The 3 Most Crucial Stages of the Business Life Cycle
The life cycle theory of business states that companies either move through several stages of growth or fail. For the most part, businesses do not stand still. In this post, I will focus on the three lifecycle phases that make or break your business. Here are the three phases we will cover today:
Stage One: Existence
This stage is punctuated by alternating periods of optimism and panic. Many new entrepreneurs “wash out” right away or a few months in. Growth is inconsistent. The business owner must address these questions:
• How can we attract enough customers to become a viable business?
• How can we deliver our product or service in a timely manner and at an adequate level of quality?
• How can we expand from our initial customer base?
• How can I ensure that we have enough money to keep us afloat during start up?
The business is simple, but innovation is at an all-time high. The owner wears many hats, and may be the sole employee. If the firm has more than one employee, the business owner must manage subordinates effectively. Most startups do not have the funds to hire an intermediary manager at this point.
To put it another way: the owner is the business — the engine that provides thrust, direction and energy. Many entrepreneurs conjure images of Internet startups when they think of this stage. However, many types of business go through this phase, including:
• Retail stores
• Textile and technology manufacturers
Many such companies never break through. This comes down to a failure to attract and keep customers, a poorly optimized product manufacturing process or a lack of managerial skills. (See, The Role of the Business Owner, below)
The business closes its doors when the founder runs out of capital. At this point, it can be near impossible to get outside funding, and the entrepreneur is lucky to sell the business for asset value. Some ventures fail because the founder underestimated their level of commitment or their ability. Successful businesses move on to the survival phase.
Stage II: Survival
By reaching this stage, the business has demonstrated that it can attract and keep customers, and that the product or services it sells is in demand and manufactured at a consistent level of quality. In this stage, the business owner focuses more on revenues and expenses. Crucial questions are:
• How can we generate enough cash to break even and maintain our capital assets in the short-term?
• How can we generate enough revenue to stay in business and finance growth?
• How can we generate a return on our assets and labor?
The organization is still simple. The company has a small sales team and a few clerical employees. The business owner may hire a manager to oversee these employees. However, this manager still reports directly to the business owner.
Innovation can be ongoing, but if Stage II drags on, you will see innovation slow. At this stage, the company hasn’t earned enough breathing room to delve headlong into systems development. Survival is still the focus.
The company may break out of this cycle with accurate cash flow forecasting. Note, however, that a company could stay in this stage indefinitely. “Mom and pop” businesses fall into this category. Many manufacturing firms remain in this stage for some time. Often, these stalled businesses are sold to larger firms. Sometimes, they go out of business when the owner retires or dies.
Stage III: Success
The business is growing. Innovation may still be high during this phase, but inevitably, it will slow as the business becomes more structured. The firm has several employees and exhibits a clear management hierarchy. The business has a customer base that:
• Consistently buys their highest margin products.
• Pays the quoted price without excessive haggling.
• Purchases cross and up-sell items.
• Places large orders instead of small orders.
• Pays on time.
All of these factors indicate high consumer trust. The company probably has a strong online presence driven by non-payroll brand ambassador’s. These individuals promote the company’s products and services on sites such as Facebook, Twitter and Pinterest because they use the product themselves. This word of mouth advertising plays a large role in the company’s relevancy.
At this point, the business owner decides between expansion and stability. If expansion is the goal, the owner marshals available capital in a bid for growth. This is by far the riskier move. Failure here can return a business to stage II, or worse. Alternatively, some business owners opt for stability so they can retire or start another venture.
The Role of the Business Owner
All small businesses move through four stages of development. This concept was popularized by Lawrence L. Steinmetz. The four stages are:
• Direct supervision. The business owner must actively manage the firm. This requires the following characteristics: self-awareness, creativity, risk-orientation, advocacy, profit-orientation, perpetual learner, self-efficacy, activator, and delegator.
• Supervised supervision. The business owner gives up some control so they can focus on growth, manage overhead and develop new products or services.
• Indirect Control. To improve efficiency, the management structure must be further refined. An internal hierarchy of managers emerges. One key manager reports to the business owner/s.
• Divisional Organization. This, the final stage, indicates that the company has “made it.” Companies may begin to ‘poach’ talent from other organizations. The management hierarchy is firmly established. A board of directors may form.
Originally published at buildgrowscale.com.