1. Nature of business - business growth and decline

Question 1

what are the stages of the business lifecycle

Answer 1

1. establishment
2. growth
3. maturity
4. post maturity

Question 2

what is the business lifecycle

Answer 2

-In each stage of the cycle, a business is confronted with new challenges.

-The nature, operation and organisation of the business changes as the business progresses from one stage to the next.

As this occurs, the business owners need to constantly develop strategies to deal with its expansion.

To do this successfully, owners must continually assess the business’s position on the life cycle.
With the business life cycle, there is no set time limit for each of the stages.

Question 3

features of the establishment phase

Answer 3

*Its prime function and location of the business is determined.
*The legal structure is determined.
*A business plan is written.
*There are initially high start-up costs, especially regarding promotion & fixtures and fittings
*There are low sales volumes, poor or erratic cash flow and low profits.

Question 4

features of the growth phase

Answer 4

*Growing customer awareness
*Increased sales and costs per unit fall
*There can be increased specialisation and greater diversity in products.
*There is an increase in the number of employees.
*There is increasing revenue, profit, and market share.
*Managers now have a better understanding of the business, its customers and government regulations.
*More emphasis is placed on marketing and the use of complex computerized accounting procedures.
*Mergers and acquisitions are common.

Question 5

Mergers and Acquisitions (Takeovers)

Answer 5

Merger: occurs when the owners of two separate businesses agree to combine their resources and form a new organisation.

Acquisition: occurs when one business takes control of another business by purchasing a controlling interest in it.

Question 6

types of acquisitions

Answer 6

Horizonal: Horizontal acquisition is where a business acquires a business performing the same function, such as Westpac Bank acquiring St George Bank

Vertical: Occurs when a business acquires a business that is part of its supply chain, either providing the business with raw materials or components, or a business that sells its products.

Diversification: When a business acquires or merges with a business in a completely unrelated industry

Question 7

features of the maturity phase

Answer 7

*Sales and profits will level off, growth and market share begin to slow

*The market experiences product saturation and there will be more competition within the market

*Innovation may decline

*The business could easily lose the energy, enthusiasm and vitality of its earlier times

*Sense of complacency often envelops the business, affecting both management and staff

Question 8

post maturity phase

Answer 8

*There are generally 3 possibilities for a business in the post maturity stage. It could experience:

1) Steady state — the business continues to operate at the level it has been during the maturity phase
2) Decline — falling sales and profits ultimately resulting in business failure
3) Renewal — increasing sales and profits due to new growth areas.
* The final business phase could be cessation (closure)

Question 9

features of a steady state

Answer 9

*A business in a steady state is neither declining nor expanding.
*Such a business is satisfying customer demand and maintaining profit levels.
*It is highly like the business at the ‘maturity’ stage, but it does not continue to spend money on research and development.
*The owner is more content to produce what it has in the past and rely on market replacement products.

Question 10

challenges of a steady state

Answer 10

Eventually the business environment will change, and the business will be adversely affected.
Ultimately, the steady state becomes very unstable, and the business stagnates.
It eventually loses sales and its competitive edge. May eventually enter decline.

Question 11

features of a decline

Answer 11

• As customer’s stop buying the business’s products the cash flow will be seriously affected.
• Eventually, profits will also decline.

Question 12

challenges of a decline

Answer 12

1. Decline becomes difficult to reverse because:
2. It becomes difficult to borrow money because financial institutions are reluctant to lend money to high-risk businesses.
3. Suppliers will restrict their credit facilities and may insist on cash payments.
4. Products become obsolete, leaving the business with unsold stock.
5. Well-qualified employees may begin to leave and seek better opportunities.
6. The longer the business attempts to stagger on, the greater the risk of failing and ceasing operations (cessation).

Question 13

features of a renewal

Answer 13

*A focus on new markets being tapped and satisfying previously unmet demand.
*Involves the business innovating – new products or new marketing strategies.

Question 14

challenges of a renewal

Answer 14

• An extensive market research program is needed.
• May not lead to continues growth.

Question 15

responding to challenges for the establishment phase

Answer 15

1. Customers not familiar with product; and retailers reluctant to put on shelves.

• Provide market research to retailers.
• Free Product Samples (Customers,
• Retailers, Industry Magazines)
• Less Expensive forms of Promotion

Question 16

responding to challenges for growth phase

Answer 16

1 .Pressure on existing resources to meet new demand.
- Purchase new equipment.
- Hire more employees.
- Extend hours of shifts

Question 17

responding to challenges for maturity phase

Answer 17

1. Maintaining high profit
   - FORCE – Focus on Reducing Costs Everywhere
   - Examine distribution chain to cut costs

Question 18

responding to challenges for post maturity phase

Answer 18

1. Sales begin to level off; and the market for the product is saturated.
   - Market research

Question 19

factors that can contribute to business decline

Answer 19

1. poor location
2. failure to plan
3. failure to meet customers needs

Question 20

Voluntary vs involuntary

Answer 20

Voluntary: Owner’s choice
Sole trader + partnership goes into bankruptcy.

Involuntary: Forced to close, Liquidation which means a company is protected by limited liability.

Question 21

sole trader and partnership cessation – bankruptcy

Answer 21

*Bankruptcy is a declaration that a business, or person, is unable to pay his or her debts.

*Bankruptcy can be either voluntary or involuntary, with either the business owner or a creditor applying to a court for a bankruptcy order to be made.

*The court then appoints a representative to collect any money owed to the business.

*This money, along with money raised from the sale of any assets of the business (as well as some personal assets of the owner), is then divided between the creditors.

*The process of converting the assets of a business into cash is called realization.

Question 22

company cessation – administration

Answer 22

Voluntary administration occurs when an independent administrator is appointed to operate the business in the hope of trading out of the financial problems.

The administrator usually has the combined experiences of a receiver, chartered accountant, and investigator.

The administrator’s main tasks are to bring the business and its creditors together and examine the financial affairs of the business.

If successful, the business may resume normal trading.
If unsuccessful, the business goes into liquidation.

Question 23

company cessation – liquidation

Answer 23

• Liquidation occurs when an independent and suitably qualified person – the liquidator – is appointed to take control of the business with the intention of selling all the company’s assets in order to pay the creditors.
• Once the creditors have been paid, any surplus cash is paid to the owners of the company.
• A company in liquidation can also be in receivership. Receivership is where a business has a receiver appointed by creditors or the Courts to take charge of the affairs of the business. Unlike liquidation, though, the business may not necessarily be wound up.
• The main features of liquidation are that it:
  – can be regarded as the equivalent of bankruptcy for a company (corporation)

– results in the life of a company coming to an end

– normally occurs because the company is unable to pay its debts as and when they fall due – it has become insolvent.