HSC Study Lab | Y11 Business Studies: Stages of a business’ life cycle

HSC Study Lab | Y11 Business Studies: Stages of a business’ life cycle


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

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