The Business Life Cycle
What would you say is the biggest, most well-established company in the world today? Some of the companies that top my list would be: Amazon, Apple, Google, Microsoft and perhaps Wal-Mart. Did any of these companies exist 50 years ago? The answer is NO, with the exemption of Wal-Mart, which was just a fledgling retailer with 27 stores, virtually unknown outside of Arkansas.
Along those same lines, what companies were the world’s biggest, 50 years ago? Names such as Chrysler, Ford and GM come to mind. Also, on the list would be US Steel, GE, IBM and AT&T. These are all companies that have either disappeared completely or, at the end of their life cycle, seem to have reinvented themselves. A telling statement that illustrates the point is that; 50 years ago, cars were made in Detroit and you couldn’t drink the water in Mexico - Today it’s the opposite.
Just like each of us, businesses tend to have a predictable life cycle. This progression can typically be divided into five stages: Launch, Growth, Shake-out, Maturity and Decline.
The launch stage can be both an exciting and a dangerous time for a new business. Most companies start with an idea. Obviously, a good idea is important, but it may surprise you that it’s not the greatest indicator of business success; According to Bill Gross, founder of the world’s largest fixed income investment company, its timing!!!
You may have the best idea in the world, but if it comes too early, the world will not be ready for it. Likewise, if it’s too late, there will be no room for competitors. A good example of this is Z.com, a video streaming service introduced in 2003. At the time, the technology wasn’t quite good enough to make it practical and not many Americans had high speed internet. Consequently, the company failed, but two years later, YouTube came along and succeeded in the exact same industry. By that time, the technology to play videos was built into most web browsers and more than half of Americans had access to high speed internet.
Another example is the resource sharing market, made possible by companies such as Uber and Air BNB. They both grew out of “the great recession” at a time when people were looking for ways to make extra money. Had they come along any sooner, neither the technology nor the market would have been ready for such a novel idea.
Once you’ve got an idea whose time has come, you’ll need to able to assemble a team. The best leaders know how to find team members who believe in their idea and have the skills to implement it. Never underestimate the importance of any team member and allow them to help you create a business model that can adapt and change to meet the needs of the time. Your team can also help secure funding which is the final step in the launch phase. This can be surprisingly easy to obtain, but hard to keep without give up control. Watch a few episodes of Shark Tank and you’ll see what I mean.
Once you are capitalized and off the ground, fasten your seatbelt for the rapid expansion of the growth phase. This is the time when you perfect your idea and learn to sell it. It’s also a time when you will likely transition from being a technician to a manager. This is a hard change for most business owners because they came up through the ranks as a producer. Now they are thrust into the, often uncomfortable, roll of being the boss. Frankly, it’s a phase that many businesses never get past and that’s okay. Know your strengths and be honest with yourself as to what you want. Small business owners are some of the hardest working people in the world and we need their skills and dedication. Not every company needs to be on the Fortune 500 list to be considered a success.
This is a time when competition springs up. Businesses such as Lyft and VRBO arise to challenge the dominance of Uber and Air BNB. To survive in this phase of the lifecycle, you’ll need to stay sharp and not be complacent. Learn which marketing techniques work for your business and focus on what you do best then find ways to do it even better.
Sometimes it’s tempting to branch out in order to gain a competitive advantage, however that can be a mistake. In their now famous book, “In Search of Excellence” Tom Peters and Robert Watterman evaluated ten of the world’s most successful companies and found that one thing they all have in common is that they “stick to their knitting”. They keep doing the thing that made them great in the first place. A good example of this is the Coca Cola company who, in the cola wars of the 1990’s, decided to branch out into the restaurant business. They purchased several franchises such as KFC and Taco Bell thinking that if they owed the restaurants, they could use them to sell more Coke products. In the end, both companies lost money and were divested a few years later. The lesson is that although they were great at making soft drinks, the execs at Coca Cola were not so great at operating restaurants. It pulled their focus away from their core business, or their “knitting”.
This is also true on a small scale. For example; we’ve had clients over the years who insisted on doing their own payroll instead of subbing it out to a professional. When they finally made the switch, they almost always reported more productivity and less stress as they stop doing the things they are not good at and focus on the things they are good at.
That is not to say that you cannot benefit from a broader focus. The key to success managing the timing and scope of the project. For example, my doctor recently purchased an x-ray machine so that he would not have to send his patients to the lab. I would not consider this a departure from his knitting, but rather perfecting and expanding on the thing he’s already good at.
If everything goes well in your business, you will reach a point where sales peak and you will begin to fine tune your operation. The business will start to benefit from economies of scale, a principal of economics where larger companies are able to decrease their per unit costs by increasing the size of their operation. For example, a law firm with four partners can split the cost of a computer system, while a sole practitioner would have to bear the burden single handedly. Think of it like buying milk at Costco vs buying it at the convenience store. Larger quantities mean more savings.
This is the phase where most businesses spend the majority of their life. After a successful startup and rise to the top, it’s nice to enjoy your success. Be careful however not to become overly complacent and remember that if you are not growing you are shrinking. It’s a bit like a balancing act and you need to be aware that there is always someone waiting to take over as king of the hill.
There comes a time when even the strongest business will reach the end of its life. It’s hard to imagine that in 100 years, Wal-Mart may no longer be the world’s largest retailer and that Uber and Air BNB will seem like old archaic ideas. Hopefully by then new companies will arise to finally give us things like those flying cars that we’ve been promised for so long.
We can no more imagine what the next 100 years will bring than the people of 100 years ago could have imagined life today. A few companies avoid decline by reinventing themselves to stay relevant. For example, AT&T was around 100 years ago, but is no longer raking in the profits from the telegraph technology that remains part of their name.
Should you decide that a complete makeover is not right for you, the process of closing a business can be difficult and heart wrenching at best. It’s an expensive and surprisingly lengthy process but knowing when to call it quits can save a lot of heartache and money. Just as timing was a key factor during startup, knowing when to fold is equally important during shutdown. As they say in the theater, you should leave them wanting more.
Some businesses have residual value and can be sold, either as a whole or in parts. There are several ways to determine the value of a company, but at the end of the day, it’s only worth what someone is willing to pay. Sometimes, it’s easiest to just close the doors and walk away. Whichever option you choose, it’s always nice to keep a memento or two so that 100 years from now the world will remember the good it has brought to your life and to the lives of others.
Regardless of where you are in the process, know that our firm is here to help. And whatever business you are in, I hope that it will bring something great to the world that wouldn’t have happened otherwise.