What is a Harvest Strategy
A harvest strategy is a plan in which there is a reduction or a termination of investments in a product, product line, or line of business, so that the entities involved can reap the maximum profits. A harvest strategy is typically employed toward the end of a product's lifecycle when it is determined that further investment will no longer boost product revenue.
BREAKING DOWN Harvest Strategy
Products have life cycles, and when the item nears the end of its life cycle, it will usually not benefit from additional investments and marketing efforts. This product stage is called the cash cow, and it is when the asset is paid off and requires no further investment. Therefore, employing a harvest strategy will allow companies to harvest the maximum benefits or profits before the item reaches its decline stage. Companies often use the proceeds from the ending item to fund the development and distribution of new products. Funds may also go towards promoting existing products with high growth potential.
For example, a soft-drink company may terminate investments in its established soda product to reallocate funds to its new line of energy drinks. Companies have several harvest strategy options. Often they will rely on brand loyalty to drive sales, thereby reducing or eliminating marketing expenses for new products. During harvest, the company can limit or eliminate capital expenses (CAPEX), such as the purchase of new equipment needed to support the ending item. Also, they can restrict spending on operations.
A harvest strategy may involve the gradual elimination of a product or product line when technological advances render the product or line obsolete. For example, companies selling stereo systems gradually eliminated sales of record turntables in favor of CD players as compact disc sales soared and record sales declined. Also, when product sales consistently fall below the target level of sales, companies may gradually eliminate the product from its portfolio.
Harvest Strategy for Equity Investors
Harvest strategy also refers to a business plan for investors such as venture capitalists or private equity investors. This method is commonly referred to as an exit strategy, as investors seek to exit the investment after its success. Investors will use a harvest strategy to collect the profit from their investment so that fund can be reinvested into new ventures. Most investors estimate that it will take between three and five years to recoup their investment. Two common harvest strategies for equity investors are to sell the company to another company or to make an initial public offering (IPO) of company stock.