LIFE CYCLE OF INDUSTRY

much more relevant as product differentiation declines

The industry life cycle refers to the evolution of an industry with consolidation.
or business based on its stages of growth and decline.
DECLINE PHASE
FOUR PHASES OF AN INDUSTRY LIFE CYCLE The decline phase marks the end of an industry’s ability to
1. Introduction support growth. Obsolescence and evolving end markets
2. Growth negatively impact demand, leading to declining revenues.
3. Maturity This creates margin pressure, forcing weaker competitors
4. Decline out of the industry.

Industries are born when new products are developed, Further consolidation is common as participants seek
with significant uncertainty regarding market size, product synergies and further gains from scale. Decline often
specifications, and main competitors. signals the end of viability for the incumbent business
model, pushing industry participants into adjacent markets.
INTRODUCTION PHASE The decline phase can be delayed with large-scale
The introduction, or startup, phase involves the product improvements or repurposing, but these tend to
development and early marketing of a new product or prolong the same process.
service. Innovators often create new businesses to enable
the production and proliferation of the new offering. Declining markets that have gone from maturity- where
sales stay flat or may even climb occasionally- to multiple
Information on the products and industry participants are periods where there are decreasing sales. This drop in
often limited, so demand tends to be unclear. Consumers sales is the first and most obvious sign of a declining
of the goods and services need to learn more about them, market, and lower sales quickly lead to other attributes.
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
 COMPETITION / RIVALRY companies cannot recover cost increases in
their own prices.
Porter’s Five Forces is a framework for analyzing a
company’s competitive environment. 4. Power of Customers/Buyers
 Exert control over price
Michael Eugene Porter is an American academic known  Number of buyers
for his theories on economics, business strategy, and  Bulk purchasing
social causes.
The presence of powerful buyers reduces
The five forces are frequently used to measure the profit potential in an industry. Buyers
competition intensity, attractiveness, and profitability of an increases competition within an industry by
industry or market. forcing down prices, bargaining for improved
quality or more services, and playing
competitors against each other. The result is
Competitive forces diminished industry profitability.

Internet makes Buyer powerful

Profit Potential
o BUYERS have lot of power when
there weren’t many of them and
1. Competition in the industry or rivalry among when there are many alternatives to
existing competitors choose from.
 Number of competitors
 Size of competitors o BUYERS power is low when they
 Industry growth purchase in small amount, acts
independently and suppliers
 Product differentiation among rivals
product is different from its
 Exit barriers
competitors.
2. Potential of new entrants into the industry
Company is decreasing Buyer’s power by:
 Prices
1. Loyalty programs
 Costs 2. Product differentiation
 Investments
5. Threat of substitute products
The higher the “entry barriers” the lower the Substitute products fulfills the same need
chance of entry of new players. although they may not look identical in the
 Economies of scale surface, customer switch to alternatives.
 Customer loyalty  Number of substitute
 Capital requirements  Buyers willingness to substitute
 Cumulative experience  Price performance
 Government policies  Trade off (substitute)
 Access to distribution channel
ECONOMIES OF SCALE
3. Power of Suppliers (exert power to overprice) Economies of scale are cost advantages that can occur
 Number of suppliers when a company increases their scale of production and
 Supplier concentration becomes more efficient, resulting in a decreased cost-per-
 Switching costs unit.
 Available substitutes
 Strength of distribution channels Economies of scale provide larger companies with a
 Uniqueness of supplier’s product competitive advantage over smaller ones, because the
larger the business, the lower its per-unit costs.
The presence of powerful suppliers reduces
the profit potential in an industry. Suppliers TWO MAIN TYPES OF ECONOMIES OF SCALE
increase competition within an industry by 1. External
threatening to raise prices or reduce the 2. Internal
quality of goods and services. As a result,
they reduce profitability in an industry where
1. EXTERNAL ECONOMIES OF SCALE Disadvantages of Economies of Scale (Diseconomies
External economies of scale are dependent on external of Scale)
factors. Anything that enables a company to cute down on 1. Poor communication
costs can be considered an external economy of scale, 2. Loss of control
including tax reductions, government subsidies, an 3. Duplication of effort
improved transportation network, or highly skilled labor 4. Weak morale
pool. 5. External opposition

2. INTERNAL ECONOMIES OF SCALE Substitute Goods:

Internal economies of scale are controlled by the  Identical
company. They can occur any time a company cuts costs,  Similar
from buying in bulk and investing in state-of-the-art  Comparable
machinery to accessing extra financial capital and hiring a
specialized workforce.

INTERNAL ECONOMIES OF SCALE:

a. TECHNICAL ECONOMIES OF SCALE
They are economies of scale achieved via
technology. That is, larger businesses more
readily have the capital to invest in newer and
better technology, which can bring them cost
advantages smaller businesses are otherwise
unable to achieve.

b. PURCHASING ECONOMIES OF SCALE

Purchasing economies of scale, also called
buying economies of scale, are a type of internal
economy of scale. They are economies of scale
achieved via buying in bulk. That is, larger
businesses more readily have the cash and
output to warrant buying materials in much larger
quantities, which can bring them per-unit cost
advantages smaller businesses are otherwise
unable to achieve.

c. FINANCIAL ECONOMIES OF SCALE

They are economies of scale enable more
favorable rates of borrowing. That is, larger
businesses are seen by lenders as more reliable
or worthy of credit due to their size, whereas
smaller businesses will tend to pay higher rates
of interest.

Advantages of Economies of Scale to Industries &

Businesses
1. Reduced long-term unit costs
2. Increases profits
3. Larger business scale

Advantages of Economies of Scale for Consumers

1. Lower prices
2. Product improvements
3. Higher wages