The industry lifecycle provides a view of the typical birth to death cycle of an industry. It has the phases: introduction, growth, maturity and decline – we will use the mobile phone market as a case study.
It is worth noting that the duration of various lifecycle phases can vary across industries and geographies, for example, the auto market in many geographies is still in the growth phase, while in the UK & US, they’re very much mature markets. Furthermore, it’s important to note that not all industries will follow the lifecycle – for example, groceries demand will never drop, so that industry will never decline.
The introduction phase
The introduction phase is where we have little to no consumer awareness of the industry and the pioneers of the industry have to educate the market on the new offering. Let’s think about the mobile phone industry – in 2007 Apple released the first iPhone – the first mainstream smartphone, they were pioneering something new – stepping away from the conventional brick or flip phone and making huge waves in the industry. But, how did they make those waves?
Whenever we’re talking about the infancy of an industry, an entrant will need to spend huge amounts of capital marketing their product & educating the market on the brilliant thing they’ve created and must continue to invest and advertise in order to gain traction and grow awareness of the technological breakthrough.
As such, pioneering an industry is a very high cost & high risk strategy, but by doing this the company can gain valuable first mover advantage – in Apple’s case, they’ve never lost their first mover advantage & have become the most prevalent smartphone brand in the industry. In some cases, first mover advantage could be simply having brand awareness and internal knowhow (Apple) or it could be the ability to patent the breakthrough product design.
The growth phase
The growth phase is all about… well, growth. Consumers are aware of the industry and sales are increasing. This enables the industry to grow not only its market share, but also its geographic footprint. During this phase, a company would be scaling up production in order to meet demand.
Many companies choose not to enter a new market immediately, rather they monitor the success of the pioneer. Being a fast follower is a much lower risk strategy as the market has already been proven, the consumers are buying and the new entrant has evidence that the market is growing. The fast follower does not need to spend the time & effort educating the consumers about the product & market – they already know, the pioneers have already educated them.
Entering a growing market is extremely desirable – typically in a growing market, the price of products remains high because there are few competitors. This means that initial investments by the new entrant are covered quickly and they see a fast ROI.
During this phase, there is ever increasing competition but as the overall market is growing, many competitors can operate successfully in the market.
In order to get a bigger market share, companies can spend on advertising, invest in production capacity for better economies of scale or expand geographically.
Thinking about the smartphone growth phase, we had new entrants like Samsung, Nokia, LG and more. In order to capture a greater market share, the companies invested heavily in marketing and all ultimately became viable, profitable businesses operating in the market. As the market was ever growing, each company was able to grow their year on year profits during the growth phase.
The maturity phase
The maturity phase is where sales have peaked and the industry is no longer growing. During this time, there is a very high level of competition as companies try to maintain their market share. In order to do this, companies start to differentiate their offerings (e.g. the edge-to-edge displays and flexible screens in mobile devices).
During this phase, one way to grow profits is to take someone else’s market share & hence, there is fierce competition during the maturity phase. In the auto industry, Renault and Nissan have collaborated and created a brand called Dacia. This diversifies their portfolio & allows them to become more competitive in a mature market, by targeting multiple price points across multiple brands in the same industry. This gives them the ability to adopt an aggressive pricing strategy with one brand to steal market share from competitors.
Another move that companies make during this phase is company consolidation – that is, two players in the industry merging to capture a greater joint market share, lower costs and achieve synergies between the two organisations. This enables the company to reduce costs (man power, production capabilities), while growing their combined marketshare – ultimately making the company more profitable.
The final key strategy during the maturity phase is cost optimisation. As the market has stagnated, it is extremely to cut costs, as it’s an easy way to impact the bottom line & make the company more profitable.
The decline phase
The decline phase is declared when we see a decrease of sales for 3 or more years across the industry. During this phase, customers abandon the market for a new industry – just like they abandoned feature phones when smartphones were released.
There are a few strategies which can be adopted during the decline stage:
- Companies may decide to abandon the market and pursue different opportunities
- Companies may choose to implement a harvesting strategy, which is where the company dramatically decreases their internal costs (by stopping marketing & R&D for example). They then milk the industry for what they can, before getting out
- Some companies may choose to invest heavily during this time. They do this to snatch other company’s market share as it’s very unlikely they will react aggressively – they don’t want to spend money on a dying industry. Even if the industry is shrinking, a company can counteract the impact by gaining a larger percentage of marketshare.
It’s worth noting that some companies can continue to operate profitably in a declining industry. For example, there are a number of companies that specialise in mobile devices for elderly users (e.g. Doro) that are still able to operate in the feature phone industry.