What Is the Consolidation Phase?
The consolidation phase is a stage in the industry life cycle where competitors in the industry start to merge with one another. Companies will seek to consolidate in order to gain a larger portion of overall market share and to take advantage of synergies.
Each of these items can increase top-line revenue and company valuation in order to improve corporate fundamentals and make shares of their stock more attractive to investors.
Key Takeaways
- The consolidation phase is a later part of the industry lifecycle when companies in the same sector begin to acquire and merge with one another.
- This is done after growth opportunities for individual companies become sparse, and financial standing can only be improved through combination.
- The phases of the industry life cycle are the introduction, growth, maturity, consolidation, and decline.
The Industry Life Cycle
The industry life cycle is the process by which an industry develops, grows, and eventually becomes extinct. The phases of the industry life cycle are introduction, growth, maturity, consolidation, and decline. Consolidations and mergers occur late in the industry life cycle.
During the introduction phase, a company or many companies may be working hard to introduce a new product or service into the mainstream. During the growth phase, the new product or service has caught on and companies involved in creating or delivering the product or service are experiencing large amounts of organic growth as demand for their product increases. This is where lots of new companies enter the industry.
In the mature phase, there is usually a shake-out of successful from unsuccessful companies. In late maturity, companies may begin to consolidate as organic growth slows and they look for ways to increase their market share and juice their growth.
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Understanding the Consolidation Phase
Consolidations and mergers are usually pursued as a form of inorganic growth when the organic growth phase of industry formation has passed. This means that as businesses stop growing due to their own innovation and new ideas, they begin merging with or buying other companies in their industry in order to keep growing and offer new services that will attract and retain customers.
Companies often merge or consolidate segments in order to cut down on costs, achieve more efficient operations or discontinue product lines that are not performing as well as others. This is done when a company has matured and is no longer in its growth phase. It often has the effect of making a company more attractive to investors. It also decreases competition within the industry because, as new companies stop emerging and the older ones begin to combine, there are fewer total businesses within the industry.
Example of Consolidation
In the early 2000s, the popularity of MySpace led to a boom in social media companies, including the growth of Facebook, which started in 2004 as a platform for university students.
Facebook eventually surpassed MySpace in popularity. As the industry matured, Facebook worked to consolidate its market share by buying other social media companies that had appeared in recent years. One of the most significant deals was when Facebook bought Instagram in 2012 for $1 billion.
Instagram continued to be a separate social media platform from Facebook, though it was owned by the same company (Facebook, Inc., now Meta Platforms). Other companies that were acquired by Facebook in the consolidation phase, however, were integrated as new parts of the Facebook platform. When Facebook acquired the group messaging service Beluga in 2011, for example, both the technology and the team behind Beluga were integrated into and used to further develop Facebook Messenger.
What Are Phases of the Industry Life Cycle?
The phases of the industry life cycle are introduction, growth, maturity, consolidation, and finally, decline. These are similar to the phases of the economic cycle, which are expansion, peak, contraction, and trough.
How Is the Industry Life Cycle Analyzed?
Industry life cycle analysis involved examining three elements of growth within an industry: how attractive the industry is to customers and investors; the factors that impact an individual company's failure or success, and the broader social, economic, and political forces that impact the industry.
What Are Ways That Consolidation Happens?
Businesses may merge together to form a new entity, known as statutory consolidation. A larger company may acquire a smaller one, either integrating it into itself or continuing to run it as a separate business with the same corporate parent company. Consolidation can also happen through stock acquisition, in which one company buys a controlling share of the stock of another company, but both companies continue to exist.
The Bottom Line
The consolidation phase is part of the industry life cycle when organic growth in an industry slows. Companies continue to increase their market share and offer customers new services by acquiring or merging with other companies. The industry tightens as fewer companies are able to survive independently.
Consolidation happens later in the industry life cycle. It usually begins after growth opportunities become harder to develop and pursue within an industry. Companies can only improve their industry standing, and increase their revenue, but combining with other companies.
