What is a life cycle?
A life cycle is a course of events that brings a new product into existence and follows its growth into a mature product and eventually critical mass and decline. The most common stages in a product’s life cycle include product development, market introduction, growth, maturity and decline / stability.
Key points to remember
- A business life cycle follows a product from creation to maturity and decline.
- A life cycle has five stages: product development, market introduction, growth, maturity and decline / stability.
- Other types of business cycles that follow a life-cycle trajectory include business, economic and inventory cycles.
Understanding the life cycle
It is important for investors to understand the life cycle of a company’s products. Companies that are primarily in the development phase will likely be characterized by low levels of sales and are more speculative in nature than companies in the growth or maturity phase. The five stages of a typical life cycle are:
- the product development phase includes market analysis, design, design and product testing.
- the market introduction phase includes the initial product release, usually marked by high levels of advertising.
- in the growth phase, sales growth is starting to accelerate, characterized by an increase in sales from year to year. As production levels increase, gross margins are expected to decline steadily, making the product less profitable on a unit basis. Increased competition is likely.
- in the maturity phase, the product will reach the upper limits of its demand cycle, and new advertising spending will have little or no effect on increasing demand.
- the decline / stability phase happens when a product has reached or exceeded its highest demand point. At this point, demand will remain stable or decline slowly as a new product makes it obsolete.
Growth can still occur when a product matures. A more mature company with mature products may be more likely to pay dividends than companies in other phases.
Reaching maturity does not mean that growth stops, as margin improvements and innovations can increase revenues.
Types of life cycles
Beyond product life cycles, finance and economics are replete with other types of life cycles, which can often mean a series of overlapping themes. But most of the “cycles” are marked by their upward and downward trends. For example, it is common to hear about an economic cycle, an economic cycle or even an inventory cycle at a more micro level.
The idea of a cycle in a commercial context is borrowed from biology. In biology, a biological cycle (or simply a biological cycle when the biological context is clear) is a series of changes in the form an organism undergoes, returning to its original state. Extended to a commercial environment, the formation and possible decline of an entity follow a path similar to biological applications. If we consider the economy and trade as a “living organization”, adapting and transforming to its environment, we can find many biological analogies for business challenges, such as “survival of the fittest”.