An industry life cycle depicts the various stages where businesses operate, progress, and slump within an industry. An industry life cycle typically consists of five stages; startup, growth, shakeout, maturity, and decline. These stages can last for different amounts of time some can be months, some can be years.
- An industry’s position in its life cycle often has a large impact on its competitive dynamics, so it is important to keep this positioning in mind when performing strategic analysis of an industry. Industries, like individual companies, tend to evolve over time and usually experience significant changes in the rate of growth and levels of profitability along the way. Just as an investment in an individual company requires careful monitoring, industry analysis is a continuous process that must be repeated over time to identify changes that may be occurring.
- A useful framework for analyzing the evolution of an industry is an industry life-cycle model, which identifies the sequential stages that an industry typically goes through. The five stages of an industry life cycle according to the Hill and Jones model are:
- Mature; and
- Price competition and thinking like a customer are important factors that are often overlooked when analyzing an industry. Whatever factors most influence customer purchasing decisions are also likely to be the focus of competitive rivalry in the industry. Broadly, industries for which price is a large factor in customer purchase decisions tend to be more competitive than industries in which customers value other attributes more highly.
- External influences on industry growth, profitability, and risk include:
- Social factors.
- Company analysis takes place after the analyst has gained an understanding of the company’s external environment and includes answering questions about how the company will respond to the threats and opportunities presented by the external environment. This intended response is the individual company’s competitive strategy. The analyst should seek to determine whether the strategy is primarily defensive or offensive in its nature and how the company intends to implement it.
- Porter identifies two chief competitive strategies:
- A low-cost strategy (cost leadership) is one in which companies strive to become the low-cost producers and to gain market share by offering their products and services at lower prices than their competition while still making a profit margin sufficient to generate a superior rate of return based on the higher revenues achieved.
- A product/service differentiation strategy is one in which companies attempt to establish themselves as the suppliers or producers of products and services that are unique either in quality, type, or means of distribution. To be successful, the companies’ price premiums must be above their costs of differentiation and the differentiation must be appealing to customers and sustainable over time.
- A checklist for company analysis includes a thorough investigation of:
- Corporate profile;
- Industry characteristics;
- Demand for products/services;
- Supply of products/services;
- Pricing; and
- Financial ratios.
At the startup stage, customer demand is limited due to unfamiliarity with the new product’s features and performance. Distribution channels are still underdeveloped. There is also a lack of complementary products that add value for the customers, limiting the profitability of the new product.
Companies at the startup stage are likely to generate zero or very low revenue and experience negative cash flows and profits, due to the large amount of capital initially invested in technology, equipment, and other fixed costs.
As the product slowly attracts attention from a bigger market segment, the industry moves on to the growth stage where profitability starts to rise. Improvement in product features increases the value to customers.
Complementary products also start to become available in the market, so people have greater benefits from purchasing the product and its complements. As demand increases, product price goes down, which further increases customer demand.
At the growth stage, revenue continues to rise and companies start generating positive cash flows and profits as product revenue and costs surpass break-even.
Shakeout usually refers to the consolidation of an industry. Some businesses are naturally eliminated because they are unable to grow along with the industry or are still generating negative cash flows. Some companies merge with competitors or are acquired by those who were able to obtain bigger market shares at the growth stage.
At the shakeout stage, the growth rate of revenue, cash flows, and profit start slowing down as the industry approaches maturity.
At the maturity stage, the majority of the companies in the industry are well-established and the industry reaches its saturation point. These companies collectively attempt to moderate the intensity of industry competition to protect themselves, and to maintain profitability by adopting strategies to deter the entry of new competitors into the industry. They also develop strategies to become a dominant player and reduce rivalry.
At this stage, companies realize maximum revenue, profits, and cash flows because customer demand is fairly high and consistent. Products become more commonplace and popular among the general public, and the prices are fairly reasonable, as compared to new products.
The decline stage is the last stage of an industry life cycle. The intensity of competition in a declining industry depends on several factors: speed of decline, the height of exit barriers, and the level of fixed costs. To deal with the decline, some companies might choose to focus on their most profitable product lines or services in order to maximize profits and stay in the industry.
Some larger companies will attempt to acquire smaller or failing competitors to become the dominant player. For those who are facing huge losses and that do not believe there are opportunities to survive, divestment will be their optimal choice.