Industry Life Cycle

It shows how the company operates, develops, and declines

Everything in this world has a particular cycle. Countries are classified according to their life cycle stage: developed, developing, and emerging. Humans are also classified according to their phases: child, adolescent, mature, and old. 

The same principle applies to the industry.

The industry life cycle shows how the company operates, develops, and declines. The typical life cycle of the industry has five stages:

  1. Startup

  2. Growth

  3. Shakeout

  4. Maturity

  5. Decline

These stages may last from months to years. So, there is no universal rule that sets the time for each phase.

The radical innovation creates a new industry. At this stage, the future of the market is uncertain. After a certain period, the consolidation and failure of numerous firms polish the industry. As the growth becomes slow, competitors will also try to minimize costs.

Eventually, the demand for the product falls, and the industry declines. At this phase, there is no room for sustainable growth.

Manufacturing firms primarily apply the industry life cycle. However, with the emergence of Information and Communication Technologies (ICT), this cycle might work differently for the services industry.

In the following sections, we will discuss:

  1. Why are the life cycle stages critical?

  2. What are the industry life cycle phases?

  3. How do we prolong the life cycle?

  4. What is an industry life cycle analysis?

  5. How to conduct industry life cycle analysis?

Why are the life cycle stages important?

Suppose you are a business owner. The industry's life cycle phases are vital because they show how your business changes over time. It's advantageous to know what kind of results to expect at each stage of the industry.

Each stage has its characteristics and rules. If you understand them, you can quickly adapt your business to that condition and scale or maintain it.

It's important to note that businesses can be in different phases despite being in the same industry. The benefits of knowing what your business's stage includes:

Forecasting the growth of your business

After entering the new industry, you have to spend your time building your brand or awareness among customers. If you know your company's industry life cycle stage, you can predict your firm's growth potential. You can set SMART goals and achieve your milestones.

For example, your business is at the industry's life cycle growth stage. If you know it, you can set strategic goals aligned with the company's best interests. In this case, your main goal would be to generate profits and scale up your business.

Differentiating your brand from competitors

The number of competitors will change throughout the industry's life cycle. Therefore, how you progress in your life cycle helps you differentiate your business.

For example, it might be practical to differentiate your company in the middle stages rather than at the cycle's start or end. The firm might lack resources at the beginning and lack room for opportunities at the end. The best time to expand is in the middle of the cycle. 

Your business's industry cycle knowledge helps you identify your firm's capabilities and understand the individual competition level.

Preparing for industry challenges

As your firm grows through its life cycle, it will be hard to stay alive in the industry. Therefore, analyze the changes your firm experienced from the startup to the maturity stage. That way, you learn the lessons from the market.

For example, you are the founder of your company. It was easier to operate since there was a low demand for your goods and few inventories. 

But, as you grow, it might become harder to operate your firm since demand outweighs the supply, and your competitors are targeting those underserved customers. Understanding the development stage of the cycle prepares you for challenges as your business scales.

Industry Life Cycle Phases

1. Introduction, Startup, or Embryonic Stage

At this stage, the demand from customers is low because customers are unfamiliar with the new products (features and performance). This indicates that product distribution is underdeveloped. 

You might also think about adding a few complimentary products to the product line to add value for the customers.

All of these factors limit the profitability of the new product. 

  • As a result, companies most likely have zero or low revenue and negative cash flows and profits. 

  • There is high capital expenditure on technology, equipment, and other fixed costs.

2. Growth Stage

At this stage, the product is slowly becoming known in the more prominent market segment. Companies at this stage move towards high revenue and positive profits. The product has developed features that increase its value to customers.

Complementary products will catch up with the original product and become widely available. The accessibility to the range of products benefits customers as well. Also, the demand for the product increases. 

To meet customers' needs, industry players use technological innovations to decrease the cost and time of production. This way, they reduce prices, which fuels the demand even more. As a result, companies raise their revenues and generate positive cash flows and profits.

In other words, firms at this stage surpass the break-even point.

3. Shakeout Stage

The shakeout stage commonly addresses the consolidation of the industry. Some companies are out of the competition because their growth pace is slower than the industry. In other cases, they might still generate negative cash flows. 

Other companies might be acquired by or merged with big players and thus have a more significant market share. As a result, the growth pace of revenues, profits, and cash flow slow down as the industry reaches maturity. 

4. Maturity Stage

At this stage, most companies are well established. The industry has reached its peak or saturation. Existing firms compete to protect their positions rather than gain new market share. 

The dominant players attempt to maintain profitability by using various strategies to prevent new players from entering the industry. The primary approach is to establish dominance in the market and reduce all possible rivalry.

Businesses here will achieve their maximum revenue, profits, and cash flows. The demand is relatively high and stable. The product has become common and is used by most of the population. The prices are also steady and reasonable for customers.

5. Decline Stage

This is the last stage of the cycle. The intensity of rivalry depends on the following factors:

Some companies use the divestiture strategy

First, they can sell off unprofitable business units and product lines. Then they concentrate on products that provide the most earnings and stay in that category. This method is appropriate for businesses struggling for survival and incurring massive losses.

Other corporations try to acquire smaller, more versatile, and innovative competitors to become the alpha leader in the industry. They also might buy failing competitors at the lowest price and use it as an avenue for growth.

How to Prolong The Life Cycle?

You may ask, "You have mentioned all the stages of the industry life cycle. But how can I maintain the position of my business? Or how can I prolong the life cycle?"

Here are the four ways to do so:

1. Understand evolution in your industry

You must know the evolution of your industry. In other words, you have to see the history of your industry and the trends that might shape its future. 

For example, marketing experts moved from radio promotion of goods & services to social media marketing in the advertising industry.

Technology evolves from generation to generation. So you have to be up-to-date on how those technologies are applied in your business's operations. By understanding the trends, you will keep up the pace of your industry (i.e., you won't be lagging behind your competitors).

2. Track changes among consumers

Your target customers are also evolving as time passes.

For example, your target audience might be a group of young people aged 20-30. As they grow old, they might stop using your services, and the new young generation might replace those customers.

Even if your target customers stick to your products, you have to consider the changes in their interests to predict their behavior. 

For example, consider the camera equipment business.

This business targeted adults between the ages of 18 and 24. The demand for cameras that can print photos instantly surged. All of this happened in the growth stage. 

But, as the camera business approached the 'mature stage,' the current young adults didn't want those cameras anymore.

Instead, customers wanted cameras that could shoot photos with high resolution. So we can see that the ages are the same in both cases, but customers' interests are different. Thus, companies must adjust their operations to customers' needs.

3. Use innovative technology

The best and fastest way to differentiate your business is using technology. It helps you to cut operational costs and improve the customer experience.

For example, let's take smartwatches. 

When tech companies produce smartwatches, they use the same technology they used in smartphones. They implemented it into the watches, which helps to check the notifications on the smartwatch and communicate with others.

For example, Apple Watch inherits most of the functionality of the iPhone. You can receive and send messages, and calls, read some articles and even check your pulse and steps. You can even pay via contactless Apple Watch Pay. Doesn't it work as an iPhone?

Many current brands transited from too-small-to-notice to too-big-to-fail only due to technological innovation. For example, at the time of its foundation, Apple was smaller than its competitor HP

But, due to innovative products, Apple became a leader in the hardware industry.

4. Consider how consumers perceive your brand

Business is not about what you think about your business. It is about what your customers think your business is. If your customers lose interest in your company, you might need to rebrand yourself as soon as possible.

For example, in the past, your firm produced goods for the masses on a large scale. Then, you standardized the product and made it affordable. But, your customers now worry about your firm's environmental, social, and governance (ESG) factors.

So you've:

- launched the recycling line of your business, 

- You raised your employees' salaries according to the cost of living, 

- made decisions based on meritocracy (appraisal of people who deserve it). 

- Make a safe product for your customers' mental and physical health.

These modifications significantly improve your chances of maintaining a strong customer relationship.

If you want to learn about a career in different financial industries, check out our Industry Comparisons course.

DCF Modeling Course

Everything You Need To Master DCF Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Learn More

Researched and authored by Almat Orakbay LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: