Archive for July 27th, 2009

Industry Life Cycle

Industry life Cycle

In general, an industry will traverse through 5 stages:

1. Pioneering development:

It is characterized by modest sales growth and huge development costs.

Consequently, profits are either negligible or are in fact negative.

2. Accelerating Growth:

At this point, the industry product is gaining wider acceptance.

Hence, it is very likely that demand for this new product is outstripping supply, as the number of firms in the industry is still relatively low.

Consequently, profit margins will tend to be very high for the existing firms.

3. Mature Growth:

The abnormal high profits of the previous stage will likely attract new entrants into the industry.

As a result, supply will begin to catch up with demand, just as the growth in sales stops accelerating.

4. Stabilization (or Market Maturity):

At this stage, both supply and demand stabilize such that the growth rate of the industry now matches that of the economy as a whole.

This phase tends to be the longest of all the industry life stages because in this phase, there is neither an incentive for new firms to enter the industry nor an incentive for existing firms to exit it.

5. Decline:

As new products are introduced from other industries, the demand for the target industry’s product will begin to decline.

As a result, profitability will begin to deteriorate.

Impact of Structural Changes on Economy

First of all, a distinction should be made between cyclical and structural changes.

Cyclical changes arise as a result of the economy progressing through the various stages of its business cycle.

Structural changes, on the contrary, arise as a result of a major shift in how the economy functions.

In particular, there are four main types of structural shifts that may impact on economy:

1. Demographics:

The economy is largely influenced by the spending power of its population.
Hence, the development of the economy has been heavily influenced by the spending habits of this generation.

2. Technology:

The same innovation in technology may simultaneously give birth to a new industry and severely impair an existing one.

Collectively, if new technology improves productivity levels, then the economy as a whole will function more efficiently.

3. Politics:

New governments may mean different fiscal policies for the foreseeable future. This may boost certain industries while damaging others.

4. Regulations:

New regulations may make certain industries less competitive, while others may become more competitive.



As we all know that different industries perform differently depending on what part of the business cycle the economy is in.

Though at present there are signs of stabilization, including a recovery of stock markets, a decline in interest rate spreads, improved business and consumer confidence but the situation still remains uncertain and significant risks remain to economic and financial stability.

Now the hundred million dollar question is that what an investor should do when it comes to investing in stock market.

However, there are so many theories available guiding an investor regarding investment in stock market.

Through this article some guidance are forwarded regarding how business cycles are related to Industry performance thereby making one understand how one can use the study to make out the maximum from the stock market.

The following relationships have generally been observed between industry performance and the stage of the economic cycle:

a) At the economic trough, industries that supply consumer durable goods tend to bottom as market participants anticipate an economic recovery.

b) As the economy recovers, businesses begin to expand and therefore industries that provide capital goods tend to do well.

c) During the peak of the cycle, industries that provide basic materials tend to do well as the overheating economy puts an upward pressure on the prices of raw materials.

d) Once the economy begins to decline (or enters a recession), industries that supply consumer staple products begin to do well as their sales are largely unaffected by economic downturns.

e) As the economy nears the end of its decline, financial services industries begin to do well as the rate of bankruptcies stabilize and interest rates reach their cycle lows.

Sebi steps in to protect minority shareholders

In a market where there are few cases of stocks with differential voting rights (DVRs), last week’s change to the Equity Listing Agreement, at first glance, seems to protect the interests of minority shareholders.

Sebi’s step is ostensibly to prevent situations wherein companies come out with follow-on-issues, rights issues or preferential allotments with higher voting rights per share, helping promoters get greater control in the company.

Though a rarity in India, there are many examples abroad such as the Ford family, which controls 40 per cent of shareholder votes with only about 4 per cent of the equity in Ford Motors.

The dual-class stock structure has worked for many including Warren Buffett, a majority shareholder of Berkshire Hathaway, which offers Class-B shares with 1/200th of the voting rights of a Class A share.

Google, at the time of going public, reserved Class-B shares with 10 votes a share for insiders and sold Class-A shares with one vote to the public, helping retain control with select shareholders.

It’s not that the amendment by the Sebi last Wednesday sealed such a possibility in India as the US stock exchanges, the NYSE or the Nasdaq, too, do not allow it.

The New York Stock Exchange allows companies to list dual-class voting shares, but once listed, firms cannot reduce the voting rights of the existing shares or issue a new class of superior voting shares.

So, a second look at Sebi’s amendment shows something else.

“More than preventing issue of fresh shares with superior rights, the amendment is about allowing firms to come out with shares with inferior rights,” said SMC Capitals equity head Jagannadham Thunuguntla.

Though shares with differential voting rights is not new in India (Tata Motors and Pantaloon issued shares with DVRs last year), lack of awareness has kept trading in DVR shares insignificant, he said.

According to Sebi regulations, firms can come up with fresh issues that offer inferior rights in terms of voting or dividend, thereby helping raise equity without resorting to debt and giving up control.

Securities and Exchange Board of India’s (Sebi) amendment of regulations to prohibit companies from issuing fresh shares with superior rights vis a vis the rights of existing shareholders seems to have been taken in the light of experiences abroad.