Just like most things, industries and businesses have a life cycle. This life cycle consists of a number of stages, from the beginning of the industry, to either its end or evolution to something new.
Knowing about these life cycle stages and what they mean is key knowledge that can help an investor decide whether to put their money into a business or not. As well as informing the trader of the best time to do it, depending on what stage of the life cycle the industry is in.
When it comes to investing, there are many different approaches that expert traders take as well as questions that they ask.
Some of these approaches can get highly technical, for example, one major strategy involves systematic investing, also known as quantitative investing. This is an approach that uses a combination of insights gathered from data, testing investment ideas and advanced computer modelling techniques to put together portfolios. It’s common to use backtesting to see how a possible investment has performed in the past, with the theory that if it worked before, it would achieve success again.
On the opposite side of this, you have qualitative analysis. This means using judgement based on feelings or personal opinion to analyse a company’s value. This includes personal feelings about things like the company’s management expertise and its place in the industry life cycle.
Industry life cycle stages can commonly be grouped into four specific phases: introduction, growth, maturity and decline. The length of each of these phases can vary widely between industries. So what does each stage of an industry life cycle involve? Let’s analyse each stage…
1. Introduction Phase
Also known as the startup phase. The introduction phase involves the creation of a new product or service. This phase also involves marketing for this new offering.
Brand new businesses may be created exclusively for the product or service in order to market and begin production or popularity of it.
Information on the product is usually limited at this stage, so this is the point where it is important to teach consumers as much as possible about it. This may prove to be difficult as whilst you’ll be trying to inform these eventual consumers, you’ll also still be developing the product, it won’t be completely finished and honed to perfection yet.
The supply chain at this stage will be highly fragmented. Whereas in later stages things will be streamlined or done via a specific outsource or even in-house, at this point, production will be broken up into different parts, spread across different suppliers and manufacturers.
This particular phase can be unprofitable as revenue will be low whilst money is spent developing and marketing the product before it becomes a success.
2. Growth Phase
The growth phase begins once consumers of the new product have started to understand its value and the demand for it quickly increases.
The key figures and leaders in the industry become clear, and you will start to associate the product with these main companies. These companies will compete with each other for a share of this new market.
Money made at this stage will be spent on developing and improving the product further or on more and better marketing. Business processes will also be improved and the company may expand across the globe.
With the new product demonstrating its success, larger companies may get involved via acquisition.
3. Maturity and Shakeout Phase
This phase begins with a shakeout, which is sometimes counted as a phase of its own. A shakeout involves a large number of investors leaving all at once, caused by bad news or uncertainty regarding the industry.
Growth then slows and companies will consolidate, profit becomes the most important. Prices become competitive.
When an industry matures, the competition becomes clearer and it becomes harder to enter the market as a smaller company.
4. Decline Phase
The industry is no longer growing, weaker competitors leave. Companies will either move on or try to keep revenue by focusing on their most profitable product. Sometimes, things become popular again which may revive an industry. But others will need to innovate.
Understanding industry life cycles can help inform an investor’s decisions. Keeping an eye on trends and doing some research can result in making an investment at just the right time. So if you see an upcoming business, don’t ignore it, investigate it.