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Unit 8: Fundamental Analysis 2: Industry Analysis

8.3 Analytical Frameworks Notes

We have identified various factors and questions relating to industry analysis. Now, we shall
consider the frameworks within which the analysis may be carried out.

Industry life-cycle stages (product life cycle theory): Every industry passes through different
stages in its lifetime. The stages can be identified as follows:

Pioneering Stage: This stage is characterized by introduction of a new product, and an
uptrend in business cycle that encourages new product introductions. Demand keeps
on growing at an increasing rate. Competition is generated by the entry of new
firms to grab the market opportunities. Weaker firms face premature death while
stronger one survives to grow and expand.

Expansion Stage: This is characterized by the hectic activity of firms surviving the
pioneering stage. After overcoming the teething problems, the firms continue to
improve financially and competitively. The market continues to grow but slowly,
offering steady and slow growth in sales of the industry. It is a phase of consolidation
wherein companies establish durable policies relating to dividends and investments.
Stabilization Stage: This stage shows signs of slow progress and also prospects of
decay. The stagnation in the economy and the pedestrian nature of the product call
for innovative strategies to begin a new life-cycle. Grodinsky explains this transition
from the rising to the crawling age with reference to latent obsolescence.
“Latent obsolescence – while an industry is still expanding economic and financial
infection may develop. Though its future is promising, seeds of decay may already
have been planted. These seeds may not germinate; the latent decay becomes real.
These seeds may be described as “latent obsolescence”, because they may not become
active, and they are the earliest signs of decline. Such factors must be examined and
interpreted by the investor.”

Notes Symptoms of latent obsolescence include changing social habits, high labour costs,
changes in technology, stationary demand.
Decay stage: An industry reaches this stage when it fails to detect the death signal and
implement – proactively or reactively – appropriate strategies. Obsolescence manifests
itself, affecting a decline in sales, profit, dividends and share prices.
Implications to the Investor: This approach is useful to the analyst as it gives insights, not
apparent merits and demerits of investments in a given industry at a given time. What the
investor has to do is.

1. Collect relevant data to identify the industry life cycle stage
2. Forecast the probable life period of the stage
3. Decide whether to buy, hold or sell.
Figure 8.1 shows the diagrammatic presentation along with the indicators of each stage. Although
the industry life cycle theory appears to be very simple, it is no so in practice. Proper identification
of the life cycle stage is difficult. Temporary setbacks or upheavals may confuse the analyst.
Further, how long the stage continues is difficult to predict.
The internal analysis can be done periodically to evaluate strengths and weaknesses either by
inside company executives or outside consultants. This can be done by using a form such as the

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