5 Stages of the Business Life Cycle and How to Make the Best of Each
Once you decide to get a new business going, you’ve basically entered a business life cycle. Over the course of time, you will move from ideating to startup. If you find success in your venture, your business will also go through growth, maturity, and probably, decline.
What you need to understand at the onset is that no matter what business you choose, you will face roadblocks along the way. Succeeding in any business requires that you remain flexible in your ideas and adapt to changing strategies as time progresses. Remember that you might need to embrace different approaches to meet different goals. For example, what you might need to do to penetrate a new market would be different from what’s required to retain your existing market share.
Startups in Numbers
Statistics surrounding the success of startups don’t look promising. Consider these numbers:
Around 20% of startups fail in the first year.
Out of every 10 startups, 9 fail at some stage.
Around 75% of startups backed by venture capital fail.
Only 40% of startups manage to generate profits.
Less than half of all businesses enter their fifth year.
More than 80% of startups that fail to experience cash flow problems.
While these numbers make the picture for startups look bleak, fact remains that several startups go on to find significant success. What usually sets the success stories apart from their failed counterparts is that they go through meticulous planning and execution at every stage of the business life cycle.
What Are the Five Stages of a Business Life Cycle?
Conventional wisdom suggests that every business goes through 5 stages of evolution. These include:
Seed/development
Startup/launch
Growth/shakeout
Maturity
Decline/renewal
Understanding which stages your business is at can make a significant impact when it comes to strategic planning as well as managing operations.
Consider this – there are several business owners who feel that their businesses are growing because their sales increase marginally each year. However, what they fail to see is that while there might be a slight growth in their big customers, they continue to lose out on smaller ones. In these cases, it becomes apparent that businesses are not putting in the required investment in systems and manpower to begin renewal. On the other hand, there are businesses in the growth stage that don’t allocate the required resources to increase their market share.
How do you determine which stage of the business life cycle your business has reached? Once you know where your business stands, what can you do to make the most of the situation? Finding out about the different business life cycle stages and just where your business stands are fairly easy. Going through each stage successfully can also be simplified, provided you know what measures to follow. For instance, every stage of a business life cycle comes with distinct management requirements.
The First Stage – Seed/Development
The first stage of a business life cycle comes in the form of an idea. This stage is referred to as the seed stage because you literally plant the seed of your business and work toward making it grow. However, the first step you need to take is determining the viability of your idea.
The success of your business will eventually depend on various aspects such as your capabilities, financial soundness, as well as the readiness and acceptance of your target audience. Asking yourself if you are willing to put in the required time and effort to make your business a success is crucial at this stage of the business life cycle.
Incidentally, the seed stage also refers to attracting seed funding. As an entrepreneur, this is when you look for investors who are interested in your idea and willing to provide the capital you need.
One of the key factors that require your consideration is if your idea will result in quick profits and return-on-investment (ROI). Establishing if there is a market requirement for your idea is also crucial. This is because the top reason why startups fail is the absence of a market requirement.
During this stage, business owners need to focus on creating business plans, getting professional advice, taking a close look at existing market conditions, reaching out to potential investors, and identifying their own roles.
Creating a business plan. How financially sound a business is when it starts out plays a vital role in its success, which is why this aspect requires meticulous planning. You need to identify and analyze existing opportunities as well as any possible threats that your business might face. This stage also requires identifying your strengths and weaknesses.
Getting advice. At the seed and development stage of your company life cycle, you need to get advice surrounding your idea’s potential from different sources. Once you have a business plan in place, share it with people who you feel might be able to offer competent advice. These could include business associates, peers, industry specialists, friends, and even family. Find out how others went about getting seed funding for their projects, and how they overcame problems that came their way.
Understanding market conditions. Given that around 90% of startups fail, you need to determine if there is a requirement for your product in the first place. How you plan to position and price your products or services is also important from your target audience’s point of view. A crucial question you need to ask at this stage is if you will be able to soothe a pain point of your target audience.
Attracting investors. Funding your idea so it sees the light of day is important. This is why you need to find venture capitalists or investors who might be interested enough in your idea to provide financial backing. This typically involves establishing the project’s feasibility by carrying out market research.
Identifying your own role. When you begin, your finances might require that you be a jack-of-all-trades and handle different aspects of your business. However, this method becomes impractical as you move forward. Fortunately, once you have the required funding in place you can streamline your role to focus on your core competencies and developing your business.
Setting the Business in Motion. You need to select a business name and create a business entity to get the ball rolling. This step includes registering your business, getting state and federal tax identification numbers (TINs), applying for the required permits and licenses, as well as filing for patents, copyrights, and trademarks. Setting up a business bank account is also part of the process.
The Second Stage – Startup/Launch
Once you have determined the viability of your idea and registered your business, it is time to launch your startup. Several marketing experts feel that of all the stages of a company, this is the riskiest. The general consensus is that mistakes businesses make during this stage impact their operations in the coming years. This is one of the reasons why a number of startups fail in the first year, and even more, before making it to their fifth.
Adaptability plays a vital role during the startup stage in a business life cycle. Entrepreneurs/business owners need to spend much of their time and resources making changes to their products or services according to the feedback they receive from their initial customers.
This stage of the business life cycle requires that you outline your overall strategy and clearly define different work processes. This is also when you need to learn how to make your venture sustainable and profitable.
The biggest challenge businesses face during this stage is to develop models that are effective in attracting new customers, generating profit, and retaining employees. Confusion often results because of changes that might be required. However, what’s important is having faith in the process.
Aspects that new ventures need to focus on during the startup stage include:
Creating a company structure. Your business might have employees donning multiple hats during the early days owing to financial constraints. However, it is important that you create a well-defined company structure to ensure that your business moves to the growth stage.
Managing cash flow. The business model you devise should ensure that there is no cash flow impediment in the foreseeable future. This way, you may look forward to consistent growth. Hiring new employees and retaining existing ones also becomes simple when you don’t have cash flow problems.
Implementing new ideas. Pay close attention to the feedback you receive from your initial customers. Come up with new strategies to reach out to your target audience. Listening to your customers and implementing new ideas gives you an indication about the aspects that require your focus going forward.
Identifying and dealing with challenges. Some of the challenges you might have to face during this stage of your business include fierce competition, hiring suitable employees, making partnership decisions, managing finances, and effective branding of your business. When addressing any such challenge, you need to be at your decisive best.
The Third Stage – Growth/Shakeout
By the time your business reaches this stage, it starts making a place for itself in the market, and the business life cycle approach switches to a slightly lower gear. This is when your existing customers spread the word about your business to prospective customers.
Businesses tend to reach this stage after having been around for five or more years, and they have a sizable customer base by this point. Their turnovers are usually low, and they have strong cash flow as well as high profits. When your business reaches this stage, your goals should include:
Dealing with competition effectively
Increasing customer base
Maximizing revenue
Expanding workforce
Creating a robust corporate structure
During the growth phase of a business life cycle, your focus should remain on looking inward, getting more investment, and strengthening customer relationships.
Looking inward. Divide your operations into clearly defined segments. Hire well-qualified and experienced people to run each department. With support staff in place, you can focus your time and energy on managing and marketing your business. This phase includes anticipating roadblocks and taking preventive measures.
Getting more investment. Looking for additional funding during the growth stage gives you means to expand your business even more. With added capital, you can think about investing in equipment, hiring more employees, and exploring new markets. Funding can come in the form of debt or through investors.
Strengthening customer relationships. Employees from across levels need to proactively drive customers into promoting your brand. They can do this by nurturing existing relationships while fostering new ones.
Some businesses also go through the shakeout stage. While there is an increase in sales during this phase, the growth rate becomes slower than before. This can be because of new competition or market saturation. In addition, businesses experience a decline in profits despite a continued rise in sales. This is owing to an increase in costs. In some cases, cash flow can increase to a level where it exceeds profits.
The Fourth Stage – Maturity
Signs that your business has reached this stage include having an annual growth of around 5% and having branches or subsidiaries. This is when your business holds its own against the competition and is looked upon with favor for a merger or an acquisition. In such a scenario, you may choose to strike a deal and exit the business or infuse more capital for further growth.
Your focus in this stage should be on whether you want to exit your business or go the expansion way.
Exit strategy. You may exit through a partial or complete sale of your stake in your company. Communicating the right information to your employees at the right time is important to maintain transparency.
Think about expanding your business only after determining if more growth can be sustainable. Identify market opportunities and account for worst-case scenarios.
The Fifth Stage – Renewal/Decline
This stage is typically marked by a decline in profits and brand reputation. Any efforts of renewal should begin before signs of decline start to show. Alternatively, business owners can think about exiting their businesses at this stage.
Quite like in the maturity stage, your focus during this phase should be to determine whether you wish to invest and expand, or sell and exit. In the case of the latter, work with people who have expertise in mergers and acquisitions.
Conclusion
Knowing which stage of the business life cycle your business has reached simplifies identifying possible problems. Coupled with careful planning and execution, getting by any potential setback becomes simpler too. While there are no definitive strategies that can help businesses survive in highly competitive markets, knowing what the future might hold is always beneficial.
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