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Stock Market Operations

Notes Cyclical Industry: In this category of the industry, the firms included are those that move
closely with the rate of industrial growth of the economy and fluctuate cyclically as the
economy fluctuates.
Defensive Industry: It is a grouping that includes firms, which move steadily with the
economy and less than the average decline of the economy in a cyclical downturn.

Another useful criterion to classify industries is the various stages of their development. Different
stages of their life cycle development exhibit different characteristic. In fact, each development
is quite unique. Grouping firms with similar characteristics of development help investors to
properly identify different investment opportunities in the companies. Based on the stage in the
life cycle, industries are classified as follows:
Pioneering stage: This is the first stage in industrial life cycle of a new industry. In this, technology
and its products are relatively new and have not reached a stage of perfection. There is an
experimental order both in product and technology. However, there is a demand for its products
in the market; the profits opportunities are in plenty. This is a stage where the venture capitalists
take a lot of interest, enter the industry and sometimes organize the business. At this stage, the
risk commences in this industry and hence, mortality rate is very high. If an industry withstands
them, the investors would reap the rewards substantially or else substantial risk of investment
exists. A very pertinent example of this stage of industry in India was the leasing industry,
which tried to come up during the mid-eighties. There was a mushroom growth of companies in
this period. Hundreds of companies came into existence. Initially, lease rental charged by them
were very high. But as competition grew among firms, lease rentals reduced and came down to
a level where it became difficult for a number of companies to survive. This period saw many
companies that could not survive the onslaught of competition of those firms that could tolerate
this onslaught of price war, could remain in the industry. The leasing industry today is much
pruned down compared to the mid-eighties.
Fast growing stage: This is the second stage when the chaotic competition and growth that is the
hallmark of the first stage is more or less over. Firms that could not survive this onslaught have
already died. The surviving large firms now dominate the industry. The demand of their product
still grows faster, leading to increasing amount of profits the companies can reap. This is a stage
where companies grow rapidly. These companies provide a good investment opportunity to
the investors. In fact, as the firms during stage of development grow faster, they sometimes
break records in various areas, like payment of dividend and become more and more attractive
for investment.
Security and stabilization stage: The third stage where industries grow roughly at the rate of
the economy, develop and reach a stage of stabilization. Looked at differently, this is a stage
where the ability of the industry appears to have more or less saturated. As compared to the
competitive industries, at this stage, the industry faces the problem of what Grodinsky called
“latent obsolescence” a term used to a stage where earliest signs of decline have emerged.
Investors have to be very cautions to examine those sings before it is too late.

Relative decline stage: The fourth stage of industrial life cycle development is the relative
decline. The industry has grown old. New products, new technologies have entered the market.
Customers have new habits, styles, likes etc. The company’s/industry’s products are not much
in demand as was in the earliest stage. Still, it continues to exist for some more time.
Consequently, the industry would grow less than the economy during the best of the times of
the economy. But as is expected, the industry’s decline is much faster than the decline of the
economy in the worst of times.
The characteristics of different stages of life cycle development of industries have a number of
implications for decisions. Investment at this stage is quite rewarding. However, for an investor
looking for steady forms with risk aversion, it is suggested that he should in general avoid

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