Industry Life Cylce

What are the stages in industry life cycle and what is the effect of each stage on sales growth and profit margins of companies in the industry?

Important points

Pioneering development: modest sales growth and very small or negative profit margins and profits

Rapid accelerating growth: Profit margins are high. Sales grow at an increasing rate. profits explode. During this phase, profits can grow at over 100 percent a year as a result of the low earnings base and the rapid growth of sales and net profit margins.

Mature growth: Future sales growth may be above normal but it no longer accelerates. For example, if the overall economy is growing at 8 percent, sales for this industry might grow at an above normal rate of 15 percent to 20 percent a year. Profit margins begin to decline to normal levels.

Stabilization and market maturity: Industry growth rate declines to the growth rate of the aggregate economy or its industry segment. Competition produces tight profit margins. Rates of retun on capital eventually become equal to or slightly below the competitive level.

Deceleration of groth and decline: Industry's sales growth rate declines. Profit margins continue to get squeezed, and some firms experience low profits or even losses. Firms that remain profitable may show very low rates of return on capital.



Reilly and Brown, Investment Analysis and Portfolio Management, 8th Edition, pp. 468-470