How long is the period of developmental stages may be?
Companies involved in establishing emerging industries are generally participating in perilous business, as their primary concerns are raising sufficient funds to engage in early-stage research and development. In their developmental stages, which may last months or even years, these companies are likely operating on a shoestring budget, while at the same time presenting to the world a product or service that has yet to be accepted. These pioneering companies might face bankruptcy, development failure and poor consumer acceptance.
What rate should rapid growth industries display?
Companies in industries that are benefiting from rapid growth have sales and earnings that are expanding at a faster rate than firms in other industries. As such, these companies should display an above average rate of earnings on invested capital for an extended period of time, probably years.
What conditions are necessary for companies’ growth in profit?
| During this period of rapid growth, companies will eventually begin to lower prices in response to competitive pressures and the decline of costs of production, which is often referred to as economies of scale. But costs decrease at a higher rate than prices, so |
companies entrenched in growth industries often experience growth in profits as their product or service becomes fully accepted in the marketplace.
The consumer electronics industry, for example, is characterized by much research and development, followed by significant economies of scale in production. Prices in home electronics inevitably fall, but the costs of production fall faster, thereby ensuring increasing profitability.
Publicly traded companies involved in rapid growth industries, often referred to as growth stocks, and are some of the most lucrative investments due to their ability to sustain growth in revenues and profits over long periods of time. Microsoft is an excellent example of a company that became very large in a growth industry (software) over a period of years, increasing its earnings all the while and, most importantly, maintaining its expectations for continued future growth.
Why does price competition become sometimes more vicious?
Once an industry has exhausted its period of rapid growth in revenues and earnings, it moves into maturity. Growth in companies in mature industries closely resembles the overall rate of growth of the economy (the GDP). Earnings and cash flow are still likely positive for these companies, but their products and services have become less distinguishable from those of their competitors. Price competition, taking profit margins along with it, and companies begin to explore other areas for products or services with potentially higher margins. Many of our economy's most closely watched industries, such as airlines, insurance and utilities can be categorized as mature industries.
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What can mature companies do in order to capitalize on the economy's eventual return to growth?
Despite their rather staid position in mature industries, investments in these companies' stocks can remain very attractive for many years. Share prices within mature industries tend to grow at a relatively stable rate that can often be predicted with some degree of accuracy based on sustainable growth prospects from historical trends. Perhaps even more importantly, companies in mature industries are able to withstand economic downturns and recessions better than growth companies, thanks to their strong financial resources. In troubled times, mature companies can draw from retained earnings for sustenance, and even concentrate on product development in order to capitalize on the economy's eventual return to growth. Investors in mature industries are those who want to enjoy the potential for growth but also avoid extreme highs and lows.
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