Stock Investing and the Industry Life Cycle
The growth of an industry’s sales over time is used to track the life cycle of that industry. When searching out stocks for potential investment, it is best to have some familiarity with the industry in which the company operates and an understanding of the current life cycle phase of that industry. Knowing the industry’s life cycle phase can help you assess the potential risk of the investment and the opportunity for growth. In balancing your portfolio, you might also consider creating a mix of stocks that operate in industries in varying stages of the industry life cycle.
Stages of the Industry Life Cycle
The industry life cycle describes the various stages an industry goes through, from inception to its eventual decline. There are usually five stages in this life cycle:
Introduction stage: In this stage of the industry life cycle, the industry is in its infancy. Often, a new product has been developed or patented. During this phase, the firm that developed the product may be alone in the industry, focusing on (what is often referred to in marketing as) “early adopter” customers. There is significant risk to investors during the introduction stage as the company will need a significant amount of cash to promote and differentiate its product.
Growth Stage: In the growth stage, there are multiple companies in the industry seeking to differentiate themselves and earn market share. Like the introduction stage, the growth stage requires a significant cash outlay from the firm, but the funding is used toward more focused marketing efforts and expansion. It is during this phase that a firm may start to benefit from economies of scale in production. This stage of industry growth, while still presenting risk to investors, demonstrates the viability of the industry.
Maturity Stage: This is the stage where the industry will start to see slowed growth with the rate of sales growth often slowing to the rate of overall economic growth. Late entrants appear in this stage seeking to capture market share through lower-cost offerings, thus requiring the existing firms to continue their marketing efforts. For investors, maturity of an industry can mean relatively stable stock investments with the possibility of income through dividends.
Decline: A decline is inevitable in any industry as technological innovations and changing consumer tastes adversely affect sales. At this stage, firms exit the industry and existing competitors often merge and consolidate. An investor should approach stocks in declining industries with caution.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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