Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.
The Industry Life Cycle
New products and services are developed by companies every day, but occasionally, a whole new market is born. Think of the auto industry in the early 1900s, or the computer industry in the 1980s. Every industry you can think of, at some point in history, was a new market.
Just like individual products, these markets go through a lifecycle. Depending on the nature of products and the market, they go through the stages of these lifecycles at different speeds, but they go through each stage. These stages are startup, growth, maturity, and decline. For this lesson, let's focus on the maturity stage.
Before a market reaches maturity, it goes through the growth stage. During the growth stage, new companies are coming into the market, demand by consumers is increasing, and profits are growing. Supply and demand is in the producer's favor. But, eventually, the market begins to saturate and supply and demand softens. Perhaps new products have been innovated or maybe most of the new customers to find have been found. As growth slows, the market reaches maturity.
A mature market is the stage where the rate of growth slows, perhaps to zero. Because there is little growth, companies in the industry end up with excess inventory and/or capacity. This can often lead to pressure on profits, as companies discount prices to get rid of their excess capacity. Whether those price drops lead to a price war or companies shutting their doors, competition increases and becomes very intense. Competition in mature markets is typically based on price, not on product differentiation.
While growth is slowing in a mature market, the market is still growing, just at a decreasing rate. For example, maybe last year the market for laptop computers grew at 6%, and this year the market grows at 4%. The market is still growing, at 4%, but it isn't growing as fast as it was. When the market actually starts to shrink, it is transitioning from the mature phase to the decline phase.
Mature Market Threats
As a market transitions from the growth stage to the mature stage, there are a number of strategic mistakes that companies make. The most common is simply not anticipating the change from operating in a growth market to a mature market. Pricing strategies, optimal production levels, and marketing are very different in a mature market than they are in a growth market, and pursuing a growth strategy in a mature market can be very costly.
Often, the next strategic mistake made by companies is to assume whatever advantage helped them succeed in the growth phase will help them maintain market share in the mature phase. Again, this is usually not the case. If their competitive advantage was being a low-cost leader, then as other firms lower their prices, they lose their edge. If a firm pursued a luxury strategy, then as consumers focus on lower cost, less differentiated products, that firm loses. It's critical, when operating in a mature market, to recognize what consumers want and offer exactly that with minor variation.
Finally, firms will sacrifice market share to realize short-term profits. If they raise prices, or don't lower prices, they will retain some customers for a little while, which will allow them to make short-term profits. But as those customers continue to leave for cheaper alternatives, the firm's ability to be profitable and their market share will shrink. As companies consolidate, or close, in a mature market, this focus on short-term profits often differentiate which companies are buying and which companies are being bought, if they survive at all.
There are plenty of markets in our economy that are mature. Companies can be, and are, very profitable in a mature market if they select and execute the right strategy. Think of automotive companies, grocery chains, oil companies, and clothing stores. All operate in mature industries, but many are very successful and very profitable.
All right, let's take a moment to review. A mature market is one that has reached the third phase of the four-phase industry lifecycle, which is the stage where the rate of growth slows, perhaps to zero. A market reaches maturity when sales continue to grow, but at a declining rate. Specifically, in a mature market, companies have excess inventory or capacity, products become more homogenized (less differentiated), and there is pressure on prices and profits.
Companies that operate in a mature market must recognize the transition and adjust their strategy if they want to be successful. Assuming the competitive advantage that carried them through the growth stage will continue to help them may be a mistake. So is sacrificing market share for short-term profits, since gaining market share in a mature market is very difficult.
Many markets in today's economy are mature markets and companies can still be very successful. However, to do so, they must recognize the threats and opportunities that come with a mature market and adjust their strategy to protect themselves and take advantage of their new environment.
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