The Industry Lifecycle

The analysis of the ‘Industry Lifecycle’ is, next to the other factors ‘Demand’, ‘Value Creation’ and ‘Competition’ one of the elements related to return expectations. The ‘Industry Lifecycle’ is not to be confused with the ‘Product Lifecycle’ but however it is very considerable to evaluate the industry life in the context of Porter’s Five Forces (Porter, 1979).

Porter’s model is based on the idea that the attractiveness of an industry is determined by the expression of the five main competitive forces:

  1. The intensity of competitive rivalry among businesses in the industry;

  2. The threat of potential new entrants to the industry;

  3. The threat of substitute products;

  4. The bargaining power of suppliers; (to business in the industry)

  5. The bargaining power of buyers or customers.

The concept of the ‘Industry Lifecycle’ is relating to the different stages an industry will go through, from the first product entry to its eventual decline. There are typically five stages in the industry lifecycle. They are defined as:

  1. Early Stages or Pioneering Phase - This phase is characterized by low demand for the industry's product and large upstart costs. Industries in this phase are typically start-up firms, with large upfront costs and few sales.

    However in this phase competition is usually low and the threat of substitutes can almost be neglected.

  2. Innovation or Growth Phase - After the pioneering phase, an industry can transfer into the growth phase. The growth phase is characterized by little competition and accelerated sales. Industries in this phase have typically survived the pioneering phase and are beginning to recognize sales growth. Product innovation declines, process innovation begins and a "dominant design" will arrive.

    Although competition is still low in this phase the number of competitors is increasing as other companies enter the market. The growing demand is still relative to the growth of capacity and therefore rivalry among firms is still considered medium to low. The buyer power is still considered low as supply is still exceeded by demand.

  3. Cost or Shakeout (Mature Growth) Phase - After the growth phase, an industry will reach the mature growth phase. The mature growth phase is characterized above average growth, but no longer accelerating growth.

    Industries in this phase now face increasing competition and, as a result, profit margins begin to erode. Companies settle on the "dominant design"; economies of scale are achieved, forcing smaller players to be acquired or exit altogether. Barriers to entry become very high, as large-scale consolidation occurs.

  4. Stabilization or Maturity Phase - After the growth phases, an industry will enter in the stabilization/maturity phase. The stabilization/maturity phase is characterized by growth that is now average. Industries in this phase have significant competition and the return on equity is now more normalized. This is typically the longest phase an industry will go through. Growth is no longer the main focus, market share and cash flow become the primary goals of the companies left in the space.

    During the maturity phases the buyer power increases because capacity usually matches or even exceeds demand. On the other hand supplier’s power decreased as the increasing volumes bought by the industry means the risk of losing large customers increases for suppliers. As well the threat of new substitutes is growing during the maturity phases.

    Competition is high and the rivalry among competitors is strong. Prices are usually falling threatening the profitability.

  5. Deceleration or Decline Phase - The deceleration/decline phase is characterized by declining growth as demand shifts to other substitute or new products. Revenues decline, the industry as a whole may be supplanted by a new one.

    Usually the weakest competitors withdraw from the market in this phase which in turn leads to more rivalry between the remaining firms. As the threat of substitutes is high this is in fact often the reason for the decline. However, if managed properly a slowly declining industry can be used as a cash cow as new investments are low and therefor attractive returns may be produced.

The industry lifecycle model and its ever-changing phases typically dealt with manufactured goods, but today's U.S. economy is more an economy of services, either on the industry's outset, or as a natural extension of a declining-product based model. The advent of the internet alone is transforming many business models from "things" to people and services.

 

Porter, Michael E., 1979. How competitive forces shape strategy. Harvard Business Review, March-April 1979, pp. 137-145.