Investors make financial decisions of whether to enter a particular industry using life cycle analysis. Learn to interpret important business cues as you implement industry life cycle analysis. Trade publications and corporate annual reports are ideal sources for information.
The industry life cycle transitions through start-up, growth and maturity phases. For entry into an industry, you may establish an independent business, or purchase shares of stock with an already existing corporation.
Life cycle analysis balances risks versus rewards. The initial start-up phase for any industry presents the highest opportunity for growth, alongside the highest amounts of risk. Companies that survive the start-up phase experience rapid profit growth until maturity. At maturity, business volatility is reduced, but sales gains may be minimal.
Industry consolidation occurs at each transition point within the industry life cycle. Companies consolidate to pool resources together and target their markets with greater efficiency.
Because of technological innovation, entire industries can become obsolete at maturity. At that point, significant investment capital is lost.
Effective diversification within industry life cycles manages risks while providing for growth. A diversified portfolio may include one multinational oil company, alongside smaller investments into two emerging biotechnology firms.