Identify the different stages of the industry life cycle
What is the Industry Life Cycle?
An industry life cycle depicts the various stages where businesses operate, progress, and slump within an industry. An industry life cycle typically consists of five stages — startup, growth, shakeout, maturity, and decline. These stages can last for different amounts of time – some can be months, some can be years.
Startup Stage
At the startup stage, customer demand is limited due to unfamiliarity with the new product’s features and performance. Distribution channels are still underdeveloped. There is also a lack of complementary products that add value for the customers, limiting the profitability of the new product.
Companies at the startup stage are likely to generate zero or very low revenue and experience negative cash flows and profits, due to the large amount of capital initially invested in technology, equipment, and other fixed costs.
Growth Stage
As the product slowly attracts attention from a bigger market segment, the industry moves on to the growth stage where profitability starts to rise. Improvement in product features increases the value to customers.
Complementary products also start to become available in the market, so people have greater benefits from purchasing the product and its complements. As demand increases, product price goes down, which further increases customer demand.
At the growth stage, revenue continues to rise and companies start generating positive cash flows and profits as product revenue and costs surpass break-even.
Shakeout Stage
Shakeout usually refers to the consolidation of an industry. Some businesses are naturally eliminated because they are unable to grow along with the industry or are still generating negative cash flows. Some companies merge with competitors or are acquired by those who were able to obtain bigger market shares at the growth stage.
At the shakeout stage, the growth rate of revenue, cash flows, and profit start slowing down as the industry approaches maturity.
Maturity Stage
At the maturity stage, the majority of the companies in the industry are well-established and the industry reaches its saturation point. These companies collectively attempt to moderate the intensity of industry competition to protect themselves, and to maintain profitability by adopting strategies to deter the entry of new competitors into the industry. They also develop strategies to become a dominant player and reduce rivalry.
At this stage, companies realize maximum revenue, profits, and cash flows because customer demand is fairly high and consistent. Products become more commonplace and popular among the general public, and the prices are fairly reasonable, as compared to new products.
Decline Stage
The decline stage is the last stage of an industry life cycle. The intensity of competition in a declining industry depends on several factors: speed of decline, the height of exit barriers, and the level of fixed costs. To deal with the decline, some companies might choose to focus on their most profitable product lines or services in order to maximize profits and stay in the industry.
Some larger companies will attempt to acquire smaller or failing competitors to become the dominant player. For those who are facing huge losses and that do not believe there are opportunities to survive, divestment will be their optimal choice.
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Additional relevant CFI resources include:
- Industry Analysis
- SWOT Analysis
- External Analysis
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In which of the following stages of product life cycle a company reduces sales promotion to take advantage of heavy consumer demand?
- Introduction
- Growth
- Maturity
- Decline
Answer (Detailed Solution Below)
Option 2 : Growth
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Teaching Aptitude Mock Test
10 Questions 20 Marks 12 Mins
Product Life Cycle:
- The term product life cycle refers to the length of time a product is introduced to consumers into the market until it's removed from the shelves.
- The life cycle of a product is broken into four stages—introduction, growth, maturity, and decline.
- This concept is used by management and by marketing professionals as a factor in deciding when it is appropriate to increase advertising, reduce prices, expand to new markets, or redesign packaging.
- The process of strategizing ways to continuously support and maintain a product is called product life cycle management.
- Introduction Stage:
- The introduction stage shows low sales numbers as the product is being introduced in the market.
- Profit is zero or negative in this stage because of the heavy expenses of product introduction.
- Sales Promotion Strategy: Use heavy sales promotion to entice trial.
- Growth Stage:
- With proper marketing, a product can go into the growth stage.
- During the growth stage, sales rise rapidly as consumers begin to accept the product.
- The production runs become longer, and economies of scale are achieved, reducing per-unit cost, and also helping profits to increase rapidly.
- Sales Promotion Strategy: Reduce to take advantage of heavy consumer demand.
- Maturity Stage:
- During the maturity stage of the product life cycle, the sharp growth in sales begins to slow, and profits at the beginning of this stage decline.
- The most notable characteristic of this stage is the peaking of the product’s sales and profit curves.
- At the beginning of the maturity stage, sales continue to grow but at a much slower rate.
- Towards the end of this stage, sales and profits will start to fall fairly rapidly.
- This stage is characterized by severe competition as many brands enter the market.
- To combat competition, marketing costs increase substantially results in a reduction in profits.
- Sales Promotion Strategy: Increase to encourage brand switching.
For any product, it’s PLC will go to the decline stage, where the product’s sales and profits fall very quickly, and most competitors leave the market. Sales Promotion Strategy: Reduce to a minimal level.
Thus, option 2 is the correct answer.
Last updated on Nov 5, 2022
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