Influences in establishing an SME (business life cycle) Flashcards
what are the stages of the life cycle
- establishment
- growth
- maturity
- post maturity
What is the business life cycle
- in each stage of the lifecycle a business is confronted with new challenges
- business owners need to constantly develop strategies to deal with expanding
- there is no set time limit for each of the stages
Features of the establishment stage
- its prime function and the location of the business is determined
- the legal structure is determined
- a business plan is written
- there are initially high startup costs, especially regarding promotion, fixtures and fittings
- low sale volumes
what is the establishment phase
SALES (Normally beginning slowly, and are somewhat erratic)
PROFIT (Usually slow to begin with, occasionally with a loss. Sometimes all the profits are put back into the business to ensure its survival)
CASHFLOW (Sometimes erratic, with a period of constant cash outflow in the early stages)
COSTS (Very high fixed cost. Major costs include premises, equipment, raw materials and insurance)
CUSTOMERS (Establishing a customer base large enough to sustain future viability is important. Need to develop a positive relationship with customers. Attempt to accurately forecast customers’ needs)
MAIN PROBLEMS (Lack of money with possible cash flow shortages)
RISK LEVEL (Extremely high, especially within the first three months. High degree of uncertainty)
The growth stage
- growing customer awareness
- increasing profits, revenue and market share
- managers now have a better understanding of the business and its government regulations
- increased sales and cost per units fall
the growth phase
SALES (Rapid increase, especially in the early stages of the growth phase. New products introduced and some slow-selling products deleted)
MARKETING (Development of new products to satisfy market niches. Price discounts due to lower production costs. Extensive promotional activities and a widening distribution network. Desire to increase market share by using mass-marketing techniques)
PROFIT (Should increase due to rising sales and falling production costs. As well, profits of other businesses acquired through acquisition or merger are available for use)
CASHFLOW (Difficulties can be experienced if the growth is too rapid. Adequate cash flow must be maintained to continue expansion. A credit policy needs to be organised. Forecasting of sales and expenditures becomes more crucial)
COSTS (Production costs tend to decrease due to economies of scale (cheaper unit costs due to larger production runs). Business becomes more efficient in areas of administration, finance and production)
MAIN PROBLEMS (Expanding too rapidly and therefore losing control of the business’s direction. Moving away from the core business activities (what the business originally produced). Businesses may not have enough experience in the new areas. The need for finance to continue with the growth)
Merges and acquisitions: takeovers
merger: occurs when owners of two separate businesses agree to combine resources and form a new organisation
Acquisition: occurs when one business takes control of another business by purchasing a controlling interest in it
vertical acquisition
- occurs when a business acquires a business that is a part of its supply chain either providing raw materials or components
horizontal aquisition
where a business aquires a business performing the same function, such as Westpac bank acquiring st George bank
diversification
- when a business aquires or merges with a business in a completely unrelated industry
Example: walt disney moved from producing animated movies to a theme park
The maturity stage (stage 3)
the third stage of the business life cycle is when the business reaches its peak sales and customer base
features of the maturity stage
- sales and profits will lecel off (growth and share slow)
- the market experiences product saturation and there will be more competition within the market (too much of the same product in the market)
the maturity phase
SALES (Rates of growth slows and eventually flattens out; plateauing)
MARKETING (Maintain customer and brand loyalty through extensive advertising. Due to increased competition, relative market share may decline. Need to improve quality of products)
PROFIT (Rates of growth slow, eventually flattening out. Reflects what is happening to the level of sales)
CASHFLOW (If costs are not able to be controlled, then the cash flow problem starts to deteriorate)
COSTS (Keeping costs under control is now essential. Need to improve efficiency to keep costs down, otherwise profits will start to fall even further)
MAIN PROBLEMS (Rate of increase in sales begins to falter, sometimes flattening out. Loss of initial enthusiasm. Air of complacency starts to dominate)
CUSTOMERS (Due to the size of the business, customers may sense a degree of impersonality. Business is in danger of losing the personalised service that gave the business success in pervious stages)
features of post maturity
- steady state - the business continues to operate at the level it has been during the maturity phase
- decline - falling sales and profits ultimately resulting in business failure
- renewal - increasing sales and profits due to new growth areas
- the final business stage could be cessation (closure)
post maturity stage (features of a steady state)
- a business in a strady state in neither declining nor expanding
- the owner is more content to produce what it has in the past relying on market replacement products
Challenges:
- the business environment will change and the business will be adversely affected
- it eventually looses sales and competitive advantage which may enter into a decline
- ultimately the steady state becomes unstable and the business sangates
