This Week In Finance

The Corporate Life Cycle and the Corporate Hype Cycle

One way to promote the integration of financial management topics with those students are exposed to in other courses is to use those topics in order to describe their relationship to financial decisions and firm value.

For example, most undergraduates have run across the "corporate life-cycle" concept somewhere in their academic career. You remember this -- a steeply sloping curve that depicts a firm's age and its hypothesized growth curve. In a nutshell, it suggests that young firms in new markets grow very rapidly; in the absence of barriers to entry, competitors enter the product market and growth slows as competition intensifies; then a steady state is reached as the market "shakes out" and consolidates. Some curve- users take things farther and suggest that, in the absence of continuing innovation, the curve will turn downward as the firm's growth rate falls.

The life-cycle concept is an extremely useful vehicle for illustrating the importance of such topics as dividend decisions (low payouts during the high-growth periods, higher payouts during the "mature" years), capital budgeting (initial high levels of investment, investment to increase the investment opportunity schedule, reduced investment in the declining years), and financing decisions. A little thought provides numerous questions to ask the class about these and other topics (possible beta changes over the life of the firm?).

Recently I came across a contemporary variation on the corporate life cycle concept - the corporate "hype cycle." The September 22, 1997 issue of Future (a supplement to Forbes magazine) contains the graph below relating firm/product visibility and time. The context is high-tech, and the "hype cycle" is described as follows:

"The hype cycle of emerging technologies characterizes the typical progression of technology from overenthusiasm through a period of disillusionment (due to the inevitable failures that arise from inappropriate application) to an eventual understanding of the technology's relevance and role."

(This graph is available in Powerpoint 4.0 file named "Hype.ppt" and can be downloaded from the "What's New at RWJ" area of this website.)

As you can see, the shape of the hype cycle differs markedly from that of the corporate life cycle; you might try juxtaposing these two models of product market activity to generate discussions revolving around such things as (a) comparison of investment and financing decisions in high- and low-tech industries; (b) the relevance of the "perfect competition" model of product markets in a high-tech world; and (c) the role of venture capitalists in high-tech industries.

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