Success Building in 2024
Some of the most fascinating aspects of business management revolve around the nature of change as a business progresses through the stages of the Business Lifecycle. The lifecycle analogy is similar to human development where there is a start, growth, maturity and decline phases as a stylized structure to understand the dynamics of business change over time. As a business moves along the development curve it faces unique sets of challenges in each phase to overcome in order to continue along a pathway of success.
A simple diagram from Wall Street Mojo illustrates the business lifecycle to provide a visual representation of the nature of business change over time. The diagram implies that a business is created and continues growing along the curve with an inevitable senescence and death at the end. If it is a foregone conclusion that all the efforts involved with organizing, sustaining and supporting the entity we call a ‘business’ ends with a dissolution at the end, why bother with creating one in the first place?
The obvious answer is that it is not an inevitability that all businesses end with nothing gained over time. Owning a business is one of the most rewarding endeavors a person can do in a lifetime. The challenges in sustaining creativity, luck, opportunity, strategy and relationship development over time can be the most impactful experience a person can have. The rewards in satisfaction, financial gain and legacy are not easily dismissed as well.
In the figure above, there are four phases in the Business Lifecycle illustrated. Some authors show five, others have a different view on how a business grows and progresses over time. Each phase has certain characteristics attached to it that govern the dynamics and activities in that phase. Entrepreneurs can accelerate their business development and progress along the curve at a more rapid pace when an understanding of the dynamics are understood.
The Introduction or Startup phase can be the most energizing and creative times a business can enjoy. This is the time to utilize your creativity in designing a business that will be sustainable over time. Utilizing design thinking, business planning and investigation into structure, legal aspects of business formation and market research are a few of the areas where competencies need to be built in order for a business to launch successfully. It is not uncommon in this phase that early adopters for the products and services the business will have are identified and also not uncommon for initial sales to start and be pretty reasonable to indicate sustainability is a possibility. Investment capital is scarce and expensive, making it a challenge to survive. This is a great time to manage your accounting by hand, as the transactions are easy to understand and the financial education an entrepreneur will gain outweighs the time needed to do the work by hand.
And then reality hits and a ‘Valley of Death’ is encountered. Realization sets in that the initial sales successes were built on a small group of customers who might not return for additional sales, are satisfied with the initial purchases, or are too few in number to make a success out of the business over the long term. There is a need for marketing and market analysis in order to increase sales and understand who the ideal customer is for the product or service offered. At this point, a majority of new ventures fail. Failure typically is attributed to a lack of sales or sustainable interest in the company’s offerings or a lack of working capital in hand at the outset to sustain the business until the continuing revenues are adequate to insure survivability.
For the businesses that survive, growing the revenue stream typically is the driving force in the growth stage. Realization has set in that the fledgling business can’t reduce expenditures enough to insure viability. The only way to survive is to grow. A second realization is discovered that the entrepreneur as a person is not capable of dealing with all of the demands and competencies needed by a growing business and the question of hiring or contracting help is at the forefront. Occasionally, an entrepreneur will decide to run a business ‘off of the books’ and skimp on meeting the legal requirements for hiring employees. This is a mistake that kills businesses through the diversion of attention, to maintaining the energy needed to subvert the legal system, and to hiding the evidence that will cause future legal penalties to be incurred. This diversion of practice has bankrupted a substantial number of business ventures.
In the Growth Stage, systems to build efficiencies are needed, employee training is needed, market share needs to be gained, marketing and branding are needed along with protecting the intellectual property built. It is time to stop doing the company’s accounting by hand and go to a computerized accounting system and contract with a competent accounting firm. All of these elements need to be built or acquired, meaning that financial resources are being put into the business at a time the entrepreneur wants to start removing money from the business, but is unable to do so. The question of an entrepreneur’s dedication to the vision and plan is now front and center in the thought process. It can be an astonishingly short period of time between having leisure time to be creative and design initial products and services to being cash poor and stressed to maintain a growing business.
As time progresses and the surviving businesses realize some solid success in the marketplace, the daily stress on cash flow lessens and a measure of stability is gained by the business. It is not unusual for company ownership to relax at this point and congratulate themselves for a job well done. Professional management oftentimes is hired and the resulting overhead increases to match the revenue stream. Once again, company growth is the best option to take to increase the revenue streams available to service the increased demand on cash resources.
Diligent businesses adapt to the changing dynamics and build workforce competencies, perform regular financial reviews, and develop systems to increase efficiencies in order to maintain margins and subsequent profitability. If attention has not been paid to work / family balance, it is not uncommon for this to start happening during the late growth stage of the lifecycle. Once the business volume stabilizes, FINALLY excess cash is generated and the financial promises the business has had since inception are realized and tax planning becomes vitally important.
All too often, the story of growth stops at this point. The majority of business starts have dropped off and most of the few survivors stagnate with a secure small market presence that is sustained through convenience and loyalty between suppliers and customers. Initiative and sustained energy are removed or dissipate. The businesses that follow this model die, but the death of the business is not always realized until the entrepreneur ages, divorces, or becomes ill and the fragility of the model is exposed, well after the point of the business being able to recover its vitality. This is a description of business senescence and decline.
Business decline is not automatic and is not inevitable. There are numerous ways to avoid business decline and senescence as long as company ownership and management are involved with a growth mindset. How then is it possible to avoid decline once a business is mature?
In a nutshell, elements that need to be kept in place and attended to in a mature business are: keep setting goals with mileposts to measure progress, plan strategically, develop new markets, new products, new divisions and new market segments, train your workforce, develop leaders within your company, develop systems and measure the results, plan a transition from current ownership to successors and use that plan to develop the methods to insure success, protect branding and other intellectual property, maintain some research and development activities, stay current with your industry’s trends, lower your turn rate for employees in a tight labor market, and use your financial information to benchmark your operations against yourself from prior periods and against peer businesses. You might expand through the strategic purchase of another business or form a joint venture. The final analysis is that you either have a culture of continuous improvement or you don’t.
Clayton Christensen was a distinguished professor at the Harvard Business School. His work in disruptive innovation set the stage for understanding how businesses can start with a small innovation at any time and develop it to become a disruptive feature in a market to gain share. He also developed theories from observing the computer chip industry to illustrate how the product growth curve, or “S” curve, can be used to understand how and when to introduce new products or features to maintain growth and company success. In simple terms, he gave us an understanding what we need to do to continue building and achieving higher levels of success. The benefits of this approach are incalculable for the entrepreneur, owner, employees and for the community.
May you have success in your quest to maintain your business on a growth curve throughout 2024 and beyond.
Marshall Doak is the Director of the Southern Oregon University Small Business Development Center and a huge supporter of innovation and the community that forms around innovation in the economy. In private practice, he works with businesses that plan to transition to new ownership within the next five years, assisting them to build value that can be converted to retirement income when the business sells. He can be reached through: firstname.lastname@example.org or 541-646-4126.