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B- Growth rate trend in sales and earnings

Growth rates of industries differ considerably as can be seen in Table T-14.1 which shows indices of industrial production in American manufacturing sectors over the past century.

Graph G-14.1 presents the indices from Table T-14.1 graphically for seven manufacturing industries. The graph emphatically contrasts the performance of rubber and chemical spectacular growth with the poor performance of tobacco and paper. Yet, these are not the extreme performers in Table T-14.1. The worst and best performers were leather and computer industries, respectively. They are not shown in the Graph G-14.1 in order to avoid distorting the scale.

Graph G-14.1

Graph G-14.1 reveals that the growth experience of different industries varies widely. To further illustrate such differences, Table T-14.2 below presents standard deviations and average of growth rates in various components of personal expenditures in the US from 1929 to 1996. See the components at the bottom of the table in particular.

To be able to make predictions of industry growth rates it is necessary to find an explanation for the enormous differences that are observed in the data above. Growth rate trends in sales and earnings are usually studied in the context of the product life cycle. Indeed it would be unreasonable to assume that an exceptional growth of an industry will be experienced for a long period of time. Sales of all products tend to grow faster in the beginning and much slower later. This has already been touched upon in Chapter 3 Section D-2 and Chapter 9 Section G-1. The issue is far more serious than just sales growth. The issue may be the very survival of a company. In many industries, almost all (i.e. 90 to 95%) of the companies are closed or acquired long before industry sales have reached their peak.

The product life cycle is most thoroughly studied in textbooks on marketing with four phases: infancy, growth, maturity and decline. In this section, we will go beyond that breakdown, and look at six phases in order to highlight not just marketing, but production, financial and managerial decisions as well. This will show that errors in any of these decisions can cause firms to fail at different points in time in the life of a product. There are several versions of the life cycles in business. In Chapter 8 Section B, a cash cycle was studied. One sometimes reads about a financial cycle for a company, as well as a corporate life cycle. Here, we will pay attention to inventories, liquidity, debt, retained earnings, various expense categories and naturally profitability.

The sales life cycle of a product is tied to the different types of customers that will buy the product. They are distinguished according to their willingness to buy the product for a first time:
- innovation seekers: these are individuals with money and education that seek out novelties; some people look upon them as deviates because they do not conform to main stream thinking; they make up only 5% of the consumer population;
- early adopters: these individuals imitate the first group; they tend to be in upper middle class but are more main stream than the previous group; they make up 10% to 15% of consumer population;
- early majority: this group of 30 to 35% of the consumer population buys the product only when it becomes convinced of its superior quality over previous products, and this may take several years;
- late majority: this group of 30 to 35% of the consumer population has to be swayed into switching by an aggressive promotion in the form of price cuts or mass advertisement;
- late adopters: the remaining group of consumers has a difficult time learning to change; they may be forced to buy the product only after competing older products are no longer available.

Most discussion of product life cycle starts with the infancy or introduction phase. Actually, there is gestation phase. It is useful to look into the phase that precedes product market introduction, namely, the invention phase because of its impact on the future of a company or even an entire industry.

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Last modified: Jun/01/01

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