipment needed to support the final item. In addition, they can limit operating expenses.
A harvesting strategy may involve the phasing out of a product or range of products when technological advances make the product or range obsolete. For example, companies selling stereo systems have gradually eliminated sales of record turntables in favor of CD players while sales of compact discs have skyrocketed and disc sales have declined. In addition, when product sales consistently fall below the target level of sales, companies can gradually eliminate related products from their portfolios.
Computers, cell phones and other electronics are common items in harvesting strategies as they quickly become obsolete and the profits are invested in new gadgets.
The harvesting strategy also refers to a business plan for investors such as venture capitalists or private equity investors. This method is commonly called exit strategy, as investors seek to exit the investment after its success. Investors will use a harvesting strategy to collect the benefits of their investment so that the fund can be reinvested in new businesses. Most investors estimate that it will take between three and five years to recover their investment. Two common harvesting strategies for equity investors are to sell the company to another company or to do an IPO of the company’s shares.