Businesses can survive by constantly generating revenue by selling goods or services. Companies that do not have sales or profit can not survive. So it is very important to judge whether the life cycle of the industry is long or short.
The life cycle of industry is divided into introduction period, growth period, maturity period, and decline period.
introduction period refers to the stage in which a product is first introduced into the market. In the case of a new product, it takes a considerable amount of time to generate demand. Because of the low sales growth rate, excessive fixed costs, selling expenses, and competition to the market, the deficit or barely increases profits.
Companies that can not withstand the deficit in the introduction phase are eliminated from the market, and the surviving adventure companies will be attracted attention as ‘new growth companies’.
In the growing season, the sales and profits of surviving companies are soaring. companies in growth period are significantly expanding their supply capabilities to meet growing demand and sales are spiking.
Competition is not fierce because many companies have already dropped out in the introduction period. As a result, the increase in profit is faster and more profitable than the increase in sales. However, in the latter half of the growth period, competition is fierce again and profitability is gradually declining.
Companies in mature period maintain a steady market share and show modest sales growth. However, in order to maintain market share, price competition or promotional competition causes profitability to decline. In addition, sales performance will vary greatly depending on the ability of the manager.
To overcome the declining trend of profit, companies extend the product life cycle or spend research and development costs of new products.
Demand declines and sales growth is lower than the market average in decline period. The profit rate is further falling, and in severe cases, many companies see a deficit.
In decline period, many companies are seeking to recover their sales and profitability through withdrawal or business diversification. However, businesses in decline period are usually classified as a specification industry, making it difficult to recover profits and sales.
Having a long life cycle means that one product is sold for a long time. Industries with long lifecycles usually show stable movements.
On the other hand, industries with short lifecycles are short-lived because of the short replacement cycle, which means that sales will take place in less than six months to two years and then disappear into the specification product. So, companies in industries with a short lifecycle show a high volatility.
If a company in a short life cycle is unable to continue its life cycle, it will suffer great difficulty.
IT industry is a representative industry with short life cycle. Especially, the IT industry is very fast in life cycle because customers’ preferences are rapidly changing and technology development is proceeding rapidly.
Knowing industry trends and industrial lifecycles is a good way to select good stocks and make new investments in a timely manner.
If you are looking for a particular tree without looking at the forest, it will take a long time. However, if you look at the forest first, you can determine in advance what kind of tree is in the forest and what the state of the tree is. And you can find the most healthy and wonderful tree in it.
Knowing the industry is a way to see the forest. It is a minimal safeguard to survive in a stock market where change is severe and nothing is unpredictable.