Which of the conditions prevail when an industry is at the end of its life cycle?

What Is the Industry Life Cycle?

The industry life cycle refers to the evolution of an industry or business through four stages based on the business characteristics commonly displayed in each phase. The four phases of an industry life cycle are the introduction, growth, maturity, and decline stages. Industries are born when new products are developed, with significant uncertainty regarding market size, product specifications, and main competitors. Consolidation and failure whittle down an established industry as it grows, and the remaining competitors minimize expenses as growth slows and demand eventually wanes.

Key Takeaways

• The industry life cycle refers to the evolution of an industry or business based on its stages of growth and decline.
• The four phases of the industry life cycle are the introduction, growth, maturity, and decline phases.
• The industry life cycle ends with the decline phase, a period when the industry or business is unable to sustain growth.

Understanding the Industry Life Cycle

There is no universal definition for the various stages of the industry life cycle, but commonly, it can be organized into introduction, growth, maturity, and decline. The relative length of each phase can also vary substantially among industries. The standard model typically deals with manufactured goods, but today's service economy can function somewhat differently, especially in the realm of Internet communications technology.

Industry Life Cycle Phases

Introduction Phase

The introduction, or startup, phase involves the development and early marketing of a new product or service. Innovators often create new businesses to enable the production and proliferation of the new offering. Information on the products and industry participants are often limited, so demand tends to be unclear. Consumers of the goods and services need to learn more about them, while the new providers are still developing and honing the offering. The industry tends to be highly fragmented in this stage. Participants tend to be unprofitable because expenses are incurred to develop and market the offering while revenues are still low.

Growth Phase

Consumers in the new industry have come to understand the value of the new offering, and demand grows rapidly. A handful of important players usually become apparent, and they compete to establish a share of the new market. Immediate profits usually are not a top priority as companies spend on research and development or marketing. Business processes are improved, and geographical expansion is common. Once the new product has demonstrated viability, larger companies in adjacent industries tend to enter the market through acquisitions or internal development.

Maturity Phase

The maturity phase begins with a shakeout period, during which growth slows, focus shifts toward expense reduction, and consolidation occurs. Some firms achieve economies of scale, hampering the sustainability of smaller competitors. As maturity is achieved, barriers to entry become higher, and the competitive landscape becomes more clear. Market share, cash flow, and profitability become the primary goals of the remaining companies now that growth is relatively less important. Price competition becomes much more relevant as product differentiation declines with consolidation.

Decline Phase

The decline phase marks the end of an industry's ability to support growth. Obsolescence and evolving end markets negatively impact demand, leading to declining revenues. This creates margin pressure, forcing weaker competitors out of the industry. Further consolidation is common as participants seek synergies and further gains from scale. Decline often signals the end of viability for the incumbent business model, pushing industry participants into adjacent markets. The decline phase can be delayed with large-scale product improvements or repurposing, but these tend to prolong the same process.

Identify the different stages of the industry life cycle

What is the Industry Life Cycle?

An industry life cycle depicts the various stages where businesses operate, progress, and slump within an industry. An industry life cycle typically consists of five stages — startup, growth, shakeout, maturity, and decline. These stages can last for different amounts of time – some can be months, some can be years.

Startup Stage

At the startup stage, customer demand is limited due to unfamiliarity with the new product’s features and performance. Distribution channels are still underdeveloped. There is also a lack of complementary products that add value for the customers, limiting the profitability of the new product.

Companies at the startup stage are likely to generate zero or very low revenue and experience negative cash flows and profits, due to the large amount of capital initially invested in technology, equipment, and other fixed costs.

Growth Stage

As the product slowly attracts attention from a bigger market segment, the industry moves on to the growth stage where profitability starts to rise. Improvement in product features increases the value to customers.

Complementary products also start to become available in the market, so people have greater benefits from purchasing the product and its complements. As demand increases, product price goes down, which further increases customer demand.

At the growth stage, revenue continues to rise and companies start generating positive cash flows and profits as product revenue and costs surpass break-even.

Shakeout Stage

Shakeout usually refers to the consolidation of an industry. Some businesses are naturally eliminated because they are unable to grow along with the industry or are still generating negative cash flows. Some companies merge with competitors or are acquired by those who were able to obtain bigger market shares at the growth stage.

At the shakeout stage, the growth rate of revenue, cash flows, and profit start slowing down as the industry approaches maturity.

Maturity Stage

At the maturity stage, the majority of the companies in the industry are well-established and the industry reaches its saturation point. These companies collectively attempt to moderate the intensity of industry competition to protect themselves, and to maintain profitability by adopting strategies to deter the entry of new competitors into the industry. They also develop strategies to become a dominant player and reduce rivalry.

At this stage, companies realize maximum revenue, profits, and cash flows because customer demand is fairly high and consistent. Products become more commonplace and popular among the general public, and the prices are fairly reasonable, as compared to new products.

Decline Stage

The decline stage is the last stage of an industry life cycle. The intensity of competition in a declining industry depends on several factors: speed of decline, the height of exit barriers, and the level of fixed costs. To deal with the decline, some companies might choose to focus on their most profitable product lines or services in order to maximize profits and stay in the industry.

Some larger companies will attempt to acquire smaller or failing competitors to become the dominant player. For those who are facing huge losses and that do not believe there are opportunities to survive, divestment will be their optimal choice.

More Resources

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Additional relevant CFI resources include:

• Industry Analysis
• SWOT Analysis
• External Analysis
• All Strategy Resources

What stage of the industry life cycle does the late majority usually come in?

Which of the following is a feature of the growth stage of the industry life cycle?

Which of the following lists the stages of the industry life cycle in the correct order group of answer choices?

Which of the following statements is true of the maturity stage of an industry's life cycle?