Translating an inspired idea into a robust business plan
015 The Industry Life Cycle
The industry life cycle is not the same as the product life cycle (see 013 Product Life Cycle), because within an industry there is a constant updating of products. For example TV manufacturers first produced monochrome TVs, then colour TVs and subsequently home entrainment systems. Within the colour TV segment, the screen technology has evolved from cathode ray displays to flat screens such as plasma screens. Recently the first 3D TVs and Internet enabled TV sets appeared on the market.
However, eventually some industries may contract sharply and even disappear. For example passenger sea transport (other than cruising) has been replaced by air travel; photo-chemical photography has been replaced by digital photography; video rental shops are being replaced by digital downloads or video on demand.
Industries evolve over time, both structurally and in terms of overall size. The industry life cycle is measured in total industry sales and the growth in total industry sales. The industry structure and competitive forces that shape the environment in which businesses operate change throughout the life cycle. Therefore a business's strategy must adapt accordingly. It is useful to consider the evolution of the industry life cycle in the context of Porter’s 5 Forces.
Introduction In the introduction stage there are few competitors and there is no threat from substitutes because the industry is so new. The power of buyers is low, because those who require the product are prepared to pay to get hold of supplies that are limited. Suppliers exert some power, because volumes purchased are still low and the industry is relatively unimportant for suppliers.
Growth In the growth stage the number of competitors increases rapidly as other firms enter the growing industry. However, because at this stage growth in demand outstrips growth of capacity, rivalry among firms is kept in check. The power of buyers is still very low because demand exceeds supply. Often industry growth is associated with high profitability. While at this stage firms may profitable, they could still be cash absorbing and running risks as they jockey for position and market share.
Maturity As the industry enters maturity, the power of buyers is increasing because capacity matches or exceeds demand. In contrast, the power of suppliers has declined because by now the volumes purchased by the industry are very important to suppliers. Losing a large customer could be very damaging to suppliers. The threat from substitutes is now growing. The industry will start to consolidate, possibly through mergers and acquisitions. Mature industries are settled in, risks are low and cash is generated. However, rivalry among competitors is fierce and falling prices pose a serious threat to profitability.
Decline The decline stage poses new challenges. Capacity exceeds supply thereby increasing the power of buyers. The weakest competitors will withdraw from the industry, leading to a decline in the rivalry between firms. At this stage firms may also combine forces to ask for government intervention or subsidies to help to protect the declining industry. The threat of substitutes is high; indeed substitutes are often the root cause of decline. However, managed correctly, a slowly declining industry can produce attractive returns for investors because there is no new investment as the industry is gradually run down and milked for cash.
