Life Cycle of a Business (Onibokun Samson O.)

Business life cycle

Although company growth phases may be less distinct than product life cycle phases, because growth is continuous, a company does usually move through phases from launch, through growth, to maturity. To avoid stagnation and eventual decline, it is likely that the business will need to expand into new products, or new markets.

As we have indicated previously, it is important for the management team, in particular the Board who are developing strategy, to be aware of the existence of the life cycle, and to know and understand at what stage in the cycle a business is , so that the strategy is appropriate.

There must be continual evolution of the product range, or introduction of new products and ranges for a business to remain strong. And there have to be new developments in the business itself to prevent its own decline.

In a larger company, this is often the task of product development, or new business development, or marketing,

In a small company, the business owner or manager must address these issues.

The length of the life cycle will vary according to the type of product or service and the sector in which the business is operating.

Effect of life cycle stage on strategy

Business success often depends on entrepreneurs and management teams recognising where the business is positioned in the life cycle and developing the most appropriate strategies for that stage in the cycle, and their plans and ambitions for the business.

The strategy for growth will be defined by management, usually in a 2, 5 or 10 year plan. It is important that the life cycle stage is kept in mind when the plan is developed, as the plan will in itself define whether the company continues inexorably on a course to maturity and eventual decline, or whether the life cycle is actively managed to extend the life of the company.

The plan will define the goals and strategies, to fit the direction of travel the Board want for the company. Different stages of the company’s life cycle require different objectives and strategies, so for example if they believe the organic growth of the company has plateaued, they must stimulate growth by moving to new products or markets.

The business life cycle will follow the usual stages.-

·         Development

·         Launch

·         Growth

·         Expansion

·         Maturity

·         Decline

·         Development

The business is just an idea and is being researched. Market research will be undertaken, a business plan produced, including cash flow forecast. A legal structure will be selected, banks and professional advisors appointed and funding will be sought.

Launch

First customers and markets are established. Adjustments may be made to product, marketing plan, selling price, packaging, production, distribution.

Growth

Customer base becomes established, competition may now be appearing, additional staff may need to be recruited and trained, and Management, Accountancy and IT systems may need to be extended. This is the difficult period where many businesses fail.

Expansion

Sales and profits are good. Extra cash funding may be needed .The Business Plan should be reviewed regularly. Management must deal effectively with problems of expansion, such as new products, markets, perhaps exporting. They must not become complacent because if they don’t continually drive the business forward, competitors will overtake. Competitors will be trying to steal market share, whether by bringing out improved products, attacking on price, mounting marketing campaigns to show their product is better than yours. Management must play a defensive game.

Maturity

There is a loyal customer base, but Sales growth slows, and may begin to drop off. Competition may intensify as new products are introduced to the market. Management must find ways to sustain and even stimulate growth, by looking for new products and markets. Professional advisors, or mentors in the case of smaller companies, may be needed to offer advice, opinion and feedback

Decline

At this point if management have failed to revitalise the company, they must consider an exit route. They may sell the business or some of its brands, or the business may eventually close. If the industry is in decline, mergers and consolidations may take place.

Strategy

So at each stage Management will be focused on different priorities. The board must develop a strategy that recognises and acknowledges the company’s position in the life cycle. Departments and processes such as product development and marketing, management structure, staffing, succession planning and the IT infrastructure must reflect the Boards’ vison for the short, medium and longer term future.

Ethics or Profit?

An organisation’s ethical policy will provide a code of professional conduct for managers when dealing with potentially controversial issues which arise in the business environment, such as human resource policies, trading practices, director’s responsibilities, industrial espionage and corporate social responsibility.

The actions of Businesses large and small can have a significant impact on their staff, suppliers, community and the planet .The management of organisations, who define their policies, can choose to act primarily in pursuit of profit or to adopt a more ethical approach. They often embody these policies in a corporate social responsibility policy (CSR).

An ethical approach aims to ensure the employees act responsibly in putting ethical considerations before profit, considering the implications of their actions on staff, suppliers, community and the planet. It encourages staff to be sensitive to their community, always do the right thing, and behave morally fairly and honestly. Such a policy will seep into the culture of the company and help staff select the correct course of action in any given situation.
Good business ethics are sometimes required by law, and will create trust and public acceptance in the market place for the company. They will reflects the culture and philosophy.

Why should businesses act ethically and risk their profits?

There are those who argue that the objective of any company is firstly to make a profit, and that many organisations have a stated aim off maximizing shareholder returns, in which case sacrificing profits to ethics may conflict with director’s fiduciary responsibilities.

Shareholders today will largely accept that ethical considerations must go at least hand in hand with profit requirements, and this should be embodied in the CSR policy, and allow directors to make socially responsible decisions.

This is a constant dilemma for managers, whether they are employed by a giant corporation or running their own business. Many owners and managers know that ethical policies will increase costs, and thereby reduce profits.

On the other hand companies who develop an ethical brand image such as Fairtrade or Body shop may be able to charge higher prices for their products and encourage loyalty from their customers. So in this case an ethical policy does not necessarily lead to reduced profits.

A company that behaves unethically , for example by paying staff low wages, may attract bad publicity and fail to appeal to potentially high flying staff , making it more difficult and expensive for them to attract new staff.

So sometimes ethical behaviour can pay off for an organisation even if they don’t put profit first.

Business ethical policy

 

Do managers feel pressure to put profit first?

Most manager’s income is tied to their performance, and the key performance indicators (KPI’s) by which they are judged are invariably financial rather than altruistic.

A UK report Management Agenda 2015 asked 1600 managers and workers whether they felt pressure to compromise their companies’ ethical standards to meet business objectives. One third of respondents reported that they had.

They said that the most common pressure was a need to follow their manager’s objectives, followed by overly aggressive financial or business objectives.

The report’s authors Roffey Park Institute, believe leaders may not realise their instructions can be interpreted in this way.

They suggest that the most ethical managers in practice are the ones who consciously take the time to think their decisions through, while others may simply not have time to do that, and are not aware their decisions may have undesirable consequences.

The report also identifies a gap between an organisations stated values, and those practised by their management –a difference in policy and action.

The Institute of Business Ethics agree with these findings, and say that employees do not trust their managers not to cut corners to win business, even at ethical companies.

They believe this may be a training issue, and that people are not aware of how the business expects them to behave.

Organisations who do have ethical policies need to ensure that staff are given clear guidelines and told how to apply them. They need to understand that they should make ethical decisions and will not be penalised even if it costs the company money or means a target is missed. Staff need to trust that this will be the case.

To some extent this depends on all leaders “buying –In “, because if there is even one leader who varies from the policy, trust will be lost. If there is one person in a leadership position who is unethical, the whole company can be compromised. This presents problems for a management team who have appointed a manager who does not act ethically.

This situation can be addressed by clear communication about what is expected of managers in terms of ethical decision making and reinforcement that ethics should always take precedence over profit.

What areas should ethical policy cover?

Let’s have a look at the different areas of a business and consider how ethical policy may impact it.

Human resource policies

Paying the legal minimum wage, or above it Not using child labour Fair working hours Workplace safety, health and safety policy Breaks during the working day Paid Holiday entitlement Health care and family health care provision Staff discounts Family friendly policies
Help with childcare costs Pension provision Looking after staff in retirement Employing disabled people, Equality of opportunity

Relationships with suppliers

Fair trading practices Fair and transparent negotiations Honouring agreement and contracts Prompt invoice payment Monitoring Supplier ethical compliance Discouraging bribery and corruption Advising new suppliers

Sales and marketing

True and fair advertising Fair pricing Concern for product safety Transparency on ingredients
Respect for customer privacy

Production

Concern for environmental impact Health and safety policies Careful waste disposal Not participating in testing on animals

Finance

True and fair view of accounts Political contributions Tax avoidance Director’s remuneration Dividend policy

How does a company ensure its ethical policies are enforced?

Despite these policies, we frequently hear stories of ethical misconduct, misappropriated finances, broken contracts, unfair labour practices, bribery and corruption. So how does the management team ensure its policies are understood and interpreted correctly?

They need to communicate regularly with staff, restate the policy, ensuring guidelines are well understood. New recruits must be trained in the detail of the policy. Some companies insist on annual ethical training for all staff as a condition of continued employment.

Someone in the management team should “own “the policy and be available to discuss contentious issues and offer guidance and interpretation to managers who request it.
Management must strictly monitor compliance and ensure deliberate violations have consequences that are visible to everyone.

Ethical policies and practices don’t of themselves guarantee success, but it is likely in today’s culture that companies that do not have them are less likely to succeed.

Licensed merchandise

Let’s have a look at licensed merchandise, how it works, what are the advantages and disadvantages for the manufacturer, retailer, consumer.

Licensing is a business arrangement in which one company gives another company permission to manufacture and sell products bearing images to which it owns the copyright. In return the licensor gets a percentage of the revenue from products sold under the license.

By licensed merchandise we mean the agreement to use copyright material, perhaps images made popular by film, TV, video games, or sporting events.

Typical licensed merchandise would be kids wear, clothes, underwear, nightwear, footwear, or kids merchandise such as stationery sets, school satchels or toys and books.

Popular characters would be Disney characters such as Elsa from Frozen, or Sleeping Beauty and Snow White. Also popular is Batman, Superman, and Ninja Turtles.. Barbie, Action man, Bob the Builder or Teletubbies.

There are also sports related licenses for events such as the Football World Cup or the Olympics or Winter Olympics. Appropriate merchandise might be T shirts, sweatshirts, footballs, flags and mugs.

Licensed revenues are significant for organisations such as the Major Baseball League who grants licenses for products to be sold which bear their team logos. In 2010, the MBL sold licensed merchandise worth approximately $2.75 billion.

Songs may be licensed for use in films or TV, and technology may be licensed for use in other products, for example Dolby technology in music players.

Designers make huge revenue from sales of licensed products such as perfume, handbags and clothing.

Licensing agreements

The license is granted by the licensor, (who owns or manages the rights to the copyright or images) to the licensee, who is usually a manufacturer or retailer. Contracts are negotiated individually, and although there are some generally accepted conventions, the licensor and licensee can agree anything they like.

The agreement will clearly identify the product to be licensed, and will specify sizes, colours and materials to be used, and will usually allow control over the quality of the product, and any changes to design.

It will grant the right to manufacture, import, advertise or sell and distribute the product in specifically agreed territories. It will also state whether the license is exclusive or not in a particular territory. It may specify the trade channels the license can be used for, such as department stores, or mass market retailers.

The licensor will usually specify that they approve quality of the product at every stage, and that they approve packaging, advertising and marketing,

Revenue agreement

The licensor will want to be assured that the licensee will make every effort to market the licensed product and to optimise revenue return for them, so they may specify that certain Trade Fairs and Exhibitions are attended. They may specify shipments are available for certain dates that will be crucial to retailers, for example in time for Halloween, Christmas, back to school, or related sporting events.

They may specify a minimum sales revenue, or that royalties reach a minimum amount. A royalty rate will be agreed.

Failure to comply with the specification may incur a penalty payment and almost certainly termination of the license.

Risks and rewards of licensed merchandise

Why license?

Merchandise licensing is usually profitable for both the licensor and the licensee. Some licenses, such as Barbie or Disney classics have a perennial appeal, and others are much more difficult to predict, such as licenses for new product or, related to events of a short duration such as a sporting event or a film release.

From a manufacturing or retailers perspective, buying the licensing rights to a popular character can significantly increase the sales of a basic product such as a T shirt, colouring book or pencil case. It will differentiate your product in the market place and increase its appeal, as long as you have chosen the correct license.

You can probably make a slightly higher margin, but need to cost carefully to ensure your royalties are taken into account, and maybe a contingency for royalty minimums and the higher risk of markdowns is covered.

Licensed product may interest Buyers who have not previously dealt with you, and once you have an account open with them because they want the license, you may be able to sell other unlicensed product to them.

What do you need to provide

Once you know the product and the license you want to use, the licensor will want to know about the products sales history in its unlicensed version, or perhaps with a different licence .They will want a detailed business plan for the promotion, marketing and sale of licensed merchandise. They will want to know target clients and estimated sales. Their interest will be in granting the license to whoever can produce the most revenue for them.

Downside

Even if the product sells well, your agreement will probably mean you have to submit designs and samples to the licensors, and allow them to monitor your quality and sales plans closely.

Stock management must be carried out carefully, ensuring you meet any contractual dates. You must take the likely performance of the licensed product (film, TV series, sports event) into account at all times.

If you choose the wrong license it can be disastrous. If the product does not perform as planned for whatever reason, then you may be left with stock on your hands that you cannot sell at any price. You may be forced to mark down quickly and heavily to clear stocks, and your clients may have to do the same.

The clients you sell product to will not forget failure – they will associate your company with that failure for a long time to come, and will question your judgement.
Quite apart from the loss on surplus merchandise, you may have to pay a minimum royalty fee or penalty for missing targets.

So should you get involved in licensed merchandise?

In certain sectors it is almost impossible not to get involved.

If you are involved you must have someone to advise you who knows how the market works, who understands the product, market, licenses and processes.

They must have up to date information on what is happening now and in the future-what is being planned for release next year and the year after . What is relevant to which season, which product will benefit from a license, will sell season in and season out, and which will be more risky.

Risk and reward must be carefully evaluated. Contracts carefully negotiated, plans laid carefully and continually evaluated.

But if you choose the right license , it can be a fantastic new lease of life for your product.