The concept of industry life cycle refers to the evolution of an industry or business over time It describes the typical stages an industry goes through, from inception to decline. Understanding the different life cycle stages can help companies make better strategic decisions
The industry life cycle model outlines four main phases introduction, growth, maturity, and decline. Each phase has distinct characteristics and poses different opportunities and challenges for businesses. Let’s take a closer look at what happens during each stage of the industry life cycle
The introduction or birth stage represents the beginning of an industry. It’s when a new product, service or technology is first brought to market. At this point, demand is limited as consumers start learning about the new offering.
During the introductory phase, the industry is highly fragmented. Many new companies and startups emerge trying to capitalize on the new product or technology. Firms focus heavily on research and development and marketing to establish a position in the nascent market.
Revenues tend to be low in the introduction stage as companies work to build awareness and consumer demand. Most firms are not yet profitable, as the cost to develop and market the new offering outweighs revenue.
There is still a lot of uncertainty around optimal product design, target segments, pricing strategies and main competitors. The regulatory environment is often undefined as well in the introductory phase.
Some examples of industries currently in the introduction stage include virtual reality, commercial space travel, and electric vertical takeoff and landing (eVTOL) aircraft.
Growth Stage
The growth phase is marked by a strong expansion in sales and revenues as consumer awareness and demand take off. Products become more refined and manufacturing processes more efficient. Companies focus on establishing market share and competitive positioning.
Many new firms continue to enter the industry attracted by the potential for rapid growth and profits. Large companies from adjacent industries may also enter via mergers and acquisitions. Industry concentration remains relatively low during this period of expansion.
Marketing and research and development spending remains high as companies seek to differentiate themselves and solidify their customer base. Economies of scale have not yet been achieved so profit margins tend to be thin.
Some examples of high-growth industries include renewable energy, online streaming, and e-commerce.
Shakeout Stage
As growth starts to slow, the industry enters the shakeout phase. This period is characterized by heightened competition, saturation and regulation. Sales and revenue growth flattens and market share becomes harder to gain.
Many weaker competitors exit the industry leading to consolidation. Companies focus more on increasing efficiency and reducing costs in order to improve profitability. Increased scale and experience curves allow the largest firms to achieve lower costs and higher margins.
Marketing expenses are reduced as companies fight for market share. Research and development spending is directed at incremental improvements rather than major innovations.
Shakeout forces companies to evaluate their competitive positions carefully. Maintaining profitability requires lean operations, well-defined business models and strong product brands.
Industries in the shakeout stage today include smartphones, social media platforms and recreational cannabis.
Maturity Stage
The maturity stage is characterized by slow growth and intense competition. Total industry revenues peak and start declining as penetration nears saturation. Highest profits are achieved by the largest companies who have established strong brands and achieved maximum economies of scale.
Consolidation continues leading to an oligopoly environment with a handful of dominant competitors controlling most of the market. Smaller niche players may continue to operate profitably by serving specialized segments.
Companies focus on maximizing return on investment and managing costs aggressively. Brand loyalty becomes increasingly important. Research and development declines and is focused on minor product modifications and special features.
Unless they reinvent themselves, individual companies eventually start declining along with the overall industry. However, large companies with diversified revenue streams may continue thriving.
Mature industries today include automobiles, airlines, telecommunications, and consumer packaged goods.
Decline Stage
In the decline stage, sales and revenues shrink rapidly. New product innovations, shifts in consumer preferences, or new regulations make the industry offerings obsolete. As revenues decrease, companies struggle to remain profitable.
The industry becomes highly concentrated with a few major players dominating the shrinking market. Companies try to squeeze the last profits through aggressive cost-cutting. They may exit less profitable market segments altogether.
Research and development stops in declining industries, except for efficiency improvements. Marketing spending declines as companies reduce product lines. Unprofitable operations get divested or shut down.
The focus shifts to generating cash flow and returning capital to shareholders. Companies compete based on price as they fight for the remaining buyers. Once growth opportunities dry up, many companies decide to exit the industry and reinvest capital elsewhere.
Examples of declining industries include wired landline telephony, print newspapers, and incandescent light bulbs.
Key Takeaways
-
The industry life cycle model describes how industries evolve over time through five stages: introduction, growth, shakeout, maturity and decline.
-
Each stage poses different opportunities and challenges for companies in terms of profitability, investment and marketing strategies.
-
Understanding which life cycle stage an industry is in helps businesses make better strategic decisions and outperform competitors.
-
Companies need to adapt their business models and strategies as the industry evolves from one stage to the next.
-
Reinventing the business successfully allows companies to prolong growth and profitability, even as the overall industry matures and declines.
What Is the Product Life Cycle?
The product life cycle has to do with how specific products or services are developed and offered to the public. This cycle has five phases: development, introduction, growth, maturity, and decline. This is separate from the industry life cycle since many products are developed within a single industry, or even within a single company.
Using Industry Life Cycle in Analysis
Analysts and traders often use industry life cycle analysis to measure the relative strength and weakness of a particular companys stock. A companys future growth prospects may be bright (or dim) depending on the stage that it is in during an industry life cycle. Porters five economic forces change as an industry matures.
For example, rivalry is most intense between companies in a sector during the growth stage. Startups slash prices and ship products as quickly as possible in a bid to garner as many customers as possible. During this time, the threat of new entrants eating into an existing companys market share is high.
The scenario changes in the maturity stage. Less competitive startups and inferior products are weeded out or acquired. The risk of new entrants is low and the industrys product is mature enough to be accepted in mainstream society. Startups become established firms during this stage but their future growth prospects are limited in existing markets. They must search out new avenues and markets for profits or risk extinction.
4 Stages of the Industry Lifecycle Model | External Analysis Course
What are the four stages of an industry life cycle?
The four phases of an industry life cycle are the introduction, growth, maturity, and decline stages. Industries are born when new products are developed, with significant uncertainty regarding market size, product specifications, and main competitors.
What is industry lifecycle?
Industry lifecycle refers to the evolution of an industry or business based on stages of growth and decline. The industry lifecycle has four phases: introduction, growth, maturity, and decline. The industry life cycle ends at the peak of the decline phase, when the industry or business is no longer able to sustain growth.
What are the goals of an industry life cycle?
These goals can include product research and development, better profitability, the implementation of innovative technology, expanding a customer base, and more. The industry life cycle traces the evolution of a given industry based on the business characteristics commonly displayed in each phase, from startup to decline.
What is the second phase of the industry life cycle?
The second phase of the industry life cycle is the growth stage, where the new business gains recognition as a brand. With more attention, its sales increase, boosting its revenue and cash flow, which enables it to develop and manufacture new products appealing to consumers.
