Unit 4: Business growth and decline.

Question 1

What are the 4 business stages?

Answer 1

• Establishment stage.
• Growth stage.
• Maturity.
• Post-maturity.

Answer 2

Establishment Stage
* The first stage of a business’s life, requiring a solid foundation and sufficient sales to cover expenses and generate cash flow.
* High fixed costs include premises, equipment, raw materials, and insurance.
* Customers require a large customer base and positive relationships.
* Management is informal, with decisions made by one or two people.
* Employees are typically few, with the owner establishing work routines and building relationships.
* The failure rate is high, up to 33% within the first year of trading.
* Main problems include lack of money and potential cash flow shortages.
* Risk level is extremely high, especially within the first few months.

Question 3

What happens in the growth stage?

Answer 3

Growth Stage
* The second stage is a time of accelerating growth, with sales increasing and cash flow being generally positive.
* The business develops new products to satisfy different market segments.
* The focus is on marketing and the use of complex computerised accounting procedures.
* The business must continually improve its competitive edge to avoid losing customers and stalling growth.
* The growth stage involves rapid sales increase, introduction of new products, marketing, profit increase, and use of computerised accounting procedures.
* Costs decrease due to economies of scale and efficiency in administration, finance, and production.
* Customers focus on satisfying existing customers while tapping into new markets.
* Management delegates responsibilities, develops a formal organizational structure, introduces line managers, and establishes specialist departments.
* Employees specialise the workforce, requiring formal and informal training.
* The failure rate decreases, especially after successful mergers or takeovers.
* Main problems include expanding too rapidly, moving away from core business activities, and needing more finance to continue with growth.
* The risk level is reduced due to diversification and less competition.
* Business entities can be incorporated entities or private or public companies.

Answer 4

Business Establishment and Growth Stages Overview

Establishment Stage:
* Requires a solid foundation and sufficient sales to cover expenses and generate cash flow.
* High fixed costs include premises, equipment, raw materials, and insurance.
* Customers require a large customer base and positive relationships.
* Management is informal, with decisions made by one or two people.
* Employees are typically few, with the owner establishing work routines and building relationships.
* High failure rate, up to 33% within the first year of trading.
* Main problems include lack of money and potential cash flow shortages.
* Risk level is extremely high, especially within the first few months.

Growth Stage:
* Accelerating growth, with sales increasing and cash flow generally positive.
* The business develops new products to satisfy different market segments.
* Focus is on marketing and the use of complex computerised accounting procedures.
* The business must continually improve its competitive edge to avoid losing customers and stalling growth.
* Rapid sales increase, introduction of new products, marketing, profit increase, and use of computerised accounting procedures.
* Costs decrease due to economies of scale and efficiency in administration, finance, and production.
* Customers focus on satisfying existing customers while tapping into new markets.
* Management delegates responsibilities, develops a formal organizational structure, introduces line managers, and establishes specialist departments.
* Employees specialize the workforce, requiring formal and informal training.
* The failure rate decreases, especially after successful mergers or takeovers.

Maturity Stage:
* Requires a great deal of rethinking about how the business should be operated to guarantee survival.
* The business may lose its energy, enthusiasm, and vitality of its earlier times.
* The owner realizes that the business could easily lose its energy, enthusiasm, and vitality.
* The main features and associated challenges of the maturity stage are outlined in table 4.3.

Post-maturity Stage:
* Three possible outcomes: Steady state, Decline, or Renewable.
* The post-maturity stage represents many opportunities and threats. The decisions made by the owner will be crucial for the future survival of the business.

Answer 5

Business Life Cycle and Decline

Standard State Business
* Similar to an aeroplane in a holding pattern, satisfying customer demand and maintaining profit levels.
* Does not continue expenditure on research and development.
* Owner is content to produce what it has in the past and rely on marketing replacement products.

Decline Stage
* As customers stop buying the business’s products, cash flow is seriously affected.
* Profits also decline.
* Difficult to reverse due to financial institutions’ reluctance to lend money to high-risk businesses.
* Suppliers may restrict their credit facilities and insist on cash payments.
* Products become obsolete, leaving the business with unsold stock.
* Well-qualified employees may leave and seek better opportunities.
* The longer the business attempts to ‘stagger on’, the greater the risk of failing and ceasing operations.

Renewal Stage
* Can be avoided by carefully planned strategies that result in new markets being tapped and satisfying previously unmet demand.
* Focus production on what customers are presently demanding, even if this means abandoning once-successful products.
* An extensive market research program needs to be undertaken to assist in forecasting of future consumer trends.

Main Features and Challenges of Post-Maturity Stage of Renewal
* Goals: To increase sales, cash flow and profits.
* Sales: Increase over time, especially as newer products are brought onto the market.
* Marketing: Conduct market research analysis to determine customers’ wants and identify any changes.
* Profit: Will improve over the long term, reaching higher levels than previously achieved.
* Financial management: May need to issue new shares to raise finance for research and development.
* Cash flow: May decline in the short term as money is spent on research and development of new products and markets.
* Costs: High in the short term as research and development, marketing, integration and restructuring costs.
* Employees: Open and honest communication is essential.
* Failure rate: Has been lessened compared to the maintaining or steady state phase.
* Main problems: Anticipated sales may not eventuate due to inaccurate forecasts, poor timing or inappropriate marketing strategies.

Answer 6

Business Life Cycle Overview

• The business life cycle comprises stages of growth and development: establishment, growth, maturity, and post-maturity.
• Establishment stage involves generating sales to create a positive cash flow. Detailed planning reduces risk of failure.
• Growth stage involves increased sales, a regular customer base, product development, and improved cash flow.
• Growth brings complexity and responsibility, necessitating long-term planning.
• Growth and expansion can occur through mergers or acquisitions.
• Vertical integration, horizontal integration, and diversification are stages of business expansion.
• Maturity stage requires a more professional approach to planning.
• Post-maturity stage can lead to a steady state, decline, or renewal.