What is an industry life cycle and how is it structured in five stages? Find out what businesses need to do in order to prolong the industry life cycle.
The life cycle of an industry is a stage-based representation of the evolution of an industry over time. Therefore, any business or a product's life is divided into certain phases to be analyzed in a better way.
As industries grow, they go through stages of development that may include innovation, consolidation, or even significant contraction. The Industry life cycle is divided into five parts.
The first stage of an industry life cycle is the startup stage which is allowed by the growth stage. After an industry has achieved growth, it moves to the shakeout stage. The shakeout stage then leads to the maturity stage. After that, the industry finally declines.
This model of analyzing the life of an industry through five different stages helps in forecasting the future of an industry. In addition, identifying the current stage of the industry and where it is heading can also help in making policies accordingly in the future.
Importance and Significance in Today's World
The industry life cycle has turned out to be an essential business tool. It helps the concerned stakeholders to find out the current position of an industry.
Knowing and understanding the life cycle stages of an industry is a great way to prepare for what's to come. Companies can construct a life cycle of the industry where they operate.
With the help of the industry life cycle, companies can anticipate product change and expansion in the industry in advance. Knowing at what stage the industry is operating will provide a competitive advantage to the companies.
We will now discuss the significance of the industry life cycle in a business environment.
Decision-making process
The industry life cycle also helps businessmen invest in the right industry. For example, imagine you are an entrepreneur looking to invest and trying to find a suitable industry to invest in.
The first thing you should do is look at the industry life cycles of different industries where you want to invest. The industry life cycle will tell you the exact stage of the industries. By looking at them, you can decide which industry is the most suitable for investment.
In this way, an Industry life cycle helps the entrepreneurs to make wise decisions and prepare timely for the stages that are yet to come in the industry.
Policy Making
Life cycle models can be beneficial for the industry's new entrants. For example, imagine a company entering an industry. Looking at the industry's life cycle will tell the new entrant what policies to adopt.
For example, if the industry life cycle shows that the industry is in the growth stage. The company will know that it'll need good advertising strategies to deal with the intense competition in the growth stage.
Future Preparation
Moreover, with the help of the life cycle, already existing companies in the industry can prepare for the upcoming stages. For example, suppose companies get to know that the next stage of the industry is the shakeout stage. In that case, they'll start trying to obtain a strong position in the industry so that they are not pushed out of the industry in the next stage.
When to Exit the Industry
The industry life cycle also makes companies aware of when to exit the market. The life cycle identifies the stage where an industry currently is. For example, suppose an industry is heading towards the decline stage. In that case, companies start to exit the industry before they experience losses.
Forecasting the Future of the Company
Other than that, the industry life cycle holds great significance for the top management of the companies. The management and strategy makers of the company use the life cycle of the industry in which they are operating to predict the future of their company.
For example, suppose an industry is in the starting stages of the industry life cycle. In that case, it is likely that along with the industry, the companies in the industry will also observe growth.
The Five Stages
Till now, we have talked a lot about the industry life cycle. Now, let's discuss the structure of the industry life cycle.
The industry life cycle consists of five stages. These stages help in the process of dividing the lifetime of an industry into five different phases.
The first stage of the industry life cycle is the startup stage. After some time, an industry then enters the growth stage. Finally, right after the growth stage, the industry experienced the shakeout stage that leads to the maturity stage of the industry.
After an industry matures, it enters the last stage of the industry life cycle, the decline stage.
Each stage of the industry life cycle provides information about the growth aspects and the opportunity for the companies within the industry.
Now that we have provided you with an overview of the five stages of the industry life cycle. Let's proceed further and discuss all five stages in detail to better understand the industry life cycle.
Startup Stage
The startup stage is the first stage of the industry life cycle. The market is not yet saturated at the startup stage, and the new product faces limited competition. However, there is a lack of customer demand due to unfamiliarity with the new product. In addition, no proper distribution channels are present to support the industry.
During the startup stage of the industry, companies will likely experience negative cash flows and low profits due to a large amount of capital initially invested in the industry. Still, once the industry attracts consumers, things get better for the companies.
Growth Stage
After the startup stage, an industry enters the growth stage. In this stage, the industry starts to attract more consumers. This leads to more profit and increased revenues for the companies within the industry.
In the growth stage, more companies enter the industry, and product quality improves. Moreover, complementary goods also start appearing in the industry.
For example, when the internet industry started growing, other complementary products such as laptops and smartphones also entered the market. Hence, the revenue of the internet industry increased.
Currently, the IT industry is one of the industries in the growth stage of the industry life cycle. The IT industry is growing at a rate of 11.2% and has more potential to grow in the future.
Shakeout Stage
The shakeout stage refers to that stage of the life cycle where the industry filters the unnecessary companies. Some companies will shrink their operations or be eliminated entirely in the shakeout stage.
This is due to an inability to grow with the industry or because they generate negative cash flows. Companies also merge with competitors or are they are acquired by those who were able to obtain more significant market shares at the growth stage.
Moreover, at this stage, the growth rate and revenue of the industry fall a bit since now the industry is heading towards the maturity stage.
An example of the shakeout stage would be when almost 200 companies in the automotive industry in the US were pushed out of the industry when the automotive industry moved from the growth stage to the shakeout stage.
Maturity Stage
After the shakeout stage arrives the maturity stage. In this stage of the industry life cycle, the industry has reached its peak. At this stage, the industry possesses the maximum market share and is operating at its full potential.
As the industry matures, it becomes saturated, and large companies compete with each other to retain market share and continue profitability. As a result, these companies develop strategies to maintain their dominant position in the industry and deter new competitors from entering.
Currently, the retail industry has reached its age of maturity. The major retail companies that survived the shakeout have gained the maximum market share, and it is expected that the industry will grow at the rate of 4.3% in the upcoming years.
Decline Stage
This stage is the last stage of the industry life cycle. An industry enters this life cycle stage after it has enjoyed its peak in the stage of maturity. Industries end up in the decline stage if the consumer base of the industry starts to shrink.
Many factors that lead the industry to the decline stage, such as the arrival of better substitutes, play an important role in causing the industry to decline.
In the decline stage of the life cycle, companies in the industry start experiencing losses in revenue. In this stage, companies try to survive by producing their most profitable product.
Recently, an industry that has been in the decline stage of the life cycle is the coal mining industry. The specific industry is declining at a rate of 3.6%.
How to prolong the industry life cycle?
We have now discussed the five stages of an industry life cycle. So let's move ahead to find ways to prolong the industry life cycle.
When an industry is heading towards decline, the companies that are a part of that industry suffer the most. Of course, companies operating in the declining industry would always want to keep their industry away from the decline, but is that even possible? Let's find out.
It can be challenging to prolong an industry's life cycle, but it is not impossible. The first thing that needs to be in mind is that an industry's life cycle and the life cycle of companies that are a part of that industry are identical.
Suppose companies don't want their industry to decline. In that case, they must keep their companies away from the decline stage of the industry life cycle.
Now we will discuss how companies in the industry can prolong the life cycle of their own industry.
Keep Up With the Technology
Industries die down due to several factors, and technological change is one of the significant factors. For example, the newspaper industry is currently declining because the digital press has replaced it.
Suppose companies want to prolong the life cycle of their industry. In that case, they should keep up with the upcoming technology so that the products offered by the industry are technologically updated and no gap is created between the substitutes.
Monitor the Demographic Changes
Moreover, suppose the life cycle of the industry is to be prolonged. In that case, the companies must keep a close eye on the changing trends and demography of the market.
To keep the consumer base intact, the companies need to provide the products desired by the consumers. Since changing tastes and preferences can also play a significant role in the decline of an industry, products/services offered should be according to the choice of consumers.
Effective Advertisement
To remain in the spotlight, companies should never stop advertising their product and always come up with new and effective marketing strategies.
Effective marketing will continuously increase the consumer base, and as a result, the decline of an industry will be delayed.
Efficient Management
Besides all the methods discussed above, a decline of an industry can also be delayed if the companies in the industry have efficient management.
Efficient management can prevent losses by implementing efficient production systems, depending on the product, such as just-in-time production. Switching to efficient ways of production will minimize the financial losses and help the industry survive longer.
Industry Life Cycle: Final Word
Now that we have reached the end of this article let's recap what we have learned so far. The primary purpose of writing this article was to spread awareness among our readers about what is an Industry life cycle.
So, initially, we started by briefly telling you guys what an industry life cycle is. We then proceeded further and analyzed the importance of industry analysis. We then learned how it can be for future forecasting and decision-making processes.
After that, we discussed the structure of the industry analysis. While doing that, we learned that the industry life cycle consists of five stages. The first stage of the life cycle is the startup stage, followed by growth, shakeout, and maturity stages before an industry enters its last stage, the decline stage.
After discussing the stages, we also discussed ways to prolong the industry life cycle. Since companies in the industry are at the same stage of the life cycle as the industry itself, things that will help companies to prolong their life cycle will also delay the decline of their industry. Now that we have covered all aspects related to the industry life cycle and explained the industry life cycle in detail, we hope that you guys are fully aware of the uses and importance of the industry life cycle.
