Life Cycle of a Business: The Stages of Business Growth Explained
While it is very important to understand product life cycles, businesses have their own life cycles that should be taken into consideration when developing strategic plans. What follows is a description of the most commonly identified stages of business growth.
The Stages of Business Growth
In short, the life cycle of a business involves the following stages:
- The seed stage
- The start-up stage
- The growth stage
- The established stage
- The expansion stage
- The mature stage
- The decline stage
- The exit stage
You will notice that the stages of business growth are very similar to the stages of product growth - both follow the same general curve.
Some have alternately described the stages of business growth more in terms of a life cycle - starting with an aspirational stage and followed by an entry stage, growth stage, crucible stage, and cruise stage, which then leads back to the aspirational stage. This cycle is ideal, as it involves the use of constant innovation to keep the company alive, however for the sake of full illustration, this description will follow the business life cycle from inception to death.
The Seed Stage
What happens internally: This is the earliest stage of a business's life - it starts with the idea and involves the development of whatever product or service this business is going to provide. Founders will need to create a business plan, conduct market research, and seek advisers and mentors to help them get started.
At this point, the "company" does not even legally exist and may only consist of one, two, or three people. Processes, hours, and meetings are likely to be highly informal, and much of the work may be done out of founders' homes.
What happens externally: At this stage, nobody knows about the business, let alone whether the product it provides will be a success - it has yet to be released (or even created)!
What happens financially: When it comes to funding, the seed stage typically involves small amounts- only that which is necessary to develop the initial product. Many business founders start by taking personal loans or using personal funds, though some apply for government grants or special programs that provide seed funding.
The Start-Up Stage
What happens internally: The product has been created and the business exists as a legal entity. Now the focus is on introducing this product to the market and drumming up customers. Adjustments will need to be made depending on how things are received, and the company is still both small and very limber.
At this point, the company will likely have an official office, and may hire some new employees to help develop the product, however it will still will have a fairly flat and informal hierarchy.
What happens eternally: For the first time the market at large has been introduced to the product and gets to try it out. In some cases, the product or service is initially released to only a small number of people - perhaps some key clients, important early adopters, or a group of beta testers. During this market testing stage, flaws and bugs will be worked out, and the product can then be released to a larger group of customers.
What happens financially: The company is still relying, in all likelihood, on its seed funding to keep it going, and is probably not profitable yet. For this reason, those running the business must be very careful not to burn through funds too quickly.
The Growth Stage
What happens internally: The company is seeing its first profits and is beginning to mature. At this point, most of the product's bugs have been worked out and focus may shift to overhauling the business plan (taking in to account unexpected changes resulting from the market's response to the product), finding additional funding, and hiring additional employees to help the business keep up with growth- as well as any competition that may have popped up.
The new wave of hiring at this stage may result in the company developing new hierarchical layers - a bunch of managers perhaps - and the company will have to adjust its internal functions in order to coordinate the work of a larger group of workers.
What happens externally: The product sold by the company has reached the point of critical mass. More and more customers have adopted the product or service, and the product is no longer obscure. It is at this point that the product may also encounter some new competition.
What happens financially: Though the company is seeing its first profits, it is also probably also dealing with increased demand and new competition, hence top management may begin looking for a new round of funding should profits and the initial funds not be adequate when it comes to covering internal growth.
The Established Stage
What happens internally: The company has made it! Now established and fully functional, the business's focus is on maintaining loyal customers and strengthening both its product and market position. To keep up with competition and reduce costs, long-term production changes may be made - a factory may be purchased, or a new branch established, or a certain amount of production may be outsourced to reduce costs.
At this point, the company may take on a slightly more corporate appearance when it comes to internal processes.
What happens externally: Customers may see improved products being developed and released.
What happens financially: The company relies on profits and existing funds for finances, and may also rely on the government and banks for money.
The Expansion Stage
What happens internally: At a certain point, it is not enough to just be an established company - to keep up with competition and remain relevant, the company may consider expanding into new markets and distribution channels. Horizontal or vertical integration may be considered to reduce costs or fight competition, which may involve the creation of new divisions or the acquisition of other businesses. In some ways, these moves bring a bit of the seed stage back to the business, as it is starting fresh in new markets. These changes can be risky, hence strategy and planning are key.
The development of new divisions may break the company into smaller pieces, while acquisitions may change company culture by introducing new management styles and different ways of going about things. In some ways, the business may now function more like a collection of smaller companies, which work more or less independently and are connected through top management levels.
What happens externally: Customers may see the company expand and begin to offer additional, complimentary products or services and lower prices.
What happens financially: The company may share the cost of new projects by entering into joint ventures with other companies, and may also get funds from investors, banks, partners, and licensing.
The Mature Stage
What happens internally: At the mature stage, the company is established, successful, and profitable. Profits are stable, though competition may be a serious threat, hence much attention goes toward maintaining a strategic advantage. Ideally, this position will be held indefinitely - there is nowhere to go from here but down. The key to survival is innovation, for remaining static will only lead to the company's eventual decline and demise.
By this point, the business has reached a considerable size and is very likely to have hierarchical, bureaucratic structure.
What happens externally: Customers may see further expansion and product development as the company strives to remain competitive.
What happens financially: The company may make additional acquisitions and may fund these strategic moves with profits from customers and licensing, banks, owners, and suppliers.
The Decline Stage
What happens internally: At this point, the company is losing its strategic edge to the competition and may begin to see losses in profits. Top management may begin considering exit strategies.
To recover from losses and maintain solvency, the company may sell off or dissolve certain divisions. Layoffs may also take place.
What happens externally: The product offered by the company is being sold to a saturated market in which there is no room for growth. Customers may see the company drop unprofitable product lines, and may turn to the competition which has developed a more compelling offer.
What happens financially: With profits declining, various assets may be sold to make up for losses.
The Exit Stage
What happens internally: Company owners cash out and sell the company - or simply shut it down. The company must therefore be valued and disposed of.
Employees are either laid off or go to work for whatever organization has acquired the company.
What happens externally: Customers see the end of the company, and perhaps its product or service as well. Chances are it will blend into another similar product or service, or will simply be obsolete.
What happens financially: Company owners work with financial advisors and accountants to ascertain the value of the company and either sell it or close it down and dispose of its sellable assets.
Timing and Sequencing
The business cycle may take place over months or years- it all depends on the nature of the business, the product, and the market.
Some companies never make it past the seed stage; others fail at the growth stage when they are unable to make it to scale and keep up with more efficient competition. Others make it to the mature stage and stay there via constant innovation and reinvention.
Depending on the strategic intentions of those running the company, a company may be built to last, or it may be built to be quickly sold. Both strategies can be profitable, and again, the success of a business depends on many factors.