Understanding an Industry’s Life Cycle
The adoption of products and services in an emerging industry follows a pattern that to some extent repeats itself over and over again in many industries.
It is important that we understand this process, at least in general terms, since the strategy of any business works best if adjusted to the particular stage its industry is going through.
The cycle usually starts with the introduction of a new solution, an innovative product or service that solves an existing problem in a way that’s different from incumbents’ solutions. Think about MP3 players in the late 1990s or the Bessemer process, the first to enable manufacturers to mass-produce cheap steel in the mid-1800s.
Some of these solutions were so radically different from incumbents’ products that when they first appeared they created their own category, as was also the case with the iPod, Viagra and Netflix’s streaming services.
This introduction marks the Emergence of the industry: the stage where a handful of innovators start putting together primitive versions of the product, trying to find a sizable market for it, in the pursuit of getting a pioneer advantage in the upcoming industry.
During the Emergence phase, it might not be clear yet to the developers which target customers the product fits best, and they may not even know what problem it solves.
But as they keep working with early adopters, testing multiple hypotheses and iterating different versions of the product, the industry starts converging towards a dominant design.
In the automobile industry, for example, early entrants experimented with numerous design ideas and fuel alternatives from steam, kerosene and coal, to oil, electricity and gasoline. Over time, the industry evolved and gravitated towards the gasoline-fueled internal combustion engine as the industry’s dominant design.
That point, when a commonly accepted design or standard emerges and is adopted by the dominant players, is called by some the annealing point of an industry, a term coined from metallurgy that relates to the heating of metals to make them malleable. The analogy suggests that an industry has reached its annealing point when it has converged towards a dominant design.
In the videotape’s format war between Sony’s Betamax video cassette recorder standard and JVC’s VHS, the annealing point was reached when the VHS emerged as the dominant standard.
Reaching annealing could take years for many industries, and it is common that small players lacking the funds to survive have to exit the market before getting to that point.
But with its annealing, an industry is poised to transition into a Growth period, leaving its Emergence behind as the adoption of the dominant design starts gaining traction and the revenues of the industry grow, in many cases exponentially.
During Growth, innovators try to make their products more appealing to larger audiences within the market, to capture bigger slices of the demand the new industry is creating.
In some industries, particularly those with a high technology content, the growth phase may happen in a very abrupt, rapid way, giving origin to a particular pattern which many have come to call an “S” adoption curve or the hockey stick because of its steep slope.
Official intervention is usually weak during the Emergence and Growth phases as regulators try to get their heads around the new solution and its implications for society (and their constituents).
As government becomes more knowledgeable about the market, they explore ideas of how to control the behavior of the industry and its players, opening up opportunities for savvy players to work with lawmakers in shaping the way the industry will be regulated.
Car sharing service Uber, for example, is well known for its aggressive lobbying efforts trying to shape how its nascent market should be monitored and controlled in the relevant jurisdictions.
As an industry reaches critical mass, turning the more conservative and cost-conscious non-customers into customers, they usually pass through a shakeout period where some companies can’t keep up with the pace of the new reality and have to close their doors, while others are absorbed through mergers or acquisitions.
This shakeout produces a consolidation of the industry which converges towards dominant business models, and that’s how the incumbent players of the industry emerge. These companies, armed with refined products and proven business models, are now set to dominate the industry for the years to come, during its Maturity phase.
With the maturity of the industry, margins also tend to diminish to a steady level. A mature industry is characterized by stable profitability, clear regulation and a predictable business environment.
The soft drinks, oil and power industries as we have come to know them are good examples of mature industries. Their incumbents know their markets so well that they can predict them with some accuracy, and regulation is very clear about the cans and cannots.
Companies operating within mature industries face competition, but they still find ways to differentiate their products and benefit from credible barriers to new entrants, moderated growth and a steady inflow of predictable demand.
The view ahead may be bumpy, but smooth and clear.
Maturity is usually the longest phase in most industries, lasting for decades or even centuries in some cases like in construction and fine dining.
After some time however, an industry’s potential for additional growth may start to slow down and differentiation becomes more difficult to achieve, which inevitably agitates competition and rivalry among competitors, clear signs that the industry has already passed its prime.
Beyond this point, the industry starts its Decline stage, a period of slow or negative growth, shrinking margins and loss of market relevance.
During Decline, businesses usually fight with each other over the limited market pie, engaging in all kind of maneuvers, price wars, deceptive marketing and dark magic tricks to win over customers.
In most cases, the transition from Maturity to Decline happens at a very slow pace, so inconspicuous that it may go unnoticed to incumbents for years, especially powerful players whose dominant position allows them to produce healthy margins even when the warning signs are evident, and while the less fortunate go out of business.
It seems that the decline of an industry is sometimes initiated, but always accelerated, by the Emergence of new solutions that move upmarket along a different life cycle – an upcoming wave of market entrants armed with innovative solutions which have emerged as the dominant design in those markets and that have gotten some traction with a sizable fraction of the potential user base.
These new entrants have a lot to fight for. Because they usually overestimate the profit potential of the market, which exaggerates the size of the prize, they will do everything at their disposal to point their business towards the main market, accelerating the decline for incumbents.
As growth slows down, incumbents in declining industries increasingly see competition as a win-lose game and their strategy gravitates towards marketing budgets, price wars, economies of scale and size.
The transition from the Decline of an incumbent industry into the Growth phase of the emerging one usually happens through a discontinuity in the adoption curve, which many
That story describes in general terms the evolution and death of many industries and will keep prescribing the fate of existing ones.
Just as film photography was disrupted by digital cameras, and digital cameras were later disrupted by smartphones, the story will continue to repeat itself.
It will repeat not because the adoption curve happens to have this shape but because it is “shaped” this way by the systematic forces and behaviors that interact underneath, throughout the evolution of an industry.
And here’s a final heads up: it is now more frequent that you see the decline or even the end of existing industries, something that a few decades ago wasn’t that common. Centuries-old industries like oil and tobacco are for the first time facing clear signals of their inevitable demise.
The rapid penetration of computing technologies, advances in data analysis, changes in customer preferences, social connectivity and virtual communications among other factors are accelerating the pace of evolution in many industries and shortening their life cycle at speeds not seen before.
Your role as a business executive is to understand how these “natural” factors act on each of your businesses to properly leverage or mitigate them.
If these factors shape the industry, they should also shape your strategy.
An emerging way of looking at the life cycle of an industry is by visualizing it as some kind of opportunity “wave” that arises at one point in time, grows to its maturity, stabilizes for a while and then starts to decline until it dies.
Your goal as an executive in charge, then, is to relentlessly look for any possible opportunity waves that may be forming in your industry, select those you believe will deliver the most impact to your business, then ride those waves and extract the most from them while they last and before they disappear, because as former Intel (NASDAQ: INTC) CEO Andy Grove famously said, “only the paranoid survive”.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
McGrath, Rita Gunther. The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business. Harvard Business Review Press. Kindle Edition.