Explain the industry life cycle and what follows from each stage
The idea
Industries pass through embryonic, growth, shakeout, mature and declining phases. In the embryonic phase demand is small, costs are high and failure rates are extreme. Growth brings rising demand, falling prices and improving profitability with little price competition. Shakeout arrives when capacity outruns demand and weaker competitors exit. Maturity brings consolidation, high barriers and stable but unspectacular returns. Decline brings overcapacity and price competition. The framework is a guide rather than a schedule: technology and regulation can return a mature industry to growth or end one prematurely.
A practice question
Which phase of the industry life cycle features rising demand with little price competition?
- ShakeoutWhy not: Defined by the opposite: capacity has outrun demand and price competition is at its most severe.
- Growth — correct
- DeclineWhy not: Shrinking demand makes every unit of volume something to be taken from a rival, which is when pricing is worst.
Demand growing faster than capacity means competitors can expand without taking volume from each other, so prices hold up.
A harder one
An industry's competitors begin exiting and capacity falls. Which phase is this?
- GrowthWhy not: Competitors enter and expand during growth; exit is a symptom of too much capacity, not of rising demand.
- EmbryonicWhy not: Failures here are of businesses that never established themselves, rather than exits that remove capacity built for a growth that slowed.
- Shakeout — correct
Capacity built for growth has outrun slowing demand. The exit of weaker competitors is the mechanism by which the imbalance is resolved.
The hardest tier
An analyst forecasts an industry's returns from its life cycle phase alone. What is the risk?
- That the phases are defined differently by different providersWhy not: Definitions vary a little, but the real danger is that an industry can be moved between phases by events the pattern does not anticipate.
- That an industry can move between phases — correct
- That the framework applies only to manufacturingWhy not: It has been applied across services, software and resources alike; nothing in it is specific to making things.
Technology or regulation can move it regardless of where the pattern says it should be. The life cycle describes a common pattern rather than a schedule an industry is obliged to follow.
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