Stages or Phases of the Industry Life Cycle

The first stage of the industry life cycle is what is known as the developmental or formative stage. This stage is frequently driven by entrepreneurial and innovative focus. The industry sales and earnings are more often than not small or possibly negative. The growth prospects are usually high. Competition is likely to enhance during the development of this stage as other entrepreneurs become acquainted with the market potential. High risks can be seen in this phase given that there is insecurity as to whether or not consumers will generally acknowledge the product, and which firms will continue to exist. Venture capitalists are frequently on the go during this period as well.

The second stage of the industry life cycle is what is known as the expansion or growth stage. This stage is set apart by quick growth of both unit sales and profits. Market leaders are inclined to come into view as a result of consolidation and shakeout of competitors that were weaker. Consumer recognition extends the market as the leaders develop the product more. The risk in this stage reduces because of increased consumer acceptance and customer loyalty starts to come about. At this stage companies are inclined to start to go public with initial public offerings. Companies are likely to reinvest earnings as a result, a very small amount no dividends at all are paid to investors, but return on equity has a tendency to be high.

In the third stage of industry life cycle the maturity stage comes about. This is by and large the most extended stage in the life cycle and can last for a good number of years. On average, in this stage, something like eighty percent of the market has been inundated. The growth rate slows down and becomes stable at a level that is sustainable over a long period of time, as a result of competition and shrinking profit margins. Companies have a tendency of expanding into extra market roles by developing accompaniments for the original product, which helps to maintain a higher rate of growth. As growth slows down, the need to increase production amenities reduces and this then reduces the need for money expenditures, improving the firm's overall financial flexibility. Surplus cash that beforehand had been invested back into expansion is now accessible to lessen corporate debt or to be paid as dividends to investors.

The fourth stage of the industry life cycle is the declining or harvesting stage.

The actual growth rate has a tendency to go down to a level that is less than that of the overall economy. Alternate products and technologies tend to make the industry's product outdated. Companies usually try to focus on keeping costs down, in order to preserve, or slow the decline in profit margins and profits. Companies can actually sell production assets that are no longer essential. Dividends paid to investors are usually quite large. Nonetheless, it is possible for firms and industries to enable themselves by becoming more dynamic and by adding new products or new product lines.