Industry Life Cycle

What is the Industry Life Cycle?

Industries, like products and businesses, emerge and eventually decline at specific points in history; the time period between inception and eventual extinction (if applicable) is the industry’s life cycle.

Understanding where an industry is in its life cycle is important for financial analysts, entrepreneurs, and other stakeholders when seeking to assess the competitive landscape and a company’s ability to grow, generate profits, and produce free cash flow.

The industry life cycle begins with a launch stage and ends with decline.

Life Cycle Considerations

What’s interesting about the industry life cycle is that it applies more broadly than to just “industries” (in terms of the technical definition of what an industry is).

The life cycle concept can also apply to technology categories. For example, generative AI isn’t really an industry (per NAICS or NACE), but it’s demonstrating industry-like characteristics. 

It’s currently somewhere between the launch and early growth stage; companies are investing heavily in potential use cases and new opportunities for commercialization.

Stages of the Industry Life Cycle

While different versions of the framework have different components, the life cycle can be broadly divided into five main stages. These are:

Launch

The launch stage is when an industry is just starting; perhaps a new technology has been developed or a new service offering has been created. 

During the launch stage, players may still be exploring what the unit economics will look like while concurrently seeking a broader product market fit. It’s primarily a pre-revenue stage and capital that’s invested goes towards R&D early, then into marketing and sales a little later.

Regulation tends to be low during the launch phase; it’s common for governments and regulators to not yet understand the landscape and therefore not really understand how to regulate it.

Growth

Once an industry hits its growth phase, a product-market fit has been established and there’s viable commercial potential for this new product, service, or technology.

Some versions of the framework, including the one we’ve presented here, break the growth stage into distinct “sub phases.” We’ve presented these as early growth and growth.

Early growth and growth are best characterized by the size of the market and the slope of the revenue trajectory. There is often considerable competition during the growth stage, as many new entrants jump into the mix to try and secure a small slice of the growing pie.

Shake-out

Shake-out is where the breakneck growth slows considerably. 

It tends to be that regulation starts to catch up around the shake out phase, as people understand the industry more and regulators can wrap their heads around what’s going on.

Between increased regulation and the fact that the winners have effectively differentiated themselves by now, Everyone else “shakes out” of the market, either by failing outright or by merging with competitors.

Maturity

During the maturity stage total revenue flattens out and may even start to decline. 

Businesses operating in mature industries tend to have stable margins and growing cash flow (since management teams aren’t aggressively re-investing in growth). 

Industry concentration tends to increase during the maturity phase. Competition whittles away at margins but the surplus cash flow means that management teams can look at optimizing capital structure and returning capital to shareholders via dividends or stock buybacks.

Decline

As the name suggests, total industry revenue starts to really decline in this stage. As a result, the main engine for growth is merger and acquisition activity, which creates even higher levels of industry revenue concentration.

Management teams of firms in declining industries are usually faced with two choices — reinvent the business or enjoy what’s left of the ride. In the latter case, the principal motivation becomes returning as much capital to shareholders as possible. 

Firms in declining industries tend to have high dividend yields and low earnings growth. In fact, any EPS growth that does occur usually comes from accretive acquisitions or financial engineering (like reducing share count).

Industry Life Cycle: The Bottom Line

There are great opportunities to deploy capital into businesses operating at all stages of an industry’s life cycle. However, the nature of opportunities depend largely on the risk/return profile of the investor (or creditor).

For example, a senior lender (like a commercial banker) will be most comfortable with later growth and mature industries. Venture capital investors, on the other hand, will invest only in businesses in the launch or early growth stages.

Understanding where a firm fits into its industry, and how that industry’s life cycle may create risks or opportunities for that management team is paramount in really understanding a business. 

Additional Resources

PESTEL Analysis

SWOT Analysis

Business Risk

Mature Industry

See all management & strategy resources