Introduction to the business life cycle
Business owners should understand that the business life cycle is a deliberate phased strategy. And is based on the characteristics the business demonstrates at a certain point. If this is ignored a catastrophic event can take place ending up in business failure.
So, in short, a Business Life Cycle is a natural way of business progression. It shows the gradual slow and steady stages through which business progress begins with developing a prototype idea to gain traction. Moving from the initial phase of slow growth to high growth. Usually, it is divided into four stages – Startup Stage, Growth Stage, Maturity Stage, and Decline Stage.
This blog will help you understand the stages of business growth. And help you to understand when to decide to move to the next stage.
The business life cycle strategy
Businesses differ in many ways. From what kind of products they have to what industry they serve to what their target customer looks like. But another way they differ on a fundamental level is where they stand in the business life cycle. This includes the stages of business development.
Your overall business strategy should reflect where you’re at in the stages of a business life cycle.
In the early stages, for example, it might be better to spend a little more time on product positioning. The alternative to do some workforce planning.
In a later stage, it might be more appropriate to aggressively implement an integrated marketing plan. And push your product through all the marketing channels available.
Each stage reflects how the business model unfolds during the business life cycle.
Here’s a brief overview of what the four stages of the business life cycle look like. And how that impacts you as a business owner.
The business life cycle stages
So first let us look at what a business cycle is.
As the name implies, the business life cycle refers to the typical arc in the life of a business. From creation to full maturity and the decline.
The business life cycle is the progression of a business in stages over time. And is most commonly divided into five stages. First start, growth, shake-out, maturity, and decline.
The cycle is shown on a graph with the horizontal axis as time and the vertical axis as dollars or various financial metrics.
In this blog, we will use three financial metrics to describe the status of each business life cycle stage, i.e., sales, profit, and cash flow.
After progressing through the first four business stages, the company can then find ways to renew itself by launching new products or moving into new industries, beginning the cycle anew.
While the business life cycle contains sales, profit, and cash as financial metrics, the funding life cycle consists of sales, business risk, and debt funding as key financial indicators. The business risk cycle is inverse to the sales and debt funding cycle.
Stage 1: Start
You might refer to this stage as seeding and development, or perhaps as the launch stage of the business.
Either way, it’s when your business comes to life. There are several stages of a startup within this stage, but they are interconnected and seem to us to warrant only one of the stages of business growth.
Before the launch, you are doing your research on the business idea and what it will take to get your product or service off the ground (which would represent one of those startup stages).
That means identifying what the organisation will look like, how you’ll do marketing, how you’ll develop the product, and what kind of funds you’ll need to get your hands on to make that happen. You might still be learning how to work for yourself.
Once you are confident that the business idea is sound and you are properly capitalized to take the plunge, you launch your startup and prepare to take on the challenges associated with this stage — and there will be challenges.
After all, one study found that 80% of startups disappear after three years.
During the start, sales are low but slowly (and hopefully steadily) increasing. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. However, as revenue is low and initial startup costs are high, businesses are prone to incur losses at this stage.
In fact, throughout the entire business life cycle, the profit cycle lags behind the sales cycle and creates a time delay between sales growth and profit growth. This lag is important as it relates to the funding life cycle, which is explained in the latter part of this article.
Finally, the cash flow during the launch stage is also negative but dips even lower than the profit. This is due to the capitalization of initial startup costs that may not be reflected in the business’ profit but that are certainly reflected in its cash flow.
At the start, when sales are the lowest, business risk is the highest. During this stage, it is impossible for a company to finance debt due to its unproven business model and uncertain ability to repay debt. As sales begin to increase slowly, the corporations’ ability to finance debt also increases.
This stage will require a lot of hard work on your part, not to mention adaptability as you encounter unforeseen obstacles. So, roll up your sleeves and get to work.
Work on developing a marketing proposal, do customer journey mapping, map out your workforce plan, and put down on paper all of the things you need to do to make the company succeed. Aggressively modify this list as necessary after launching.
Stage 2: Growth
Getting past the startup stage of your business is like a rocket finally breaking through the gravitational pull of the earth and sailing into space.
However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales. Finally, the cash flow during the growth stage becomes positive, representing an excess cash inflow.
As companies experience booming sales growth, business risks decrease, while their ability to raise debt increases. During the growth stage, companies start seeing a profit and positive cash flow, which evidences their ability to repay debt.
The corporations’ products or services have been proven to provide value in the marketplace. Companies at the growth stage seek more and more capital as they wish to expand their market reach and diversify their businesses.
This stage makes your business even more attractive to investors, so if you still have a need for more funding to get your business over the hump with more facilities or employees, this is a good time to reach out to potential investors.
Although the startup stage certainly is the most challenging for any business, the growth stage can be risky as well. Business owners often make mistakes at this stage, such as hiring the wrong people, investing in the wrong things, or just not keeping their eye on the ball due to a wide range of new demands on their time.
In order to survive this stage, you must hire good leaders who can help you establish a growth strategy and manage it successfully. Look for people who have a strong track record for guiding other businesses, and whose visions align well with yours.
This is also a good time to implement a change management plan to help your company adapt.
Stage 3: Shake-out
Eventually, the soaring revenue you’ve been enjoying will start to slow down due to more competitors entering the market or just the saturation of your target marketing. This is what we call the “shake-out” stage in the business life cycle.
At this point, you’ve peaked as a business and your sales start a long, slow decline — or, your sales are going up, but you’re experiencing more competition. This is when businesses do a lot of consolidations and mergers with other firms.
During the shake-out stage, sales continue to increase, but at a slower rate, usually due to either approaching market saturation or the entry of new competitors in the market.
Sales peak during the shake-out stage. Although sales continue to increase, profit starts to decrease in the shake-out stage.
This growth in sales and decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit.
During the shake-out stage, sales peak. The industry experiences steep growth, leading to fierce competition in the marketplace. However, as sales peak, the debt financing life cycle increases exponentially.
Companies prove their successful positioning in the market, exhibiting their ability to repay debt. The business risk continues to decline.
Conduct a full audit of your company to find areas of waste, and eliminate them or find better ways to do necessary activities.
Stage 4: Maturity
Soaring profits may be a thing of the past, but that doesn’t mean your business is done for. On the contrary, what comes next may be the best stage of all: maturity.
At this point, you’re pretty well set. Profits aren’t explosive, but they are solid and dependable.
You know where you stand, and your business appears well-positioned to last for years or even decades. If your business has adapted well, you should be experiencing slight but persistent growth each year.
The main challenge during this stage will be fending off all the competitors that will be constantly trying to knock you off your perch.
There is certainly still some risk here, and it’s important to try to find ways to launch new products and expand into new market areas.
When the business matures, sales begin to decrease slowly. Profit margins get thinner, while cash flow stays relatively stagnant.
As firms approach maturity, significant capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement.
However, it’s important to note that many businesses extend their business life cycle during this stage by reinventing themselves and investing in new technologies and emerging markets.
This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace.
As corporations approach maturity, sales start to decline. However, unlike the earlier stages where the business risk cycle was inverse to the sales cycle, business risk moves in correlation with sales to the point where it carries no business risk.
Due to the elimination of business risk, the most mature and stable businesses have the easiest access to debt capital.
Look for opportunities. Remember, we are talking about a cycle here. Begin the cycle anew by looking for new products to launch, and keep that startup mentality alive. With all the resources you now have as a mature company, this should be a lot easier to do compared to when you were a startup with limited cash.
Stage 5: Decline
Depending on how your business was structured and how employees and owners engaged in the business. In most cases, the business owner services the debts if they still can and exist in the business.
In the final stage of the business life cycle, sales, profit, and cash flow all decline.
During this stage, companies accept their failure to extend their business life cycle by adapting to the changing business environment. Companies lose their competitive advantage and finally exit the market.
In the final stage of the funding life cycle, sales begin to decline at an accelerating rate. This decline in sales portrays the companies’ inability to adapt to changing business environments and extend their life cycles.
Focus on the best ways to exit the business for everyone.
Examples of Life Cycles
Coca-Cola released this diet soda in 1963, decades before Diet Coke’s heyday. Tab was the company’s first foray into the diet drink market.
The drink became popular in the ’70s and early ’80s but fizzled out in popularity when Diet Coke created a decline in the Tab’s market share.
Coca-Cola discontinued Tab in 2020, along with other products that were underperforming.
This discontinuation marked the decline life cycle phase for the once-popular diet beverage.
Electric cars are in their growth cycle as of April 2021.
The global Electric Vehicles Market was worth approximately $140 billion in 2019, the most recent figures made available by Facts & Factors, which published a 175-page research report on the electric vehicle market.
The electric car is a prime example of a product in the “growth” phase of a life cycle. It is estimated that by 2026, the electric car market will hit $700 billion. And it’s not just Tesla running the electric car charge anymore.
Top market players also include Kia, Hyundai, BMW, Volkswagon, Ford, and Toyota.
If we think of the economy and commerce as a “living organisation,” adapting and transforming to its surroundings, we can find many biological analogies for business challenges, such as “survival of the fittest.”
Business life cycle FAQs
1. How does the business life cycle affect a company’s business strategy?
2. At what stage of the business life cycle does seed financing occur?
Seed financing usually happens in the product development stage.
3. What impact does the life cycle have on a small business?
If a small business makes a product that goes into decline, the business could fail.
Meta (formerly Facebook) may be in the maturity phase heading into decline or stability, according to various sources, including GWS Technologies.4
Business life cycle key takeaways
- A life cycle in business follows a product from creation to maturity and decline
- There are five steps in a life cycle—product development/startup and market introduction, growth, maturity, and decline/stability.
- Other types of cycles in business that follow a life cycle type trajectory include business, economic, and inventory cycles.
- Seed money is often invested in the product development stage.
- Studying the life cycle of a competitor’s product is worthwhile.
Understanding the business life cycle characteristics is critical for business owners, it guides business strategy and financial decisions. Use the characteristics and identify in which business cycle stage your business is today. Check if you apply the appropriate strategy and financial decisions now and in the future.
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