Life cycle of an Industry
Four distinct Phases
The specific phase of an industry can be
understood in terms of its sales (volume and
value) and profitability.
The first stage in the industrial life cycle of a new industry
Industry is not yet established
technology as well as the product are relatively new
may actually make losses with large injections of capitaland has not
rapid growth in demand for output of industry.
a scenario where weak firms are ultimately eliminated and a lesser
number of businesses survive
Industry is established
New companies start entering
Development of Strategies , new innovations to offer improved
product at lower price
Demand is more than supply
High return for investor at lower risk as Companies will earn
increasing amounts of profitsand pay attractive dividend.
Stage the growth of industry stabilizes
Sales may be increasing though at a slower rate due to
o changes in social habits and
o development of improved technology.
emphasis on increasing profit rather than achieving growth.
Stagnation has either an abrupt ending by a new innovation or could
lead to declining stage
Debts are normally re-paid out of internal accruals.
Maturity slowly degenerates into stagnation and sometimes even
creeps into decline.
Products are no longer popular.
A typical mature company loses its competitive nerve,
it declines over a period of time into bankruptcy and
At this bleak stage, there will be no takers
The risk at this time in investing in these companies is
high but the returns are low, even negative.
An investor should get out of the industry before the onset
of the declining
Initial Phase – High level of uncertainty, slow rate of sales
Growth Phase -- Rising demand · Greater predictability in market
demands and technology Entry of
Maturity Phase---- Low market growth , Relative stability in
technology · Intense competition ,
Imbalance in capacity related to business cycle.
Decline Phase ---- Emergence of substitutes leading to a decline in
sales volume · Chronic over-capacity · Low,
or negative, industry profits.
The New S curve may emerge after a unplanned discontinuity
Financial data analysis
Strengths and weakness
Opportunity and threats
Characteristics of industry analysis
Past sale and Earnings performance
• Top line
• Operating margin
• Net margin
Nature of Industry
Labor conditions within the industry
Attitude of government towards the industry
Stock prices of firms in the industry relative to their earning
Characteristics of Industry
Past sales and historical figures serve as a base for forecasting the
growth of the industry, the cost structure in terms of fixed and
variable costs etc and break even levels.
The governments attitude towards the industry in terms of legislative
policies and regulations also play a big role in boosting the growth .
E.g I T tax holiday, excise customs duty , subsidies etc.
Labour intensive industries need to be identified as strikes could
affect them adversely.
Risk return of investment in particular industry based on current
stock prices of securities in the industry.
Market Structure of an Industry
Dominant firm oligopoly:
Lack of choice for customers
Price Market dominance
destroyed by high costs, inefficiencies and powerful competition
numerous small firms offering an identical product or service. And no
one can affect the market price
profit margins tend to be very low and unattractive for newcomers
lies between absolute monopoly and perfect competition. few
suppliers who can exercise some degree of control over price.
A few suppliers collude to form a cartel in order to avoid co
-mpetition and maximize profits e.g Manufacturers of Tyres in
Dominant firm oligopoly:
There is a dominant leader surrounded by a number of small
competitors. E,g toothpaste
Products are differentiated e.g bath soap industry
Product differentiation advantages through patents, brand-value,
technology, market access, after-sales service, specification in
purchase orders, etc. consumer durable
• Absolute cost advantages through lower costs, high volumes,
control over key resources, learning and experience curves. Food and
• Economies of scale through high capital costs, large scale
operations, massive logistics management, etc.Tata steel, Hindalco
MICHAEL PORTER FIVE FORCES’ MODEL
The bargaining power of the buyers
The bargaining power of the suppliers
Entry of new competitors
The threat of substitutes
The rivalry among the existing competitors.
First two are vertical forces and the last three are horizontal
The collective strength of these five competitive forces determine the
ability of a firm in an industry to earn, on average, rates of return on
investment in excess of the cost of capital
The five forces determine industry profitability because they influence
the prices, costs and required
Investment of firms in an industry – the elements of return on
Bargaining Power of Suppliers
Inputs are needed in order to provide goods or services
Negotiating power of suppliers of inputs are good when
o The market is dominated by a few large suppliers rather than a fragmented
source of supply,
o There are no substitutes for the particular input,
o The suppliers customers are fragmented, so their bargaining power is low,
o The switching costs from one supplier to another are high,
o There is the possibility of the supplier integrating forwards in order to
obtain higher prices and margins. This threat is especially high when
the buying industry has a higher profitability than the supplying industry,
o Forward integration provides economies of scale for the supplier,
o The buying industry hinders the supplying industry in their development
(e.g.reluctance to accept new releases of products),
o The buying industry has low barriers to entry
Result is squeeze in Margins
Bargaining Power of Customers:
They buy large volumes, there is a concentration of buyers,
The supplying industry comprises a large number of small operators,
The supplying industry operates with high fixed costs,
The product is undifferentiated and can be replaces by substitutes,
Switching to an alternative product is relatively simple and is not
related to high costs,
Customers have low margins and are price-sensitive,
Customers could produce the product themselves,
The product is not of strategically importance for the customer,
The customer knows about the production costs of the product
There is the possibility for the customer integrating backwards
e.g vanaspati packs or oil tins
Threat of New Entrants
Economies of scale (minimum size requirements for profitable
High initial investments and fixed costs,
Cost advantages of existing players due to experience curve effects of
operation with fully depreciated assets,
Brand loyalty of customers
Protected intellectual property like patents, licenses etc,
Scarcity of important resources, e.g. qualified expert staff
Access to raw materials is controlled by existing players,
Distribution channels are controlled by existing players,
Existing players have close customer relations, e.g. from long-term
high switching cost for customers
Legislation and government action
Competitive Rivalry between Existing Players
This force describes the intensity of competition between existing players
(companies) in an industry.
High competitive pressureresults in a market pressure on prices and margins
that affects profitability.
Competition between existing players is likely to be high when:
• There are many players of about the same size,
• Players have similar strategies
• There is not much differentiation between players and their products, hence,
there is much price competition
• Low market growth rates (growth of a particular company is possible only at
the expense of a competitor),
• Barriers for exit are high (e.g. expensive and highly specialized equipment).
Five Forces Analysis
Analysis of Options: