Meaning of Industry Life cycle:
Industry life cycle is an industry can be defined as a group of companies. That offering products or services that are close substitutes for each other.
Changes that take place in an industry over time are an important determinant of the strength of the competitive forces in the industry. The similarities and difference between companies in an industry often become more pronounced over time. And its strategic group structure frequently changes. The strength and nature of each competitive force also changes as an industry evolves. Particular the two forces of risk of entry by potential competitors and rivalry among existing firm.
A useful tool for analyzing the effects of industry evolution on competitive forces is the industry life cycle model. This model identifies five sequential stages in the evolution of an industry that lead to five distinct kinds of industry environment:
Embryonic Industries – stage of Industry Life Cycle:
An embryonic industry is one that is just beginning to develop. Growth at this stage is slow because of factors such as buyer’s unfamiliarity with the industry’s product. High prices due to the inability if companies to leverage significant scale economies, and poorly developed distribution channels. Barriers to entry tend to be based on access to key technological knowhow rather than cost economies or brand loyalty. Rivalry in embryonic industries is based not so much on price as on educating customers. Opening up distribution channels, and perfecting the design of the product. An embryonic industry may also be the creation of one company’s innovative efforts, as happened with microprocessors (Intel), vacuum cleaners (Hoover), photocopiers (Xerox), and internet search engines (Google).
Growth Industries – Stage of Life Cycle:
Once demand for an industry’s product begins to increase, it develops the characteristics of a growth industry. In a growth industry, first time demand is expanding rapidly as many new customers enter the market. Typically, an industry grows when customers become familiar with the product, prices fall because scale economies have been attained, and distribution channels develop. The U.S. wireless telephone industry remained in the growth stage for most of the 1985-2012 periods.
Industry Shakeout – Life Cycle:
Explosive growth cannot be maintained indefinitely. Sooner or later, the rate of growth slows, and the industry enters the shakeout stage. In the shakeout stage, demand approaches saturation levels: more and more of the demand is limited to replacement because fewer potential first time buyers remain. As an industry enters the shakeout stage, rivalry between companies can build.
Mature Industries – Industry Life Cycle:
The shakeout stage ends when the industry enters its mature stage: The market is totally saturated, demand is limited to replacement demand, and growth is low or zero. Typically, the growth that remains comes from population expansion, bringing new customers into the market, or increasing replacement demand.
As an industry enters maturity, barriers to entry increase, and the threat of entry from potential competitors decreases. As growth slows during the shakeout, companies can no longer maintain historic growth rates merely by holding on to their market share.
Declining Industries – Cycle of Industrial Sector:
Eventually, most industries enter a stage of decline: growth becomes negative for a variety of reasons, including technological substitution (air travel instead of rail travel), social changes (greater health consciousness impacting tobacco sales), demographics, and international competition (low cost, foreign competition pushing the U.S. steel industry into decline). Within a decline industry, the degree of rivalry among established companies usually increases. The largest problem in a declining industry is that falling demand leads to the emergence of excess capacity. In trying to use this capacity, companies begin to cut prices, thus sparking a price war.
A third task of Industry Life Cycle analysis is to identify the opportunities and threats that are characteristics of different kinds of industry environments in order to develop effective strategies. Managers have to tailor their strategies to changing industry conditions. They must also learn to recognize the crucial points in an industry’s development, so they can forecast when the shakeout stage of an industry might begin, when an industry might be moving into decline.