What it means
Industries, like products and people, tend to move through stages. In the introduction stage a new industry has few customers, high costs and many losses, as with early electric vehicles or early online shopping.
Sales are small, but the potential is large, and a lot of money is spent on research and persuading customers to try the product. In the growth stage, sales rise quickly and profits begin to appear.
New competitors arrive, prices start to fall as production becomes efficient, and the best firms expand rapidly. Many analysts consider this the most exciting stage, but it is also the most uncertain because it is hard to know which firms will win.
A shakeout follows when growth slows and weaker firms fail or are bought. Maturity comes next, with steady sales, a few large players, price competition and modest growth, often close to the growth of the wider economy.
Companies in mature industries usually pay out more of their profit as dividends because there are fewer chances to invest at high returns. Some industries then enter decline, as customers switch to substitutes or tastes change.
Sales fall, firms cut costs and merge, and the strongest survivors often earn decent profits by serving a smaller market. Others avoid decline by reinventing themselves with new products or markets, which restarts the cycle.
The framework is a useful guide but not a law. The stages can overlap, they vary in length, and the same industry may look mature in one country and young in another.
Analysts therefore combine it with other tools, such as competitive analysis and valuation, rather than relying on it alone. For a finance team the stage drives practical choices.
A young industry needs equity funding and patience, a growth industry needs working capital and capacity, and a mature industry rewards cost control and steady cash returns to shareholders.
In practice
Real-world examples.
Example
A venture capital investor looks at companies making a new type of battery for homes. She expects losses for years but possible large rewards, so she limits the size of each investment. She treats the sector as being in the introduction stage. She also plans to invest more only if sales begin to climb quickly.
Example
A fund manager screens for mature industries such as packaged food and utilities. He selects companies with steady dividends and low growth, knowing that returns will come mostly from income. His clients are retirees who want regular payments. He accepts that the share prices will rise slowly.
Example
A printing company sees demand for printed directories falling every year. Its owner decides to cut costs, sell off part of its equipment and move into digital marketing services. The change helps it survive while rivals close. Within three years, digital services provide most of its revenue.
Formula
Calculation
Industry growth rate = (Industry sales this year - Industry sales last year) / Industry sales last year x 100
Suppose an industry had sales of $2,000,000,000 last year and $2,400,000,000 this year. The increase is 2,400,000,000 - 2,000,000,000 = $400,000,000.
The growth rate is 400,000,000 / 2,000,000,000 x 100 = 20%. A rate this high, compared with a general economic growth rate of perhaps 2% to 4%, suggests the industry is in its growth stage. If the figure fell to 3% the next year and stayed there, an analyst would suspect the industry was moving into maturity.Case study
Seen in the real world.
Voltaic Mobility is a fictional maker of electric scooters, operating in a market that analysts consider to be in its early growth stage. Industry sales rose from $500,000,000 to $750,000,000 in a year, a rise of 50%.
The company's finance team used life cycle analysis to plan. In a growth stage, they reasoned, cash would be needed for factories and marketing, so they chose to keep profits in the business and raise a $20,000,000 loan.
In this illustrative case, they also prepared for the shakeout stage by keeping costs low and building a loyal customer base. When two weaker rivals failed three years later, Voltaic bought one of them cheaply and became the market leader. The board credited the early focus on cash and customer loyalty.
Watch out
Common mistakes.
- Assuming every industry follows the same neat sequence and timing, when stages can overlap or be skipped.
- Believing that an industry in decline is always a bad investment, when the strongest survivors can earn good returns by serving a smaller market with lower costs.
- Assuming growth industries guarantee profits, when fast growth often attracts so many competitors that profits are small.
Questions
People also ask.
What are the stages of the industry life cycle?
They are usually listed as introduction, growth, shakeout, maturity and decline.
How do investors use it?
They use it to set expectations for growth, risk and dividends, and to choose between young, fast-growing sectors and steady, mature ones.
Can an industry restart its cycle?
Yes. New technology or new uses for a product can bring a mature industry back to growth, as happened when photography moved from film to digital cameras and then to phones.
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