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Empowerment Through Knowledge
No.25: Industry Life Cycle

The Industry Life Cycle describes a number of stages that a type of product, service or entire industry goes through while it is on the market. You may be familiar with these stages, but the real value comes from understanding their implications on customers, marketing, operations, competition and the offerings themselves. Once you are aware of what stage the market is currently in, or if you are able predict the shape of the cycle before you start the introduction stage, then you can use the industry life cycle as a tool for management, which is what we will discuss in this article.

The four stages of the Industry Life Cycle
Stage 1: Introduction

This is when a type of offering is new and the demand or market for it is still being established. Sales tend to be slow and competition low, while marketing strategies are still being tested. This is usually the most costly stage in the cycle. The offerings on the market go through frequent design changes while they are being developed further and adjusted based on the public’s response. Quality tends to be at its lowest and standards are not yet established. Operationally, specialists and highly skilled labour is needed to survive this stage.

The duration of this stage depends very much on the degree of pre-existing demand and substitute competition. The risk of failure can be high until sales start to increase. Pioneering and failing is very costly as the offering would already have gone through a process of research and development. Therefore, many companies choose to let other businesses do the pioneering and costly marketing, and will only step into the market once others have tested the waters and growth can be observed. Although they are then not the first on the market, they save the cost of the pioneering and reduce their risk of failure if they join the market in time when there is still room for other competitors.

 

Stage 2: Growth

Here, demand and sales increase, with the offerings becoming more widely or frequently available as the market takes off. It is at this point when competition increases, making branding, tactful pricing and ease of access to the offerings all the more important. The quality of offerings on the market increases and changes occur in the form of competitive improvements. Customers will become choosier, as their options increase, and low quality offerings will have a tendency to fail.

Your goal now shifts from encouraging new customers to try your offering, to developing more and more reasons as to why your particular offering is the best choice over that of your competition. Therefore, your marketing strategy needs to be adapted, taking competition into consideration, although there still tends to be enough increase in sales for most businesses in the market to remain profitable.

 

Stage 3: Maturity

At this stage, the cost of production and marketing are at their lowest, while sales reach a steady constant. The public is well aware of the benefits of the offering in question, becoming repeat customers, while competition is also well-established and the market nears saturation. Very little new competition enters the market and the existing players continue on their battle to gain market dominance through more tactful and fine-tuned marketing.

Consumers can identify the ideal form of good or service on the market and, therefore, differentiation between offerings is lower with drastic changes being infrequent. Out of fear of moving into the Decline stage, this is when the greatest effort to extend the life cycle is made. When done right, the market can fluctuate between the growth and maturity stage, with ongoing developments sending it back into growth. At maturity, operational costs are also on the low side, as the most efficient processes have been developed and the need for skilled labour tends to be lower.

 

Stage 4: Decline

An offering’s sales will begin to decline when the competition’s or other industry’s offerings become more advanced than yours. This can be characterised by better features, lower prices, or even substitute goods/services that fulfil consumer needs in a more efficient or better-perceived manner. The market is now saturated and there is little room for profit to be gained as the profit margin decreases. At this stage, businesses begin out-compete one another, with only the strongest names surviving the aggressive marketing war. Exiting the market, mergers and buy-outs become common.

Although you will want to extend the life cycle as much as possible, your goal here is to know when it’s time to quit. If you have the capacity to outcompete the others, then stay in the game as long as possible. If the other players hold a significantly larger market share than you do, then it may be time to exit before you make losses.

 

Different Situations

The different stages of the Industry Life Cycle will vary in duration based on the industry and pre-existing opinion of the public. New building supplies, for example, will take long to catch on, having a long Introduction phase, but will have a long Maturity phase once buyers are convinced of their effectiveness through completed projects. New fashion, on the other hand tends to be quick on the uptake, while the Maturity stage tends to be short as consumers seek out the latest trends.

The Industry Life Cycle combines quite well with other management tools to be able to take more informed decisions. For example, a couple of weeks ago in Edition 21 of Empowerment Through Knowledge we discussed Ansoff’s Matrix, which is a tool to assess your options to grow your business. One of the options in that framework was to stay where you are and put all (or most) of your efforts towards increasing market share and sales in your current market with your current products or services. Now, applying the Industry Life Cycle to this situation, one can see that such a decision would make a lot of sense if your industry is at the growth stage. New customers are pouring in, so you should use all your competitive advantages to increase sales at a faster rate than your competition, and hence increase your market share in a growing market. Again, assessing your advantages using a SWOT Analysis and the VRIO Framework (Edition 10 and 14 respectively) would also be helpful. On the other hand, if your industry has reached saturation/maturity, then it would be wise to dedicate a larger portion of your resources to finding new avenues to achieve business growth, whether new products or new markets, or even diversification (the other three options in Ansoff’s Matix).

 

Conclusion

Keeping the predicted shape of your Industry Life Cycle in mind will help you determine the most appropriate pricing strategy for your offering, especially when you are one of those pioneers. Your decisions will depend on your initial predictions of the total length of the life cycle and the shape and duration of each stage. To what degree are you protected by patent? How much capital did it take to get the offering onto the market? The elasticity of demand in the early stages and many other factors will play a role here.

In the development of a market you could choose to set a high price to recover your investment costs quickly. This may, however, attract competition and reduce your exclusivity. On the other hand, setting your price low could mean less competition but slower profits, or a speedy uptake but short life cycle. Pricing an offering in a way that reflects the way it would be priced once it becomes commonplace can be an effective strategy in lengthening the life cycle and generating greater stability. The offering will take longer to pick up, but will also spend a longer time in the later growth and maturity stages, extending your profits.

 

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