MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 2.2
Define Industry Life Cycle
The industry life cycle theory is generally attributed to Julius Grodensky. The life cycle of the industry is separated into four well defined stages such as
Industry Life Cycle
The industry life cycle theory is generally attributed to Julius
Grodensky. The life cycle of the industry is separated into four well defined
stages such as
Pioneering stage
Rapid growth stage
Maturity and stabilization stage
Declining stage
Pioneering Stage
The prospective demand for the product is promising in this stage
and the technology of the product is low. The demand for the product attracts
many producers to produce the particular product. There would be severe
competition and only fittest companies survive this stage. The producers try to
develop brand name, differentiate the product and create a product image. This
would lead to non-price competition too. The severe competition often leads to
the change of position of the firms in terms of market shares and profit. In
this situation, it is difficult to select companies for investment because the
survival rate is unknown.
Rapid Growth Stage
This stage starts with the appearance of surviving firms from the
pioneering stage. The companies that have withstood the competition grow
strongly in market share and financial performance. The technology of the
production would have improved resulting in low cost of production and good
quality products. The companies have stable growth rate in this stage and they
declare dividend to the share holders. It is advisable to invest in the shares
of these companies. The pharmaceutical industry has improved its technology and
the top companies in this sector are giving dividend to the shareholders.
Likewise power industry and telecommunication industry can be cited as examples
of expansion stage.
Maturity and Stabilization
Stage
In the stabilization stage, the growth rate tends to moderate and
the rate of growth would be more or less equal to the industrial growth rate or
the gross domestic product growth rate. Symptoms of obsolescence may appear in
the technology. The keep going, technological innovations in the production
process and products should be introduced. The investors have to closely
monitor the events that take place in the maturity stage of the industry.
Declining Stage
In this stage, demand for the particular product and the earnings
of the companies in the industry decline. Now-a-days very few consumers demand
black and white T.V. innovation of new products and change in consumer
preferences lead to this stage. The specific feature of the declining stage is
that even in the boom period; the growth of the industry would be low and
decline at a higher rate during the recession. It is better to avoid investing
in the shares of the low growth industry even in the boom period. Investment in
the shares of these types of companies leads to erosion of capital
