What Is the Industry Life Cycle?

The industry life cycle refers to the evolution of an industry or business through four stages based on the business characteristics commonly displayed in each phase.

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.

Consolidation and failure whittle down an established industry as it grows, and the remaining competitors minimize expenses as growth slows and demand eventually wanes.

Key Takeaways

  • The industry life cycle refers to the evolution of an industry or business based on its stages of growth and decline.
  • The four phases of the industry life cycle are the introduction, growth, maturity, and decline phases.
  • The industry life cycle ends with the culmination of the decline phase, a period when the industry or business is unable to sustain growth.
  • Mature industries include food and agriculture, mining, and financial services.
  • Investors can make better-informed investment decisions once they understand industry life cycles.

Understanding the Industry Life Cycle

There is no universal definition for the various stages of the industry life cycle, but commonly, it can be organized into introduction, growth, maturity, and decline.

Life cycles are present in all aspects of life. The industry life cycle can relate to youth, inexperience, and determination (introduction), learning, improvement, and social expansion (growth), achievement and fulfillment (maturity), and the decreasing ability to compete, win, and thrive (decline).

The relative length of each phase of the industry life cycle can vary substantially among industries. The standard model typically deals with manufactured goods, but today’s service economy can function somewhat differently, especially in the realm of internet communications technology.

Sales, profits, and cash flows are typical financial metrics followed closely in every phase of the industry life cycle.

Industry Life Cycle Phases

Introduction Phase

The introduction, or startup, phase involves the development and early marketing of a new product or service. Innovators often create new businesses to enable the production and proliferation of the new offering.

Information about the products and industry participants is often limited, so demand tends to be unclear. During this stage, consumers of the goods and services need to learn more about them, while the new providers are still developing and honing the offering.

The industry or business tends to be highly fragmented in the introduction stage. Participants tend to be unprofitable because expenses are incurred to develop and market the offering while revenues are still low.

Growth Phase

In this second phase, consumers have come to understand the value of the new offering, business, or industry. Demand grows rapidly.

A handful of important players usually becomes apparent, and they compete to establish a share of the new market. Immediate profits usually are not a top priority as companies spend on research and development or marketing.

Business processes are improved, and geographical expansion is common. Once the new product has demonstrated viability, larger companies in adjacent industries tend to enter the market through acquisitions or internal development.

Maturity Phase

The maturity phase begins with a shakeout period, during which sales growth slows, focus shifts toward expense reduction, and consolidation occurs (as companies begin to merge or acquire each other).

Some firms attain economies of scale, hampering the sustainability of smaller competitors. Growth can continue.

As maturity is achieved, barriers to entry become higher, and the competitive landscape becomes more clear. Market share, cash flow, and profitability become the primary goals of the remaining companies now that growth is relatively less important.

Price competition becomes much more relevant as product differentiation declines with consolidation.

Businesses may prolong the maturity phase by repositioning their offerings, investing in new markets and technology, and spurring new growth.

Decline Phase

The decline phase marks the end of an industry’s or business’ ability to support growth. Obsolescence and evolving end markets (end users) negatively impact demand, leading to declining revenues. This creates margin pressure, forcing weaker competitors out of the industry.

Further consolidation is common as participants seek synergies and further gains from scale. The decline phase often signals the end of viability for the incumbent business model, pushing industry participants into adjacent markets.

As with the maturity phase, the decline phase can be delayed with large-scale product improvements or repurposing. However, these tend simply to prolong the decline and ultimate market exit.

Examples

Introduction Phase

Some industries in the startup or emergent stage include the artificial intelligence industry, the self-driving vehicle industry, the biotechnology industry, and the virtual reality industry.

Growth Phase

Coca-Cola is an example of a savvy life cycle survivor. In western countries, it is considered to be in the maturity stage because its market offers no room for expansion. But its ability to change its business efficiently and effectively to serve huge populations in Asia also put it in the growth phase.

The computer industry, as well, has had an extended growth phase because of its longtime focus on updating hardware, features, and functionality.

Maturity Phase

In the U.S., mature industries include food and agriculture, mining, and financial services. Companies such as Apple, Xerox, Intel, IBM, and Procter & Gamble are considered mature-phase companies.

Decline Phase

Certain revenue analysis research indicates that the fastest declining industries in the U.S. include:

  • Iron and steel manufacturing
  • Natural gas distribution
  • Semiconductor machinery manufacturing
  • Oil drilling and gas extraction
  • Chicken egg production

Does the Industry Life Cycle Apply to All Businesses?

Ultimately, yes. However, the discrete stages may occur differently, and have different durations depending on a business and its industry.

What Can Prolong the Industry Life Cycle?

Production efficiencies, new developments that position the industry/business for greater achievements, effective management, new technologies that are harnessed properly, and ongoing customer base and relationship development can all help maintain the growth and maturity phases.

Why Does the Industry Life Cycle Matter?

For companies, life cycle stages are important because they can drive strategies and actions related to sales, research, expenses, competition, and more. For investors, understanding life cycles and the stage that an industry or business is in can help them decide whether to get in or out of an investment.

The Bottom Line

The industry life cycle refers to the stages of existence that an industry or business experiences, from its beginning to its end. The four phases are introduction, growth, maturity, and decline.

Understanding the life cycle can help companies manage their operational and financial decisions and activities so that they position themselves to achieve important goals. These goals can include product research and development, better profitability, the implementation of innovative technology, expanding a customer base, and more.

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By admin