Introductory, growth, maturity, decline, strategies applied at each stage

The industry life cycle

The industry lifecycle traces the evolution of a given industry based on the business
characteristics commonly displayed in each phase. 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.
The industry undergoes various stages throughout its life span. These stages can be shown in the
diagram below:

The first phase is the:

Introduction phase
The introductory 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. New technologies for example personal computers or wireless communication
portray the initial stages of an industry life cycle. At this stage, it is very difficult to anticipate
which firms will succeed as information on the products and industry participants is often
limited, so demand tends to be unclear therefore some firms will be a total success while some
might fail completely. Consumers of the goods and services need to learn more about them,
while the new providers are still developing and honing the offering. Hence, the risk involved in
selecting any specific firm in the industry is quite high at this stage.

Strategies involved in the introductory stage are:

The pioneer strategy: Research suggests that successful pioneers attain and sustain their
competitive advantages through both the quality of products and the range of production lines
(Robinson & Fornell, 1988). Potential sources of competitive advantages that are available to
pioneer firms are (Varadarajan & Peterson, 1992):

 first choice of market and market positioning;

 the ability to determine the rules of the game;

 distribution advantages;

 economies of scale and experience curve effects;

 high switching costs for early followers;

 the possibility of appropriation of rare resources and suppliers’

Late entrant strategy: There are many business situations which essentially force the firm to
become a follower by default for example another company manages to introduce their products
to the market faster. However, even firms that have the ability to be pioneers sometimes let
others to be first-movers and observe how the situation in the market unfolds.

The advantages of this strategy include:

 exploitation of mistakes made by the pioneer (in market positioning, marketing, product
mistakes)

 and the ability to use limited resources of the pioneer firms (Walker & Larreche, 1996).
The second phase is:

Growth

This is when the 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 share in the new market. Profits usually are not a priority, as
companies spend on research and development or marketing. Business processes are improved,
and geographical expansion is common. As the product breaks through the market place and is
used commonly, the growth rate of the industry is still faster than the rest of economy.

Strategies involved are:

Market leader strategy: Position of a market leader represents a kind of orientation point or
benchmark for competitors, one which they should challenge, imitate or perhaps avoid. For a
firm to determine its optimal share of the market it needs to assess the relationship between
market share and profitability, assign level of risk associated with each market share and
determine the point where the increase in market share (taking on additional risk) will not be
compensated any more by an increase in profits. Once the firm determines its optimal market
share, to achieve and attain the market leader position the firm should do the following: firstly,
the company must find ways to increase the overall market demand; secondly, the company must
defend its current market share through effective defensive and offensive actions; and thirdly, the
company may try to increase its market share, even if the market size remains unchanged
(Kotler, 2001).

Challenger strategy: A firm which is usually placed second in terms of relative market share is
fighting fiercely to become market leader. In general, a market challenger can achieve its goal by
attacking the market leader and other competitors with the implementation of strategies such as
frontal attack.

The third phase is the:

Maturity phase
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
clearer. Market share and cash flow 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.

Strategies involved:

Cost leadership strategy: A firm that chose the cost leadership strategy aims to lower its
production costs by implementing cost reduction through experience, constant cost control, cost
reduction in the areas of research and development, advertising and promotion. Having relatively
lower costs than competitors becomes the goal of the strategy, although quality of services and
other areas must not be ignored.

Qualitative differentiation strategy: Qualitative differentiation strategy is characterized by the

creation of a product/service which will be perceived as unique by the customers. This is
achieved through design or brand image, superior technology, great customer service or
diversified distribution network. Qualitative differentiation is a viable strategy for achieving
above than average returns because it creates a defensible position for coping with competitive
forces. Differentiation provides protection from competitors in a sense that consumer brand
loyalty makes the firm less sensitive to changes in price. This increases the profit margin and
avoids the need for setting up a low-cost position in the market. Consumer loyalty and
competitors’ need to fight the uniqueness of the firm provide entry barriers to potential entrants.

Focus strategy : This strategy focuses on specific groups of customers, a segment of a product
line or geographic markets. The goal is to apply one the two strategies above, but by focusing on
serving specifically targeted areas or niche markets. The strategy rests on the assumption that the
firm is in a better position to serve a narrow, strategically vital area of the market. As a result, the
firm achieves qualitative differentiation through better solutions for the needs of specific targeted
areas, or lower costs in serving these areas.

The last stage is the

Decline
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..

Strategy involved:

Harvesting strategy

(Kotler 2001) defines harvesting strategy as a strategic management decision to reduce

investment in the business unit with the hope of reducing costs and/or improving cash flow. It
entails the elimination of all investments, with possible divestitures, and generation of maximum
cash flow from the business in question. This strategy is acceptable when the competitive
advantage of the business is in a unstoppable decline, when market conditions worsen and when
the firm has a relatively strong competitive position in the market at the beginning of the decline,
which makes it likely for current customers to keep the level of their purchases even when the
marketing support is highly reduced (Doyle, 2008). In declining industries firms typically focus
on harvesting strategy and forget two other alternatives: the strategy of market leadership and the
market-nicher strategy. A company that follows the market leadership strategy is trying to
achieve above than average profitability in the industry by becoming one of the companies that
remain in the industry. The main premise of this strategy is that by winning market leadership,
the firm can be profitable because it has the ability to exercise more control in the process of
decline and also avoid price wars. Managers execute this strategy by actions such as reducing
barriers to exit or forcing other competitors that remain in the industry in additional investment.
A market-nicher strategy is commonly associated with small businesses, although it is also used
as a strategy of strategic business units of large companies in which the costs of achieving a
prominent place in the market are disproportionately high. Benefits of this strategy are
significant since it is not only profitable, but also avoids competition and confrontation.

Conclusion

According to the theory of industry life cycle all industries go through four very different phases,
where each particular phase requires a strategy that will effectively absorb specific conditions of
the phase. The structure of the industry affects the rules of competition, and thus the necessary
strategy for survival and development. Changes in industrial structure, demand and technology
requirements through the industry life cycle have important implications for sources of
competitive advantage in every phase. This is why understanding the industrial context and
finding an attractive competitive position within the industry becomes a strategic goal. It can be
noted that different ways of overcoming growing complexity of the environment manifest as a
need for different, innovative business strategies. Each of the phases in the industry life cycle
requires an appropriate business strategy, which in turn demands innovative knowledge of
relationships that link the past, the present and the future of the firm and/or its parts. In managing
a firm this implies that, due to increasing complexity of the globalised environment, there is
constant need for more interdisciplinary knowledge.