Companies from one industry act alike. Their performance is often explained by the type of products they offer. Such companies are not allies. Instead, they play against each other to win over the customers. They invent marketing strategies, pour money into advertising and try to stand out among the others.
The way a single company evolves mimics the way the whole industry evolves. In both cases, it all starts with a big idea. Then the pattern follows.
Emerging industries are always either highly innovative or extremely risky. Or both. So are the companies within them. Could anybody have predicted that the first video game Atari made would spark one of the most successful industries of our age? Or that someone looked at the first Motorola phone and thought ‘It will be a blast and we will do our banking via this things in a few decades’. No. Everything new is subject to doubt.
Companies that appear in young and fresh industries are often bound to act on a limited budget and spend a decent proportion of their money on R&D.
Such companies are almost always accompanied by scarce funds and little trust. The service or product they offer seems to outsider to be very dubious, if not useless. To resonate and become successful it has to proof itself first.
Such companies are risky. Investors should be prepared that it may be years before a new company from an emerging industry starts generating profits.
Let’s assume you and your company survived hard times of being a startup. Most likely so did the industry you are operating in. Now you grow fast, your capital expands. Sales are booming. The following couple of years should bring even more earnings and excellent balance sheets.
That’s when competitive aspect steps in. Given that the industry is going through a period of blossoming, there are many companies that strive to dominate in the niche. As a result, you start to come up with the ideas on how attract more attention and appeal to customers, squeezing out the opponents. In addition, the production rate increases causing a general fall in production costs. The trend is called an economy of scale and eventually affects every big company. It’s a good trend. Production costs drop thus ensuring a better chance of profitability.
It goes without saying that growing companies, as much as growing industries, are often considered pots of gold for investors.
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But, it doesn't come out of the blue. Maturity follows up a period of a rapid growth. Nothing dramatic happens. It’s just that you are gradually losing your identity among other industry players. You compete in terms of quality, prices, marketing and so on. Some of the companies start to enrich their portfolio with radically different products and services hoping to stay afloat for a while.
It’s not a surprise that for the most part, the industries you know well are mature. Food, insurance, automobile. These things are ubiquitous with a growth period passed long ago. They are just stable and the fact is obvious to investors. Mature companies and mature industries are very popular and there are high chances they won’t let you down. Historically they are profitable and have solid financial positions. In case a depression shakes the economy, such companies will live due to the net earnings that were not paid as dividends to the shareholders.
Declining industries are industries that are gradually becoming outdated. They are dying. They don’t or can’t keep up with the economic growth. Examples of declining industries are mills, photofinishing, newspaper publishing and a bunch of other fields that not so long ago seemed a well-entrenched part of the society.
Nevertheless, declining industries can demonstrate flashes of life and even generate profit. There are still newspapers and people who can’t start a day without a fresh copy of The Daily Mirror. But, there are a lot more readers who receive news online.
What’s It All About
Every company, like every industry, comes from an emerging stage to a declining one. It’s critical for an investor to pick the right period. Where a company is on that scale depends on a number of factors, whether it will be a long way away or like the flash of a light. Those who are chasing emerging and promising companies, should brace themselves for a high level of risks. Investors craving stability and good earnings should consider growing companies and mature ones.
And declining industries? Experienced investors prefer to keep awat from them. Unless they have rock-solid guarantees that their investment will pay off over time. But remember that trading is not about guarantees. It’s all about risks. So think twice before putting your money in a dying venture.