The five stages in the life cycle of business

By Morf Morford

Tacoma Daily Index

Every business, to some degree, follows the same structure as it makes its mark in any market.

You could also make the argument that every religious tradition, empire and perhaps even friendship or possibly even individual life-span, makes essentially the same trajectory.

This progression transverses five stages: launch, growth, shake-out, maturity, and decline.

Phase One: Launch

Each company begins its operations as a business and usually by launching new products or services.

During the launch phase, sales (and profits) are low but slowly (and presumably steadily) increasing.

Businesses focus on marketing to their existing target consumer segments by advertising their comparative advantages and value propositions.

As beginning revenues are low and initial startup costs are high, businesses are prone to incur losses in this phase.

The vast majority of businesses, as we all know, go under in the first year or so of opening.

Cash (flow) is king

Throughout the entire business life cycle, the profit cycle lags behind the sales cycle and creates a time delay between sales growth and profit growth.

This lag is crucial as, especially in the early days of any company, cash in hand is worth far more than cash on its way.

Finally, the cash flow during the launch phase is often negative but dips even lower than the profit.

This is due to the capitalization of initial startup costs that may not be reflected (yet) in the business’ profit but that are certainly reflected in its cash flow.

Phase Two: Growth

In the growth phase, if they survive, companies experience rapid sales growth.

As sales steadily increase, businesses start seeing profit once they pass the break-even point.

However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales.

Finally, the cash flow during the growth phase becomes positive, representing an excess, hence profitable, cash inflow.

Phase Three: Shake-out

During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either approaching market saturation or the entry of new competitors in the market

New competitors, by definition, pose a threat – or maybe inspiration – to current players within an industry.

Although sales continue to increase, profit starts to decrease in the shake-out phase.

This growth in sales and decline in profit represents a significant increase in costs. Eventually, if the business stabilizes, cash flow increases and exceeds profit.

Phase Four: Maturity

When the business matures, sales begin to decrease slowly.

Profit margins get thinner, while cash flow stays relatively stagnant.

As firms approach maturity, major capital spending/investment is largely behind the business, and therefore cash generation is higher than the profit on the income statement.

Many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets.

This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace.

This is assuming, of course, that the industry as a whole persists.

Or at least in a recognizable form.

Transportation, for example, continues as a basic human need, but the transition from human feet, to horse, to automobile (and, as currently, from common combustion engine to electric) is always clumsy and fraught with challenges.

Phase Five: Decline

In the final stage of the business life cycle, sales, profit, and cash flow all decline.

Businesses flounder and some do their best by adapting, as much as they can, to the changing business environment.

But unless a company can completely re-invent itself, it finds itself tied, not only to a business model, but to an era or cultural mind-set that no longer holds much appeal.

The companies that fit this model and five-stage process are too many to name, but just a few are Kodak, Sears, AOL, Yahoo!, Myspace, Blockbuster, RadioShack, and, of course, almost every North American automobile manufacturer.