Industry Life Cycle Analysis

A useful tool for analyzing the effects of industry evolution on competitive forces is the industry life cycle
model, which identifies five sequential stages in the evolution of an industry that lead to five distinct kinds
of industry environment: embryonic, growth, shakeout, mature, and decline (see Figure 3.3). The task
facing managers is to anticipate how the strength of competitive forces will change as the industry
environment evolves and to formulate strategies that take advantage of opportunities as they arise and that
counter emerging threats.
INDUSTRY LIFE CYCLE STAGE

Embryonic Industries
An embryonic industry is just beginning to develop (e.g., personal computers and biotechnology in the
1970s, and nanotechnology today). Growth at this stage is slow because of buyers’ unfamiliarity with the
industry’s product, high prices due to the inability of companies to reap any significant scale economies,
and poorly developed distribution channels. Barriers to entry tend to be based on access to key technological
know- how rather than cost economies or brand loyalty. If the core know- how required to compete in the
industry is complex and difficult to grasp, barriers to entry can be quite high, and established companies
will be protected from potential competitors. Rivalry in embryonic industries is based not so much on price
as on educating customers, opening up distribution channels, and perfecting the design of the product. Such
rivalry can be intense, and the company that is the first to solve design problems often has the opportunity
to develop a significant market position. An embryonic industry may also be the creation of one company’s
innovative efforts, as happened with microprocessors (Intel) and photocopiers (Xerox). In such
circumstances, the company has a major opportunity to capitalize on the lack of rivalry and build a strong
hold on the market.
Growth Industries
An industry where demand is expanding as first- time consumers enter the market.
Once demand for the industry’s product begins to take off, the industry develops the characteristics of a
growth industry. In a growth industry, first- time demand is expanding rapidly as many new customers enter
the market. An industry grows when customers become familiar with the product, prices fall because
experience and scale economies have been attained, and distribution channels develop. The U.S. cellular
telephone industry was in the growth stage for most of the 1990s. In 1990, there were only 5 million cellular
subscribers in the nation. By 2006, this figure had increased to over 160 million, and overall demand was
still expanding.
Normally, the importance of control over technological knowledge as a barrier to entry has diminished by
the time an industry enters its growth stage. Because few companies have yet achieved significant scale
economies or built brand loyalty, other entry barriers tend to be relatively low as well, particularly early in
the growth stage. Thus, the threat from potential competitors generally is highest at this point.
Paradoxically, however, high growth usually means that new entrants can be absorbed into an industry
without a marked increase in the intensity of rivalry. Thus, rivalry tends to be relatively low. Rapid growth
in demand enables companies to expand their revenues and profits without taking market share away from
competitors. A strategically aware company takes advantage of the relatively benign environment of the
growth stage to prepare itself for the intense competition of the coming industry shakeout.
Industry Shakeout
Explosive growth cannot be maintained indefinitely. Sooner or later, the rate of growth slows, and the
industry enters the shakeout stage. In the shakeout stage, demand approaches saturation levels: most of the
demand is limited to replacement because there are few potential first- time buyers left. As an industry
enters the shakeout stage, rivalry between companies becomes intense. Typically, companies that have
become accustomed to rapid growth continue to add capacity at rates consistent with past growth. However,
demand is no longer growing at historic rates, and the consequence is the emergence of excess productive
capacity. This condition is illustrated in Figure 3.4, where the solid curve indicates the growth in demand
over time and the broken curve indicates the growth in productive capacity over time. As you can see, past
point t 1 , demand growth becomes slower as the industry becomes mature. However, capacity continues
to grow until time t 2 . The gap between the solid and the broken lines signifies excess capacity. In an
attempt to use this capacity, companies often cut prices. The result can be a price war, which drives many
of the most inefficient companies into bankruptcy, which is enough to deter any new entry.
Mature Industries
The stage in which the market is saturated, demand is limited to replacement demand, and growth is slow.
The shakeout stage ends when the industry enters its mature stage:

 the market is totally saturated,

 demand is limited primarily to replacement demand, and growth is low or zero.
 What growth there is comes from population expansion that brings new customers into the market
or an increase in replacement demand.
 As an industry enters maturity, barriers to entry increase, and the threat of entry from potential
competitors decreases.
  As growth slows during the shakeout, companies can no longer maintain historic growth rates
merely by holding on to their market share.
 Competition for market share develops, driving down prices.
 Often the result is a price war, as has happened in the airline industry for example.
 To survive the shakeout, companies begin to focus on cost minimization and building brand loyalty.
The airlines, for example, tried to cut operating costs by hiring nonunion labor and to build brand loyalty
by introducing frequent- flyer programs. By the time an industry matures, the surviving companies are those
that have brand loyalty and efficient low- cost operations. Because both these factors constitute a significant
barrier to entry, the threat of entry by potential competitors is greatly diminished. High entry barriers in
mature industries give companies the opportunity to increase prices and profits. As a result of the shakeout,
most industries in the maturity stage have consolidated and become oligopolies. In mature industries,
companies tend to recognize their interdependence and try to avoid price wars. Stable demand gives them
the opportunity to enter into price leadership agreements. The net effect is to reduce the threat of intense
rivalry among established companies, thereby allowing greater profitability. Nevertheless, the stability of
a mature industry is always threatened by further price wars. A general slump in economic activity can
depress industry demand. As companies fight to maintain their revenues in the face of declining demand,
price leadership agreements break down, rivalry increases, and prices and profits fall. The periodic price
wars that occur in the airline industry seem to follow this pattern.
Declining Industries
The stage in which primary demand is declining.
Eventually, most industries enter a decline stage: growth becomes negative for a variety of reasons,
including technological substitution (e.g., air travel for rail travel), social changes (greater health
consciousness hitting tobacco sales), demographics (the declining birthrate hurting the market for baby and
child products), and international competition (low- cost foreign competition pushing the U.S. steel industry
into decline). Within a declining industry, the degree of rivalry among established companies usually
increases. Depending on the speed of the decline and the height of exit barriers, competitive pressures can
become as fierce as in the shakeout stage.16 The main problem in a declining industry is that falling demand
leads to the emergence of excess capacity. In trying to use this capacity, companies begin to cut prices, thus
sparking a price war. The U.S. steel industry experienced these problems because steel companies tried to
use their excess capacity despite falling demand. The same problem occurred in the airline industry in the
1990–1992 period and again in 2001–2002, as companies cut prices to ensure that they would not be flying
with half- empty planes (that is, that they would not be operating with substantial excess capacity). Exit
barriers play a part in adjusting excess capacity. The greater the exit barriers, the harder it is for companies
to reduce capacity and the greater is the threat of severe price competition.
Feature of Embryonic Industries
Embryonic Industries

 Completely new product

 Customer conscious
 No technical standard
 Imperfect product
 High business cost
 Price skimming
  Specialized distribution
 Focus/distribution
 Innovation/early adaptor
Feature of growth industry
Growth Industries

 Mass market
 Distribution channel develop
 Huge promotion
 Rapid growth in demand
 Industry growth because of customer familiar with product
Feature of industry shakeout

 Industry Shakeout
 Slow growth
 Rivalry intense
 Demand no longer
 Price war
 Initial price cut
Feature of mature industry
Mature Industries

 Market totally saturated

 Barrier to entry increase
 Zero growth
 Consolidate industry
Feature of decline industry

 Divest/leveraging (quit/sell)
 Harvest (survive) both competition and strength high
 Niche-particular focus group
 Leadership (Competition low and strength high) aggressive marketing strategy
Feature of fragmented industry

 Absence of market leader

 None of the unit has a king size market share
 No single unit has widespread buyer recognition
Example-Health clinic, restaurant , hotel, boutique ect.
What is the BCG Matrix?
The Boston Consulting group's product portfolio matrix (BCG matrix) is designed to help with
long-term strategic planning, to help a business consider growth opportunities by reviewing its
portfolio of products to decide where to invest, to discontinue, or develop products.

Dog products: The usual marketing advice here is to aim to remove any dogs from your product
portfolio as they are a drain on resources.
Question mark products: As the name suggests, it’s not known if they will become a star or drop
into the dog quadrant. These products often require significant investment to push them into the
star quadrant. The challenge is that a lot of investment may be required to get a return. For example,
Rovio, creators of the very successful Angry Birds game has developed many other games you
may not have heard of. Computer games companies often develop hundreds of games before
gaining one successful game. It’s not always easy to spot the future star and this can result in
potentially wasted funds.
Star products: Can be the market leader though require ongoing investment to sustain. They
generate more ROI than other product categories.
Cash cow products: The simple rule here is to ‘Milk these products as much as possible without
killing the cow! Often mature, well-established products. The company Procter & Gamble which
manufactures Pampers nappies to Lynx deodorants has often been described as a ‘cash cow
company’
Each of the four quadrants represents a specific combination of relative market share, and growth:
1. Low Growth, High Share. Companies should milk these “cash cows” for cash to reinvest.
2. High Growth, High Share. Companies should significantly invest in these “stars” as they
have high future potential.
3. High Growth, Low Share. Companies should invest in or discard these “question marks,”
depending on their chances of becoming stars.
4. Low Share, Low Growth. Companies should liquidate, divest, or reposition these “pets.”
The two axes within the BCG matrix are:
 Relative market share: This axis shows a business or product line's market share
compared to its largest competitor. Knowing its position on the market in relation to its
biggest competitor can be relevant when planning its future.
 Market growth rate: This axis is an indicator of the market's current value and future
potential. It's a useful piece of information, as higher growth rates typically mean more
earnings and profits, but it also indicates the fact that future investments are required to
keep up with the constantly expanding competition