The analysis of an industry’s life cycle is useful for making projections about profit margins, earnings growth, trends in sales and profitability. To simplify things it is quite common to reduce the entire life cycle of an industry to 5 stages Such a 5-stage model is described by Reilly and Brown (2003). Abrief description of the different stages will follow next.

Pioneering development: A modest sales growth is accompanied by small or negative profit margins and profits. The firms face high R&D costs. Most recent examples are high-tech companies or internet-based companies with unproven business models. Most of the financing is obtained through venture capital or private equity.

Rapid accelerating growth: Demand for products and services grows and due to only few competitors, profit margins are high. Firms experience substantial backlogs and production capacity is being built up. At this stage successful companies will be able to access the capital markets for further financing.

Mature growth: An increasing number of competitors enter the market. The demand for the industry’s goods and services is satisfied, prices decline and profit margins begin to decline. At this stage financial discipline is important because future earnings might be lower due to competition. Companies with sustainable debt levels will benefit in the long run.

Stabilization and market maturity: The growth rate of the industry declines to the growth rate of the aggregate economy and profit growth will vary by industry due to different competitive structures. Competition will result in lower profit margins. In this stage industry trends will contribute to the development of aggregate credit quality.

Deceleration of growth and decline: Sales growth declines because of changes in demand and new substitutes. An increasing number of companies start to generate losses. The industry experiences a negative credit trend.

The final item needed for this valuation method is the expected capitalization rate. The capitalization rate is determined by understanding how much of a return investors can expect to realize in a particular market. The rate will vary in different parts of the country, in different parts of a city, even in buildings within a few blocks of each other.

Additionally, residential, commercial, and industrial properties also have varying capitalization rates. Remember, because the capitalization rate measures the profitability of an investment, certain types of properties involve other risks and thus dissimilar profit possibilities.

State Policy Research, Inc. has projected spending and revenues for state and local governments combined in each of the 50 states, allowing comparisons of structural deficits and surpluses in each. This is the first time such calculations have ever been made using a nationally uniform approach. The research will be published early next year by its sponsor, the National Education Association. The results summarized in this paper are preliminary and subject to change. Changes, described at the end of this paper, will affect the rankings of certain states other than Tennessee significantly and may affect the exact size of the structural deficits and surpluses shown for each state.

No changes contemplated will affect the basic conclusions for Tennessee:

• Tennessee has a structural deficit problem. Its revenues from existing taxes will grow more slowly than personal income, forcing a constant shrinkage of state and local government relative to the private economy unless tax rates are increased.
• Tennessee has a worse structural deficit problem than any of its eight neighboring states.
• Tennessee has a worse structural deficit problem than any major state (state with more than two million residents) in the nation.
• Tennessee’s tax system does a poorer job of capturing revenues from economic growth than the systems of any of its neighboring states.
• In capturing economic growth, Tennessee’s tax system ranks 46th among the 50 states. Only the tax systems of Florida, Nevada, Texas, and Washington do less well at capturing growth.