Industry analysis

Industry analysis

The Industry Life Cycle model resembles the product life cycle model but refers to entire industries, rather than individual products. Strongly influenced by product innovation, the model reflects changes in demand and spread of information across a particular industry over time. Take the coal industry for example. In the developed world, the coal industry is in terminal decline, largely for environmental reasons. However, in developing nations coal is still a very important source of energy – in China, for instance, coal-fired power stations are frequently being built to contribute to the nation’s power grid. Such industry life cycles can also be seen for other areas, such as transport, electronics, consumer goods, service industries, etc.

There are typically considered to be five stages to the industry lifecycle model:

Industry life cycle

During the development phase, there are typically few competitors in the industry, and few customers too – such customers are typically early adopters of the product or service. Innovation is key to such customers, price sensitivity is low. Competitive pressures are therefore low.

When the industry enters the growth phase, more and more customers are drawn into the industry, and capacity becomes very tight – pushing sales prices and margins up. This attracts many new entrants to the industry. Competitive pressures, whilst still low, start to grow between the industry participants. Customers become more and more discerning on both quality and price grounds, and a ‘shake-out’ phase arrives whereby cost- and price-cutting by firms causes margins to fall, forcing out the less efficient firms from the industry.

Mature industries are characterised by saturated marketplaces, whereby firms compete strongly with one another for repeat customers or late adopters. Ultimately, other industries rise due to market innovation, making this industry relatively less attractive. Customers desert this industry to join the newer, more innovative industry, causing the onset of decline.

Here firms exit the industry as best they can, leaving behind those customers and firms that cannot easily exit the market.