The Industry Life Cycle: Emergence to Decline

An industry life cycle is the shape a field takes over time, not a shape any one business takes. A field emerges, grows, matures and declines. The stage shows up in how fast new sellers arrive, in the direction capacity is moving and in what is happening to price. No field publishes accounts, so the stage is read off those three observables rather than off a statement.

The object comes first. Everything about reading a stage follows from the object. A business has a set of accounts, so a state can be read off the direction of its cash and off what that business is short of, as it is under the business life cycle, and both of those are subtractions anybody can do with a statement in front of them. A field has no accounts at all. There is no statement anywhere that reports how many sellers a field carries, what its capacity is doing, or where its price has been. The same two words, life cycle, point at two different objects, and the two are read in completely different ways. Quietly borrowing the business method would give a false account of what is actually available.

Second, a stage is a reading of several observations and never a property a field holds. The business life cycle draws its four panels with no arrow of travel between them, and states outright that a name is a reading of one period rather than a route from one panel to the next. A curve drawn left to right looks like a schedule, so the same discipline binds a field and is harder to keep. Nothing makes a field pass through the four in order, nothing says how long any stage lasts, and a field can sit in one of them for decades without anything happening. The curve is a shape and it is not a timetable.

Third, the three facts required here are all outside facts. How fast new sellers are arriving, the direction capacity is moving and what is happening to price are three facts about a field, and not one of them appears in any statement of profit and loss. That is the same ruling made under competitive rivalry, where a set of accounts can rule a rival out and can never rule one in. Anybody who wants to place a field has to go and get three facts that nobody's accounts will hand over, and stating that plainly is worth a great deal more than a stage name arrived at by feel.

Where does the curve come from, and what is it a curve of?

Theodore Levitt set the life cycle shape out in the Harvard Business Review in 1965, writing about a product rather than about a firm, and the industry life cycle borrows his shape. The business life cycle borrows the same shape from him, so the citation is the same one pointed at a different object rather than a fresh one.

The difference is entirely in the object. The business life cycle draws four stages over one business. The industry life cycle draws the same shape over a field, meaning every seller of the thing. A field and a business are different objects, and the same two words are doing two jobs.

Think of the road between the station and the office. One tea stall opening, filling up over three years and shutting when the lease ends is a business, and its money can be followed the whole way from the first kettle to the last day. Every tea stall on that road arriving, multiplying until there are eleven of them and then thinning back to four is a field. The road keeps no accounts, so there is nobody at all to ask for them.

Why can a field's stage not be read the way one business's stage is read?

The built method is one sentence long and it works beautifully. Take the direction of the cash a business is making or burning, put it beside what that business is short of, and read the state off the pair. The business method is covered separately under The Business Life Cycle: What Changes at Each Stage, and it is about the cleanest reading of a state there is.

Point it at a field and it fails. Notice carefully where it fails. The place is the whole lesson. The method does not fail at the conclusion. It fails at the input. A field is not a thing that holds money, so it files nothing, publishes nothing and has no cash direction of its own. No bank account belongs to the paper market. No field has a set of accounts, so no field can be read off one.

A field's stage is therefore read off three outside observables rather than off one subtraction. The method did not get harder. The thing it subtracts from was never there in the first place.

What are the four stages, and what is actually different about each one?

Four of them, and they are worth counting off one by one: emergence, growth, maturity, decline. None of the four is defined by a figure. No field's path is published, so a number attached to a stage would be a number from memory wearing an illustration's clothes.

Emergence. Few sellers, no settled way of doing the thing, and no settled price. There is not yet enough of a field to ask the three questions of, so none of them has an answer yet. Nobody can give a rate at which sellers are arriving when the total number of sellers is four.

Growth. New sellers arriving. CapacityThe most a seller could make or serve if everything ran as intended, counted in units of the thing itself rather than in money. Adding capacity means putting in the ability to make more, whether or not anybody makes it. being added. Price holding, with buyers arriving about as fast as the capacity is.

Maturity. New sellers rare. Capacity still going in, from the sellers already there rather than from new ones. Price becoming the lever that is left. When there is nothing else to compete on, sellers compete on price.

Decline. Sellers leaving. Capacity being retired. Price falling.

Read those four again and notice what they have in common. Each stage is three movements, not a category. Not one of them says what the field is. All four say what three things inside it are doing. The four names are therefore descriptions, not labels that could be stuck on a field once and left there.

Industry Analysis: which three things have to be observed?

Three of them, and they are worth taking in this order.

One, the rate of entry. How many sellers arrived this year against how many arrived the year before. A count is one observation and a rate needs two of them, so a count of sellers is not a rate of entry. Ten sellers is a count. Ten this year against six last year is a rate, and the two answer completely different questions about a field.

Two, the direction of capacity. Whether the ability to make more of the thing is being added or retired, across the field and not inside any one business. One business putting up a second shed says nothing on its own. The field putting up more sheds than it is shutting is the observation, and it is a different observation from the first because a seller already in the field can add capacity without anybody new arriving at all.

Three, the direction of price. Whether the price of the thing itself is holding or falling. The thing, not any one seller's version of it, and not any one seller's margin on it either.

Two neighbouring questions belong elsewhere. How many sellers there are in a field, and how tightly the selling bunches among them, is covered separately under Consolidation and Fragmentation: How an Industry Concentrates. The whole procedure for reading a field, of which placing it on the curve is one small part, is covered separately under How to Apply Porter's Five Forces to an Industry.

How to Analyse a Sector: where do those three come from, and what can one of them settle alone?

Where they come from is the short half of the answer. All three sit outside any set of accounts, so all three are gathered by looking rather than by reading. The number of sellers visible now against a year ago comes from a trade directory, a market row, a list of stalls, or a folder of quotes asked for and kept. The building and the shutting come from announcements, hoardings, and shut gates. The price of the thing comes from a quote, and quotes can simply be asked for by anybody willing to ask.

The long half is what each one settles on its own, and it is not obvious. One observable is a fact and three observables are a reading. Each of the three is ambiguous entirely on its own.

A falling price appears in maturity, where it is the lever that is left, and it appears in decline, where there is simply more capacity than there are buyers. Same observation, two stages, and nothing in the observation itself chooses between them.

Capacity being added appears in growth, where buyers are arriving to fill it, and it appears in the last year before there is too much of it, where they are not. The concrete floor goes down identically in both years.

A low rate of entry appears in maturity, and it appears just as readily in a field that has become harder to enter for some reason with nothing to do with its age at all.

Back to the road for a moment. Three new tea stalls this year against one last year, four handcarts being built behind the sweet shop, and the price of a cup unchanged since last spring. Now the same road with three new stalls, four handcarts, and a cup that has been getting cheaper all year. The first observation is identical in the two. The reading is not, and only having all three settles which road it is.

How many readings do three observables produce, and how many of them have a name?

Three observables with two directions each. Two times two times two is eight, so eight readings, and every one of them is a field somebody could actually be standing in front of.

The curve names four stages. In an emerging field the three questions have no answers yet, and an absence is not a combination of directions. So emergence is not one of the eight at all. So three of the four names are readings, and eight readings less three named ones leaves five with no name on this curve at all.

Two of the five, concretely, so they stop being arithmetic. Sellers still arriving while capacity is being retired: somebody is walking in through a door other people are walking out of, and the curve has nothing to call that. Sellers no longer arriving while capacity is still going in and the price is still holding: the field looks entirely settled from outside, and something inside it has already changed.

A field can produce a reading the curve has no name for, and that is a fact about the curve rather than about the field.

The useful part is what to do about it, and it is not to pick the nearest name. Report the three directions and stop. A note saying that entry has stopped, capacity is still going in and price is holding tells a reader three things they can go and check. A note saying the field is mature tells them one thing they cannot check at all. A classification has as many cells as its tests produce, and four names over eight readings is not a shortage of names. The gap is the curve being a summary, and a summary is what a curve is for.

In what order do the three of them turn?

The three do not turn together, and the order is the most useful thing about them.

Entry turns first. Arriving is a decision somebody takes before anything at all gets built. The year in which the last new seller quietly decides not to come is a year in which nothing else about the field has moved yet, and nothing anywhere records the decision.

Capacity turns next. The capacity decided on last year is still being built this year. A shed signed for before the mood changed still goes up afterwards, and the concrete does not know.

Price turns last. Price only moves once the capacity that was decided, and then built, is actually standing in the field looking for buyers.

So a field that still shows a holding price can already have stopped attracting entrants, and a reader watching only price is watching the slowest of the three. Price is also the one most often published, and that is precisely why it is the one most often watched.

Then the honest limit, and it matters more than the claim. The order says nothing about how long the gap between the three is, in any field. The order is the claim. The duration is not, and any figure put on it would be invented. The panel below walks one marker along the curve and shows the three flipping one at a time. Its opening setting is entry already turned, capacity not yet and price not yet, and that reading has no stage name on this curve at all.

What happens when a field that actually exists is placed?

Two fields are described in enough detail to be worth trying it on. Ask each of them the three questions and see what comes back.

The paper market first. Nine mills within reach make paper to an identical weight and finish. A quote is back inside a day, a first load arrives in roughly a fortnight, and so ten sellers of one thing are known to exist. Now the three questions. How many mills arrived this year against last year? Nothing published anywhere answers it. Is capacity being added or retired across those ten? Nothing answers that either. What has the price of a reamA standard bundle of paper, counted rather than weighed, and the unit a mill quotes and invoices in. Five hundred sheets is the usual count. done over time? All that exists is one weighted average of Rs 210.00/- a ream in one year, and a single year's average is a level and not a direction. One point is not a path.

Then the field Setu Bazaar, an invented marketplace, competes in. Two thousand merchants sell across it, and that count is the only population of sellers on record. Put the count to one use only, as a candidate answer to the first of the three questions. The count is not an answer. A count at a single moment is not a rate of entry, however large and however precise the count is. The other two rows are blank before they are even asked.

Both fields come back unplaced, and for the same reason both times: the observables are not published.

A description is still worth writing down. Ten known sellers of one identical good, one quote turned round inside a day, a fortnight to a first load: that is a real description of the paper market and it is worth a great deal more than most stage names. A description is simply not a placement, and the two are different kinds of thing. The honest output is the description with the three blanks visible beside it. The next person to look then knows exactly which three facts would settle it.

The kind of field the paper market is belongs under Industry Types: How Sectors Behave Differently. Whether the selling in it can be measured for tightness is covered separately under Herfindahl-Hirschman Index: Which Market Are You Measuring? Three different questions are put to the paper market, and the refusals that come back are different refusals. The life cycle is missing three directions, and the index is missing a share for each seller.

How Cyclicality Affects Company Revenue and Margins: what would a movement in demand do to one business?

A cycle needs an economy to move against, and none is published behind the business below. Supplying a reason demand would move would mean inventing one. The narrower question is completely answerable: if the demand a business faced moved, what would reach its revenue and what would reach its margin? The answer is a property of the structure the business publishes, and it holds whatever label anybody later attaches to the field it sells into.

Anjani Stationers Private Limited, an invented maker of school registers, publishes both halves of the structure. Its price side margin is 42.78 per cent, so 42.78 paise of every rupee of revenue survives the costs that move with volume and arrives as contributionThe part of a sale that survives the costs which rise and fall with volume, counted before anything that stays the same size has been paid for.. Its standing baseCost that arrives in the same size each year however many units get made. Rent on the shed, the insurance and the salaried staff all belong here. is Rs 74,00,000/-, which is 27.41 per cent of its revenue of Rs 2,70,00,000/-, and it does not move when volume does.

Now hold that structure completely still and move revenue down a tenth.

There are two routes to that Rs 11,55,000/- and only one of them is right. The right route is a tenth of the published contribution: Rs 1,15,50,000/- divided by ten is Rs 11,55,000/-, and the standing base absorbs none of it. The other route takes 42.78 per cent of the Rs 27,00,000/- of lost revenue and returns Rs 11,55,060/-. The 42.78 per cent is itself a rounding of Rs 1,15,50,000/- over Rs 2,70,00,000/-, and a rounded ratio applied to a fresh base carries its rounding straight into the answer. The gap is only Rs 60/- and it is the wrong Rs 60/-. The published figure is Rs 11,55,000/-. Where a figure is published, use the published figure, and never rebuild it out of a percentage that was rounded on the way out.

The Rs 11,55,000/- that would be lost, set against the published Rs 41,50,000/- of operating profit, would be 27.83 per cent of it. So if revenue moved ten per cent, operating profit would move 27.83 per cent, and that multiple is a property of the structure rather than of any label anybody attaches to the field.

Read the whole calculation as the conditional it is. The calculation says what would happen if demand moved. It does not say demand will move, and any reason it would is a claim about an economy. No economy is published behind this business.

Why a standing base pulls a result further than revenue moved is covered separately under Operating Leverage: How Fixed Costs Amplify a Revenue Movement. Putting two businesses' structures side by side against the same movement is covered separately under Cyclical vs Defensive Sector: What the Label Leaves Out.

The household version fits in one sentence. A house running on one salary has its rent cut by nothing at all when the salary is cut by a tenth, so a tenth off the pay packet is always more than a tenth off what is left at the end of the month.

Why is a season not a cycle, and why is neither of them a life cycle?

Three patterns, and they get called by each other's names constantly. Count them out.

A life cycle runs one way and does not repeat. A field that has declined does not emerge again as the same field. Whatever comes afterwards is a different field with different sellers doing a different thing.

A cycle turns with an economy and repeats without a fixed date. Nobody can say which spring it turns, only that it has turned before and will turn again.

A season turns with a calendar and repeats at the same points of it every year. The definition is the one set out under The Revenue Model: The Shape of How Money Comes In.

Now the case, and the case is exactly where a guess goes wrong. Anjani Stationers Private Limited's volume is seasonal, and its own published accounts show it rather than anybody having to assert it: the cash credit facilityA working capital borrowing where a business draws and repays as it needs to, up to an agreed limit, and pays interest only on what is actually drawn. is drawn through the school-supply season and cleared before the year end, and the order bookThe orders a business has already taken and has still to fulfil. An order book is a count of work promised rather than of money earned, and it is a forward view where the accounts are a backward one. refills each spring without anybody having to persuade the schools all over again. A borrowing drawn and cleared at the same points of every year is a season, and it is not evidence of a cycle.

Then the refusal, and it is a refusal rather than an omission. Anjani Stationers Private Limited's two published years grew 12.50 per cent, from Rs 2,40,00,000/- to Rs 2,70,00,000/-. Against what? Against nothing at all. No output path for any economy is published alongside it, so the 12.50 per cent has no second line to be read beside. One business observed twice, with nothing to set it against, settles the question in neither direction.

A maker of school registers sounds like a business whose customers could simply wait a year, so the pull towards a label is strong. The intuition that customers could wait is doing all of the work. There is no evidence for it and none at all against it, and the question stays open. Whether a sector is cyclical or defensive, and the test that decides it, are covered separately under Cyclical and Defensive Sectors: How They Behave Through a Cycle.

What does the curve refuse to say, even when it does place a field?

Four refusals, counted, and they hold even in the happy case where all three rows came back filled.

One. It does not say how long a stage lasts. Nothing anywhere measures a duration, and a field can sit in one stage for a generation.

Two. It does not say what comes next. Nothing makes a field move through the four in order, and the curve was never a schedule.

Three. It does not say whether the field is one to be in. The curve says nothing at all about what anybody earns inside it. A crowded growing field and a quiet mature one can pay their sellers in either order.

Four. It does not describe any one business inside the field. A stage name is a description of a field and is never a description of a member of it.

The fourth is the one that costs money, so it is worth an example. Every other shop had shut and the people who still had players had nowhere else to go, so the last video cassette shop on a street was busier in its final two years than it had ever been. The field it sat in was finished and the shop was full, and any note that read the shop off the field, or the field off the shop, got both of them wrong.

How are the three observables actually used on a field?

The three go in a fixed order, written down as three rows: entry, then capacity, then price, with the answer beside each and the date of the observation at the bottom. The order stays fixed even when a row comes back blank. A fixed order is what stops the one fact that happens to be easy to find from being reached for first. Filled in for the paper market, that is what a completed card looks like.

Rate of entry: blank. How many mills arrived this year against last year is not published. Direction of capacity: blank. Nothing says what those ten are building or shutting. Direction of price: blank. One weighted average of Rs 210.00/- a ream is a level, and a level is not a direction. Description: ten interchangeable mills, one identical weight and finish, a quote turned round inside a day, a fortnight to a first load.

The finding is the blank rather than the guess, so a card with three blank rows and a description underneath it is a completed card.

Who uses it, and how it changes what they write. An analyst putting the words growth industry into a note has to be able to point at a row, and if all three rows are blank then the words are an opinion wearing a frame. A lender looking at a borrower who wants money for a second shed is being asked to fund capacity. The second row says whether the field is already putting in more capacity than it is shutting, and that is a different question from whether this borrower can repay. Sellers arriving is what gives a buyer somewhere else to go next year, so a buyer negotiating a year's supply reads the first row. And a household does the same thing without any of the vocabulary: the day a third tea stall opens on the road is the day the household stops paying the first one in advance.

Then the one instruction that matters. The three directions and the date they were observed are what gets reported, and the stage name comes last, if it is written at all.