Life cycle of an IndustryFour distinct Phases pioneering stage, expansion stage, stagnation stage, declining stage.

The specific phase of an industry can be understood in terms of its sales (volume andvalue) and profitability.

Pioneering stageThe first stage in the industrial life cycle of a new industry

Industry is not yet established

technology as well as the product are relatively new

may actually make losses with large injections of capitaland has not many competitors

rapid growth in demand for output of industry.

a scenario where weak firms are ultimately eliminated and a lesser number of businesses survive

Expansion stage

Industry is established

New companies start entering

Competition increases

Development of Strategies , new innovations to offer improved product at lower price

Demand is more than supply

High return for investor at lower risk as Companies will earn increasing amounts of profitsand pay attractive dividend.

Stagnation stageStage the growth of industry stabilizesSales may be increasing though at a slower rate due too changes in social habits ando development of improved technology.emphasis on increasing profit rather than achieving

growth.Stagnation has either an abrupt ending by a new

innovation or couldlead to declining stage

Debts are normally re-paid out of internal accruals. Maturity slowly degenerates into stagnation and sometimes

even creeps into decline.

Declining stage

Products are no longer popular. A typical mature company loses its competitive

nerve, it declines over a period of time into bankruptcy

and winding up. At this bleak stage, there will be no takers

The risk at this time in investing in these companies is high but the returns are low, even negative.

An investor should get out of the industry before the onset of the declining

S curve

S Curve Initial Phase – High level of uncertainty, slow rate of sales

growth

Growth Phase -- Rising demand · Greater predictability in market demands and technology Entry of

competition.

Maturity Phase---- Low market growth , Relative stability in technology · Intense competition ,

Imbalance in capacity related to business cycle.

Decline Phase ---- Emergence of substitutes leading to a decline in sales volume · Chronic over-capacity ·

Low, or negative, industry profits.

The New S curve may emerge after a unplanned discontinuity

SWOT AnalysisFinancial data analysisStrengths and weaknessOpportunity and threats

Characteristics of industry analysisPast sale and Earnings performance

• Top line• Operating margin • Net margin

Nature of Industry

Labor conditions within the industry

Attitude of government towards the industry

Competitive conditions

Stock prices of firms in the industry relative to their earning

Characteristics of IndustryPast sales and historical figures serve as a base for

forecasting the growth of the industry, the cost structure in terms of fixed and variable costs etc and break even levels.

The governments attitude towards the industry in terms of legislative policies and regulations also play a big role in boosting the growth .

E.g I T tax holiday, excise customs duty , subsidies etc.

Labour intensive industries need to be identified as strikes could affect them adversely.

Risk return of investment in particular industry based on current stock prices of securities in the industry.

Market Structure of an IndustryCompetitivenessAbsolute monopoly

Perfect competition

Imperfect competitionCollusive oligopoly:Dominant firm oligopoly:Monopolistic competition:

Absolute Monopoly

Lack of choice for customers Price Market dominance inefficiency destroyed by high costs, inefficiencies and powerful

competition

Perfect Competition

numerous small firms offering an identical product or service. And no one can affect the market price

profit margins tend to be very low and unattractive for newcomers

Imperfect competition lies between absolute monopoly and perfect competition. few

suppliers who can exercise some degree of control over price.Collusive oligopoly

A few suppliers collude to form a cartel in order to avoid co -mpetition and maximize profits e.g Manufacturers of Tyres in India

Dominant firm oligopoly:There is a dominant leader surrounded by a number of

small

competitors. E,g toothpaste

Monopolistic competition:Products are differentiated e.g bath soap industry

Competitive conditionsProduct differentiation advantages through patents,

brand-value, technology, market access, after-sales service, specification in purchase orders, etc. consumer durable

• Absolute cost advantages through lower costs, high volumes, control over key resources, learning and experience curves. Food and Beverages

• Economies of scale through high capital costs, large scale operations, massive logistics management, etc.Tata steel, Hindalco

MICHAEL PORTER FIVE FORCES’ MODEL The bargaining power of the buyers The bargaining power of the suppliers Entry of new competitors The threat of substitutes The rivalry among the existing competitors. First two are vertical forces and the last three are horizontalThe collective strength of these five competitive forces

determine the ability of a firm in an industry to earn, on average, rates of return on investment in excess of the cost of capital

The five forces determine industry profitability because they influence the prices, costs and required

Investment of firms in an industry – the elements of return on investment

Bargaining Power of Suppliers Inputs are needed in order to provide goods or servicesNegotiating power of suppliers of inputs are good when

o The market is dominated by a few large suppliers rather than a fragmented source of supply,

o There are no substitutes for the particular input,o The suppliers customers are fragmented, so their bargaining power is

low,o The switching costs from one supplier to another are high,o There is the possibility of the supplier integrating forwards in order

to obtain higher prices and margins. This threat is especially high whenthe buying industry has a higher profitability than the supplying industry,

o Forward integration provides economies of scale for the supplier,o The buying industry hinders the supplying industry in their

development (e.g.reluctance to accept new releases of products),o The buying industry has low barriers to entry

Result is squeeze in Margins

Bargaining Power of Customers: They buy large volumes, there is a concentration of buyers, The supplying industry comprises a large number of small

operators, The supplying industry operates with high fixed costs, The product is undifferentiated and can be replaces by

substitutes, Switching to an alternative product is relatively simple and is

not related to high costs, Customers have low margins and are price-sensitive, Customers could produce the product themselves,The product is not of strategically importance for the customer,The customer knows about the production costs of the product There is the possibility for the customer integrating backwardse.g vanaspati packs or oil tins

Threat of New Entrants Economies of scale (minimum size requirements for

profitable operations), High initial investments and fixed costs, Cost advantages of existing players due to experience

curve effects of operation with fully depreciated assets, Brand loyalty of customers Protected intellectual property like patents, licenses etc, Scarcity of important resources, e.g. qualified expert staff Access to raw materials is controlled by existing players, Distribution channels are controlled by existing players, Existing players have close customer relations, e.g. from

long-term service contracts, high switching cost for customersLegislation and government action

Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players (companies) in an industry.

High competitive pressureresults in a market pressure on prices

and margins that affects profitability.

Competition between existing players is likely to be high when:• There are many players of about the same size,• Players have similar strategies• There is not much differentiation between players and their products, hence, there is much price competition• Low market growth rates (growth of a particular company is possible only at the expense of a competitor),• Barriers for exit are high (e.g. expensive and highly specialized equipment).

Five Forces AnalysisStatistical Analysis:Dynamical Analysis:Analysis of Options: