H. Describe product and industry life cycle models, classify an industry as to life cycle phase, and describe the limitations of the life‐cycle concept in forecasting industry performance.

Question 1

Phases of the industry life-cycle model are the embryonic, growth, shakeout, maturity, and decline stages.

Answer 1

Embryonic stage: Slow growth; high prices; large investment required; high risk of failure.
Growth stage: Rapid growth; little competition; falling prices; increasing profitability.
Shakeout stage: Slowing growth; intense competition; industry overcapacity; declining profitability; cost cutting; increased failures.
Mature stage: Slow growth; consolidation; high barriers to entry; stable pricing; superior firms gain market share.
Decline stage: Negative growth; declining prices; consolidation.

Industry life cycle analysis should be ac
component of an analyst’s strategic analysis. An
industry’s stage in the cycle has an impact on
industry competition, growth and profits.
Consider the five stages of the Industry Life Cycle
on page 222‐223

• Embryonic stage – recent formation
– Slow growth
– High prices
– Large investment required
– High risk of failure
• Growth stage
– Rapidly increasing demand
– Low / limited competition
– Falling prices
– Increasing profitability

• Shakeout stage
– Slowing growth
– Intense competition
– Increasing industry overcapacity
– Declining profitability
– Increased cost cutting
– Increased business failures
• Mature stage
– Little or no growth
– Industry Consolidation
– Brand loyalty and efficient cost structures create high barriers to
entry
– Tendency to avoid price wars
– Firms with superior products or services gain market share

• Decline stage
– Negative growth
– Declining prices
– Consolidation

Question 2

A limitation of life-cycle analysis is that life-cycle stages may not be as long or short as anticipated or might be skipped altogether due to technological change, government regulation, societal change, or demographics. Firms in the same life-cycle stage will experience dissimilar growth and profits due to their competitive positions.

Answer 2

The mature stage exhibits little or no growth, industry consolidation, and high barriers to entry. Kidwell has noted that the industry is growing, but slowly (replacement demand and population gains). Furthermore, the firms have efficient cost structures and strong brand loyalty; both of which are high barriers to entry.

The decline stage exhibits negative growth, excess capacity, and high competition. Kidwell has observed positive, slow growth and a lack of price wars. Both of these observations are contrary to what would be expected in the decline stage.

The shakeout stage exhibits slowing growth, intense competition, and declining profitability. Kidwell has observed that growth is stable, the firms have achieved efficient cost structures, and price wars are uncommon. Hence, growth is not slowing, competition must not be intense because there are price wars (these occur when competition is intense), and profitability is likely stable given the efficient cost structures.

The growth stage is typically characterized by decreasing prices.

Prices tend to decrease in the growth stage as firms begin to realize economies of scale in production. The stages of the industry life cycle, in order, are embryonic, growth, shakeout, mature, and decline. Industry growth is slow during the embryonic stage as firms develop products and attempt to gain customer acceptance.

Question 3

Declining prices that result from the development of substitute products are most likely to characterize an industry in the:

Answer 3

The decline stage of the industry life cycle is often characterized by declining prices as substitute products or global competition emerge, or as a result of decreasing demand due to societal changes.