04/ 01/ 2002
There are four potential stages to the growth cycle of any business or product. Stage Four is not inevitable, but it is essential to discuss in the context of reversing if it occurs.
- Creation
- Growth
- Maturity
- Decline
In last week's workshop, contributor Jeffrey Moses analyzed Stages One and Two, showing the most common sources of failure at each stage. Today's article discusses how you can avoid having your business move from Stage Three to Stage Four, which can be the beginning of a downward course.
During Stage Three (Maturity), when cash flows have become stable and all marketing and operational channels have been established, the most important thing for a business to consider is expanding and diversifying its sales channels. An analogy can be made between a maturing business and a growing plant or vine. The vine grows from its original roots, but as it puts out offshoots, these offshoots in themselves begin to put down new roots, which support the entire plant's ability to continue further growth. The growth of a business, like a vine, is limited when there is only one root. What does this mean for a business in practical terms? It means that as cash flows stabilize and profitability grows, new avenues of income should be explored. It's dangerous for any business to continue depending on one product line, or one source of business for all its income. Diversity is the key to longevity, in most cases.
While a business may not choose to diversify beyond its original field or industry, it should always continue to generate new sources of income within that field. For example, a music store might begin by selling guitars, drums, amplifiers and related equipment. As the business moves through Stages One and Two and enters Stage Three, it could consider branching out, selling band instruments to students and professionals, and establishing relationships with schools to provide cost-effective rental/purchase/repair plans for students. When that new source of income has been stabilized, the business could create an eStore, using its growing purchasing power to offer competitively priced instruments and services to a wider potential customer base. Eventually, additional stores could be opened, broadening the "root structure" and the stability of income potential of the entire operation.
This principle has been taken to the extreme by certain large corporations, which have diversified into a variety of industries. General Electric, for example, one of the country's oldest and largest corporations, has become a conglomerate. It's "roots" today are in industries as diverse as airplane engines, broadcasting and consumer finance. This diversification serves to protect the company from cyclic business changes, giving it a stability that helps support future growth. While a small business could not diversify to the extent of General Electric, by putting down a variety of roots any small business can work toward creating insulation against ups and downs in its particular market segment.
It is absolutely necessary for a business to integrate all costs accompanied with its expansion and diversification. Few people can grasp the scope of this balance without adequate training and education, and without the advice of experienced business professionals such as accountants, attorneys and consultants. To assure success of required Stage Three activities, you should continue your business education in every way you can: reading books on the subject, continuing college classes, seminars, and all other sources of advanced learning.
Stage Four (Decline) is the inevitable result of any business that does not adequately carry out the key activities of the first three stages. The indications of Stage Four are: sales declines over a period of three or more years; the emergence of competitors who successfully take away formerly loyal customers; and the loss of profitability due to continually increasing costs which can occur even as sales increase. When Stage Four signs are seen in a business, it's usually difficult to return to Stage Three. However, some companies, through sound strategic planning, can revert from Stage Four to Stage Three. To do so requires success in five distinct activities:
- Redesigning the business plan;
- Setting up adequate funding to implement new directions indicated in the redesigned business plan;
- Cutting costs;
- Obtaining personnel capable of managing the expansion or shift to Stage Three activities;
- Weathering the psychological ramifications that may result as owners, managers and employees adjust to new directions and cost-cutting measures, which may include reduced benefits, salaries and perks.
