Business Studies
Topic 1:
Preliminary Course
Nature of Business
Section 1.3:
Business Life Cycle
Section Overview:
1.3.1
Phases of the cycle
– establishment
– growth
– maturity
– post-maturity
1.3.2
Challenges presented at each stage of business life cycle
1.3.3
Voluntary and involuntary cessation
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Section 1.3
Business Life Cycle
1.3.1 Phases of the Cycle
 Establishment, Growth, Maturity, Post-Maturity
Once they are established, businesses often go through different phases over the course of
their existence. This is known as the life cycle of the business.
The figure below depicts the four distinct stages in the life cycle of a business –
establishment, growth, maturity and post-maturity.
The Life Cycle of a Business
Each phase has its own characteristics, challenges and opportunities that distinguish it from
other phases and which need to be addressed by businesses before they can advance into the
next phase of the life cycle.
Businesses can also move through the life cycle at different rates; some move to maturity
very quickly, only to fail abruptly. Other businesses may take a number of years to move
through the growth stage.
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Section 1.3
Stage 1:
Business Life Cycle
Establishment
The establishment phase is where the business entrepreneurial idea is created.
This phase is full of expectation, creativity, enthusiasm, and stress. The
owner/manager must make many decisions about their new venture such as:
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What is the most appropriate legal structure for the business?
Who is going to provide the finance?
Where is the right location for the business?
What government regulations must be adhered to?
What type of staff will the business employ?
These are only a few of the decisions that must be made during the
establishment phase.
Stage 2:
Growth
Once a business has survived its establishment stage, it moves on to a period
of rapid growth. Several features characterise this stage:
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Customer awareness of the business and what it offers increases.
Business OPERATIONS generally improve resulting in cost savings.
Increased sales may also result in ECONOMIES OF SCALE.
DISTRIBUTION CHANNELS & MARKETING are often refined.
The business benefits from better management having learnt from
earlier mistakes.
 It becomes easier to obtain finance.
 Staff levels increase allowing for specialisation for some individuals.
There are several ways a business may expand and grow. For example:
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Merging (MERGER) with another business. (i.e. Colonial State Bank)
Taking over (TAKEOVER) another business. (i.e. Burns Philp)
Selling retail FRANCHISES (i.e. McDonald’s, L.J. Hooker, 7-11)
Extending the sales territory by setting up new BRANCHes.
Overhauling the business structure. (RESTRUCTURING)
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Section 1.3
Business Life Cycle
 Diversifying the product range. (i.e. Mercedes Benz, Coles Myer)
 Moving up or down the production chain. (VERTICAL
INTEGRATION)
As mentioned, DIVERSIFICATION is another avenue for business
growth, where a business moves from its initial prime function into unrelated
markets. Rip Curl is a good example of a business moving away from its
prime function and reaping the benefits of diversifying into other areas.
Consider Activity 2:
Stage 3:
The Business Brief 1.3
Maturity
A business enters the third stage in its life cycle when the rapid growth phase
levels off. At this point the business has reached maturity, and it is unlikely
to achieve substantial further growth unless internal or external conditions
change significantly. Factors that contribute to a business maturing include:
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The owner may be content with the size of the business.
The owner may not wish to take the risks that he/she used to.
The management may have run out of ideas.
The overall growth in demand may have slowed with the emergence of
numerous competitors.
Because it is now harder for the business to increase its sales or prices, the
firm tends to focus on reducing its production costs. This may involve
changes to management, reducing staffing levels, using different equipment,
or scaling back on expenses such as marketing.
Stage 4:
Post-Maturity
After maturity, the business can head in one of three different directions:
1)
Steady State
This is where sales levels are maintained and the business remains
profitable without any significant changes to the overall business
strategy.
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Section 1.3
Business Life Cycle
2)
Renewal
This is where the business takes off and expands again. This
expansion might be fuelled by the introduction of new products, a
takeover or merger, or expansion into new markets (such as new
markets for the products overseas).
3)
Decline/Cessation
Here, the business may lose its competitive advantage or its product
may become obsolete. Profits may decline steadily, finally reaching a
point where the business is no longer viable.
Consider the Case Study: Business Life Cycle – Poppy Industries
1.3.2 Challenges Presented at Each Stage of the Business Cycle
Stage 1:
Establishment
The challenges facing the entrepreneur at this stage are:
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High costs associated with the setup of the business.
Difficulties in obtaining the necessary funds for the business.
Slow growth in sales putting pressure on cash flow.
Difficulties in attracting staff with appropriate skills.
High costs associated with the promotion of the business.
If the business can conquer these challenges it will experience growth, move
into the second phase of the business cycle and be confronted with a whole
new set of decisions to be made.
Stage 2:
Growth
The challenges for business operators during the growth phase include:
 Ensuring the quality of service or production is maintained as
output grows.
 Developing appropriate accounting and financial information
systems which provide management with detail about the business.
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Section 1.3
Business Life Cycle
 Managing the cash flow and being aware of the financial requirements
involved in expanding the business.
 Sustaining growth and not letting the successes of the business create a
sense of self-satisfaction or laziness.
 Redefining the role of management so that the manager’s workload is
not overwhelming.
 Recruiting new employees and delegating responsibility.
Stage 3:
Maturity
The challenges for business operators during the maturity phase include:
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Stage 4:
Staying responsive to changes in consumer demands.
Identifying opportunities for innovation in products and services.
Rationalising business operations and minimizing costs.
Sustaining the motivation of management and staff and avoiding
laziness and complacency.
Post-Maturity
 Understanding the changing tastes and needs of the customer base.
 Shifting into new or related markets where there are greater growth
opportunities.
 Orienting the management and staff towards change.
Consider the Case Study: Business Life Cycle – Graphic Preprint
1.3.3 Voluntary and Involuntary Cessation
There are two main reasons why businesses cease trading.
1)
Because the owners wish to get out, whether it be for retirement or so that they can
redeploy their investment funds elsewhere. This is known as voluntary cessation.
2)
Because the business may have been forced to close its doors because of its inability
to pay its debts. This is known as involuntary cessation.
Voluntary cessation is not considered to be business failure, whereas involuntary cessation is.
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Section 1.3
Business Life Cycle
Close to 30 000 small businesses fail in Australia each year, that is about 100 every working
day. Businesses fail for many reasons. They can fail because of external or internal factors
or because the owner decides to voluntarily become insolvent.
External Factors for Business Failure
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Government policies
Unexpected competition
Natural disasters
Even though external factors are considered to be beyond the control of business, careful
planning can minimise their impact.
Internal Factors for Business Failure
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Lack of management knowledge and skills
Inadequate planning
Lack of adequate cash flow and finance
Incorrect location
Unable to service excessive debt
Death or illness of a key individual
What are the procedures for cessation?
The procedures that businesses must follow in order to cease to exist, voluntarily or
involuntarily, depend on the legal structure of the business.
Structure 1: Sole Trader
A sole trader ceases to exist when the owner dies, when the sole trader
voluntarily decides to cease the operations in a solvent state by paying all
debts, or when a court declares the business bankrupt. BANKRUPTCY
occurs when those who have lent money to the business go to court to
seek recovery of loans which have not been repaid.
At this point, courts appoint a trustee who assesses the financial position of
the owner and the business. The trustee has complete control over the
finances of the company and may require the owner to sell all their assets
in order to repay the creditors. The trustee will endeavor to pay all the
debts of the firm.
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Section 1.3
Business Life Cycle
Structure 2: Partnership
Partners may decide to end the partnership because they may have had a
disagreement, or because they no longer need the stress. To end the
partnership, they will follow the details of the partnership agreement. If
the partners do not have an agreement, they must follow the Partnership Act.
A partnership can also be dissolved by an order of the court if it is not
paying its debts, if one of the partners dies, if one or more of the partners
have been involved in fraud, and if any of the partners becomes bankrupt.
Structure 3: Company
The winding up of a company is the most complex.
that a company comes to an end.
There are three ways
1)
By Administration
Here an administrator attempts to trade the business out of financial
difficulty. If unsuccessful, the business is wound up.
2)
Through Liquidation
Here a liquidator is appointed with the specific task of converting all
the company’s assets into cash, so as to pay down its debts.
3)
By Receivership
Here a person is appointed under a debenture deed to manage the
company until the debt is paid. The business may survive or end.
The main difference between the closure of a business operated by an individual or
partnership and the closure of a company is that when companies cease trading, creditors
can not gain access to the personal assets of the owner of the company.
The Process of Winding Up a Business
Involuntary Wind-Up
Voluntary Wind-Up
 The courts make an order to wind up the company
Liquidator is appointed by the court
 Directors write a solvency declaration
 Shareholders pass a resolution
Liquidator is appointed by the shareholders
Liquidator converts all of the company’s assets into cash. Creditors are paid in order of priority.
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Section 1.3
Business Life Cycle
DEFINITIONS:
Bankruptcy
Where an individual has insufficient funds to pay debts. This
may happen to sole traders and partners whose businesses
become insolvent.
Branch
A division of a business which is expanding into new
locations.
Distribution Channels
The means by which the product or service is transferred to
the marketplace.
Diversification
The development or acquisition by a business of product
lines that are not related to its prime function or core
business.
Economies of Scale
Savings that are made by a business when increased
productive capacity allows units of production to be
produced at a lower cost.
Franchise
The provision of a licence by the owner of a successful
business to others to produce that good or service.
Horizontal Integration
The process by which a business acquires or develops
businesses which have the same core business of producing
similar products.
Insolvency
The situation where a business has insufficient funds to pay
its debts.
Marketing
A system of business activities designed to plan, price,
promote and distribute goods, services and ideas in order to
satisfy the wants and needs of the customer.
Merger
Two or more enterprises combine to form a new business.
Operations
The process of planning and controlling all of the activities
necessary for production.
Restructuring
Completely overhauling the business, staff and procedures;
often selling off non-core assets.
Takeover
The situation where one business purchases another business.
Vertical Integration
The situation in which a business acquires or develops a
business which either produces inputs for the original
business or which purchases the original business’ output.
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Section 1.3
Business Life Cycle
HOMEWORK ACTIVITIES:
Activity 1:
Computer Room
View the website:
Task:
http://www.arnotts.com.au
This site has a history section for the company. Open the site
and prepare a time line for Arnott’s establishment, growth
and maturity.
Activity 2:
Complete Business Brief 1.3 on P.22 of Heinemann Text.
Activity 3:
Complete the following questions:
(1)
(2)
(3)
(4)
(5)
Using a diagram, define each of the stages of the business cycle.
Explain why the plateau effect happens in the maturity stage.
What is meant by involuntary cessation?
What are the main reasons for business failure?
Explain the difference between insolvency and bankruptcy.
Activity 4:
Case Study:
Business Life Cycle – Poppy Industries
Activity 5:
Case Study:
Business Life Cycle – Graphic Preprint
Activity 6:
For each of the businesses described below, identify the phase of the life
cycle, give reasons for your answer and give an example of a challenge to be
faced at this stage of the life cycle.
Business One is an internet service provider. It has been in business for
four years. Last year its turnover was $100 000. This year, its turnover is
forecast to be $1.4 million.
Phase:
Reason:
Challenge:
…………………………………………….
…………………………………………………………………………...
…………………………………………………………………………...
…………………………………………………………………………...
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Section 1.3
Business Life Cycle
Business Two is a plant nursery in the outer suburbs of Sydney. It is run by
two brothers who inherited the 30 year old business from their father 10
years ago. Since taking over, they have successfully diversified into landscape
supplies and garden accessories. They have increasing turnover and have
purchased additional land for extra display space.
Phase:
Reason:
Challenge:
…………………………………………….
…………………………………………………………………………...
…………………………………………………………………………...
…………………………………………………………………………...
Business Three is a tutoring service run by 3 university students who did
the HSC last year. They plan to provide maths and science tutoring to local
students once they have raised the money to rent and fit out some premises.
Phase:
Reason:
Challenge:
Activity 7:
…………………………………………….
…………………………………………………………………………...
…………………………………………………………………………...
…………………………………………………………………………...
Vocabulary Exercise and Chapter Review
There are distinct __________ of the business life cycle: _______________,
growth, ____________ and ________ ____________. In this last stage, a
business can remain in a __________ _________ or it can ___________
and eventually cease, or it may ______________.
In the establishment stage, a major problem is ________ ________. A
business will have _________ costs which have to be paid, regardless of how
much is sold. These costs include ________ and the connection costs of
_____________ and _______________. Businesses also have to pay
____________ costs which vary according to how much is sold. These
costs include _________, ________ and __________. Businesses may have
allowed customers __credit__ on their purchases and may not receive that
__income__ for a __month__ or more.
About __________ businesses fail in Australia each year (or about _______
every working day). The main reasons for failure are poor ____________
and inexperienced and untrained ______________.
planning, establishment, cash flow, 30 000, 100, stages, fixed, variable,
management, rent, labour, decline, rejuvenate, maturity, electricity,
power, income, month, steady state, post maturity, telephone, fuel, credit
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