© 2000 John Petroff 

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.

Table T-14.1

Indices of industrial production for selected US industries 1950-1998 (base year 1992)
. 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 1998
Lumber 42 48 47 61 67 66 77 88 98 104 113
Furniture 27 35 37 49 56 59 78 88 100 110 119
Glass 38 47 53 66 71 78 92 94 101 106 121
Metals 75 89 77 110 115 107 111 102 109 123 130
Fabricated metals 25 31 32 41 46 77 92 94 104 114 124
Machinery nonelectric 12 16 18 27 33 38 61 87 87 125 178
Electric Machinery 11 15 19 30 40 45 73 93 131 250 434
Vehicles 26 42 40 58 55 60 72 92 105 109 127
Instruments 9 16 21 29 39 52 79 96 105 111 121
Computers - - - - - - 100 - 579 1507 4643
Food 34 39 46 54 64 71 85 95 104 114 116
Tobacco 62 66 81 89 91 98 104 97 103 110 104
Textiles 40 43 46 61 74 78 92 90 96 114 117
Paper 25 31 37 50 63 66 83 92 106 122 127
Printing 24 30 35 44 53 54 70 88 100 98 102
Chemicals 12 19 26 41 56 69 88 91 112 124 133
Petroleum 36 49 57 68 84 91 99 93 103 107 116
Rubber 8 12 15 25 38 47 62 86 108 140 154
Leather 194 210 208 226 208 182 162 112 96 77 67
Source: Board of Governors of the Federal Reserve System, Federal Reserve Bulletin

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.

Table T-14.2

Standard deviation and average of annual growth rate in US personal expenditures by type of expenditure 1929-1996
.

Standard deviation

Average growth rate
Housing 2.19 3.67
Rental value of farm dwellings 2.31 -0.66
Tenant-occupied nonfarm dwellings rent 2.41 3.10
Nonprofit 2.77 4.82
Food and tobacco 2.79 2.24
Household utilities 3.01 2.85
Hospitals 3.04 4.73
Personal business 3.08 2.41
Funeral and burial expenses 3.14 0.59
Water and other sanitary services 3.21 3.13
Medical care and hospitalization 3.22 3.40
Personal consumption expenditures (all combined) 3.25 3.21
Medical care 3.29 4.48
Food purchased for off-premise consumption 3.31 2.22
Hospitals and nursing homes 3.37 4.85
Electricity 3.82 5.73
Education and research 3.88 3.57
Proprietary 3.92 4.61
Legal services 4.21 2.18
Higher education 4.33 3.97
Tobacco products 4.39 1.13
Telephone and telegraph 4.44 6.35
Clothing and accessories except shoes 4.46 2.92
Clothing, accessories, and jewelry 4.49 2.78
Gas 4.50 3.22
Men's and boys' clothing 4.52 2.64
Purchased meals and beverages 4.70 3.28
Magazines, newspapers, and sheet music 4.72 1.95
Religious and welfare activities 4.85 3.81
Drug preparations and sundries 4.87 5.21
Dentists 4.87 2.79
Women's and children's clothing 4.91 3.10
Clubs and fraternal organizations 4.94 1.92
Physicians 5.03 3.58
Barbershops, beauty parlors, and health clubs 5.12 1.79
Shoes 5.13 2.08
Household operation 5.18 3.32
Personal care 5.21 3.19
Expense of handling life insurance 5.27 2.77
Government 5.69 4.59
Other alcoholic beverages 5.80 2.86
Nursery, elementary, and secondary schools 5.80 3.22
Recreation 6.12 5.06
Admissions to specified spectator amusements 6.34 1.10
Food produced and consumed on farms 6.67 -3.99
Cleaning, storage, and repair of clothing and shoes 6.67 0.28
Fuel oil and coal 6.71 -0.70
Domestic service 6.74 -0.94
Bank service charges, trust services, and safe deposit box rental 6.83 4.06
Mass transit systems 6.88 -1.21
Purchased local transportation 6.94 -0.81
Commercial participant amusement 7.21 4.47
Toilet articles and preparations 7.31 4.43
Semidurable house furnishings 7.34 3.41
Nondurable toys and sport supplies 7.87 5.60
Motion picture theaters 8.11 -0.57
Stationery and writing supplies 8.59 4.44
Theaters and opera, and entertainments of nonprofit institutions 8.61 2.75
Insurance 8.66 4.87
Books and maps 8.73 3.32
Net purchases of used autos 8.74 4.17
Ophthalmic products and orthopedic appliances 9.17 4.90
Nursing homes 9.29 9.60
China, glassware, tableware, and utensils 10.24 2.94
Workers' compensation 10.57 2.39
Furniture, including mattresses and bedsprings 10.62 3.33
Taxicab 11.15 0.79
Purchased intercity transportation 11.27 4.50
Jewelry and watches 11.34 4.99
Flowers, seeds, and potted plants 11.45 4.41
Auto repair, greasing, washing, parking, storage, rental, and leasing 12.05 5.22
Expenditures in the United States by nonresidents 12.11 6.61
Gasoline and oil 12.24 4.14
Health insurance 12.41 5.79
Transportation 12.80 4.33
Spectator sports 13.26 4.69
Wheel goods, sports and photographic equipment, boats, and pleasure aircraft 14.61 7.25
Bus 14.98 2.62
Radio and television repair 15.43 6.72
Foreign travel by U.S. residents 15.69 5.48
Railway 16.05 -0.91
New autos 16.55 4.61
Airline 17.53 11.63
Food furnished to employees (including military) 17.59 3.45
Tires, tubes, accessories, and other parts 18.80 6.37
User-operated transportation 18.83 5.29
Personal remittances in kind to nonresidents 19.08 1.20
Bridge, tunnel, ferry, and road tolls 20.17 6.39
Brokerage charges and investment counseling 21.76 3.35
Pari-mutuel net receipts 26.42 6.89
Video and audio products, computing equipment, and musical instruments 33.24 12.47
Kitchen and other household appliances 55.96 10.52
Expenditures abroad by U.S. residents 65.83 12.68
Alcoholic beverages purchased for off-premise consumption 97.03 15.46
Standard clothing issued to military personnel 109.00 17.67
Foreign travel and other, net 128.53 -9.25
Source: US Department of Commerce, The National Income and Product Accounts of the United States, Personal Expenditures

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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