What Is Business Life Cycle ?
Business Life Cycle is a natural way of business progression. It shows the gradual and slow and steady stages through which business progress begins with developing a prototype idea to gaining traction, moving from the initial phase of slow growth to high growth. Usually, it is divided into four stages – Introduction Stage, Growth Stage, Maturity Stage, and Decline Stage.
Management needs to understand the business cycle well to generate positive returns, which are in the best interest of the shareholders at large. The different business cycles will result in varying financial metrics, both Top LineTop LineThe top line is the revenue earned by the business by selling goods or services, reported in the income statement for a defined period. (Revenues) and Bottom line (Net Profit) for the business and, as such, holds equal relevance for various stakeholders such as Financial InstitutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. (who lend to the business), Customers, suppliers and so on.
Table of contents
- The business life cycle is a natural business progression approach that displays the evenly slow, steady levels from where the business growth initiates, changing an original concept to obtain traction and inclining from slow to high growth. In addition, it is divided into four stages: introduction, growth, maturity, and decline.
- It is a basic design that presents business growth. In addition, it is a fundamental theory that has held a practical value because of its immemorially.
- The various business cycles outcomes in changing financial metrics: top line, i.e., revenues, and bottom line, i.e., net profit. Furthermore, it has balanced importance for stakeholders like financial institutions who contribute to the business, customers, suppliers, etc.
Business Life Cycle Explained
The business life cycle model is a structural pattern that shows the evolution of a business. It is an important concept that has held its practical value since time immemorial. It refers to the various phases that any company typically goes through right from the beginning to till it gets transformed or closes down. Each of the phases show the different opportunities, challenges or risks, the strength and weaknesses that the entity faces on a daily basis while conducting operations as they continuously expand and grow.
However, all the above depends a lot on many external and internal factors. Some external factors are market conditions, political situations, sudden and unexpected natural calamilty, change in taste and preference of consumers, problem in availability or raw material etc. Some internal factors include lack of skilled and experienced labor force, financial downturn for the business, the entity lagging behind in technological upgradation, mismanagement of operations or lack of systematic and strategic approach towards problem handling, etc.
So the business in general faces various stages of development which are commonly known as introduction, growth, maturity and decline. Each of them have been elaborately explained later in the article. But it is important to understand that all buisnesses do not undergo the above stages or in the same sequence. Some may skip a particular stage or some others may experience an addition of a new stage in the whole process.
Successful companies strategically plan their operational methods in such a way that they are able to extract the maximum benefit from each phase without incurring any extra cost and ensuring long term success.
Stages (With Graph)
Business Life Cycle comprises of multiple stages as depicted through the graph below and explanation henceforth:
#1 – Introduction Stage
It is marked by the initiation of the business life cycle characterized by the evolution of product testing, understanding the product’s commercial viability. This period involves the nascent stage for business characterized by no revenue visibility and cash outflow. Investors, during this stage, commit a small portion of money normally in the form of Seed funding. The purpose during this stage is to check the product/service viability and acceptability in the market. The majority of the business fails to go beyond this stage.
#2 – Growth Stage
This stage separates men from boys. Businesses that reach this stage have achieved market acceptability and revenue visibility. Cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. generation accelerates at this stage, along with heavy investments in the business. During the business life cycle, various investors and financial institutions also undertake a large amount of investment in the business. It is a high growth stage of the business and results in phenomenal growth in financial metrics before any competitor arrives or the business loses its mojo.
#3 – Maturity Stage
Stable markets characterize this stage for the business, stable revenue generation, and a highly acceptable customer base. It is the stage of the business life cycle model where revenue and profits are at their peak. The business has a streamlined process and a stable source of income for its various investors. Normally businesses spend a lot of years in this stage. The majority of the world’s long-standing FMCGFMCGFast-moving consumer goods (FMCG) are non-durable consumer goods that sell like hotcakes as they usually come with a low price and high usability. Their examples include toothpaste, ready-to-make food, soap, cookie, notebook, chocolate, etc. companies fall into this category.
#4 – Decline/Saturation Stage
This stage is characterized by the end of the business cycleBusiness CycleThe business cycle refers to the alternating phases of economic growth and decline., falling revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions., profits, customer movement, and the slow and gradual closure of the business. Not all business reaches this stage, and once a business reaches this stage, it’s the end of the cycle for it. This stage is characterized by customer disinterest and outdated product/service of the business.
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Now let us try to understand the various features of the concept of business life cycle phases as detailed below:
- Business Life Cycle is depicted through multiple stages, which can either be one at a time or multiple, and majorly every business starting from scratch to reaching heights observe these stages.
- Stages of the trade cycle require businesses to formulate an altogether different strategy. Business at the start stage follows a different policy than a business at the maturity stage.
- They are natural and not forced ones. It is a gradual development of a business depicted through this cycle.
- Another important feature of the business life cycle phases is its irregular period. Some stages last for a few months to a year (For example, Development Stage, during which a business tries to develop the idea into a commercially successful venture) while some run for a decade.
- Trade cycles are common across industries; however, their impact varies across companies within the same industry.
Let us understand the concept with the help of an example.
We assume that a group of 3 people have created a mobile application that will help people manage the daily tasks efficiently in limited time and within the comfort of their home. They have managed to get an initial funding from some small investors and financial institutions which is enough to start the implementation of the app in mobiles along with advertising and promotion to potential users. This can be assumed to be the introduction stage of the business.
The next is growth stage, the application gains popularity and importance among users because it is easy to install and handle. It is also compatible with different mobile operating systems. The startup starts growing its customer base and also starts getting positive reviews and many downloads. The business now has to hire more staff to handle the traffic and other operational needs which requires more investment along with rise in revenue.
Then comes the maturity stage of the business life cycle theory where the application has now acquired a very high customer base and has expanded its services in various ways. It has introduced upgraded version of the same for better user experience. The business management tries new interface and features to attract attention.
The saturation or decline stage will see a fall in customer growth. Due to rise in market competition staying ahead in the market is difficult. Now it may have to enter into partnership or sell off the business to a big company or integrate the application with some other important service that is in demand.
So, we see from the above example the various stages of the establishment business life cycle, how it affects the operations and what the entrepreneurs do to handle it.
Here are some points that state the importance of establishing a business life cycle.
- Understanding the Business Life Cycle stage helps various stakeholders, especially investors, fund the business properly.
- It also enables businesses to adopt a different approach based on the life cycle stage.
- Resource allocation becomes easy by studying the stage the business is currently undergoing since resources are not unlimited. Startups typically need a lot of initial investment during growth stage but when the business matures, investment requirement goes down but cost increases.
- Risk management is an integral part of any business. The risk of failure is more in the initial stages. So business cycle helps in identifying what kind of risk is possible and how to tackle it.
- Studying the business cycle is important from the viewpoint of financial planning and budgeting. This is because initial stages will require more funds due to innovation and advertising expense, compared to maturity.
- Undersatnding the cycle helps in designing healthy workplace practices where employees will be encouraged to contribute their ideas for development and expansion.
Now let us look at the different challenges:
- Various stages have different periods that make business static and lead to longer time cycles.
- Some business life cycles result in job losses, falling revenues, and declining stock prices, such as the maturity/saturation stage.
- The fund requirements at different stages are different. If the management cannot arrange funds at the right time, it leads to loss of opportunity and downfall for the business.
- It is sometimes difficult to convince prospective investor for getting funding. If the business idea is not something which is in good demand or has good future prospects, investors may not come forward to contribute money.
- Market uncertainty cannot be ruled out because it is an external factor that may result in trouble in carrying on business operations. Customer taste and preference may suddenly change, there may be some political problems leading to fall in demand or any other related situations.
- The maturity stage of the business life cycle theory faces a lot of competition because new entrants come in with innovative technologies. So, the existing business needs to upgrade to keep up with the competition continuously.
- It is necessary for the management to be skilled and experienced to guide the business. Any mismanagement regarding finance, or human resource policies can be detrimental to the business.
- There may also be legal issues and regulatory requirements that should be adhered to. Else they hamper the smooth working of the operations.
Therefore it is important to understand both the positive and negative aspects of the business concept so that there is a clarity regarding what is to be done at which stage of the business.
Frequently Asked Questions (FAQs)
Who created the business life cycle?
Business consultant and former professor Ichak Adizes developed the idea of the business life cycle. According to him, organizations have five stages of development: birth, growth, maturity, decline, and death.
A business cycle impacts the economy’s all sectors. So, likewise, it will also affect all firm sectors. Every aspect, such as demand, supply, and production cost, depends on the business cycle phase. Therefore, the firm must know the present situation appropriately.
What is the maturity stage of the business life cycle?
The business reaches a stable phase during the maturity stage with a well-established market position. Growth slows, and the focus shifts to maintaining market share, optimizing operations, and managing competition.
In the startup stage, a business is just getting off the ground. It involves conceptualizing the business idea, market research, creating a business plan, and securing initial funding or investment.
This has been a guide to what is Business Life Cycle. We explain the stages, with example, importance, characteristics and challenges. You may learn more about financing from the following articles –