Understanding Business Life Cycles & Growth

By: Rich Kramarik

 

Surprises are a part of everyday life. But surprises in business can mean the difference between survival and death. Anticipating what lies ahead at the different phases of company growth is not easy because issues change as the company grows. A company's business plan needs to be flexible to reflect what is happening in the constantly changing business world. That's why successful companies treat planning as a "work in progress."

How individual companies react to business conditions often depends on which phase of the business life cycle they are in. A complication to this obvious statement is that there are several competing life cycles of growth:

  • Business Life Cycle

  • Industry Life Cycle

  • Personnel Life Cycle

  • Financing Life Cycle

The phases in each of these cycles may or may not coincide (see the graphic below), depending upon your starting point as a company and your growth rate relative to the competition and the industry. For example, any company at a particular point in time could be at the "roll-out" Business Life Cycle Phase; the "expansion" Industry Life Cycle Phase; the "specialist" Personnel Life Cycle Phase; and the "mezzanine" Financing Life Cycle Phase. So, correctly making decisions is partly dependent on your ability to identify where your company is with respect to the different growth phases within the different growth cycles.

Let's gain more insight by reviewing some examples of companies at different phases, the challenges that arise and the management solutions. Although we use business life cycle phases to describe each example, notice that the challenges and solutions involve related phases from the business, industry, personnel and financing life cycles.

Example 1: The company is in the inception phase, where the business is not much more than an idea. This is when a new business must determine whether it fulfills a compelling market need and can be successful.

Challenge: Most inception phase companies will have to overcome the challenge of:

  • Identifying a legitimate market need

  • Developing a differentiated solution that matches the need

  • Organizing the Business strategy

  • Funding

Solution: The focus should be on matching the business opportunity with your skills, experience and passions. Don't avoid the important focus on deciding on a business

 

ownership structure, finding professional advisors, and writing a business or strategic plan. Funding will typically have to come from grants, your bank account or friends and family.

Example 2: The company is in the prototype phase of the business life cycle and now exists as a legal entity. A working model of your solution has been created and may be in beta testing with some of your prospects.

Challenge: In this phase, it is likely you have underestimated cash needs and the time to market. The main challenge is your cash burn rate. At this point, you are still pre-revenue and you realize that your prospects don’t understand why they need your products or services. You start looking for a reality check on your business plan.

Solution: Focus on understanding and satisfying your customers’ needs. Articulate how your products or services satisfy these needs and are differentiated from the competition. Don’t hire staff until you can afford them. Don’t buy equipment until you absolutely need it. Don’t move into expensive facilities. Image is not as important as viability. The prototype phase requires establishing a customer base and market presence along with tracking and conserving cash flow.

Example 3: The company is in the roll-out phase and has made it through market research and product development and is now ready to launch their product.

Challenge: The biggest challenge for this phase is dealing with the constant range of issues bidding for more time and money. Cash is in short supply because of all the development and marketing expenses. An effective product launch will likely require a substantial amount of money to support a marketing campaign and sales force.

Solution: Roll-out phase businesses must prepare for launching their product by ensuring that appropriate resources are available to support the roll-out. This may require obtaining sufficient funding from angel investors or strategic partners and hiring of additional personnel.

Example 4: The growth phase business has matured into a prosperous company with a recognized brand and loyal customers. Sales growth is not overwhelming but manageable. Day-to-day business operations have become more normal.

Challenge: It is easy to decide to take a break and rest on your laurels during this phase. You have worked hard and have earned the right to put your feet up but the marketplace is unyielding and competition is fierce. It’s difficult to stay focused on the big picture. Issues with the economy, competitors and changing customer needs quickly dilute your focus.

Solution: A growth phase company should be focused on improvement and productivity. Building management and leadership skills in the management team is a must. To compete in this established market, you need better business practices, more operational controls and solid process management. You must reinforce your operations with automation and outsourcing to improve throughput and productivity.

Example 5: An expansion phase business is characterized by growth into new markets and distribution channels. In this phase the business owner decides to gain a larger market share and find new revenue and profit from additional channels.

Challenge: Moving into new markets requires the planning and research of an inception or prototype phase business. The CEO focuses on expansion into any business as long as it brings growth. Expansion into unrelated businesses is often ill-fated. Resources and expenses required to support the expansion is underestimated. Cash flow is stressed.

Solution: Add new products or services to support the needs of existing markets or expand the business to support additional customer needs in the existing markets. Don’t be distracted by new markets and customer types that can stress skills and drain cash and resources. Search for products, services and market segments that complement your existing experience and capabilities. Don’t underestimate the significant cost of market development activities.

Bottom Line: We have used the life cycle phase descriptions to describe each of the examples, but you can see from the challenges and solutions that the corresponding phases of the business, industry, personnel and financing cycles are always a factor in making the right decisions. The phases of each life cycle may or may not occur in the order shown above, or not at all. Some businesses may be "built to flip"; quickly going from inception to exit. Others will choose to avoid expansion and stay in the growth phase.

Whether your business is a glowing success or a dismal failure depends on your ability to adapt to the demands of changing growth cycles. What you focus on and overcome today will require a different strategy in the future. Understanding the life cycles and phases of your business growth will help you foresee upcoming challenges, make the best business decisions and find continuing success.

                                             

 

 

Understanding Business Life Cycles & Growth
Case Study

By: Rich Kramarik

 

Here are seven short stories - each to illustrate one of the phases of the business life cycles. Each is a different company and we share the challenge and the solution in each case.

Inception Phase: A computer programmer and development manager invented a piece of code that could be used by other programmers to make it easier to implement communications with handheld devices. He had built a working prototype and had used the latest Microsoft Dot.Net technology. He was a go getter and sold his idea to every software development organization that would listen to him.

No one would buy the software or the idea.

The problem was that it was just as easy for each developer to use the Microsoft building blocks themselves. They didn’t see the value in buying template code from a vendor. There were also about 300 other companies offering similar templates and some of these even supported more device types.

This CEO want-to-be didn’t want to “see” his market research or “listen” to the market. This product was not needed in the market. He would have been better off to choose to develop a product that was needed and that was not already provided by so much competition.

Rollout Phase: A sales training company serviced a specialized market and found success providing service to some of the largest companies in the market. This CEO only had to make two or three sales a year and his company was making good profits.

This profitable company soon found itself fighting for survival. New sales were not materializing. The sales person he hired was not able to sell a single new client in nine months. This CEO resorted to telling his prospects what they needed and no one wanted to listen. This was not really a start-up company – it was a successful series of projects.

The CEO thought his initial success would continue into the future but it didn’t. He should have started selling into smaller prospect companies. “Elephant” hunting takes to much time because of long sell cycles. He also hired too quickly and had a high cash burn rate that exceeded revenues. He should have waited for a couple of quarters of good sales before hiring additional resources.

Growth Phase: This self-storage business had locations in three states and was approaching 30 locations. This CEO had a groove swing on building, buying, staffing, managing, marketing, training, and sending money to the bottom line. He was growing faster than planned. Then it happened. He built a new property in an area of new housing development and he couldn’t get occupancy up. Then he purchased and took over management of an exiting facility and couldn’t get occupancy up. Then he had a problem with a property manager who was skimming cash. As if that was not enough, he then had a problem with this operations manager – sexual harassment.

This CEO was growing faster than he could handle. He was not able to manage the growth. He was making mistakes in hiring, purchasing and buying properties. He should have anticipated changes in the business as he grew. He should not have added a new property until he got his one trouble property under control. He should have had his eye on the operations – not just delegated it to an operations manager who had issues.

Expansion Phase: This advertising agency CEO had 25 years of experience in advertising. She was a leader in her industry because of her skill and success in the industry. She had hired a staff of senior advertising executives from around the country – the best-of-the-best. She had purposefully kept the company from growing beyond the current level because she had done her research and found that to grow larger would create significant stress on margin.

Things were going well until she decided to add creative and sales staff and grow the business further. She proved what she had already learned in her research. The costs got out of control and sales did not grow as anticipated. The new, younger staff she hired did not “get along” with the existing mature staff. The new staff wanted to make their mark in the industry and kept “bucking” the system – not following procedures and not taking advice from the older, experienced staff. Decisions were made by consensus in the past and now. There were no managers in place to help her manage the business.

She should have hired new staff that was mature and experienced like the existing staff. She changed the culture and created a riff by hiring people with a different culture. She knew there would be a cash crunch, but she did not realize it would be as big as it was. She should have put a management structure in place to help her manage the business. She should have believed her experience and her research.

Expansion Phase: This five year old company was already at a hundred million dollars in revenue. It was time to expand to international operations so the CEO hired top executives in Europe and Asia and opened operations around the world in the same quarter. Things were going so well that the development division was given the green light to develop five new products in areas that the company had never served before. The company had clients and competitors who were partnering and funding new development. One investment was from a Japanese firm who provided nine million dollars of development funding.

In a word this company became so diluted and unfocused that nothing was going right in year six. Costs were more than out of control and the company was in the red. Multi-year sales were being made on contracts that were paid up front, but didn’t have to be delivered for two years. This was classic “robbing from Peter to pay Paul.”

This CEO should have gone back to basic business planning for the expansion – but he did not. He should have implemented a phased plan of expansion which would allow him to control expansion costs and get new revenue streams started to fund the follow-on phases of the growth plan. His expansion decisions led to the eventual decline of the company.

Decline Phase: This company had been in business for 17 years. They developed, sold and installed Enterprise Resource Planning (ERP) software. When they started the business they didn’t have any competition. They were a leader in ERP installations in mid-sized companies. The CEO had a partner who had been with him from the start who had now “retired on the job.” He had a solid customer base and satisfied customer who were given the enhancements they had requested over the years.

This CEO was well grounded and he made the right decisions. First he divested himself of the partner. This was not easy after their 25 year friendship and 17 year business partnership. This decision sent two hundred thousand dollars right to the bottom line per year. Next he sold 10 of his best customers on the idea to fund the development of a new ERP system that would run on the Microsoft Windows platform. He downsized his office space and sent more money to the bottom line. He made an alliance with a competitor that turned out to be a win-win for both companies. He made several other changes that allowed him to turn the company around and get back on the growth curve.

Exit Phase: This company had grown steadily over its five year life to five million dollars in revenues. The CEO had built a national service company with 3,500 employees who only got paid when they worked. They were contractors. They sold through third party companies who owned the customers. As the company grew, it became more people intensive and margins were squeezed to zero. The CEO figured he could recover by cutting out the middle man and sell directly to the customer. This was a success, but it increased the need for staff to administer the extra workload. This bold move made the company more visible in the industry. It was not long before a competitor made an offer to buy the company.

In order to make the company look more lucrative, the CEO released half the administrative and management staff. The irony is that half the staff was still able to run the business effectively. And, the margins were better than they had ever been since the formation of the company. The CEO and the buyer came to terms and the CEO/founder walked away with two million dollars to start his next venture.

 

Brought to you by:                                                         [BACK]

            Bob De Contreras                                                  
            Rich Kramarik                                                     

 


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