Analysis of Industry Life Cycle for Stock Investment

Traditionally, the industry life cycle is broken down into stages from pioneering development to decline. Of course, one must be careful in industry definition. Industry life cycles are normally categorized by rates of growth in sales. The stage of growth can clearly vary in length.

Industry Life Cycle and Sales Growth Rate

There are five stages in industry life cycle categories.

• Pioneering development is the first stage and has a low but slowly increasing industry sales growth rate. Substantial development costs and acceptance by only early adopters can lead to low profit margins.
• Rapid accelerating growth is the second stage, and the industry sales growth rate is still modest but is rapidly increasing, High profit margins are possible because firms from outside the new industry may face barriers to entering the newly established markets.
• Mature growth is the third stage and has a high but more modestly increasing industry sales growth rate. The entry of competitors lowers profit margins, but the return on equity is high.
• Stabilization and market maturity is the fourth stage and has a high but slowly increasing sales growth rate. The sales growth rate has not yet begun to decline, but increasing capacity and competition may cause returns on equity to decline to the level of average returns on equity in the economy.
• Deceleration of growth and decline is the fifth stage with a decreasing sales growth rate. At this stage, the industry may experience overcapacity, and profit margins may be completely eroded.

One would expect that somewhere in the final stage,  the industry sales growth rate would fall back to the GDP growth rate and then decline below it. It is important to know that the position of an industry in its life cycle should be judged on a global basis.