Chapter 4: Business Growth and Decline

Question 1

How are business similar to people?

Answer 1

• No two are identical - each has its own identity, characteristics or ‘personality’, and physical appearance
• They are referred to by name or brand
• They have to face numerous challenges
• They go through periods of success and failure
• They rely on each other for survival
• businesses, like people, pass through a number of distinct stages as they develop.

Question 2

What must owners do to as the nature, operation and organisation of a business changes as the business progresses from one stage to the next?

Answer 2

business owners need to develop strategies to deal with expansion.

Question 3

How can business owners develop strategies to deal with expansion successfully?

Answer 3

owners must continually assess the business’s position on the life cycle

Question 4

What happens if the owners fail to continually assess the business’s position on the life cycle?

Answer 4

It will result in inappropriate strategies being put in place, threatening the survival of the business.

Question 5

Why is it often difficult for owners to determine their position on the lifecycle?

Answer 5

because they often fail to recognise the changes taking place.

Question 6

Whats the main difference between people and businesses?

Answer 6

There is no set time limit for each of the stages.

Some businesses can reach maturity in a short period of time, while others may take decades to move beyond the establishment stage. Some businesses go through several stages of renewal over a long period of time, continually growing and expanding, becoming dominant within specific markets; while others go into decline within a few years.

Question 7

What is a ‘merger’?

Answer 7

when the owners of two separate businesses agree to combine resources to form a new organisation.

Question 8

What is an ‘acquisition’?

Answer 8

When one business takes control of another business by purchasing a controlling interest in it.
→ Often motivated by the desire for a business to continually expand its range of products.
→ Can also be to eliminate competitors.

Question 9

What is “vertical integration”?

Answer 9

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

Question 10

What are the two types of vertical integration?

Answer 10

1. Backward vertical integration
2. Forward vertical integration

Question 11

Explain what backward vertical integration
is

Answer 11

Occurs when a business integrates with its supplier (e.g a bakery integrates with a wheat farm).

Question 12

Explain what forward vertical integration is

Answer 12

Occurs when a business integrates with a firm it sells with.

Question 13

What is the establishment stage?

Answer 13

the point at which the business is starting out and beginning its ‘life’. This is when the basis of the business is put in place and the idea or concept around which the business is built becomes a reality.

• a vulnerable stage
• overriding concern is to get the business on a solid foundation.
• requires a positive cash flow.

Question 14

What are alternative names for the establishment stage?

Answer 14

• Start up
• Birth
• Beginning
• Commencement

Question 15

What are the goals for the establishment stage?

Answer 15

• Survival
• Setting a foundation for future growth

Question 16

What are the sales like in the establishment stage?

Answer 16

Begin slowly and are somewhat erratic

Question 17

What is marketing like in the establishment stage?

Answer 17

Promote product by highlighting its strengths, inexpensive promotion strategies

Question 18

What is profit like in the establishment stage?

Answer 18

Slow to begin with, sometimes profits put back into the business to ensure survival

Question 19

What is cash flow like in the establishment stage?

Answer 19

Erratic
Period of cash outflow during early stages

Question 20

What are costs like in the establishment stage?

Answer 20

• High fixed costs
• Spent on premises (factory)
• and Equipment

Question 21

What is the failure rate in the establishment stage?

Answer 21

High - up to 33%

Question 22

What are the main problems during the establishment stage?

Answer 22

Lack of money and cash shortages

Question 23

What is the risk level in the establishment stage?

Answer 23

High - high degree of uncertainty

Question 24

What is the business entity usually for the establishment stage?

Answer 24

Usually sole trader or partnership

Question 25

What is the meaning of a ‘niche market’?

Answer 25

A a very specific demographic which a product or service is aimed at.

Question 26

What are the features of a business in the growth stage?

Answer 26

➔ Accelerating growth
➔ Sales increase due to increased customer
awareness & cash flow is positive
➔ Need more stock, storage and suppliers but not adequate storage space.
➔ Need more staff- hard to train
➔ Purchase more equipment
➔ Increased expenses, cash flow becomes positive.
➔ Business expands rapidly thus the owner
can lose direction over the business.

Question 27

What are the goals of a business in the growth stage?

Answer 27

• Increase levels of sales
• Continue growing through mergers and takeover
• Diversify business activity

Question 28

What are the sales like in growth stage?

Answer 28

rapid increase

Question 29

What is financial management like in the growth stage?

Answer 29

• using more complex technology
• finance from banks
• selling shares
• taking more partners

Question 30

What is marketing like in the growth stage?

Answer 30

• Developing new products to satisfy niche markets
• Adding price discounts due to lower cost production

Question 31

What are the main problems during the growth stage?

Answer 31

1. expanding too rapidly
2. moving away from core business idea
3. not enough experience in new areas
4. requiring more finance to continue growing

Question 32

What is the business entity for businesses in the growth stage?

Answer 32

• incorporated entities
• private or public company

Question 33

What should businesses in the maturity stage look to?

Answer 33

• Achieve/maintain high levels of customer service.
• Find better/more efficient ways of operating (to speed up service and reduce costs).
• Start planning for the renewal stage, looking to introduce new products and/or services.

Question 34

What are the features of a business in the maturity stage?

Answer 34

• 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 35

What is the major risk for businesses in the maturity stage?

Answer 35

Complacency

Increasing sales during the growth stage can give owners and management a false sense of security, particularly if the business has managed to avoid difficulties with cash flow. If owners and management become too comfortable, a business can lose the energy and dynamism which led to earlier success. The slowdown in sales from the growth stage is a warning signal of possible future decline, which can be missed if leadership has become complacent. This is of particular concern if there is a high degree of competition.

Question 36

Beyond the maturity stage a business is faced with what 3 possible outcomes?

Answer 36

1. Steady state - the business continues to operate at the same level
2. Decline - falling sales and profitability eventually lead to business failure/closure
3. Renewal - new growth areas lead to increasing sales and higher profitability

Question 37

A business in a steady state is …

Answer 37

..neither declining or expanding It is satisfying consumer demand and maintaining levels of profitability, similar to the maturity stage.

Question 38

Why can no business remain in a steady state indefinitely?

Answer 38

Changes in the business environment, such as changing consumer tastes, new competitors or new forms of technology will eventually lead to falling sales and business decline.

Question 39

To avoid business decline what is required?

Answer 39

• carefully planned strategies are required
  to generate a recovery in sales, cash flow and profitability.
• refreshing the business’s product mix,
  phasing out less profitable items and focusing on producing goods and services for which present and future demand is high.

Question 40

What are 2 main causes of business decline in SME?

Answer 40

1. Lack of management expertise
   When a business fails to prepare or fails to keep on modifying an existing plan as the environment changes, they become set up to fail.
2. Lack of sufficient money - Undercapitalisation.
   Without sufficient capital and positive cash flow the business will not be able to purchase stock and material.

Question 41

What are other factors that cause business decline?

Answer 41

• Wrong location
  Business may not attract customers, this is also poor management since the location strategy (referred to as the place strategy) developed by marketing would not be appropriate for the goods or services being offered by the business.
• Poor quality control
  Execution problems in creating the product or delivering the good or service may lead to unhappy customers, poor market reputation, and insufficient revenue in order to cover costs. This derives from poor management - this time within the operations key business function and issues in relation to quality control and quality management which can result in the failure of the business.

Question 42

What is voluntary cessation?

Answer 42

When a business ceases operations and voluntarily windes up its affairs.

Question 43

What is involuntary cessation?

Answer 43

The owner is forced to cease trading by the people who are owed money by the business (creditors).

Question 44

What is bankruptcy?

Answer 44

Bankruptcy is a declaration that a business, or person, is unable to pay his or her debts.
Bankruptcy can be either voluntary or involuntary.
The process of converting the assets of a business into cash is called realisation.

Question 45

What is liquidation?

Answer 45

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 an orderly and fair way in order to pay the creditors.

Question 46

What are the features of liquidation

Answer 46

• 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

Question 47

What is insolvent liquidation?

Answer 47

when a company is closing because it cannot pay its bills as they fall due

Question 48

What are the two types of insolvent liquidation:

Answer 48

1. Creditors’ (voluntary) liquidation
2. Court (involuntary) liquidation

Question 49

What is the difference between solvent and insolvent liquidation?

Answer 49

Solvent liquidation occurs when a company is financially stable
Insolvent liquidation occurs when a company is unable to pay its debts.