Management Experiences: Executive MBA seminar is hosted by İzzet Garih who is the chairman of the Alarko Group of Companies. The subject of the day was the life cycle of a business. Life cycle models are not just a phenomenon of the life sciences. Industries experience a similar cycle of life. Just as a person is born, grows, matures, and eventually experiences decline and ultimately death, so too do industries and product lines. The stages are the same for all industries, yet every industry will experience these stages differently, they will last longer for some and pass quickly for others. Even within the same industry, various firms may be at different life cycle stages. Firms' strategic plan is likely to be greatly influenced by the stage in the life cycle at which the firm finds itself. Some companies or even industries find new uses for declining products, thus extending their life cycle.
The growth of an industry's sales over time is used to chart the life cycle. The distinct stages of an industry life cycle are introduction, growth, maturity, and decline. Sales typically begin slowly at the introduction phase, then take off rapidly during the growth phase. After leveling out at maturity, sales then begin a gradual decline. In contrast, profits generally continue to increase throughout the life cycle, as companies in an industry take advantage of expertise and economies of scale and scope to reduce unit costs over time.
Stage One: Launch
Every company starts its operation as a business and, lunch a product or a service. In the lunching phase, sales are low but gradually increasing.
Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. However, as revenue is low and initial startup costs are high, businesses are prone to incur losses in this phase. In fact, 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. Finally, the cash flow during the launch phase is also negative but dips even lower than the profit. This is due to the capitalization of initial startup costs that may not be reflected in the business’ profit but that are certainly reflected in its cash flow.
Stage Two: Growth
In the growth phase, companies experience rapid sales growth. As sales increase rapidly, 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 cash inflow.
Stage 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. Sales peak during the shake-out phase. Although sales continue to increase, profit starts to decrease in the shake-out phase. This growth in sales and a decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit.
Stage Four: Maturity
When business matures, sales begin to slowly decrease. Profit margins get thinner, while cash flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement.
However, it’s important to note that many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets. This allows for companies to reposition themselves in their dynamic industries, and hence refresh their growth in the marketplace.
Stage Five: Decline
In the final stage of the business life cycle, sales, profit, and cash flow all decline. During this phase, companies accept their failure to extend their business life cycle by adapting to the changing business environment. Firms lose their competitive advantage and finally exit the market.
March 6, 2018
by Zuhal ÇAKIR