Throughout the life a business it is common to observe four key stages of business development. These generally follow the same order, however it should be noted, not all organisations experience all four stages. Frequently an organisation will sit between areas A and B in the graph below. Each stage is detailed below:
- Market entry & early growth: This stage is characterised large initial capital outlays, tight cash flows and high initial growth. Typical capital outlays during this period include purchase of land, construction of premises, purchase of gaming machines and acquisition of general plant and equipment. Clubs and hotels during the 1990s often found themselves in this stage as they began purchasing and operating poker machines. In the graph below this stage is represented by part A.
Stable success: Now an established business, the organisation has steady revenues, healthy profits, increasing assets and adequate cash flow to finance capital investment. Businesses at this stage often focus on improving marking, customer service as well as systems and process. Competitors frequently enter the market seeing the success of the pioneer organisation. This stage is represented by part B in the below graph.
- Maturity and decline: As facilities and assets age, revenues start to decline while expenses remain relatively constant. Profitability declines slowly. Competition has increased substantially and industry growth in the area slowed, it may have been some time since a large injection of capital has been committed. Businesses at this stage require attention to rectify trading performance. This stage can be seen in area C and D of the graph below. Part D of the below diagram indicates accelerating business decline.
Business death: Without prudent management and capital investment the organisations revenues continue to decline to the point that expenses exceed revenues and a negative cash flow is generated. At this stage assets decline and liabilities increase. Without urgent action the business will fail. Part D of the graph below illustrates this stage of the life cycle.
Going from right to left on the graph:
So how does a business go from stage C, D or E to A or B? While sometimes difficult, it is quite possible.
Avoiding Decline and Death (getting out of stage D): One of the only ways to get out of this stage is through capital investment. Unfortunately for a lot of businesses, there is no cash and financiers are reluctant to lend money. Sufficient working capital and some capital works on property, plant and equipment are necessary. Clubs and hotels, provided it's possible would be wise to invest in their gaming rooms. Organisations at this stage are often forced to sell their property, plant and or other assets and rent instead.
From Initial decline to stable success (moving from stage C or D to B): Moving from stage C or D to B in the business cycle is often more to do with a change in business model rather than a large capital investment. However, some capital investment will never be wasted. Organisations need to look at their marketing, customer service, pricing, margins and cost structures (particularly overheads).
Growth (moving from stage B to A): To reignite (or ignite in the first place) the growth stage on the business life cycle, an organisation almost certainly needs a moderate to large scale capital investment program. For the hospitality industry this more than likely means a significant venue improvement program.