3. Industry lifecycle - YouTube Videos - MODULE 3 - Home

The four stages of the industry lifecycle model - An introduction - Video 1

Transcript

In this lesson I would like to show you the industry life cycle model and its four stages: introduction, growth, maturity, and decline. It should be an interesting one. So, let's get started. Just like everything else in life industries have a life cycle too, well most of them do. Some industries will never face a decline. Can you imagine the demand for clothing and food products drying up? I can't, however we can say most industries go through four stages in their development: 

The introduction phase is characterized by the initial offering of the products or services sold in this industry. People are unaware of the existence of these products and firms trying to grow consumers awareness as much as possible. In the infancy of most industries you can always find a technological breakthrough as solo entrepreneur, a startup, or an established company that came up with the technological innovation that gives birth to an industry. A good example of an industry in the introduction phase right now is consumer robotics and all products related to artificial intelligence, very few people know and even fewer have used the products offered in this field. 

Eventually, more people will learn about the industry due to the word of mouth effect, or to the marketing efforts of the few companies operating in the industry. Consumers will learn of the industry and sales will speed up. When this happens we would be in the growth phase. Revenues grow faster, but as more competitors into the market, companies must invest a lot of resources to grow the business and reach even more consumers. This is the phase where companies grow geographically as well. They may expand to new geographic locations and even operate at a multinational level. Companies aim to expand their market share and win as many first-time buyers as they can. Car sharing services within urban cities is an industry in its growth phase, more people have started using these services, and are buying subscriptions that allowed them to hop in to a car and move from point A to point B, and then abandon the car there, a very exciting and innovative industry.

Sales reach their peak in the maturity face, and then slow down until the industry reaches its decline. The maturity stage is characterized by a high level of competition and companies try to do their best to keep their market share intact. This is when firms differentiate their products even more and concentrate on specific market niches. The automobile industry is a good example of a mature industry. Virtually all consumers know of the industry. The companies operating in it are profiatible and the competition between producers is fierce. 

Things are less romantic in the decline period. Competing industries have surpassed the pace of innovation of the industry and decline. Imagine that virtual reality glasses provide a better movie watching experience than cinema theaters in the future, this would probably lead to the decline of the cinema industry, sad  but this is how things happen sometimes in life, isn’t it? Okay, in our next lesson we will talk about the way industries evolve and how they change in each of the stages they go through. This is all for now. Thanks for watching!

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Industry Life Cycle - Video 2

Transcript

This video draws heavily from chapter 11 of the textbook “Strategic Management” by Garth Saloner, Andrea Shepard and Joel Podoleni. Typically an industry's life cycle can be characterized by four stages. 

During the first or emergent stage the industry is in a period of experimentation and uncertainty, there are generally a lot of competitors with different technological designs and barriers to entry are relatively low. Firms are experimenting in technology, organizational design, markets, and business strategy. In this stage it is common for firms to fell. 

During the second or a girl stage a consensus on technology emerges consensus on the firm organization and strategy also emerges. Innovation is now incremental rather than fundamental. Rather than strategizing about anticipated market conditions most of the strategy is focused on the current market environment. 

During the growth stage the number of competitors decrease in barriers to entry increase. The rapid industry growth can mitigate competition between the remaining companies, any new entrants are likely to avoid competing directly with existing competitors by focusing on a niche market. 

The maturity stage is the most stable of the four stages. The industry is dominated by a relatively few well-established competitors, failure rates are high among new entrants, often the dominant firms are blind to new opportunities. New technology or changes in taste or the number of buyers can bring about industry decline. In this stage some companies are likely to go out of business. However firms can miss profit opportunities by exiting too soon or by staying too long.

How an industry is organized generally varies as it moves through its lifecycle. Industries can be organized vertically or horizontally: in a vertically organized industry a single firm orchestrates the overall design manufacturing, and assembly of the product. The firm may produce its own components. If the components are subcontracted out the firm maintains control of the architecture of the parts dictating specific component characteristics. This  diagram illustrates a vertically organized  bicycle industry with three firms, each firm produces its own components, or subcontracts out components to be manufactured to specific specifications for its specific bicycles. 

Horizontal industry organization contracts with vertical industry organization. When an industry is horizontally organized independent firms produce standardized components which in an assembler, then combines. This diagram roughly illustrates the modern mountain bike industry. The three biggest mountain bike companies are specialized, trek and giant. These three companies manufacturer some components, however most of the components are purchased from independent manufactures. For instance most trailers and shifters are made by either Shimano or SRAM, any bicycle manufacturer may purchase dereliers from either Shimano or SRAM. Finally, there are numerous companies that compete in retail sales, often the retails companies sell numerous by different bicycle brands. A key advantage of horizontal industry organization is increased specialization and competition. When the bicycle industry is vertically organized each firm has to concern itself with the design and manufacturing of every part. With horizontal organization Shimano SRAM, each specialized in manufacturing and relatively few components: high quality and low prices are likely if there's a high degree of competition between the companies. A key benefit of vertical industry organization is increased coordination. The traditional PC industry is an example of horizontally organized industry. A computer assembler like Dale buys its operating system software and components from a number of different manufactures. This gives Dale flexibility when designing computers, low price and high quality is disciplined to the extent to which there is competition between the companies that can choose from. However, since the various components and software are produced from many different suppliers, the various parts may not be optimized to work with each other. This problem is overcome by Apple’s more vertical approach. Apple manufactures its own parts, creates its own operating system, and writes much of its own software. If another firm manufactures apart for Apple it will likely be making the part custom for just Apple. This gives apple more control over the overall process so that there is a greater degree of coordination between all the parts. They can be optimized to work better together.

During emergent stage an industry is usually vertically organized. To see why? Consider the bicycle industry in the the 1930s. The industry had been decimated by the emergence of the automobile in the early 20th century. In the 1930s when launched a new hire bicycle design for recreational riders. Since this was a new type of bicycle there were no manufactures the types of components and frames they needed. They would have to manufacture their own, or they would have to subcontract the production of parts built to very specific design specifications. Since the emergence stage is a period of technological uncertainty and change each bicycle for manufacturing the new higher-end bikes was manufactured in very different parts, and was innovating and changing the parts at a rapid pace. This environment makes it prohibitively risky for an independent company to start manufacturing parts without a contract with a specific buyer. However, the external transaction costs for the bicycle firm to search out a producer negotiate the contract and enforce the contract are very high due to the technological and market uncertainty. These external transaction costs can be avoided if the firm chooses to make the components themselves, that is, if the firm makes instead of buys as the industry grows and matures technological change slows and standards are developed. The stable environment enables independent companies to begin manufacturing and selling components for numerous bicycle producers. It is in the mature bicycle industry today that we observe numerous component manufacturers like Shimano and SRAM producing standardized components that work on virtually any bicycle. 

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Lecture on Industry Life Cycle - London School of Business and Finance - Video 3

Transcript

One of the big things that affects an organization is where it is in the industry life cycle. Now this is a very important concept that will affect some of the strategic analysis that you are able to do. Often the examiner gives you lots of clues about where you might be in this life cycle. One of the biggest things that you might have to do is you may have to use numbers to identify where you actually are, particularly if you are given the market size of an industry. If you are given the market size of an industry particularly over a period of time. If you are given it over three or four years, look to see, is it getting bigger quickly? Is it getting bigger slowly? Is it not doing anything at all? Is it raining fairly static? or is it starting to go down? is it starting to decline? Because that will give you useful information when you are starting to analyze the entire industry. So, the life cycle of an industry basically an industry grows and then shrinks again. Now, there are a number of distinct stages that you will go through. 

First of all, we have what is known as the introduction stage. Now, at the introduction stage people don't really know very much about the industry because it's pretty new, it’s brand new. I suppose an example of this would be that we are still probably in the introduction stage of electronic books. There are electronic book readers that are available: Amazon do one, Sony do one, various other people do one, Apple do one. But the idea is still very much in the introduction stage. So, the entire industry there aren't that many people doing it. It's all often seen as a niche. It means it might be something small that a company is doing or it might be that be because there aren't that many customer you are not necessarily going to make a lot of money from it. There may be a few competitors as I say for electronic books as far as I'm aware there aren't that many people doing them at the moment. You might even have one company doing it. However, probably the biggest issue that faces an industry at that stage is that customers might not really understand what the product is, or they may not understand why they need one. So a lot of the marketing and a lot of the advertising that goes with an industry in the introduction stage is simply making people where isn't this product great? How did you ever live without it? Now in the introduction stage if we are worried about competition, there will only be a few competitors potentially. What want to do is we want to get customers to think of our product as quickly as we possibly can.

In the growth stage you can see that we start making reasonable profits you are now getting to the stage where enough customers are buying the product. So it is actually paying for itself, our costs will be covered presumably because we are going to start getting economies of scale so our fixed costs will be spread over enough units so the weekend out he start making a little bit of money. However, because other people, other companies can now see that you are making money, they will think to themselves, “why don't we do exactly the same thing?” So there are more and more competitors who will start joining into that industry. Now I can guarantee with any new technology if it looks like it's going to be successful, within two or three years the number of competitors will probably double if not triple because people can see there is money to be made. Now that is very important because if you work for a company or you have a company in the exam that is in that stage, they may will be growing very quickly. It may be difficult to carry on growing as quickly because of these new competitors who will come in. Now where will they come from? They may be completely new companies that just have been formed to do something. On the other hand, they may be coming from other industries so it may be some kind of convergence that they are coming into our industries it seems like a natural product for them to offer.

At the mature stage you have what is called a period of consolidation. At the mature stage it means the industry is not really getting any bigger, so we have gone from an introduction quite low sales, perhaps a fairly rapid growth and then we get to the mature stage. People are still buying, but the number of people buying is not really going up if you were to look at your turnover figure, if you will look at the number of units that are being sold each year it's not really increasing. Now I think there is an argument that could be made to say that that's the stage that the mobile phone industry is in, particularly in the U.K. So, introduction mobile phones have been in the UK for about 20 years now. They have been around for quite along time. One of the interesting things if you look at an old tv show, or you look at an old film you can almost tell if it has been made in the last 20 years you can almost tell when it was made by looking at what kind of phone people have got so in the beginning in the 80s they were very large phones almost size of a small book and of course now they are actually be tiny to the stage where you can never find one. So mature stage, consolidation, what that means is that the bigger companies start buying the smaller companies. There aren’t really enough customers to have 10 companies all fighting out for them. So what will happen is maybe the big two or three will end up buying the smaller seven, so you go from ten companies so perhaps only having three companies, so that is what we mean by period of consolidation. Weaker companies ones that are not really making a lot of money might either sell themselves to a bigger company or perhaps will simply say it is not worth us being in this industry anymore, we will shut down our product and we will just to go and do something else instead. 

In the decline stage of the industry customers start buying different products. For whatever reason they no longer want your product. So, no doubt in have no idea; 10 years, 20 years, 30 years, I do not know. People may not bother with mobile phones so there might be something else instead which means they don't even need to carry a phone around with them, I do not know what it will be, but they might will be something. With a lot of technology pipe based items they go through a fairly rapid. 

Introduction, growth, maturity, decline. So introduction, growth, maturity and decline. It could be five or ten years from beginning to end. It could be 20 years, it could be 30 years, but if you are a company and you are in an industry which is in decline whatever you do however good your strategy is, however good your product is, sales are going down and there is nothing that you can do about it so you will need to think about doing something else get into a different industry. All of this means that as part of your corporate strategy, and remember corporate strategy means the industries that you are in you should regularly review to decide, are the industries that you want to exit from? Are there industries that are in maturity? other industries that are in decline? Whatever you do you are not going to grow very much. Get out and do something else or, do you want to enter into new industries? are there new industries which are in the introduction stage? or are they in the growth stage that you want to move into instead? So for example, what you could do is you could own a factory and you decide we are making something in that factory, the industry is in decline, let’s not use the factory to make that product anymore. We find an industry which is growing let's use the same factory, but we will produce a different product for a different industry in the there. Now that's an incredibly important point as far corporate strategy is concerned.

Retrieved from: https://www.youtube.com/watch?v=tGSiKlyQRII