Economically, it makes common sense that most new industries are fragmented and consolidate as they mature. But what about the fact that all industries have similar lifecycles as indicated by A.T. Kearney study of more than 29,000 listed companies over the recent 14 years? Once an industry forms or is deregulated, it will move through four stages of consolidation. Thus, an understanding of an industry’s position within this cycle should be the cornerstone of a company’s long-term strategic plan.

Stage 1– Opening. The first stage generally begins with a single start-up or with a monopoly just emerging from a newly deregulated or privatized industry. But this 100% industry concentration quickly drops off. Soon the combined market share of the three largest companies drops to between 30% and 10% as competitors quickly arise to create the frontier of industry consolidation. For oil and gas, the dissolution of Rockefeller’s Standard Oil monopoly in 1911 was such a trigger point as well as the privatization of the state-owned East European oil and gas companies in the 1990s.

Companies in Stage 1 should aggressively defend their first-mover advantage by building scale, creating a global footprint, and establishing entry barriers. They should focus more on revenue than on profit, working to amass market share.

Stage 2– Scale. This stage is all about building scale. Major players begin to emerge, buying up competitors and forming empires. The top three players in Stage 2 industries will own 15% to 45% of their market, as the industry consolidates rapidly. Typical Stage 2 industries include airlines, hotel chains, automotive suppliers, banks, and pharmaceuticals. Also oil and gas downstream stays in Stage 2. Due to the large number of acquisitions in this stage, companies must hone their merger-integration skills. These include learning how to carefully protect their core culture as they absorb new companies and focusing on retaining the best employees of acquired companies.

Stage 3– Focus. Companies that are in Stage 3 focus on strengthening their core business and continue to aggressively outgrow the competition. The top three industry players will now control between 45% and 70% of the market. By this time there are still generally five to twelve major players. This is a period of mega-deals and large-scale consolidation plays and the goal is to emerge as one of a small number of global industry powerhouses with a well-defined business. Typical focus-stage industries include steel producers, automotive companies, shipbuilders and distillers – and oil and gas upstream as well as integrated oil and gas.

Companies in Stage 3 industries need to emphasize their core competencies, focus on profitability, and either shore up or part with weak business. The well-entrenched competition at this phase will attack underperformers. Recognizing start-up competitors early on allows focus-stage players to decide whether to crush them, acquire them, or simply emulate them. Stage 3 companies should also identify other major rivals that will likely survive into the next stage and avoid all-out assaults.

Stage 4– Balance and Alliance. Here the titans of industry reign, from tobacco to soft drinks and defense. The industry CR is at its peak and can even dip a bit as, at this stage, the top three companies claim as much as 70 to 90% of the market. Large companies may form alliances with their peers as growth is now more challenging. Companies do not move through Stage 4: they stay in it. Firms in these industries must defend their leading positions. They must find new ways to grow their core business in a mature industry and create a new wave of growth by spinning off new businesses. They must be alerted to the industry regulation and the danger of being lulled into complacency by their own dominance.