The S curve
Introduction
An S curve is a graphical representation of the product life cycle. It shows the growth of a product over time, starting from its introduction to market until it reaches saturation. This can be seen as a bell-shaped graph that resembles an S when viewed from above, hence its name. The S curve is also known as an "S-shaped curve" or "S-curve”. The three stages of an S curve are; Infancy, Expansion, and Maturity.
A feedback control process is a methodical way of managing change over time. These processes allow you to anticipate changes in your environment and determine how they will affect your business or organization’s performance by anticipating where you want to end up, then using sensors and systems (like alarms) along the way so that when something unexpected happens you can take corrective action before it becomes too severe an issue for continued success.
S curve
The shape of the S curve depends on many factors, including market conditions and competition. This means that the S curve is not a perfect model for all businesses or markets; it's simply one way to think about how your business might grow over time.
The S curve also doesn't account for nonlinear growth opportunities like acquisitions or investments in new technologies—but it still provides valuable insights into how these types of activities will affect your company's overall trajectory.
Product life cycle (PLC)
You’ve probably heard about the product life cycle (PLC), but do you know what it is? The PLC is a model that illustrates how a product moves through different phases of its development, growth, and maturity over time. Each stage has its own characteristics, which impact how you should approach your marketing strategy.
It can be helpful to think of this in terms of S curves: When a product is first introduced into the market, it experiences high interest as consumers try it out and get to know it better; this is called the “infancy” phase. This initial interest eventually declines as consumers become familiarized with the features and benefits of the product. Eventually, demand stabilizes and flattens out (this is referred to as maturity) until there comes a point where sales begin to decline until finally ceasing altogether at death!
Keep the S curve alive
As the product or the company reaches maturity the company needs to decide on three actions:
Can the product start a new S curve? By improving the product or maybe finding a new customer group or application.
Have the product reached such a position in the market that the sales won’t decline a lot and through marketing activities, can it continue to grow in low digits? Think of a such as WD-40, a product that has been similar for decades.
The product has gone through a bust and boom cycle. It can’t take off again due to no repeatability in its usage or new technology has entered the market and rendered the product useless. Think of products such as broadband fiber installations or mechanic calculators. Hopefully, the company has a suite of products. Otherwise the company will die with its product, for example, Kodak.
Number of ways to achieve a new S curve
The goal of any company is to prolong the expansion phase as much as possible and when in maturity enter a new S curve. A few ways to do this:
New geographical markets
New applications
Improve the product
Increase price
Decrease the quantity and keep the same price
It is far more profitable to have an existing product have a second S curve than to innovate a new product.
How does a quality company’s S curve look?
The true source of continuous growth is innovation, both in the product but also in the usage of the product. A quality company innovates its products and finds new pockets of growth when the old products die off, it can be costly to all the time be demanded to innovate in order to survive. A quality company’s S curve looks look this, they stack on each other.
Apple is a good example of a company that innovates in order to have the S curves stacking on each other, combining it with the brand and people see Apple products as an accessory to a lifestyle is a powerful combination. We are on iPhone 14 now, it started with the iPod and Macs. Now we have iPhone, Apple Watch, iPad, Mac computers, and a number of services to support these products. A true sign of innovation, as it has gone through so many product categories to find new pockets of growth.
How does the S curve affect an investment analysis?
Well, in a number of ways. First, think of where the company is on the S curve. Is it in infancy, expansion, or in maturity? Or maybe even before infancy?
All these stages require a different approach to the company. A company in the infancy stage should probably be examined on the uptake of the product, if people use it will it probably have good sales. Here comes all the value in a company from the management’s ability to monetize and take the right price for the product without excluding too many customers. Also, think of the behavior of the users of the product. If is it a one-time use and a high price, then the company needs to find new customers all the time. Or the other way around it is a high level of repetition and frequency, let’s say bottled water. People need to drink at least two or three bottles every day, but then water is a commodity. So the product will have a lot of competition putting pressure on both the marketing and the pricing of the bottled water.
Let’s say the company is in the expansion phase. It has survived the chasm in the adoption curve and is at a high growth pace. It may not be profitable yet and why should it? It should probably take market shares before thinking of being profitable. What happens then? The majority of the value of the company is pushed far in the future and the terminal value is probably the largest part of the calculated intrinsic value. We can talk about an expansion phase of 15+ years, and forecasting say that humans can’t even forecast with precision further out than 3 years. Valuation multiples that use EBIT, EBITDA, FCF, Earnings, and so on are useless. P/S and EV/S can be used when peering with other similar companies. I would say the two most important things to look at is;
Gross margin. If it is higher than 50% is it very good and a sign of good pricing power.
How defendable the market share is after it is taken. In short the Moat. (I would like to suggest you look at my article regarding Porter’s Power Model if you want to evaluate the moat of a company.)
The third phase, the maturity stage is what the majority of all finance literature is focusing on. As said earlier companies have three kinds of outcomes to bet on. The Stalwarts as Peter Lynch would call them which can still grow despite the products of the company having reached maturity. It is here you want to be, hopefully with a growing underlying market also. And the two other “stagnaters” and the has-beens. It is more about traditional value investing in these kinds of companies. Finding the ones that have a moat and can keep defending their cash flows. For these kinds of companies is it more about capital allocation than anything else, can they continue to have a high Return on Invested Capital then they probably are a good investment. Therefore the American blue ship companies use both dividends and buybacks to transfer value to their shareholders.
Conclusion
The S curve is a widely used term in business. It illustrates the way that growth tends to happen in stages: There's a slow period of time where sales are increasing at a slow rate. Then there's an upswing where sales increase rapidly for a short period before leveling off once again. It says quite a lot about the company and helps an investor to understand what it should evaluate in the different phases.