The Industry Lifecycle

The Industry Lifecycle
A critical aspect of industry analysis is the understanding that industries are dynamic. They are constantly growing, shrinking, changing or evolving. Thus when you complete a five forces analysis you are creating a SNAPSHOT of that industry at that particular point in time. Depending upon the industry, your analysis may not be relevant in 5 years, 3 years, or even the following year for segments that are extremely dynamic. Fortunately, despite being in a constant state of flux, decades of research has shown us that industries evolve in ways that are largely predictable. This ebb and flow of growth from the beginning to maturity and then to decline or renewal is known as the industry lifecycle.


Take a look at the figure and its 5 distinct industry phases: startup, growth, shakeout, maturity and decline. Some versions of this figure omit the shakeout phase and combine it with the maturity phase. But it’s distinct enough to have a separate discussion. Let's discuss four of the stages in a bit more detail. Click on the tabs below to learn about each. 

 Startup
Think of this as the birth of an industry. A company invents a new product or service or innovates upon an existing one to the extent that a new industry is formed. In this stage cashflow and profits are negative due to major expenditures on both research and development to make early refinements and on promotion in order to raise awareness about the product. Except in some rarer cases, growth is usually slow during this phase as new adopters may be hesitant to try the product.
 Growth
Many new entrepreneurial ventures do not progress past the startup phase for various reasons. If the product or service proves successful regarding the value proposition, consumer growth will typically accelerate as knowledge and popularity of the product grows. In this phase, many businesses are challenged with scaling their operations to meet accelerating demand. As revenues and profits increase, unless there are significant barriers to entry, we see the entrance of multiple new imitators and competitors. Despite the increase in new firms, competitive rivalry as an industry force is still somewhat muted as firms can expand their market share by acquiring new customers outside of the industry. Complementary products/accessories become available, distribution channels are expanded and some firms consider international expansion.
Shakeout
In this phase we begin to see industry consolidation. As growth begins to slow, inefficient firms close, exit the industry or are absorbed by a better positioned competitor.
 Maturity
At a certain point, as product awareness and adoption reaches saturation, industry growth stalls. This phase is defined by larger, consolidated, well-established firms that survived the shakeout phase. In a mature market we see high levels of competitive rivalry. Many competitive strategies rely on obtaining scale efficiencies and process improvement.
As you might have already inferred, the stage of the industry your firm is competing in will have a dramatic effect on strategic planning. The life cycle concept is a powerful tool to better anticipate changes in the industry and properly inform decision making.


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