Industry Life-Cycle Analysis

Stages of Life-Cycle of Business / Industry

• Embryonic
• Growth
• Shakeout
• Mature
• Decline

Embryonic

Industries in this stage are just beginning to develop.

They are characterised by:

• Slow growth as customers are still unfamiliar with the product.
• High prices as volumes are too low to achieve significant economies of scale.
• Significant initial investment.
• High risk of failure.

Companies focus on raising product awareness and developing distribution channels during this stage.

Growth

Once the new product starts gaining acceptance in the market, the industry experiences rapid growth.

The growth stage is characterised by:

• New customers entering the market, which increases demand.
• Improved profitability as sales grow rapidly.
• Lower prices as econmies of scale are achieved.
• Relatively low competition among companies in the industry as the overall market size is growing rapidly.  Firms do no need to wrestle market share away from competitors to grow.
• High threat of new competitors entering the market due to low barriers to entry.

During this stage, companies focus on building customer loyalty and reinvest heavily in the business.

Shakeout

The period of rapid growth is followed by a period of slower growth.

The shakeout stage is characterised by:

• Slower demand growth as fewer new customers are left to enter the industry.
• Intense competition as growth becomes dependent on market share growth.
• Excess industry capacity, which leads to price reductions and declining profitability.

During this stage, companies focus on reducing their costs and building brand loyalty.

Some firms may fail or merge with others.

Mature

Eventually demand stops growing and the industry matures.

Characteristics of this stage are:

• Little or no growth in demand as the market is completely saturated.
• Companies move towards consolidation.  They recognize that they are interdependent so they stay away from price wars  However, price wars may occur during downturns.
• High barriers to entry in the form of brand loyalty and relatively efficient cost structures.

During this stage, companies are likely to be pursuing replacement demand rather than new buyers and should focus on extending successful product lines rather than introducing revolutionary new products.

Companies have limited opportunities to reinvest and often have strong cash flows.  

As a result, they are more likely to pay dividends.

Decline

Technological substitution, social changes or global competition may eventually cause an industry to decline.

The decline stage is characterised by:

• Negative growth
• Excess capacity due to diminishing demand.
• Price competition due to excess capacity.
• Weaker firms leaving the industry.

Limitations of Industry Life-Cycle Analysis

The following factors may

• change the shape of the industry life cycle, 
• cause some stages to be longer or shorter than expected, or 
• even result in certain stages being skipped altogether.

These factors are:

• Technological changes
• Regulatory changes
• Social changes
• Demographics

Industry life-cycles analysis is most useful in analyzing industries during periods of relative stability.

It is not as useful in analyzing industries experiencing rapid change.

Not all companies in an industry display similar performance.