Industry Life Cycle Analysis
Industry life cycle analysis examines the stage an industry occupies at a given time to inform forecasts of revenue, profit trends, and company valuations. It complements company-level fundamental analysis by placing firms within the broader evolution of their industry.
The four stages
Industry life cycles typically follow four stages—Expansion, Peak, Contraction, and Trough—though timing and magnitude can vary by sector.
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- Expansion
- Demand and revenues grow, profits rise, and new competitors enter.
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Firms invest to scale production and capture market share.
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Peak
- Growth slows and reaches zero as demand saturates.
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Profits flatten and competition intensifies for existing customers.
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Contraction
- Sales and profits decline. Production capacity is adjusted, weaker players exit or are acquired, and surviving firms cut volumes.
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This phase can coincide with a broader economic recession or reflect industry-specific demand exhaustion.
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Trough
- Output aligns with lower demand; the industry stabilizes.
- As macro conditions improve, the industry becomes positioned for a new expansion.
How analysts use it
Industry stage influences forecasts, valuation assumptions, and investment strategy:
- Growth expectations and forward price multiples depend on the stage—higher in expansion, lower in contraction/maturity.
- Competitive dynamics shift as industries mature: rivalry, threat of new entrants, and bargaining power of buyers/suppliers change (see Porter’s Five Forces).
- Investors use lifecycle analysis to judge whether a company’s growth is driven by industry tailwinds or company-specific advantages, and to anticipate margin pressure or consolidation.
Example: social media
Early social media saw rapid expansion with many entrants (Myspace, Orkut, Bebo). Consolidation followed as dominant platforms (Facebook) displaced rivals, creating mature-market dynamics: high valuations based on expected continued growth, then slower user growth and strategic diversification (e.g., rebranding and product expansion). This illustrates movement from expansion through maturity and strategic repositioning during slower growth.
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Relationship to the economic and product cycles
- Economic cycle: The industry life cycle often mirrors economic cycles but can lead, lag, or diverge. Some industries (e.g., consumer leisure) align closely with macro cycles; others (e.g., certain tech sectors) may expand independently of GDP trends.
- Product life cycle: Product cycles (development, introduction, growth, maturity, decline) apply to individual products or services and can overlap multiple industry stages. Multiple products within an industry can be at different points in their own cycles.
Three parts of industry analysis
A comprehensive industry analysis typically covers:
1. Overall industry attractiveness to customers and investors.
2. Key success factors that determine which companies will thrive or fail.
3. Broader economic, political, and social forces that influence industry prospects.
Key takeaways
- The industry life cycle frames industry growth, consolidation, and decline as expansion → peak → contraction → trough.
- Understanding an industry’s stage helps set realistic growth assumptions, assess competitive dynamics, and guide valuation and investment decisions.
- Industry cycles may align with or diverge from economic cycles; product cycles operate at a different (often shorter) timescale.