A growth industry is one that is growing at a rate faster than that of the total market. Companies use strategies such as heavy price discounting, increased advertising and the introduction of new features to their products to expand into new markets.
Growth Industry Investment
A growth industry attracts investors who are not weary of taking on high risk for the potential of reaping large returns. A growth industry may be comprised of a large number of growth stocks (individual companies that achieve higher revenue growth than the industry). However, a growth industry may not necessarily result in the creation of growth stocks. This is because an industry may grow fast due to the entry of new players, which exerts pressure on the profitability of individual companies.
Growth Industry Characteristics
A growth industry’s characteristics are:
- Increased costs on research and development
- Market acceptance
- Impressive return on investment (ROI)
- Sustainability of profits for an extended duration
- Declining costs (cost of production)
- Stiff competition
- Reduction of prices (in the later stages) due to competitive pressures
Growth Industry in the Emerging Markets
Emerging markets are typically characterized by growing consumer demand. This supports growth industries. The other typical features of an emerging economy that facilitates growth industries are:
1. High fiscal stimulus for industrial growth
2. Increased availability of loans, like housing and car loans
3. Export financing
4. Huge investments into infrastructure
Industry Growth: Stages
An industry generally passes through four stages of growth, creating an S-curve:
- Entry: At the stage of market entry, growth is bleak. This stage is characterized by low sales volume. The investment on research and advertising are huge. Competition is absent or negligible.
- Growth: At this stage, the industry begins to grow faster. It leads to increased profitability and customer awareness. New players are attracted to this industry, thereby, increasing the competition.
- Maturity: Growth saturates and profits begin to plummet. Increase in competition leads to pricing pressure.
- Decline: During this stage, industry growth begins to deteriorate due to declining sales volume.
Extension strategies are generally adopted by companies at the maturity stage. Its purpose is to extend the product life cycle and delay the progress into the declining stage.