What’s it: The industry life cycle is the series of an industry’s evolution over time. That usually includes the introduction, growing, shakeout, maturity, and decline.
Why is the industry life cycle important?
Industry cycles reveal essential information to you about growth prospects, opportunities, and challenges, as well as supply chains, corporate strategies, and their profits.
The industry cycle affects company strategy and company profits. Each stage has different characteristics and impacts on the company. The industry players’ numbers and size change with the cycle, as do market size and demand. Costs, like marketing, also vary throughout the cycle.
Each competitive force’s strengths and nature also change when an industry evolves, especially the barriers to entry and the intensity of competition among existing companies. Therefore, each stage of the life cycle will require different competencies and strategic approaches for the company to perform well.
Industry life cycle stages
The five industry life cycle stages are:
At this stage, the industry may consist of only one company, which we know as the first mover. Therefore, failure occurs not because of competitive pressures but because it faces a low risk of product acceptance. Consumers do not realize the benefits of the product and are reluctant to take risks by buying it.
Thus, the company’s strategic objective is to achieve market acceptance and create future demand. The first mover will seek to raise awareness among consumers and convince them to try the product.
Because the risk of rejection is high, first movers may be selective in developing marketing strategies. Companies are likely to target innovators and early adopters. These are individuals who are willing to take risks to use a new product.
Another strategy is to initiate and take advantage of network effects. Network effect refers to the positive effect when a large number of users encourages more usage. The larger the initial user base, the greater the network’s effect on driving growth.
On the financial side, cash flow and profitability are usually still negative. Companies have to spend a lot of money on marketing and promotion. Meanwhile, sales are still limited because they only have a few customers.
At this stage, the market growth rate increases, usually exponentially. More and more people are using it. And so, the network effect got to work.
Competition at this stage is still loose. The low level of market penetration allows the company to pursue growth by acquiring customers instead of seizing customers from competitors. They do this by increasing promotion and marketing.
A marketing strategy’s main objective is to reach as quickly and as many new customers as possible. That way, companies can sell more products and achieve higher economies of scale.
Companies may also differentiate their offerings. So, apart from having a more extensive customer base, they can maintain their existing customers’ loyalty.
The number of players increases. Some new players may enter because they are attracted by the industry’s potential for growth and profits.
New players introduce additional capacity to the market. That may not depress prices because high demand can still absorb additional supply.
The consolidation in the industry is still not taking place. Acquisition and merger activities are usually low. If there is, it is usually the acquirer who is external and wants to enter the market.
In terms of product development, industry standards emerge and are being adopted by most companies. Industry standards refer to a common set of engineering features and design options inherent in a product, for example, QWERTY for a keyboard.
Standardization can emerge from the ground up through competition, usually coming from first-movers. Or, it appears top-down, where the government or standard-setting agency determines it.
Once standards have been set, competition shifts from product innovation to process innovation. Under process innovation, companies find new ways to produce existing products more efficiently.
In the end, product standardization and promotion have pushed some companies to achieve higher economies of scale. They slowly lower the cost per unit.
As a result, the company’s profitability usually improves. Some firms’ cash flow may start out positive due to higher sales and cost savings from economies of scale.
During this stage, the growth rate begins to slow down. Companies began to compete directly with each other for market share.
Market penetration is getting saturated because it has reached most consumers. New customers are becoming increasingly rare. In the face of this situation, the company begins to grab customers from competitors or encourage repeat purchases. At the same time, they will retain their existing customers.
Competitive pressure builds up and forces out some weak players. The market leaves only strong and efficient companies.
The high intensity of competition also reduces the profitability of several companies. They may cut prices and offer more and better service. That way, they can grab customers from competitors while maintaining the loyalty of existing customers. If successful, some players gain a higher market share and emerge as the dominant firm.
On the financial side, dominant companies enjoy large cash flows. The profitability is high because the company enjoys not only high sales volume but also lower costs.
At this stage, the market reaches its maximum size, and industry growth reaches its peak. The market structure began to change into an oligopoly with only a few dominant firms.
To grow sales, the company seeks to grab customers from competitors or encourage repeat purchases.
Market consolidation is taking place. Some players may acquire their competitors to strengthen their market position. Or, they merged to increase the size of the business.
The company’s revenue sources only come from replacement or repeat purchases. The company is no longer pursuing growth but instead focuses on market share, profitability, and cash flow.
The industry growth is negative, usually the result of changes in the external factors, such as changes in technology and new innovations. The substitution product market is growing and starting to switch customers.
Excess capacity increases downward pressure on prices. That, in turn, increases the competitive intensity, especially if the industry has high exit barriers.
Competitive pressures push profit margins down even further. Consolidation continues, whereby large companies will acquire their weaker competitors. Several other companies may be looking out for growth in other businesses. Others seek to find new uses for the product, thereby extending the life cycle.