Industry Life Cycle Models

An industry’s life-cycle position often has a large impact on its competitive dynamics, making this position an important component of the strategic analysis of an industry.

Life-Cycle Stages

  • Embryonic: an industry just beginning to develop, characterized by slow growth, high prices, low volumes, a substantial need for investment, and high risk of failure.
  • Growth: characterized by rapidly increasing demand, improving profitability, falling prices, and relatively low competition (though a threat of new competitors is generally at its highest point in this stage).
  • Shakeout: characterized by slowing growth, intense competition, declining profitability, and a focus on cost reduction.
  • Mature: characterized by little or no growth, industry consolidation, and high barriers to entry.
  • Decline: characterized by negative growth, excess capacity, and intense competition.

cfa-industry-life-cycle

Limitations

The evolution of an industry does not always follow a predictable pattern as various external factors (technological, regulatory, social, or demographic changes) may significantly affect the shape of the pattern. Also, the performance of companies within industries does not always mirror that of the overall industry as there can be successful companies in declining businesses and failing companies in high-growth industries.

Question

The newspaper industry has been shrinking for years in the shadow of the internet and 24-hour cable news networks. What is the life-cycle stage that best fits the newspaper industry?

A. Shakeout

B. Mature

C. Decline

Solution

The correct answer is C.

The newspaper industry has long ago moved past the shakeout stage and has more recently shifted into a period of decline against the increasing popularity of the internet.

Reading 48 LOS 48h:

Describe industry life cycle models, classify an industry as to life cycle stage, and describe limitations of the life-cycle concept in forecasting industry performance

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