4. Business Growth and Decline

Question 1

What are the 4 key stages in the business life cycle?

Answer 1

1. Establishment
2. Growth
3. Maturity
4. Post-maturity

Question 2

What are the 3 sub-stages of post maturity?

Answer 2

1. Renewal
2. Steady state
3. Decline
   Prolonged decline –> cessation.

Question 3

Describe the establishment stage.

Answer 3

The “birth” stage of a business.
Businesses are very vulnerable.
Overriding concern is to get the business on a solid foundation to pay expenses and generate a positive cash flow.
High level of risk, high degree of uncertainty, high failure rate.
Occasionally start off by making losses rather than profits.
Few employees.
Greatest source of start-up capital is from the owner’s personal savings, and/or a loan from a financial institution.
Usually sole trader/partnership.

Question 4

Describe the growth stage.

Answer 4

A time of accelerating growth.
Changes in staff; responsibilities of staff change, management takes on more specialist roles. May need to introduce a human resource department.
Sales increase, cash flow is positive.
Customer base has been established.
More emphasis on marketing, greater use of complex computerised accounting procedures
Loyalty is strong.
Must continually improve its competitive edge to avoid losing customers and stalling growth.
Comes with complexity, responsibility and the need for long-term planning
→ Must look at developing budgets to ensure greater organisation of financial issues such as cash flow to cover day-to-day expenses.

Question 5

What is a “merger?”

Answer 5

When two owners of separate businesses agree to combine resources and form a new organisation.

Question 6

What is vertical integration?

Answer 6

When a business expands by taking up interests in different but related levels in the production and marketing.

Question 7

What is backwards vertical integration?

Answer 7

Backward vertical integration occurs when a business integrates with its supplier (e.g a bakery integrates with a wheat farm).

Question 8

What is forwards vertical integration?

Answer 8

Forward vertical integration occurs when a business integrates with a firm it sells with.

Question 9

What is horizontal integration?

Answer 9

Horizontal Integration occurs when a business acquires or merges with another firm that makes and sells similar (exactly the same) products (e.g if a bakery merges with or is acquired by another bakery).

Question 10

What is diversification?

Answer 10

Diversification occurs when a business acquires or merges with a business in a completely unrelated industry. (e.g a bakery and furniture manufacturer).

Question 11

Describe the maturity stage.

Answer 11

Characterised by unique challenges: market saturation, market hardening.
Growth and market share begin to slow
Sales are still increasing, but at a decreasing rate..
Increased competition, consumers become more willing to buy from competitors.
Cash flow position starts to deteriorate.
Rate of growth of profit slows.
Business loses dynamism and energy - a warning signal of possible future decline could be missed if we are too complacent.
Rethinking about how the business should be operated to guarantee survival.
A feeling of complacency (feeling a (too) strong sense of security with your accomplishments).

Question 12

Define cessation.

Answer 12

The closure of a business.

Question 13

What is the difference between voluntary and involuntary cessation?

Answer 13

Voluntary cessation is when a business is deliberately closed by a owner (i.e, it is closed out of the owner’s own will). Involuntary cessation is when a business is forced to close due to external interests.

Question 14

What are some reasons for voluntary cessation?

Answer 14

• a loss of enthusiasm and ideas
• the decision to retire
• a party offering to purchase the business
• declining profits
• the desire to seek new challenges and move
  into a new business venture

Question 15

What are some reasons for involuntary cessation?

Answer 15

• the death of the owner
• lack of demand for the product that is
  offered by the business
• unfavourable economic conditions, which
  discourage consumer spending
• increased competition within the
  marketplace, meaning that the business is
  unable to continue operating in competition
  with low-cost competitors
• the Supreme Court of New South Wales
  ordering that the assets of the business
  be sold to cover the

Question 16

What are some ways to respond the challenges faced by businesses in the establishment stage?

Answer 16

• Undertaking detailed planning to minimise the risk of failure.
• Choosing a location that is in close proximity to potential customers, as well as suppliers and support services.
• Developing appropriate marketing strategies to bring awareness to the business itself, and the products it offers.
• Ensuring that all government regulations are followed, such as business registration, occupational health and safety and taxational requirements.

Question 17

Define “outsource.”

Answer 17

Delegate.
For example, a business grows, it may need to outsource some responsibilities.

Question 17

What are some strategies that can be implemented by a business in the growth stage?

Answer 17

• Continually monitoring and tracking growth, avoid feeling a sense of complacency as it could cause for the business to unintentionally avoid signs of potential decline in the future.
• Motivating staff, fostering a positive work environment to ensure employees’ performances are not affected by the stress that comes with managing rapid growth.
• Tracking and managing cash needs; there may be need to secure more finance options through debts and equity.
• Examine opportunities that will allow the business to sustain its growth, such as through mergers or acquisitions.

Question 18

What are some strategies that can be implemented by a business in the maturity stage?

Answer 18

• Improving strategies to maintain customer loyalty + attract new customers, e.g reward/loyalty programs.
• Expanding product range, offering new products.
• Maintaining an active interest in the external environment of the business to be aware of changing consumer patterns,
  new production methods and competitors’
  marketing strategies.

Question 19

What are some factors that contribute to business decline?

Answer 19

• Lack of planning
• Increased competition
• Lack of adequate cash flow
• Poor location
• Uncontrolled growth
• Failure to adapt to changes in the external environment
• Ill-conceived business idea
• Failure to meet customer needs
• Lack of demand for product.

Question 20

How might rapid growth actually lead to failure for a business?

Answer 20

• Creates financial burdens
• An influx of customers and overwhelm a business’s systems and employees, affecting their performance.
• Management’s attention shifts from the core of the business to managing growth.