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HSC Study Lab | Y11 Business Studies: Stages of a business' life cycle - YouTube
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There are typically four stages in the business
life cycle - establishment, growth, maturity
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and post-maturity, and the length of each
of these stages will be unique to each business.
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A diagram can be constructed showing the stages
of the business life cycle relating sales
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on the vertical axis to time on the horizontal axis.
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When a business first starts, it must find
a location, gather resources such as staff,
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and find customers for its products.
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During this stage, relatively few sales are
made and establishment costs are high.
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Critically, the business must have enough
capital to cover the costs of its operations
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until the customer base is established and
a regular revenue stream develops.
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Businesses will have a combination of fixed
costs and variable costs.
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Fixed costs include rent and loan repayments
and must be paid even if there are no sales.
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Variable costs are related to the level of
output and the cost per unit, with a higher
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level of output leading to higher variable costs.
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In order to keep the business afloat, firms
must make enough sales and revenue to cover
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both their fixed and variable costs.
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The correlation between the level of output
and the volume of sales is called the break-even
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point.
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Some businesses will never get past the establishment
stage.
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It could just be a bad business idea that
did not have a chance of establishing a customer
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base.
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It could be because of poor management decisions
and misallocation of resources.
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Very often however, it is because of a lack
of access to funds, known as undercapitalisation.
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It can take a great deal of money to get a
promising business established and operating
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successfully.
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If the owners do not have sufficient funds
to see the business through the establishment
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stage, a potentially successful business might
fail in its infancy.
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In the growth stage of the business life cycle,
sales begin to increase, revenues and profits
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start to rise, and firms have established
regular cash flow from an established and
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growing customer base.
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In order to continue to grow, they will continually
monitor the cost and availability of important
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inputs.
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They may need to relocate to a newer or larger
site that is able to handle the growing needs
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of the business.
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It could be that more and newer capital equipment
is required to handle the increasing level
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of business activity.
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At this stage, firms might need more capital
to service the growing business.
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Extra finance can be added through debt or
equity.
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Increasing the debt simply means borrowing
from a bank or other financial institution.
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This could mean that the business becomes
more highly geared and a larger proportion
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of the revenue will go to paying interest
rather than into profits.
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The owner could add additional money to the
firm by increasing their equity.
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This can be done by injecting more of their
own money into the business or by reinvesting
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part of the firm's profits.
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By inviting partners into the business, or
by incorporating and selling shares, equity
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in the business can be sold to raise capital.
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Growth can also be achieved by what is known
as 'integration'.
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Horizontal integration occurs when one firm
buys out another firm in the same part of
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the production chain, therefore increasing
their overall volume of production and market
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share.
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For example, an electronics retailer looking
to grow, takes over a competitor, expanding
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the overall number of stores opening up a
larger retail footprint.
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Vertical integration aims to secure resource
supply chains, service providers, or control
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of distribution networks by buying firms before
and after them in the production process.
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A biscuit company might look to buy a chocolate
maker in order to guarantee quality and supply
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and to expand their current product range
to target a competitor.
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At the maturity stage, sales start to plateau
and profits and revenue stabilise.
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In order to increase profits, businesses need
to cut costs through innovation.
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The market becomes saturated.
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Product differentiation and diversification
into new product lines can give a firm a competitive
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advantage.
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Management may become complacent and avoid
taking risks that may threaten an established
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market share.
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In Australia, many mature industries are dominated
by a few large firms, which sell similar but
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differentiated products.
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This form of market is called an oligopoly.
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Three situations are possible in the post-maturity
stage.
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A process of renewal can take place where
innovation, redesign or mergers, and takeovers
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can occur. This revitalises profitability
and repeats the growth stage.
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Some businesses are content with their level
of profitability and sales, and happy to remain
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in a steady state.
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They often have strong relationships with
existing customers and prefer to avoid any
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risks involved with undertaking innovation
or change.
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Other businesses will ultimately lose touch
with their customer base or fail to respond
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effectively to competitors or new entrants.
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Their products may become obsolete or outdated
and, as a result, the business will decline
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and fail.
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Of course businesses may voluntarily cease
operations or close because of the owner's
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choice to finish their business, by retiring for example.
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Many factors influence the stages and timing
of a businesses' life cycle.
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And while these influences may be difficult
to predict, careful management and constant
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focus on operations and the broader market
will give every business the best chance of
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survival and growth.
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