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Explaining the Stages of the Business Cycle

written by: Vikas Vij•edited by: Jean Scheid•updated: 1/5/2011

It's important to review the different stages of a business cycle and prepare your business to go through these stages with optimal efficiency. The longevity of a business organization depends on how it manages itself through the different stages of its business lifecycle.

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    Business Life Cycle

    Business Life Cycle A business organization goes through a cyclical existence which includes different economic phases of upturns and downturns. There are many macro and micro economic factors that continue to impact the external and internal business environment of a business. These factors are highly dynamic and continually evolve in a complex environment. An organization goes through different stages of business cycles due to the influence of these dynamics and tries to create enough sustainability to manage itself efficiently during all the stages of the cycle.

    Business Establishment Stage

    The primary stage of any business is the stage of its inception--including evaluating business start-up costs and writing an effective business plan. The length of this stage varies from one business to another, but almost every new business must struggle and learn to adapt itself in the macro environment at this stage. The learning curve of the business is the steepest at this stage. There is usually a need for detailed market research, large fixed investments and cautious decision making at this stage. Key decisions regarding the product line, branding, market positioning and segmentation are taken at this stage. The business promoters and the top management have a crucial role to play at this most delicate stage of the business that sets the course for the company’s future.

    Growth and Expansion Stage

    One of the most important stages of business cycle is the business growth stage. At this stage the sales and revenues begin to rise as sufficient market awareness about the company and its brands is created. If the business is innovative and targets a differentiated market segment or introduces a differentiated product or service, usually this stage witnesses rapid growth because of little competition. It is crucial for the business to be fully geared up to capitalize on high market demand for its products and services. The company’s financial resources, production capacity and manpower must be in place to realize the full potential of this growth phase.

    Business Consolidation Stage

    Gradually, the growth curve of the business begins to plateau as the growth rate declines. At this stage the company is still growing, but not at an exceptionally high rate. This is the time when the company can consolidate its early lead and gains over the competitors by winning the long-term customer loyalty and creating a strong brand image. This helps to prolong the growth-oriented life of the business as far as possible due to a consolidated market share.

    Business Decline Stage

    Different companies may have different durations of the business growth and consolidation stages. But over a long period of time, almost every corporation witnesses a decline stage. It may happen due to global or local economic factors, sudden technological changes, change of business ownership or management, change in tastes and preferences of the consumers, change in government policies, or simply excessive competition, price wars and market saturation. The business may need to cut its costs in order to survive and sustain itself through this stage.

    Business Recovery and Re-growth Stage

    Some companies manage to reinvent themselves or diversify into new areas and recover their market position and pace of growth. In some other cases, the weaker competitors exit the business during the stage of decline and market saturation. So those who sustain through the decline stage are once again in a commanding position to capture the markets. Once the business is in a fully recovery mode, it can again witness high growth levels and renew its business life cycle.

    Photo Credit: guitargoa