What is the business life cycle?
The definition of the business life cycle says that it’s the progression of a business in phases over time. The business life cycle is divided into five stages. The first one is creating an organisation. The second one is when the organisation is developing and growing. The third one is shake-out. Maturity stage is another phase. The final stage of the business life cycle is decline or stability.
Some of the companies live a long time, but we have to keep in mind that nothing is forever. There are new companies appearing on the market every single day. At the same time, hundreds of companies disappear. They can’t survive the test of time. Only the ones which can adapt to changes develop.
There are some organisations which grow faster and do their job better than others. The person who is in charge of the organisation has to know on what development stage the company is at a given moment. He has to choose the style of leadership that most closely fits a particular stage.
Business life cycle – a marketing concept
The business lifecycle is an important marketing concept which enables us to have access to the competitive dynamics of the product. At the same time, it can be misleading if it’s not properly used. Business or industry life cycle means that each product’ life span is limited. Selling a product goes through a few different phases and each of the phases creates different opportunities for the seller.
Businesses face increase in profit or decline in profit depending on the stage of the life cycle. Also, we need to know that products require different marketing, financial, procurement and production strategies during the different phases of the business life cycle. The personnel policy should be changed depending on the stage of life cycle.
Start with a need
When you want to set up a business and you think about marketing – you shouldn’t start with a product or with a product class. What you need is… a need. Your job is to create a product which will respond to the needs of people from your target group. The need is met with a use of technology. Any new technology can satisfy a given need in a more efficient way.
Five stages of the business life cycle
As mentioned before, there are five stages in a business entity lifecycle – launch stage, growth stage, shake-out stage, maturity stage and decline stage. We focus on different things at different stages. Business owners think about the best direction of development for them. They take care of the intensity of the development. They implement strategic planning and they set tactical goals. They try to figure out the best business model for them. Let’s learn more about the stages.
Phase one: launch
Every company which appears on the market has to think about the customers needs and how to satisfy them. Business owners have to find their place and take a position on the market. The founders of those companies need to have leadership qualities. To succeed they must have faith in what they can achieve. They should be willing to take risks. They are responsible for business planning, employee management, client acquisitions, sales expectations and many more. That’s why they should use the services of small business advisory.
The company’s goals are still unclear, even though the company put some products and services on the market. At the beginning, sales are rather low, but over time, they increase. Company owners hope that the sales will be constantly growing. They focus on marketing to their target audience. They show their business idea and values. Businesses don’t make profits in this phase – quite the opposite. They are prone to incur losses.
Phase two: growth
This growth stage is a bit insecure too because the company can collapse due to the lack of appropriate experience and managers’ competence. The communication and the structure of the organisation still remains informal. The organisation members spend much time on developing contacts. They demonstrate a big involvement. They try to strengthen their position on the market, they establish a market presence. They try their best to be competitive and flexible. They take on new customers.
What business owners need is a good business strategy. For this reason, they should take advantage of business strategy services. Professionals will help them create an achievable business plan and to set goals.
The main aim at the growth phase is to increase the success of a particular product and keep growing. The second phase is the time when companies experience rapid growth. They pass the break-even point and they finally start making some profit. The cash flow during this phase becomes positive. This is also the time that will require investment. Business owners should seek outside investment capital.
Phase three: shake-out
This phase is characterised by integrated management, easy forms of financing, planning and predicting. The growth is still important of course, however, sales increase at a slower rate. The cause may be saturation of the market or increasing competition.
The organisation needs industry specialists with great knowledge and a lot of experience. It often happens that business owners are overconfident. They think that the company will easily continue to grow even when some problems arise, which is not true. In the shake-out phase, sales keep increasing but profit slowly starts to decrease. It leads to bigger costs. Cash flow increases and becomes bigger than profit.
Phase four: maturity
Maturity stage is phase number four when the development of the organisation is based on sustainable and balanced growth. The company has a stable structure and effective management. Profit margins get thinner. Cash flow stays stagnant. Stability – this is the right word describing the fourth stage. Among others, organisations gain financial stability.
We can say that there are three substages of the maturity stage – early maturity, intermediate maturity and final maturity. They aren’t official names but it is easy to guess that the level of maturity increases with each stage. “The youngest” substage is about a systematic growth of the organisation. “The middle” substage is sustainable growth. And “the oldest” is a time when the individuality and the image of the organisation is shaped.
It’s worth mentioning that organisations fight for themselves and they sometimes try to bring a breath of fresh air to their businesses. It means that they try to extend their business life, especially by reinvesting themselves. They often invest in new technologies and focus on emerging markets. Thanks to that, companies can refresh their growth.
Phase five: decline
If we see the organisation unwilling to take risks, we can be sure that this organisation is at the fifth stage of the business life cycle. The company is no longer flexible in its efforts. It doesn’t attain the results it deserves. The aim is not to take long and risky actions. Understanding the business life cycle is critical especially for corporate financial analysts and investment bankers.
Fifth phase is like a fight for survival and trying to maintain its market share. Everything declines: profit, sales and cash flow. Unfortunately, such businesses lose their competitive advantage. They exit the market at the very end.
It’s worth knowing about the business life cycle with each of the phases, even more so when you are a business owner. Organisations have a chance to “survive” and stay on the market thanks to it because they know what they should do and what actions to avoid. Knowledge about business lifecycle should be generally known. Entrepreneurs have to be familiar with it!