Description
In this description business growth and decline.
Business
Growth and
Decline
Chapter 4
Personal use only
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You know about these ideas already! Try this introductory activity!
Work with a partner to show your understanding of the human life cycle. What are the
stages in the cycle? What are the characteristics and features of each stage? What are the
challenges that have to be overcome or learned in each stage?
4.1
Activities
One of the most important infuences on the success or failure of a business is the way it is
managed through its life cycle. Te business life cycle refers to the series of predictable phases
businesses experience as they develop. Each phase presents a number of management challenges
that must be overcome before the business proceeds to the next phase.
Stages of the business life cycle
Typically a business evolves through four major stages of development. Te four stages are
establishment, growth, maturity and post-maturity. Each phase, or stage of development, is
characterised by a number of features that seem to be common to most businesses and need to
be carefully managed.
Establishment
Te establishment stage is when a business is launched. Before we give you any detail on
establishing a business, work in small groups to fnd out how much you already know about the
difculties associated with launching a business.
Most people establishing manufacturing businesses (such as the computer games business) will
put in a lot of efort convincing retailers to try their product.
Imagine you have developed a new computer game. You have discussed it with your
friends and they all agree that it is exciting and addictive and that the graphics are
fantastic. Tey all say they would buy the product if it were available in shops.
You have a choice. You could possibly sell it to a games manufacturer such as Sony. Sony
would manufacture the game and distribute it to computer games retailers throughout
the world. Sony would pay you a small royalty (about 5 – 10% of the recommended
retail price) for each game sold. Te other alternative is to establish your own business to
produce and distribute the game. You will need to buy equipment, such as commercial
disc-copying machines, and premises to take phone calls, keep records and stock and
manufacture the games discs. Te major problem, of course, is that the only potential
customers who know about the game are your friends.
Nevertheless you decide to establish your own business and give up school to work full
time on establishing the business.
Activities
An example of a cycle:
Life Cycle of a
Caterpillar
1 Egg
2 Caterpillar
3 Pupa
4 Butterfy
Establishment
stage is when the business is
launched
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It might be possible, for example, to convince a retail chain such as EBE Games to try some free
samples (free to the store) and display some posters called ‘point of sale advertising’. It might
be possible to send free samples to industry magazines to assess the product and write about it.
When Krispy Kreme Donuts established their business at Penrith a few years ago, they ofered
free samples to all customers for a couple of days. Cars were lined up along several streets.
One of the most important features of the establishment phase is that it is typically a stage
when expenses are higher than sales revenue. Sales revenue is the total amount of money
received from selling products. It is calculated by multiplying the price by the quantity sold. Te
establishment phase is characterised by negative profts. In other words, the typical business
loses money in the establishment stage.
4.2
Group responses
Tink about your responses to the following questions. Jot down your ideas and discuss
them with the other people in the group.
1. Where will you get the money for things like machinery, telephone, premises and
living expenses until the business takes of?
2. How will you let customers know that you have this product and how great the
product is? Remember you will need to sell thousands of discs, not just a few to your
friends.
3. How will you distribute the product to the fnal customer?
4. How long do you think it will be before potential customers know about the product
and you start to sell enough games discs to cover your expenses?
Te establishment stage can be very difcult. Even though the owner has tremendous
faith in the product, potential customers are not familiar with it and will be reluctant to
purchase it. Retailers will also be reluctant to put it on their shelves, because it has no track
record. Te retailer expects a return from each metre of shelf space and would much prefer
products on the shelves that have a track record of a certain value of sales. It will take time
to establish the product.
During this time when it is hard to sell products, costs, or expenses, will be high. It is not
just the costs of the machinery and the premises. One of the most important expenses
will be the promotion that is needed to tell both fnal customers and retailers that your
business exists and that you have products that will meet their needs.
Think, Pair, Share
In the light of this information would you make changes to your ideas on establishing the
computer games business? Would it be better to stay at school? Jot down your ideas and
discuss them with a friend.
4.3
Establishment
stage typically involves
expenses higher than
revenue
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Growth
Te growth stage is characterised by a rapid increase in sales. Tis is because customers are
more aware of the business and now know it has products that meet their needs. Te growth
stage requires careful management to meet a number of challenges.
Te rapid increase in sales puts pressure on resources. Te phone is constantly ringing.
Customers are placing orders for stock. Stock is being packed for distribution to customers.
Tere can be communication breakdowns as several people sometimes try to solve the same
problem.
Cash problems ofen develop. Tis is because of the rapid expansion. Suppliers are reluctant to
advance too much credit because they do not have a track record with the business. More people
are needed to do the work and this means a higher wages bill. Ofen the result is a cash fow
crisis where money has to be paid out as wages and payments to suppliers before it comes into
the business as payments for sales to customers. Tere is a time lag because customers, who are
usually retailers, will take full advantage of the credit terms ofered to them.
Another important feature of the growth stage is that competitors will be attracted by the rapid
increase in sales. Te most efective way of dealing with competitors is by building a brand and
promoting the brand, rather than just the products.
Think, Pair, Share
Do you have an iPhone? Do you think Apple Inc. would face the same growth problems as
a business just established? Jot down your ideas and discuss them with a friend.
4.4
Growth is
characterised by a rapid
increase in sales
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Image:
Courtesy of Preshafood Ltd.
Preshafruit® juice contains
100% fruit with no added
sugar, sweeteners or
colours. Te juice contains
twice the antioxidants of
regular juice and comes
in an innovative triangle
shaped bottle.
Using Australian business to illustrate the concept of the growth stage
Preshafood Limited was established in 2006 and started manufacturing fruit-based
products in 2007. Te company has worked out a better way to process fruits and argues
the technology it has developed is ‘why our fruits taste just
picked and our juices just squeezed’. Tey also
claim ‘Preshafood is better for you because it
retains nutrients longer than heat-pasteurised
fruit and juices’.
Te initial product development and
commercial production was undertaken at
Food Science Australia’s Innovative
Foods Centre. Food Science
Australia is a joint venture
between the CSIRO and the
Victorian government. Together
they were able to fnd a way
of processing fruit based on
pressurised cold rather than
cooking, heating or chemicals. Te
technique is called High Pressure
Processing (HPP).
In the establishment stage of the
business life cycle a state of the art
High Pressure Processing (HPP)
food processing facility was built in
Derrimut in Melbourne’s west.
Te frst commercial product was an
apricot, peach and apple mix for yoghurt.
A range of fruit juices was the next product
developed. Te fruit juices have resulted in rapid
growth. In 2009 Preshafood juices won the prestigious
International Beverage Innovation Awards held at Drinktec
in Germany. Preshafood took out frst prize in the ‘Best New Juice
or Juice Drink’ and the overall award across the 24 award categories ‘Best New Beverage
Concept’.
Te Beverage Innovation Awards are the Oscars equivalent for the beverage industry,
and Preshafood beat many of the global giants such as Pepsi and Coca-Cola. It was a
remarkable achievement for a small start-up Australian company and indicates the
Case Study
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4.5
business is a ‘signifcant player’ in a very competitive industry.
Preshafruit® juices are mainly distributed through Victorian and New South Wales Coles,
Woolworths and Safeway stores. Already the business is accessing
global markets, with exports to Singapore and Hong Kong, and
is currently making arrangements to export to Japan, the United
States, Canada and Europe.
Te rapid growth is putting enormous pressure on a
small staf, cash fow and equipment. For this reason the
business is raising additional capital on the Australian
Small Scale Oferings Board (ASSOB) to cover the costs
of the additional equipment and particularly to get more
working capital to deal with potential cash fow difculties.
You may recall, from an earlier case study, the ASSOB
showcases investment opportunities in early stage, high
growth unlisted companies. It brings together people with
surplus money who want to invest and businesses growing
rapidly that need additional funds to grow further. In this
sense it is similar to the Australian Stock Exchange (ASX) but is focused on a diferent type
of investor and business.
Working capital is always a problem in the growth stage. Working capital is the money
needed for the day-to-day operation of the business. When Preshafood Limited sell
the product to Woolworths, an invoice is sent with the goods. Te invoice sets out the
conditions of the sale, the price and quantity of stock and when the bill is to be paid.
Working capital is the bufer between the need to pay suppliers and wages and the time
when customers such as Woolworths pay the bill.
Image:
Courtesy of Preshafood Ltd.
Maturity
In the maturity stage the growth in sales levels of. Te business is selling the same value
of products year afer year. Te reason for this is simply that the market for the product is
saturated. Afer a time, for example, everyone who wants a plasma television set has one. Te
only sales will be made to people who are replacing sets that are worn out. Businesses that rely
on products in the maturity stage must develop new ways to grow the value of their business.
An example of a business in the maturity stage is Sanitarium, which relies on the product
Weetbix.
Think, Pair, Share
Jot down the advice you would give to Sanitarium management to increase sales. Suggest
4 other businesses you think are in the maturity stage.
4.6
Sales level of in
the maturity stage
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Using an Australian business to illustrate the concept of the maturity stage
When the Coles Group managed the Coles’ supermarkets, the
business was in the maturity stage of the business life cycle.
Sales had not only levelled out but were beginning to fall. Tere
was very little innovation and customers started to shop at
Woolworths, where the focus was on providing the products and
service they expected, but were not getting, at Coles.
Case Study
Te maturity stage is the time to employ professional managers. Tis is because professional
managers have the skills to grow the value of the business by making the business more
competitive. A more competitive business will attract customers from other businesses because
it is ofering cheaper products or providing customers with additional benefts. Te result is
increased share of the market and this grows the value of the business. Where managers are
successful in this, as, for example, Roger Corbett with Woolworths, the business’s share price
increases. Te increased share price refects the growth in the value of the business.
One of the most efective ways to increase the competitive position of a business in the
maturity stage is to cut costs. Professional managers will carefully examine every aspect of the
value chain, seeking to cut costs. Te value chain is a central idea in business that every single
activity in a business should add value to the fnal good or service that the business produces.
Woolworths achieved most of their cost cutting in the warehouse and distribution aspects of
their business. It made them very competitive compared to Coles and Coles’ customers started
to shop at Woolworths.
Other businesses have successfully grown the value of the business while in the maturity phase
by diversifying. Diversifying means to develop new products. Fosters, for example, moved into
wine when the beer market matured. Again, this strategy needs professional managers, because
there are risks associated with the markets in which these new products will be sold. Tis is
mainly because the managers are not experienced in these markets. Te markets for beer and
wine, for example, are very diferent, and Fosters was forced to separate the beer and wine units
in 2010.
Think, Pair, Share
In what ways are the beer and wine markets diferent? Jot down your ideas and share them
with a friend.
4.7
Cost-cutting is
ofen used to improve the
competitive position of the
business
Diversifying
means to develop new
products
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Wesfarmers Limited purchased the business in 2007 and put into operation the classic
strategies to manage a business in the maturity stage. Te managers immediately
implemented a 5-year business turnaround program to grow the value of the business.
It was not easy. In 2010 Coles had 763 supermarket stores, 775 liquor outlets, 95 hotels
and was the operator of a national chain of fuel and convenience outlets. Te business
employed 113 000 people whom they call ‘team members’.
Te frst thing the managers did in this turnaround program was to improve the in-store
oferings – products that better met the needs of customers, such as dairy, delicatessen,
bakery and fresh produce - and improve on-shelf availability. Te second focus was on
improving, or enhancing, the value customers receive. During the year 2009/2010 prices
decreased, overall, by 2% in Coles’ supermarkets.
Te second major component of a successful turnaround is improved service. In the past
Woolworths were much better at customer service, but Wesfarmers had a solid reputation
for high levels of customer service in some of their other businesses such as Bunnings
Hardware.
Te strategies needed to improve customer service focus on training. Te managers
applied the same techniques that were working so well in K-Mart: on-line instruction,
supported by certifcates of achievement, video instruction to demonstrate the standards
of customer service the managers wanted and, fnally, the mentoring of staf from
department managers. Rewards to reinforce high standards are also important. Te
rewards range from merit certifcates and vouchers to store performance-based bonuses.
In the frst phase of the turnaround strategy, senior management focused on building a
strong leadership team, changing the culture of the business, improving the standards of
things like product availability and a store renewal program.
Te next phase of the turnaround program will be to ‘embed the new store-focused
culture, drive further business efciencies, improve in-store customer service, move to a
scale roll-out of new store formats, and enhance Coles’ fresh ofering and in-store value’.
Some of the language the senior management is using in this quote is difcult and it is
worth doing some vocabulary work here.
1. ‘embed the new store-focused culture’. Tis phrase stresses the importance of building
attitudes and values in employees that will ensure the store they work in is successful.
One of those attitudes, for example, is a high level of customer service. Te attitudes
and values or ‘way things are done in the store’ is referred to as the business culture.
2. ‘drive further business efciencies’. Tis phrase refers to cost savings that result
from things like highly trained and productive employees, cost efective distribution
systems and so on.
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Note taking
Note taking is an
important skill needed
for success in the HSC.
Summarise this Coles’ case
study in one page using
your favoured style – mind
map, dot points, key
concepts.
4.8
3. ‘improve in-store customer service’. Tis phrase is more obvious. Te success of the
business will relate to the level of customer service in each individual store.
4. ‘a scale roll-out of new store formats’. A number of diferent store formats are being
trialled and customers are being asked about how they like a particular format. As
soon as the managers are satisfed that they have the best format, it will be put into all
the 700 or so stores.
5. ‘enhance Coles’ fresh ofering and in-store value’. Woolworths picked up the trend
to the healthy lifestyle early and responded with the ‘Woolworths the fresh food
people’ slogan. Coles is playing catch-up but recognises the importance of efectively
responding.
Te results of the turnaround program are quite remarkable. In 2008 Coles’ revenue
from sales was just over $16.5 billion. In 2009 it was just over $28.5 billion. In 2008 EBIT
(earnings before interest and tax is paid) was $475 million. In 2009 EBIT was $831 million.
Obviously the managers were succeeding in their turnaround strategy and had taken a
business in the maturity stage of the cycle and were now growing the business.
It is really important to understand that there is not a natural progression between the
stages of the business life cycle. Businesses in the maturity stage do not face an inevitable
progression to post-maturity. If the managers are good enough they can, as the Coles’
managers have demonstrated, return to growth. When managers are able to again grow the
value of the business, it is called renewal.
4.9
What stage of the business life cycle do you think your school is currently in? What
evidence is your decision based on? Select a business you are familiar with in your local
area. What stage of the business life cycle is it in? Why do you think this?
HomeThink
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Evaluate scaffold
Literacy development: learning to evaluate
Difculty: High
Mark Range: 6 -10
Defnition: Make a judgement based on criteria; determine the value of
Comments: Tis verb is ofen used in the second part of the extended response in the HSC
Example Evaluate the effectiveness of your Business Studies
teacher
Scaffold
1. Begin with an introductory
sentence that sets out the
main idea of what you are
writing about.
Te introductory sentence
here is a judgement.
2. Provides criteria on which
the judgement is made.
Provides criteria on which
the judgement is made.
Provides criteria on which
the judgement is made.
3. Sometimes a concluding
sentence might be helpful.
Example
My Business Studies teacher is highly efective. My Business Studies teacher
is female, in her 30s, and has a delightful personality. She works very hard
but this is not the reason that I think she is highly efective.
Te main reason I think she is highly efective is that her results have
been well above state averages for a number of years. I think this is because
she motivates her students to want to learn.
Another reason is that she helps her students to learn how to do the
really important things, such as how to describe, analyse and evaluate,
rather than just teach content. Te ability to evaluate efectively leads to
higher marks in the HSC.
My Business Studies teacher has a pastoral interest in her students that
goes well beyond the course outcomes. She is interested in her students’
learning problems and ofers advice.
My Business Studies teacher is highly efective. Te criteria I have used
to make this judgement include: results in the HSC, competent lessons and
the interest she shows in her students.
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1. Begin with an introductory
sentence, setting out the
main idea.
Te introductory sentence
here is a judgement.
2. Provide criteria on which the
judgement is made.
Provide criteria on which
the judgement is made.
Provide criteria on which the
judgement is made.
3. Provide a concluding
sentence if it seems helpful.
Woolworths’ managers have been highly efective in achieving the business’s
goals. Woolworths is a large Australian retailing company with interests in
groceries, petrol and liquor.
Woolworths’ managers have achieved a highly competitive business and
this is the most important goal. In 2006 the increase in Woolworths’ market
share was 20% compared to 5% for the Coles Group.
Woolworths’ managers were also able to achieve a highly fexible business
that is able to respond quickly to changes in the external environment such
as, for example, the trend to the healthy lifestyle.
Woolworths’ managers were highly efective in achieving the goals of the
business. Teir success was evident in the increased value of the business,
where the share price rose from $11 to nearly $30 in seven years.
Model
Example With reference to a business you have studied,
evaluate the performance of its managers in achieving
the goals of the business.
Writing task
Write 200 words to:
evaluate the efectiveness of managers in meeting the challenges of a phase in the business life cycle.
* Check the evaluate scafold.
Task rubric
In your answer you will be assessed on how well you:
* demonstrate knowledge and understanding relevant to the question
* use relevant business case study/studies
* communicate using relevant business terminology and concepts
* present a sustained, logical and cohesive response
Tink about possible topic sentences you might use. Write down a possible topic sentence.
Jot down your ideas and share them with a friend.
List 3 – 5 points that will provide detail to the topic sentence.
Now write 200 to 300 words of sustained writing. Ensure you underline and explain business terminology.
Remember that it is through your writing skills that you will gain marks in the HSC. You will gain more marks if
you know how to evaluate, rather than writing everything you know about the content. Te evaluate scafold is very
important.
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Activity
Swap your writing with a friend. Use the following marking criteria to assess each other’s work. Give the work a
mark. Write a comment to justify the mark.
* has a well-constructed topic sentence that relates directly to the question and makes a judgement
* provides detailed criteria that the judgement is based on
* presents a comprehensive, well-structured, logical response which incorporates appropriate
business terminology and concepts that are illustrated with appropriate case study/studies.
* provides a general introductory sentence
* provides some criteria that the judgement is based on
* incorporates into the extended response business terminology and concepts.
* may identify some components of the value chain
* incorporates some business terminology and includes some case study/studies.
Mark
7-10
4-6
0-3
Short answer
a) Explain the meaning of the term ‘business life cycle’. 3 marks
b) Describe the characteristics of the establishment phase of the business life cycle. 4 marks
c) Explain the process of cessation. 3 marks
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Post-maturity
Te post-maturity phase is the fnal stage of the business life cycle. Typically, the business has
failed to respond to increased competition and is haemorrhaging market share. Tis phase is
characterised by falling sales and loss of market share. Te business soon becomes unproftable
and cash fow problems emerge. Ofen there is difculty in paying bills on time. Te business
starts to decline. Unless something is done the business will fail.
And something can be done. Te competitive position of the business can be improved by cost
cutting. It may then be possible for the business to maintain its position in the marketplace. Tis
type of post-maturity position is called steady state.
Another possibility is renewal. If the managers are able to develop new products or more
competitive ways of providing customer benefts, then it may be possible to again grow the value
of the business. However, this type of change is very rare and usually needs new managers with
new ideas.
4.10
Literacy Development
As you know, the word haemorrhaging usually means ‘rapidly losing blood’. In this context
‘haemorrhaging’ refers to the damaging loss of customers sufered by the business. A word
like ‘haemorrhaging’ is only used when you want to stress the damaging nature of the loss.
Decide what phase each of the cartoons below is showing, and write a description of what
the challenges of managing that phase would be.
4.11
Activities
A B C D
Renewal is a
possibility in the post-
maturity phase
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*
customers not familiar
with product
*
retailers reluctant to put
on shelves
*
takes time to establish
product
*
expenses higher than
sales revenue
*
typically characterised
by negative profts
*
Businesses lose money
in the establishment
stage
Strategies to meet the
challenges
*
prepare for the cash
problem with adequate
savings
*
develop efective
marketing strategies
to price and promote
products
*
do Business courses
to develop the
management skills
needed
*
research government
regulations
*
rapid increase in sales
*
pressure on resources,
particularly cash and
labour
*
cash problems develop
*
competitors attracted
by increasing sales
Strategies to meet the
challenges
*
prepare to work even
harder
*
develop an efective
credit policy to collect
debts efciently
*
consider factoring
*
carefully pick the time
when professional
managers are needed
*
sales level of
*
market for product is
saturated
*
time to employ professional
managers
*
focus on remaining
competitive
Strategies to meet the
challenges
*
focus on cutting costs
*
examine every aspect of
value chain to cut costs
*
diversify into new products
*
fnd ways to grow the value
of the business
*
fnal stage of life cycle
*
falling sales and loss of
market share
*
cash fow problems
emerge
*
business starts to
decline
Strategies to meet the
challenges
*
improve the
competitive position of
the business through
cost cutting
*
renewal may be a
possibility with new
products
*
new managers with
new ideas
*
manage the closure
efectively and ethically
Establishment
Characteristics
Growth
Characteristics
Maturity
Characteristics
Post-maturity
Characteristics
S
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R
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Steady
State
Decline
Cessation
Renewal
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Responding to challenges at each stage
of the business life cycle
Challenges are simply obstacles that have to be overcome. Each phase of the business life cycle
presents challenges that will test the manager’s abilities and skills. Te challenges need to be met
if the business is to progress to the next phase, or, indeed, prevent the movement to the fnal
phase. Te business life cycle is unlike the human life cycle in one important aspect: there are no
time limits for any phase.
4.12
Literacy Development
Te word challenge in the business context usually means ‘a task or situation that tests
someone’s abilities and is something that needs to be overcome’.
Challenges in the establishment phase
Challenges associated with fnance and market share are most important in the establishment
phase. Tere will a period of time where profts are negative. In other words, business costs
are greater than business revenues. Tis is because it will take time to establish the business. It
will take time for customers to get to know about the products the business has for sale and to
make judgements on the benefts those products ofer them. However, costs pile up from day
one. Rent on premises must be met. Ofen suppliers are reluctant to supply until they have been
paid, because there is no track record to indicate that the customer is reliable. It will take time to
establish a track record.
Tere is only one way to meet the fnance challenge, and that is to prepare for it. Tere needs to
be sufcient cash to run the business in its establishment stage. Running out of cash is a major
cause of business failure. Indeed, there needs to be sufcient cash to meet the owner’s personal
needs during this phase. When the owner takes money out of the business for personal needs,
such as paying school fees or for entertainment, it is called drawings.
Ways of getting customers to know about the business’s products can ofen be the biggest
challenge in the establishment phase. Tese are called marketing strategies. If the business
is a manufacturing business, it is likely that other businesses, retail businesses, will need to
be persuaded to buy the products before they can get to the fnal customer. Retailers will be
reluctant to put on the shelves products that have no sales record. Te challenge is to get them to
try the product. Tis may be achieved by showing the retailer the benefts their customers will
get from the products. Tis is called personal selling and it is a most important promotional
strategy.
Managing the business will also be a major challenge in the establishment phase. Te workload
is typically enormous because there is simply not the cash needed to employ people to do all the
things that need to be done. Even knowing what needs to be done is a challenge. Government
Te most
important challenges in
the establishment phase
are getting the fnance and
market share needed to
grow
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Think, Pair, Share
Jot down all the tasks required if you and your partner were to establish a small business
selling potted plants at local weekend markets.
4.13
4.14
Literacy Development
Frenetic in this context means ‘fast and energetic, in a rather wild and uncontrolled way’.
Are there times when you could describe the behaviour of one of your friends as ‘frenetic’?
regulations, for example, relating to such things as registering the business name and keeping
appropriate records, will require a great deal of research (unless, of course, you have done a
business course like this!).
Challenges in the growth phase
Tere is not a lot of diference in the challenges in the establishment and growth phases.
Tey still focus on fnance, marketing and the workload. It simply becomes more frenetic.
Customers want products quickly, but the fnance is not available to provide enough stock and
customer orders have, in turn, to be ordered from suppliers. Suppliers must be paid on time, but
customers ofen do not pay on time.
Te challenge is to provide organisation in what could easily become chaos. Customer debts
must be efciently collected to avoid a cash crisis. Tis can be achieved by either a credit
policy or by factoring. A credit policy sets out the terms and conditions of supplying goods
to customers on credit. Generally, the terms and conditions are determined by the industry
in which the business operates. Careful consideration needs to be given as to what to do if
customers do not pay on time. Te money from customers will be needed to pay suppliers on
time.
Factoring may be a way out of the fnance crisis. Factoring is the sale of customer debts to
fnanciers. Te customer debt is sold to a fnancier such as a bank. Te fnancier collects the
customer debt when it falls due. Te business gets the cash immediately. Typically, the fnancier
will charge about 3 per cent of the debt, so it is not cheap. But it can be very helpful for rapidly
growing businesses, where the cash fow crisis is the major danger.
Te workload remains enormous during the growth phase. Te hours are long and there is little
specialisation of tasks. Everyone in the business knows how to do all the tasks that need to be
done, and they do them. Te most important challenge in the growth phase is to pick the time
A credit policy
can help deal with fnancial
stress in this phase
Factoring is the
sale of customer debts to
fnanciers
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when the business needs professional managers to take over from the entrepreneurial
people who started and grew the business.
4.15
Using Australian businesses to illustrate the business life cycle concept
When Stephane and Laurence Bourrigaud moved to Bowral, about an hour from Sydney,
Laurence began making pots of chocolate mousse, using his grandmother’s recipe.
Stephane cracked about 200 eggs each day and then delivered the product, by motorbike,
to small retailers in Sydney. For the frst fve years the business remained quite small, but
the couple worked hard to promote their product. At weekends they would visit shops and
ofer tastings. Before long, they were selling out every weekend.
Stephane now cracks and separates 1 000 eggs a day and delivers the mousse once a week
to Harris Farm and David Jones’ stores
around NSW. Stephane and Laurence are
having difculty meeting the demand.
All production takes place in the large
kitchen of their country home. Te
business has almost taken over the house,
with bags of chocolate in the hall, tubs of
organic sugar in the dining room, and an
ofce in a closed-in front veranda.
Tere are plans to build a chocolate factory at the back of the home, but Stephane is aware
that growth can be difcult for small business owners. ‘I don’t have any experience in
running a business,’ he says. ‘But I understand there are a few key things to know. At the
beginning cash fow was a problem, but now we are on top of that. As a small business
person you have to be super sharp. You can’t let your accounts go to whack, you can’t let
people owe you too much money.’
Stephane and Laurence are negotiating with someone who might help them expand – not
only by helping them with fnance, but also with business knowledge and experience.
Stephane explains that ‘these guys have a big business with about 3 500 people working for
them. We are talking pretty much weekly, it’s all about having a feel for each other. Tey’ve
been eating my mousse for about 10 years. Tey know the quality is always the same.’
Adapted from an article by Perrie Croshaw in the Sun Herald 16 September 2007
Case Study
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Challenges in the maturity stage
Tere are many challenges associated with the maturity stage of a business. Te most important
is to fnd ways of growing the value of the business. Businesses, like Woolworths, for example,
are typically mature businesses. But their managers have continually found ways to grow the
value of the business. Te growth in value is represented in the share price. During the early
2000s the Woolworths’ share price grew from just on $10 to $30 a share.
Businesses in the mature phase of the business life cycle operate in a market that is highly
competitive. We can learn a great deal from Roger Corbett (CEO of Woolworths during the
early 2000s) on how to grow the value of the business in a highly competitive market. Cost
cutting is a central idea. Corbett cut costs in every area of the Woolworths’ value chain, but
particularly in the warehousing and distribution areas. Te lower costs enabled the business to
ofer additional benefts to their customers and the business attracted additional customers. Te
business became more competitive and its market share increased.
Corbett was also able to develop in the business’s employees a culture of service, where
employees understood the importance of gaining customer loyalty and repeat business. Tis is
essential in a mature business. Woolworths achieved this by efective staf training and rewards.
Developing new, more proftable, ways of doing things is also important. One way Woolworths
is doing this is through the Select brand. Te Select brand is a Woolworths’ brand. Woolworths
establish the design criteria and the quality standards and have the products manufactured to
meet those standards. Te Select brand gives the business bigger margins and more bargaining
power with traditional suppliers.
Challenges of the post maturity stage
Renewal is very rare. Sometimes entrepreneurs with fair are able to take a declining business
and get it to grow again. In the past, this was usually done through acquisitions - that is, buying
new businesses that ofer growth prospects. But it does not ofen happen.
1. What stage of the business life cycle is the business currently in?
2. What are the fnancial challenges they face in this stage of the cycle? How well are they
managing this challenge?
3. Te owners stress the importance of collecting debts efciently. Imagine you were in
charge of this aspect and David Jones had not paid an account that was due a month
ago. What would you do?
4. How did they market the product in the establishment stage? Was it successful? How
did they minimise costs during the establishment stage?
5. What are the marketing challenges they are now facing?
4.16
Activities
Corbett
developed a culture of
service with the business’s
employees
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Te NSW Department of State and Regional Development (www.smallbiz.nsw.gov.au)
published a list of warning signs that a business was under stress and heading for trouble.
Your task is to rank these warning signs in terms of the importance they play in alerting
the business manager to potential problems in the business. Circle number 1 as the most
important warning sign, number 2 as the second most important and so on to number 10,
as the least important.
Step 1 You do your own ranking, without discussing it with anyone else at this stage.
Make your judgement based on the big (macro) picture rather than on your
personal or immediate needs and experiences.
Step 2 In teams of four, discuss your ranking of each role and your reasons for making
that decision. Your team then needs to reach a consensus , to produce a ranking
that refects the team’s opinion.
Step 3 Each team reports to the whole class on their three most important and their
three least important criteria. All students discuss the fndings.
4.17
Activities
Regular customers stop coming
Sales are down on last year
Te average sale per customer has decreased
1 2 3 4 5 6 7 8 9 10
Te storeroom is full of slow-moving stock
Invoices and receipts are very disorganised
Competitors have lower prices
Staf are unable to answer customer enquiries
Proft margins compare badly with industry averages
Window display is dated and dusty
Customers are returning more purchases than
previously
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
Te major challenge for the managers of declining businesses is an ethical challenge. Te
challenge is to ensure that the business is closed down in a manner that considers the needs of
all the stakeholders. Te employees should receive their entitlements, such as long service leave,
and be helped to fnd new jobs. Creditors, such as suppliers, must be paid money owed to them.
It is important that managers do the right thing, because their decisions will impact on other
people.
Te challenge is not easy, because the managers of declining businesses ofen leave it too late to
plan for the closure, and by the time it is forced to close, there is insufcient money.
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Factors that can contribute to
business decline
Tere is a number of factors that contribute to business decline. Te most important is the
failure to embrace change. Businesses that do not develop the products to meet the changing
needs of customers start to gradually lose their customers as the customers fnd competitors
who better meet their needs. And it is not just products. Te failure to embrace change in such
matters as adopting new technology and new production techniques may well result in the
ability of competitors to produce goods more cheaply, which, in turn, enables the competitor to
increase their share of the market.
Lack of fnance is another important reason why some businesses decline. Businesses must pay
their bills as those bills fall due. Wages must be paid on time. Suppliers must be paid on time.
Te money needed to pay bills like this is called working capital and a key aspect is the efcient
collection of customer debts. Small suppliers of, say, vegetables to Woolworths rely on the
money owed to them to be paid on time. Te supplier will send the goods to Woolworths with
an invoice. Te invoice sets out the conditions of the sale, the quantity of goods supplied, the
price at which they were sold and, most importantly, when the money is to be paid. Many small
businesses have poorly developed collection policies and don’t know what to do when customers
don’t pay on time.
Business culture can make a critical contribution to the decline of a business. Ofen managers
fail to deliberately establish a business culture through things like induction programs and
training programs. Induction refers to the way a new employee is introduced to the business.
It is important the new employee understands expectations about things like quality. Failure to
establish a business culture ofen leads to a ‘she’ll be right’ attitude and this is very dangerous.
Of course environmental infuences can also contribute to the decline of a business. Economic
recessions, for example, can lead to a rapid fall in sales and, if the business has too much stock in
these circumstances, it can lead to difculties in paying suppliers.
Voluntary cessation
‘Cessation’ is not a word you hear every day. Indeed when you consider the alternatives that
could have been used (see literacy development), it is hard to understand why this word is used
to signal the end of a business. However, many businesses come to an end. Sometimes the end
is forced – the managers have no choice but to close the business. In other cases, the owners
voluntarily close the business.
4.18
Literacy Development
Words that have a similar meaning to cessation include ‘ending’, ‘termination’, ‘stopping’,
‘halting’, ‘ceasing’, ‘fnish’, ‘fnishing’, ‘stoppage’, ‘conclusion’, ‘winding up’, ‘discontinuation’,
‘abandonment’, ‘suspension’, ‘breaking of’, ‘cutting short’.
Lack of
fnance is a critical reason
businesses fail
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When the owner of a business decides to end the operation of a business by his or her own
free will, it is called voluntary cessation. Tere is a number of reasons why the owner may
take this step. One common reason is that the owner wants to retire and there is no one who
wants to continue the business. Another possible reason is where another business purchases
the business and incorporates its customers, employees and so on into the purchasing business.
Voluntary cessation is rarely a problem because the cessation is planned and all the stakeholder
interests are considered.
4.19
Krispy Kreme Falls in a Hole
Vernon Rudolph opened the frst Krispy Kreme store in North Carolina in 1937 but it
wasn’t until 2003 that Krispy Kreme opened in Australia.
In seven years, 50 stores, employing 660 people, opened in Brisbane, Canberra, the Central
and Gold Coasts, Melbourne and Sydney.
Sadly for some, the chief executive announced on November 1, 2010, that Krispy Kreme
Australia had gone into voluntary administration. He explained that this decision resulted
from a combination of factors: falling sales, high distribution costs, unsustainable rents
and poor store locations.
As recent accounts show, Krispy Kreme Australia was in a weak fnancial position well
before administrators moved in. A $12 million loss in 2008 had become a slim proft of
$62,400 in 2009.
Voluntary administration gives Krispy Kreme Australia a chance to restructure and close
the unproftable stores while allowing the proftable stores to continue to operate.
Adapted from an article by Michael Evans, Sydney Morning Herald 2 November 2010
Case Study
1. Draw the life-cycle of Krispy Kreme Australia and label the features and challenges of
each stage.
2. Focus on the post-maturity stage. Can KKA ‘reinvent’ itself as a proftable business?
3. What factors in the external business environment would have reduced the demand
for doughnuts?
4.20
Activities
Voluntary
cessation is when the owner
closes the business by free
will
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Involuntary cessation
Involuntary cessation refers to the forced ending of a business. Tis usually happens because
the business is simply unable to pay its debts and a creditor takes legal action to wind the
business up, or, in other words, end it. A creditor is a person who is owed money by the
business, and if the business is not able to pay that creditor what it owes within the agreed
period, that person has the right to ask a court to end the business and make the payment out of
the assets of the business.
Liquidation
Te legal process of winding up a business is called liquidation. Liquidation means turning
assets such as land, equipment and so on into cash. Te cash will then be distributed to the
creditors. Some of the creditors may have secured loans. A bank, for example, may have a
mortgage over land. A mortgage is a secured loan where the asset being purchased is used to
guarantee the repayment of the loan. Secured lenders are paid frst. Any cash lef over is then
distributed to the unsecured creditors. If there is not enough money, these creditors may, for
example, receive 50 cents for every dollar they are owed by the business.
While businesses are liquidated, a sole trader running a business may be made bankrupt.
Debtors become bankrupt when a creditor (or even the debtor themselves) asks a court to
declare the debtor bankrupt. Te court will then decide how the debtor’s assets are to be
distributed.
It is not just the shareholders of the business who experience
problems when a company is liquidated. Te shareholders
lose the money they invested in purchasing the shares.
Limited liability means their loss is limited to this. But
other stakeholders also experience problems. Suppliers, for
example, may not be paid in full for inventory or stock they
have supplied to the company. Even if some portion of the
debt is eventually paid, the supplier will have to wait a long
time and this may put pressure on the supplier’s cash fow.
Employees and managers, of course, will also experience
problems. First, they will lose their jobs, and employees with
very specialised skills may fnd it difcult to get another job without training courses. Second, it
is possible they may not get all their entitlements such as holiday pay and long service leave.
Customers of the liquidated company may also experience problems. If the company is a
manufacturer supplying component parts to other businesses, there will be a disruption in
supply and the need to fnd new sources. Te owners of land or premises leased by the company
will also experience not only loss of payment by the liquidated company but also loss from the
delay in re-leasing the premises. Investors who have fnanced the lease of equipment to the
company may also experience loss due to non-payment of the lease payments in the last months
of the liquidated company but also potentially by having to sell the leased equipment with loss
of value.
When a company is liquidated all the stakeholders in that business experience problems.
Liquidation
means turning assets such
as land and equipment into
cash
Customers of
liquidated businesses can
experience problems
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4.22
Research the current Australian regulations about bankruptcy and debate the following:
Tat bankrupts get it too easy.
Debate
4.21
Using Australian business to illustrate the concept of liquidation
Austech Institute for Further Education was a cookery school. It went into voluntary
liquidation in March 2010. Te College was founded in Blacktown with 10 students in
2002. It had a history of rapid growth and by 2007-2008 the business had sales of over
$30 million and nearly 1 400 students. At the time, education was one of Australia’s major
export industries.
At that time a qualifcation in hairdressing or cookery almost guaranteed permanent
residency status in Australia and many students were more concerned with gaining
residency than cookery qualifcations. When the Labor government was elected in 2007,
it started to tighten up the regulations, and this put many businesses such as Austech
Institute for Further Education under a great deal of pressure.
Te pressure on Austech became more severe following a 2008 audit by state regulators
who found that the business did not have enough kitchens for its 1 700 students and that
some students were enrolled for more than a year before they had any experience in a
kitchen.
Te regulator, the Vocational Education Training Accreditation Board, found Austech was
in breach of state and federal standards and ordered the business to refund $2 million in
fees to some 350 students, but the NSW Administrative Decisions Tribunal gave Austech a
second chance.
Austech’s chief executive Kharak Bajwa blamed bad publicity about attacks on Indian
students and changes to migration rules for the failure of the business.
Te students were found placement in similar courses under the Tuition Assistance
Scheme, or refunded their unused course fees through the Education Services for Overseas
Students Assurance Fund.
Adapted from an article in the Australian of March 23, 2010 by James Robertson and Bernard Lane
Case Study
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Worksheet 4.1
Business Growth and Decline
1. Simplify the business life-cycle diagram by selecting the 2 main challenges of each stage and the strategies
needed to keep businesses competitive in each stage.
2. Design 4 advertisements, in random order, for a business at each stage of the business life cycle. Do not
label the stages and then see if your learning partner can identify the stages correctly.
3. Funeral directors advise families who are experiencing the death of a loved one. Imagine you are a Business
Cessation Counsellor. What advice would you include on your website?
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Literacy development: learning to analyse
You will maximise your marks in the HSC if you can efectively respond to the specifc instructions to ‘outline’, or
‘describe’, or ‘evaluate’ and so on. ‘Analyse’ and ‘evaluate’ are higher order skills. Not everyone can do them well.
You need to learn how to do them well. In this activity you will develop skills in ‘analysing’.
Tere are two key aspects to analysing. Te frst part is to identify the parts of whatever it is you are
analysing. Te parts of the value chain are things like inbound logistics, operations, service and so on. Whenever
you use a specialist term such as ‘operations’, you need to underline the term and explain its meaning in the
sentence that follows.
Te second part is the hard bit. Analysing is concerned with showing the relationships between the parts
and the goals that the business activity, or strategy, was designed to achieve. Why, for example, did Woolworths
focus on cost-cutting in the part of the value chain concerned with inbound logistics? Cost cutting improved the
competitive position of Woolworths compared to Coles.
Format
1. Begin with an introductory
sentence. Tis sentence sets
out the main idea of what
you are writing about.
2. Identify components and the
relationship between them.
3. Sometimes a concluding
sentence might be helpful.
Example
Several factors infuence the marks a student of Business Studies might
receive in the HSC. Some of the most important are the amount of study the
student does, the quality of the teaching and the availability of appropriate
resources.
Tere is a very strong relationship between the amount of study time and the
fnal HSC marks. Te simple fact is that students need to be well-organised
and to regularly revisit material if they want to achieve high marks.
Tere is also a signifcant relationship between quality teaching and higher
marks. Tere is signifcant research that supports this relationship.
However, it is very difcult for students to receive high marks without the
assistance of appropriate resources.
A number of factors contribute to higher marks in Business Studies.
Analyse scaffold
Difculty: High
Mark Range: 4-10
Defnition: Identify components and the relationship between them; draw out and relate the
implications.
Comments: Tere are four stages in this verb form:
1. Defning each component by naming it
2. Identifying the relationships between each component
3. Explaining how each component is related to another
4. Stating the implications or consequences of these relationships.
Example Analyse the factors that influence Business Studies
marks in the HSC
Scaffold
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1. Begin with an introductory
sentence, setting out the
main idea.
2. Identify components and the
relationship between them.
3. Provide a concluding
sentence if it seems helpful.
A number of factors determine the interdependence between a business and
its environment. Tese include government, competitors and employees. Te
business environment refers to all the factors that infuence the operation of
a business.
Te relationship between a business and government is particularly
signifcant. Governments supply the infrastructure businesses need to
conduct their operations. Businesses provide taxes that contribute to the
government’s capacity to provide infrastructure.
Competitors are each trying to better meet the needs of a similar group
of customers. Te types of benefts a competitor ofers their customers
strongly infuences other competitors, because they will lose customers
if they cannot ofer equal or better benefts. Tere is an equally strong
relationship in the pricing policies of competitors. Te price charged by one
infuences the others.
Another factor is the interdependence between a business and its
employees. Te employees rely on the business for challenging work and
rewards. Te business relies on the employees to operate the business.
Factors such as government, competitors and employees infuence the
interdependence of a business with its environment.
Model
Writing task
Analyse the factors that contribute to business decline.
(200 - 300 words)
Task rubric
In your answer you will be assessed on how well you:
* demonstrate knowledge and understanding relevant to the question
* use relevant business case study/studies
* communicate using relevant business terminology and concepts
* present a sustained, logical and cohesive response
Tink about possible introductory sentences you might use. Write down three possible sentences.
Example Analyse the factors that determine the
interdependence between a business and its
environment
Scaffold and verb unpacking have been adapted from work done by the Science Teachers’
Association of NSW.
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1. ‘Cullen and Baker’ is a solicitors’ partnership.
Tis business provides clients with:
(a) advice
(b) service
(c) goods
(d) help
2. Richard Branson is a well-known entrepreneur.
Entrepreneurship is related to:
(a) risk
(b) innovation
(c) choice
(d) proft
3. Spanline Pty Ltd is a well-known home extension
company.
From its name we know it is:
(a) a sole trader
(b) a public company
(c) a SME
(d) a private company
4. Rob and Lynne Hain produce fne wool and fat
lambs on their Cooma property.
Tis partnership belongs to which industry
sector?
(a) Primary
(b) Secondary
(c) Tertiary
(d) Quaternary
5. Qantas is Australia’s major airline.
It could be classifed as:
(a) government enterprise, large and national
(b) global, large and public
(c) SME, secondary and private
(d) public, quinary and national
6. Which is not a characteristic of a business in the
growth phase of the lifecycle?
(a) Rapid increase in sales
(b) Increasing competition
(c) Cash problems develop
(d) Market for product is saturated
7. Te strategy of introducing a new idea that relates
to a product or service or way of doing something is
(a) change
(b) innovation
(c) a brain-wave
(d) entrepreneurship
8. Jim’s Lawnmowing franchise specialises in home
garden maintenance.
Tis business belongs to which industry sector?
(a) Secondary
(b) Tertiary
(c) Quaternary
(d) Quinary
9. Jessica is 18 and very conscious of a healthy lifestyle.
Tere is a range of businesses responding to her
needs.
Which of the following environmental infuences is
impacting on these businesses?
(a) Social
(b) Legal
(c) Cultural
(d) Consumer tastes
10. Te introduction of an Emissions Trading Scheme
(ETS) would have a signifcant impact on Australian
mining companies.
Tis is an example of which external environmental
infuence?
(a) Economic
(b) Geographic
(c) Political
(d) Technological
Topic 1 Revision
Multiple choice
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Short Answers
1a. Outline one economic and one social role of businesses.
Economic
Social
1b. Discuss two factors that infuence a business owner’s choice of legal structure.
1c. Explain how changes in the external business environment have contributed to the growth of the
quaternary and quinary industries in Australia.
2a. Explain the meaning of the termv ‘business life cycle’.
2b. A retail business has moved into the maturity stage of the business life cycle. Analyse two strategies
that management could use to meet the challenges of remaining competitive.
2c. Describe two problems that arise for stakeholders when companies go into liquidation.
3a. Outline the life cycle of Austech I.F.E (page 100).
3b. Describe how stakeholders have been afected by the voluntary liquidation of Austech I.F.E.
3c. Explain why Austech I.F.E went into voluntary liquidation.
Extended Response
1. Using specifc examples, discuss the nature of business and its role in society in a changing business
environment.
2. Using specifc examples, discuss two ethical issues raised in the case study on Austech I.F.E (page 100).
Syllabus questions
1. Go to page 13 of the syllabus. Under Nature of Business there are two main sections, Outcome and Content.
Content is divided into two sections - Students learn to and Students learn about. You will notice that under
Outcome and Students learn to the requirements are structured as questions. Have a go at answering them.
You can access the Stage 6 Business Studies syllabus from the Board of Studies NSW website:http://www.boardofstudies.nsw.edu.au/syllabus_hsc/pdf_doc/business-studies-st6-syl-from2012.pdf
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doc_609832393.pdf
In this description business growth and decline.
Business
Growth and
Decline
Chapter 4
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You know about these ideas already! Try this introductory activity!
Work with a partner to show your understanding of the human life cycle. What are the
stages in the cycle? What are the characteristics and features of each stage? What are the
challenges that have to be overcome or learned in each stage?
4.1
Activities
One of the most important infuences on the success or failure of a business is the way it is
managed through its life cycle. Te business life cycle refers to the series of predictable phases
businesses experience as they develop. Each phase presents a number of management challenges
that must be overcome before the business proceeds to the next phase.
Stages of the business life cycle
Typically a business evolves through four major stages of development. Te four stages are
establishment, growth, maturity and post-maturity. Each phase, or stage of development, is
characterised by a number of features that seem to be common to most businesses and need to
be carefully managed.
Establishment
Te establishment stage is when a business is launched. Before we give you any detail on
establishing a business, work in small groups to fnd out how much you already know about the
difculties associated with launching a business.
Most people establishing manufacturing businesses (such as the computer games business) will
put in a lot of efort convincing retailers to try their product.
Imagine you have developed a new computer game. You have discussed it with your
friends and they all agree that it is exciting and addictive and that the graphics are
fantastic. Tey all say they would buy the product if it were available in shops.
You have a choice. You could possibly sell it to a games manufacturer such as Sony. Sony
would manufacture the game and distribute it to computer games retailers throughout
the world. Sony would pay you a small royalty (about 5 – 10% of the recommended
retail price) for each game sold. Te other alternative is to establish your own business to
produce and distribute the game. You will need to buy equipment, such as commercial
disc-copying machines, and premises to take phone calls, keep records and stock and
manufacture the games discs. Te major problem, of course, is that the only potential
customers who know about the game are your friends.
Nevertheless you decide to establish your own business and give up school to work full
time on establishing the business.
Activities
An example of a cycle:
Life Cycle of a
Caterpillar
1 Egg
2 Caterpillar
3 Pupa
4 Butterfy
Establishment
stage is when the business is
launched
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It might be possible, for example, to convince a retail chain such as EBE Games to try some free
samples (free to the store) and display some posters called ‘point of sale advertising’. It might
be possible to send free samples to industry magazines to assess the product and write about it.
When Krispy Kreme Donuts established their business at Penrith a few years ago, they ofered
free samples to all customers for a couple of days. Cars were lined up along several streets.
One of the most important features of the establishment phase is that it is typically a stage
when expenses are higher than sales revenue. Sales revenue is the total amount of money
received from selling products. It is calculated by multiplying the price by the quantity sold. Te
establishment phase is characterised by negative profts. In other words, the typical business
loses money in the establishment stage.
4.2
Group responses
Tink about your responses to the following questions. Jot down your ideas and discuss
them with the other people in the group.
1. Where will you get the money for things like machinery, telephone, premises and
living expenses until the business takes of?
2. How will you let customers know that you have this product and how great the
product is? Remember you will need to sell thousands of discs, not just a few to your
friends.
3. How will you distribute the product to the fnal customer?
4. How long do you think it will be before potential customers know about the product
and you start to sell enough games discs to cover your expenses?
Te establishment stage can be very difcult. Even though the owner has tremendous
faith in the product, potential customers are not familiar with it and will be reluctant to
purchase it. Retailers will also be reluctant to put it on their shelves, because it has no track
record. Te retailer expects a return from each metre of shelf space and would much prefer
products on the shelves that have a track record of a certain value of sales. It will take time
to establish the product.
During this time when it is hard to sell products, costs, or expenses, will be high. It is not
just the costs of the machinery and the premises. One of the most important expenses
will be the promotion that is needed to tell both fnal customers and retailers that your
business exists and that you have products that will meet their needs.
Think, Pair, Share
In the light of this information would you make changes to your ideas on establishing the
computer games business? Would it be better to stay at school? Jot down your ideas and
discuss them with a friend.
4.3
Establishment
stage typically involves
expenses higher than
revenue
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Growth
Te growth stage is characterised by a rapid increase in sales. Tis is because customers are
more aware of the business and now know it has products that meet their needs. Te growth
stage requires careful management to meet a number of challenges.
Te rapid increase in sales puts pressure on resources. Te phone is constantly ringing.
Customers are placing orders for stock. Stock is being packed for distribution to customers.
Tere can be communication breakdowns as several people sometimes try to solve the same
problem.
Cash problems ofen develop. Tis is because of the rapid expansion. Suppliers are reluctant to
advance too much credit because they do not have a track record with the business. More people
are needed to do the work and this means a higher wages bill. Ofen the result is a cash fow
crisis where money has to be paid out as wages and payments to suppliers before it comes into
the business as payments for sales to customers. Tere is a time lag because customers, who are
usually retailers, will take full advantage of the credit terms ofered to them.
Another important feature of the growth stage is that competitors will be attracted by the rapid
increase in sales. Te most efective way of dealing with competitors is by building a brand and
promoting the brand, rather than just the products.
Think, Pair, Share
Do you have an iPhone? Do you think Apple Inc. would face the same growth problems as
a business just established? Jot down your ideas and discuss them with a friend.
4.4
Growth is
characterised by a rapid
increase in sales
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Image:
Courtesy of Preshafood Ltd.
Preshafruit® juice contains
100% fruit with no added
sugar, sweeteners or
colours. Te juice contains
twice the antioxidants of
regular juice and comes
in an innovative triangle
shaped bottle.
Using Australian business to illustrate the concept of the growth stage
Preshafood Limited was established in 2006 and started manufacturing fruit-based
products in 2007. Te company has worked out a better way to process fruits and argues
the technology it has developed is ‘why our fruits taste just
picked and our juices just squeezed’. Tey also
claim ‘Preshafood is better for you because it
retains nutrients longer than heat-pasteurised
fruit and juices’.
Te initial product development and
commercial production was undertaken at
Food Science Australia’s Innovative
Foods Centre. Food Science
Australia is a joint venture
between the CSIRO and the
Victorian government. Together
they were able to fnd a way
of processing fruit based on
pressurised cold rather than
cooking, heating or chemicals. Te
technique is called High Pressure
Processing (HPP).
In the establishment stage of the
business life cycle a state of the art
High Pressure Processing (HPP)
food processing facility was built in
Derrimut in Melbourne’s west.
Te frst commercial product was an
apricot, peach and apple mix for yoghurt.
A range of fruit juices was the next product
developed. Te fruit juices have resulted in rapid
growth. In 2009 Preshafood juices won the prestigious
International Beverage Innovation Awards held at Drinktec
in Germany. Preshafood took out frst prize in the ‘Best New Juice
or Juice Drink’ and the overall award across the 24 award categories ‘Best New Beverage
Concept’.
Te Beverage Innovation Awards are the Oscars equivalent for the beverage industry,
and Preshafood beat many of the global giants such as Pepsi and Coca-Cola. It was a
remarkable achievement for a small start-up Australian company and indicates the
Case Study
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4.5
business is a ‘signifcant player’ in a very competitive industry.
Preshafruit® juices are mainly distributed through Victorian and New South Wales Coles,
Woolworths and Safeway stores. Already the business is accessing
global markets, with exports to Singapore and Hong Kong, and
is currently making arrangements to export to Japan, the United
States, Canada and Europe.
Te rapid growth is putting enormous pressure on a
small staf, cash fow and equipment. For this reason the
business is raising additional capital on the Australian
Small Scale Oferings Board (ASSOB) to cover the costs
of the additional equipment and particularly to get more
working capital to deal with potential cash fow difculties.
You may recall, from an earlier case study, the ASSOB
showcases investment opportunities in early stage, high
growth unlisted companies. It brings together people with
surplus money who want to invest and businesses growing
rapidly that need additional funds to grow further. In this
sense it is similar to the Australian Stock Exchange (ASX) but is focused on a diferent type
of investor and business.
Working capital is always a problem in the growth stage. Working capital is the money
needed for the day-to-day operation of the business. When Preshafood Limited sell
the product to Woolworths, an invoice is sent with the goods. Te invoice sets out the
conditions of the sale, the price and quantity of stock and when the bill is to be paid.
Working capital is the bufer between the need to pay suppliers and wages and the time
when customers such as Woolworths pay the bill.
Image:
Courtesy of Preshafood Ltd.
Maturity
In the maturity stage the growth in sales levels of. Te business is selling the same value
of products year afer year. Te reason for this is simply that the market for the product is
saturated. Afer a time, for example, everyone who wants a plasma television set has one. Te
only sales will be made to people who are replacing sets that are worn out. Businesses that rely
on products in the maturity stage must develop new ways to grow the value of their business.
An example of a business in the maturity stage is Sanitarium, which relies on the product
Weetbix.
Think, Pair, Share
Jot down the advice you would give to Sanitarium management to increase sales. Suggest
4 other businesses you think are in the maturity stage.
4.6
Sales level of in
the maturity stage
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Using an Australian business to illustrate the concept of the maturity stage
When the Coles Group managed the Coles’ supermarkets, the
business was in the maturity stage of the business life cycle.
Sales had not only levelled out but were beginning to fall. Tere
was very little innovation and customers started to shop at
Woolworths, where the focus was on providing the products and
service they expected, but were not getting, at Coles.
Case Study
Te maturity stage is the time to employ professional managers. Tis is because professional
managers have the skills to grow the value of the business by making the business more
competitive. A more competitive business will attract customers from other businesses because
it is ofering cheaper products or providing customers with additional benefts. Te result is
increased share of the market and this grows the value of the business. Where managers are
successful in this, as, for example, Roger Corbett with Woolworths, the business’s share price
increases. Te increased share price refects the growth in the value of the business.
One of the most efective ways to increase the competitive position of a business in the
maturity stage is to cut costs. Professional managers will carefully examine every aspect of the
value chain, seeking to cut costs. Te value chain is a central idea in business that every single
activity in a business should add value to the fnal good or service that the business produces.
Woolworths achieved most of their cost cutting in the warehouse and distribution aspects of
their business. It made them very competitive compared to Coles and Coles’ customers started
to shop at Woolworths.
Other businesses have successfully grown the value of the business while in the maturity phase
by diversifying. Diversifying means to develop new products. Fosters, for example, moved into
wine when the beer market matured. Again, this strategy needs professional managers, because
there are risks associated with the markets in which these new products will be sold. Tis is
mainly because the managers are not experienced in these markets. Te markets for beer and
wine, for example, are very diferent, and Fosters was forced to separate the beer and wine units
in 2010.
Think, Pair, Share
In what ways are the beer and wine markets diferent? Jot down your ideas and share them
with a friend.
4.7
Cost-cutting is
ofen used to improve the
competitive position of the
business
Diversifying
means to develop new
products
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Wesfarmers Limited purchased the business in 2007 and put into operation the classic
strategies to manage a business in the maturity stage. Te managers immediately
implemented a 5-year business turnaround program to grow the value of the business.
It was not easy. In 2010 Coles had 763 supermarket stores, 775 liquor outlets, 95 hotels
and was the operator of a national chain of fuel and convenience outlets. Te business
employed 113 000 people whom they call ‘team members’.
Te frst thing the managers did in this turnaround program was to improve the in-store
oferings – products that better met the needs of customers, such as dairy, delicatessen,
bakery and fresh produce - and improve on-shelf availability. Te second focus was on
improving, or enhancing, the value customers receive. During the year 2009/2010 prices
decreased, overall, by 2% in Coles’ supermarkets.
Te second major component of a successful turnaround is improved service. In the past
Woolworths were much better at customer service, but Wesfarmers had a solid reputation
for high levels of customer service in some of their other businesses such as Bunnings
Hardware.
Te strategies needed to improve customer service focus on training. Te managers
applied the same techniques that were working so well in K-Mart: on-line instruction,
supported by certifcates of achievement, video instruction to demonstrate the standards
of customer service the managers wanted and, fnally, the mentoring of staf from
department managers. Rewards to reinforce high standards are also important. Te
rewards range from merit certifcates and vouchers to store performance-based bonuses.
In the frst phase of the turnaround strategy, senior management focused on building a
strong leadership team, changing the culture of the business, improving the standards of
things like product availability and a store renewal program.
Te next phase of the turnaround program will be to ‘embed the new store-focused
culture, drive further business efciencies, improve in-store customer service, move to a
scale roll-out of new store formats, and enhance Coles’ fresh ofering and in-store value’.
Some of the language the senior management is using in this quote is difcult and it is
worth doing some vocabulary work here.
1. ‘embed the new store-focused culture’. Tis phrase stresses the importance of building
attitudes and values in employees that will ensure the store they work in is successful.
One of those attitudes, for example, is a high level of customer service. Te attitudes
and values or ‘way things are done in the store’ is referred to as the business culture.
2. ‘drive further business efciencies’. Tis phrase refers to cost savings that result
from things like highly trained and productive employees, cost efective distribution
systems and so on.
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Note taking
Note taking is an
important skill needed
for success in the HSC.
Summarise this Coles’ case
study in one page using
your favoured style – mind
map, dot points, key
concepts.
4.8
3. ‘improve in-store customer service’. Tis phrase is more obvious. Te success of the
business will relate to the level of customer service in each individual store.
4. ‘a scale roll-out of new store formats’. A number of diferent store formats are being
trialled and customers are being asked about how they like a particular format. As
soon as the managers are satisfed that they have the best format, it will be put into all
the 700 or so stores.
5. ‘enhance Coles’ fresh ofering and in-store value’. Woolworths picked up the trend
to the healthy lifestyle early and responded with the ‘Woolworths the fresh food
people’ slogan. Coles is playing catch-up but recognises the importance of efectively
responding.
Te results of the turnaround program are quite remarkable. In 2008 Coles’ revenue
from sales was just over $16.5 billion. In 2009 it was just over $28.5 billion. In 2008 EBIT
(earnings before interest and tax is paid) was $475 million. In 2009 EBIT was $831 million.
Obviously the managers were succeeding in their turnaround strategy and had taken a
business in the maturity stage of the cycle and were now growing the business.
It is really important to understand that there is not a natural progression between the
stages of the business life cycle. Businesses in the maturity stage do not face an inevitable
progression to post-maturity. If the managers are good enough they can, as the Coles’
managers have demonstrated, return to growth. When managers are able to again grow the
value of the business, it is called renewal.
4.9
What stage of the business life cycle do you think your school is currently in? What
evidence is your decision based on? Select a business you are familiar with in your local
area. What stage of the business life cycle is it in? Why do you think this?
HomeThink
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Evaluate scaffold
Literacy development: learning to evaluate
Difculty: High
Mark Range: 6 -10
Defnition: Make a judgement based on criteria; determine the value of
Comments: Tis verb is ofen used in the second part of the extended response in the HSC
Example Evaluate the effectiveness of your Business Studies
teacher
Scaffold
1. Begin with an introductory
sentence that sets out the
main idea of what you are
writing about.
Te introductory sentence
here is a judgement.
2. Provides criteria on which
the judgement is made.
Provides criteria on which
the judgement is made.
Provides criteria on which
the judgement is made.
3. Sometimes a concluding
sentence might be helpful.
Example
My Business Studies teacher is highly efective. My Business Studies teacher
is female, in her 30s, and has a delightful personality. She works very hard
but this is not the reason that I think she is highly efective.
Te main reason I think she is highly efective is that her results have
been well above state averages for a number of years. I think this is because
she motivates her students to want to learn.
Another reason is that she helps her students to learn how to do the
really important things, such as how to describe, analyse and evaluate,
rather than just teach content. Te ability to evaluate efectively leads to
higher marks in the HSC.
My Business Studies teacher has a pastoral interest in her students that
goes well beyond the course outcomes. She is interested in her students’
learning problems and ofers advice.
My Business Studies teacher is highly efective. Te criteria I have used
to make this judgement include: results in the HSC, competent lessons and
the interest she shows in her students.
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1. Begin with an introductory
sentence, setting out the
main idea.
Te introductory sentence
here is a judgement.
2. Provide criteria on which the
judgement is made.
Provide criteria on which
the judgement is made.
Provide criteria on which the
judgement is made.
3. Provide a concluding
sentence if it seems helpful.
Woolworths’ managers have been highly efective in achieving the business’s
goals. Woolworths is a large Australian retailing company with interests in
groceries, petrol and liquor.
Woolworths’ managers have achieved a highly competitive business and
this is the most important goal. In 2006 the increase in Woolworths’ market
share was 20% compared to 5% for the Coles Group.
Woolworths’ managers were also able to achieve a highly fexible business
that is able to respond quickly to changes in the external environment such
as, for example, the trend to the healthy lifestyle.
Woolworths’ managers were highly efective in achieving the goals of the
business. Teir success was evident in the increased value of the business,
where the share price rose from $11 to nearly $30 in seven years.
Model
Example With reference to a business you have studied,
evaluate the performance of its managers in achieving
the goals of the business.
Writing task
Write 200 words to:
evaluate the efectiveness of managers in meeting the challenges of a phase in the business life cycle.
* Check the evaluate scafold.
Task rubric
In your answer you will be assessed on how well you:
* demonstrate knowledge and understanding relevant to the question
* use relevant business case study/studies
* communicate using relevant business terminology and concepts
* present a sustained, logical and cohesive response
Tink about possible topic sentences you might use. Write down a possible topic sentence.
Jot down your ideas and share them with a friend.
List 3 – 5 points that will provide detail to the topic sentence.
Now write 200 to 300 words of sustained writing. Ensure you underline and explain business terminology.
Remember that it is through your writing skills that you will gain marks in the HSC. You will gain more marks if
you know how to evaluate, rather than writing everything you know about the content. Te evaluate scafold is very
important.
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Activity
Swap your writing with a friend. Use the following marking criteria to assess each other’s work. Give the work a
mark. Write a comment to justify the mark.
* has a well-constructed topic sentence that relates directly to the question and makes a judgement
* provides detailed criteria that the judgement is based on
* presents a comprehensive, well-structured, logical response which incorporates appropriate
business terminology and concepts that are illustrated with appropriate case study/studies.
* provides a general introductory sentence
* provides some criteria that the judgement is based on
* incorporates into the extended response business terminology and concepts.
* may identify some components of the value chain
* incorporates some business terminology and includes some case study/studies.
Mark
7-10
4-6
0-3
Short answer
a) Explain the meaning of the term ‘business life cycle’. 3 marks
b) Describe the characteristics of the establishment phase of the business life cycle. 4 marks
c) Explain the process of cessation. 3 marks
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Post-maturity
Te post-maturity phase is the fnal stage of the business life cycle. Typically, the business has
failed to respond to increased competition and is haemorrhaging market share. Tis phase is
characterised by falling sales and loss of market share. Te business soon becomes unproftable
and cash fow problems emerge. Ofen there is difculty in paying bills on time. Te business
starts to decline. Unless something is done the business will fail.
And something can be done. Te competitive position of the business can be improved by cost
cutting. It may then be possible for the business to maintain its position in the marketplace. Tis
type of post-maturity position is called steady state.
Another possibility is renewal. If the managers are able to develop new products or more
competitive ways of providing customer benefts, then it may be possible to again grow the value
of the business. However, this type of change is very rare and usually needs new managers with
new ideas.
4.10
Literacy Development
As you know, the word haemorrhaging usually means ‘rapidly losing blood’. In this context
‘haemorrhaging’ refers to the damaging loss of customers sufered by the business. A word
like ‘haemorrhaging’ is only used when you want to stress the damaging nature of the loss.
Decide what phase each of the cartoons below is showing, and write a description of what
the challenges of managing that phase would be.
4.11
Activities
A B C D
Renewal is a
possibility in the post-
maturity phase
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*
customers not familiar
with product
*
retailers reluctant to put
on shelves
*
takes time to establish
product
*
expenses higher than
sales revenue
*
typically characterised
by negative profts
*
Businesses lose money
in the establishment
stage
Strategies to meet the
challenges
*
prepare for the cash
problem with adequate
savings
*
develop efective
marketing strategies
to price and promote
products
*
do Business courses
to develop the
management skills
needed
*
research government
regulations
*
rapid increase in sales
*
pressure on resources,
particularly cash and
labour
*
cash problems develop
*
competitors attracted
by increasing sales
Strategies to meet the
challenges
*
prepare to work even
harder
*
develop an efective
credit policy to collect
debts efciently
*
consider factoring
*
carefully pick the time
when professional
managers are needed
*
sales level of
*
market for product is
saturated
*
time to employ professional
managers
*
focus on remaining
competitive
Strategies to meet the
challenges
*
focus on cutting costs
*
examine every aspect of
value chain to cut costs
*
diversify into new products
*
fnd ways to grow the value
of the business
*
fnal stage of life cycle
*
falling sales and loss of
market share
*
cash fow problems
emerge
*
business starts to
decline
Strategies to meet the
challenges
*
improve the
competitive position of
the business through
cost cutting
*
renewal may be a
possibility with new
products
*
new managers with
new ideas
*
manage the closure
efectively and ethically
Establishment
Characteristics
Growth
Characteristics
Maturity
Characteristics
Post-maturity
Characteristics
S
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Steady
State
Decline
Cessation
Renewal
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Responding to challenges at each stage
of the business life cycle
Challenges are simply obstacles that have to be overcome. Each phase of the business life cycle
presents challenges that will test the manager’s abilities and skills. Te challenges need to be met
if the business is to progress to the next phase, or, indeed, prevent the movement to the fnal
phase. Te business life cycle is unlike the human life cycle in one important aspect: there are no
time limits for any phase.
4.12
Literacy Development
Te word challenge in the business context usually means ‘a task or situation that tests
someone’s abilities and is something that needs to be overcome’.
Challenges in the establishment phase
Challenges associated with fnance and market share are most important in the establishment
phase. Tere will a period of time where profts are negative. In other words, business costs
are greater than business revenues. Tis is because it will take time to establish the business. It
will take time for customers to get to know about the products the business has for sale and to
make judgements on the benefts those products ofer them. However, costs pile up from day
one. Rent on premises must be met. Ofen suppliers are reluctant to supply until they have been
paid, because there is no track record to indicate that the customer is reliable. It will take time to
establish a track record.
Tere is only one way to meet the fnance challenge, and that is to prepare for it. Tere needs to
be sufcient cash to run the business in its establishment stage. Running out of cash is a major
cause of business failure. Indeed, there needs to be sufcient cash to meet the owner’s personal
needs during this phase. When the owner takes money out of the business for personal needs,
such as paying school fees or for entertainment, it is called drawings.
Ways of getting customers to know about the business’s products can ofen be the biggest
challenge in the establishment phase. Tese are called marketing strategies. If the business
is a manufacturing business, it is likely that other businesses, retail businesses, will need to
be persuaded to buy the products before they can get to the fnal customer. Retailers will be
reluctant to put on the shelves products that have no sales record. Te challenge is to get them to
try the product. Tis may be achieved by showing the retailer the benefts their customers will
get from the products. Tis is called personal selling and it is a most important promotional
strategy.
Managing the business will also be a major challenge in the establishment phase. Te workload
is typically enormous because there is simply not the cash needed to employ people to do all the
things that need to be done. Even knowing what needs to be done is a challenge. Government
Te most
important challenges in
the establishment phase
are getting the fnance and
market share needed to
grow
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Think, Pair, Share
Jot down all the tasks required if you and your partner were to establish a small business
selling potted plants at local weekend markets.
4.13
4.14
Literacy Development
Frenetic in this context means ‘fast and energetic, in a rather wild and uncontrolled way’.
Are there times when you could describe the behaviour of one of your friends as ‘frenetic’?
regulations, for example, relating to such things as registering the business name and keeping
appropriate records, will require a great deal of research (unless, of course, you have done a
business course like this!).
Challenges in the growth phase
Tere is not a lot of diference in the challenges in the establishment and growth phases.
Tey still focus on fnance, marketing and the workload. It simply becomes more frenetic.
Customers want products quickly, but the fnance is not available to provide enough stock and
customer orders have, in turn, to be ordered from suppliers. Suppliers must be paid on time, but
customers ofen do not pay on time.
Te challenge is to provide organisation in what could easily become chaos. Customer debts
must be efciently collected to avoid a cash crisis. Tis can be achieved by either a credit
policy or by factoring. A credit policy sets out the terms and conditions of supplying goods
to customers on credit. Generally, the terms and conditions are determined by the industry
in which the business operates. Careful consideration needs to be given as to what to do if
customers do not pay on time. Te money from customers will be needed to pay suppliers on
time.
Factoring may be a way out of the fnance crisis. Factoring is the sale of customer debts to
fnanciers. Te customer debt is sold to a fnancier such as a bank. Te fnancier collects the
customer debt when it falls due. Te business gets the cash immediately. Typically, the fnancier
will charge about 3 per cent of the debt, so it is not cheap. But it can be very helpful for rapidly
growing businesses, where the cash fow crisis is the major danger.
Te workload remains enormous during the growth phase. Te hours are long and there is little
specialisation of tasks. Everyone in the business knows how to do all the tasks that need to be
done, and they do them. Te most important challenge in the growth phase is to pick the time
A credit policy
can help deal with fnancial
stress in this phase
Factoring is the
sale of customer debts to
fnanciers
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when the business needs professional managers to take over from the entrepreneurial
people who started and grew the business.
4.15
Using Australian businesses to illustrate the business life cycle concept
When Stephane and Laurence Bourrigaud moved to Bowral, about an hour from Sydney,
Laurence began making pots of chocolate mousse, using his grandmother’s recipe.
Stephane cracked about 200 eggs each day and then delivered the product, by motorbike,
to small retailers in Sydney. For the frst fve years the business remained quite small, but
the couple worked hard to promote their product. At weekends they would visit shops and
ofer tastings. Before long, they were selling out every weekend.
Stephane now cracks and separates 1 000 eggs a day and delivers the mousse once a week
to Harris Farm and David Jones’ stores
around NSW. Stephane and Laurence are
having difculty meeting the demand.
All production takes place in the large
kitchen of their country home. Te
business has almost taken over the house,
with bags of chocolate in the hall, tubs of
organic sugar in the dining room, and an
ofce in a closed-in front veranda.
Tere are plans to build a chocolate factory at the back of the home, but Stephane is aware
that growth can be difcult for small business owners. ‘I don’t have any experience in
running a business,’ he says. ‘But I understand there are a few key things to know. At the
beginning cash fow was a problem, but now we are on top of that. As a small business
person you have to be super sharp. You can’t let your accounts go to whack, you can’t let
people owe you too much money.’
Stephane and Laurence are negotiating with someone who might help them expand – not
only by helping them with fnance, but also with business knowledge and experience.
Stephane explains that ‘these guys have a big business with about 3 500 people working for
them. We are talking pretty much weekly, it’s all about having a feel for each other. Tey’ve
been eating my mousse for about 10 years. Tey know the quality is always the same.’
Adapted from an article by Perrie Croshaw in the Sun Herald 16 September 2007
Case Study
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Challenges in the maturity stage
Tere are many challenges associated with the maturity stage of a business. Te most important
is to fnd ways of growing the value of the business. Businesses, like Woolworths, for example,
are typically mature businesses. But their managers have continually found ways to grow the
value of the business. Te growth in value is represented in the share price. During the early
2000s the Woolworths’ share price grew from just on $10 to $30 a share.
Businesses in the mature phase of the business life cycle operate in a market that is highly
competitive. We can learn a great deal from Roger Corbett (CEO of Woolworths during the
early 2000s) on how to grow the value of the business in a highly competitive market. Cost
cutting is a central idea. Corbett cut costs in every area of the Woolworths’ value chain, but
particularly in the warehousing and distribution areas. Te lower costs enabled the business to
ofer additional benefts to their customers and the business attracted additional customers. Te
business became more competitive and its market share increased.
Corbett was also able to develop in the business’s employees a culture of service, where
employees understood the importance of gaining customer loyalty and repeat business. Tis is
essential in a mature business. Woolworths achieved this by efective staf training and rewards.
Developing new, more proftable, ways of doing things is also important. One way Woolworths
is doing this is through the Select brand. Te Select brand is a Woolworths’ brand. Woolworths
establish the design criteria and the quality standards and have the products manufactured to
meet those standards. Te Select brand gives the business bigger margins and more bargaining
power with traditional suppliers.
Challenges of the post maturity stage
Renewal is very rare. Sometimes entrepreneurs with fair are able to take a declining business
and get it to grow again. In the past, this was usually done through acquisitions - that is, buying
new businesses that ofer growth prospects. But it does not ofen happen.
1. What stage of the business life cycle is the business currently in?
2. What are the fnancial challenges they face in this stage of the cycle? How well are they
managing this challenge?
3. Te owners stress the importance of collecting debts efciently. Imagine you were in
charge of this aspect and David Jones had not paid an account that was due a month
ago. What would you do?
4. How did they market the product in the establishment stage? Was it successful? How
did they minimise costs during the establishment stage?
5. What are the marketing challenges they are now facing?
4.16
Activities
Corbett
developed a culture of
service with the business’s
employees
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Te NSW Department of State and Regional Development (www.smallbiz.nsw.gov.au)
published a list of warning signs that a business was under stress and heading for trouble.
Your task is to rank these warning signs in terms of the importance they play in alerting
the business manager to potential problems in the business. Circle number 1 as the most
important warning sign, number 2 as the second most important and so on to number 10,
as the least important.
Step 1 You do your own ranking, without discussing it with anyone else at this stage.
Make your judgement based on the big (macro) picture rather than on your
personal or immediate needs and experiences.
Step 2 In teams of four, discuss your ranking of each role and your reasons for making
that decision. Your team then needs to reach a consensus , to produce a ranking
that refects the team’s opinion.
Step 3 Each team reports to the whole class on their three most important and their
three least important criteria. All students discuss the fndings.
4.17
Activities
Regular customers stop coming
Sales are down on last year
Te average sale per customer has decreased
1 2 3 4 5 6 7 8 9 10
Te storeroom is full of slow-moving stock
Invoices and receipts are very disorganised
Competitors have lower prices
Staf are unable to answer customer enquiries
Proft margins compare badly with industry averages
Window display is dated and dusty
Customers are returning more purchases than
previously
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
Te major challenge for the managers of declining businesses is an ethical challenge. Te
challenge is to ensure that the business is closed down in a manner that considers the needs of
all the stakeholders. Te employees should receive their entitlements, such as long service leave,
and be helped to fnd new jobs. Creditors, such as suppliers, must be paid money owed to them.
It is important that managers do the right thing, because their decisions will impact on other
people.
Te challenge is not easy, because the managers of declining businesses ofen leave it too late to
plan for the closure, and by the time it is forced to close, there is insufcient money.
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Factors that can contribute to
business decline
Tere is a number of factors that contribute to business decline. Te most important is the
failure to embrace change. Businesses that do not develop the products to meet the changing
needs of customers start to gradually lose their customers as the customers fnd competitors
who better meet their needs. And it is not just products. Te failure to embrace change in such
matters as adopting new technology and new production techniques may well result in the
ability of competitors to produce goods more cheaply, which, in turn, enables the competitor to
increase their share of the market.
Lack of fnance is another important reason why some businesses decline. Businesses must pay
their bills as those bills fall due. Wages must be paid on time. Suppliers must be paid on time.
Te money needed to pay bills like this is called working capital and a key aspect is the efcient
collection of customer debts. Small suppliers of, say, vegetables to Woolworths rely on the
money owed to them to be paid on time. Te supplier will send the goods to Woolworths with
an invoice. Te invoice sets out the conditions of the sale, the quantity of goods supplied, the
price at which they were sold and, most importantly, when the money is to be paid. Many small
businesses have poorly developed collection policies and don’t know what to do when customers
don’t pay on time.
Business culture can make a critical contribution to the decline of a business. Ofen managers
fail to deliberately establish a business culture through things like induction programs and
training programs. Induction refers to the way a new employee is introduced to the business.
It is important the new employee understands expectations about things like quality. Failure to
establish a business culture ofen leads to a ‘she’ll be right’ attitude and this is very dangerous.
Of course environmental infuences can also contribute to the decline of a business. Economic
recessions, for example, can lead to a rapid fall in sales and, if the business has too much stock in
these circumstances, it can lead to difculties in paying suppliers.
Voluntary cessation
‘Cessation’ is not a word you hear every day. Indeed when you consider the alternatives that
could have been used (see literacy development), it is hard to understand why this word is used
to signal the end of a business. However, many businesses come to an end. Sometimes the end
is forced – the managers have no choice but to close the business. In other cases, the owners
voluntarily close the business.
4.18
Literacy Development
Words that have a similar meaning to cessation include ‘ending’, ‘termination’, ‘stopping’,
‘halting’, ‘ceasing’, ‘fnish’, ‘fnishing’, ‘stoppage’, ‘conclusion’, ‘winding up’, ‘discontinuation’,
‘abandonment’, ‘suspension’, ‘breaking of’, ‘cutting short’.
Lack of
fnance is a critical reason
businesses fail
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When the owner of a business decides to end the operation of a business by his or her own
free will, it is called voluntary cessation. Tere is a number of reasons why the owner may
take this step. One common reason is that the owner wants to retire and there is no one who
wants to continue the business. Another possible reason is where another business purchases
the business and incorporates its customers, employees and so on into the purchasing business.
Voluntary cessation is rarely a problem because the cessation is planned and all the stakeholder
interests are considered.
4.19
Krispy Kreme Falls in a Hole
Vernon Rudolph opened the frst Krispy Kreme store in North Carolina in 1937 but it
wasn’t until 2003 that Krispy Kreme opened in Australia.
In seven years, 50 stores, employing 660 people, opened in Brisbane, Canberra, the Central
and Gold Coasts, Melbourne and Sydney.
Sadly for some, the chief executive announced on November 1, 2010, that Krispy Kreme
Australia had gone into voluntary administration. He explained that this decision resulted
from a combination of factors: falling sales, high distribution costs, unsustainable rents
and poor store locations.
As recent accounts show, Krispy Kreme Australia was in a weak fnancial position well
before administrators moved in. A $12 million loss in 2008 had become a slim proft of
$62,400 in 2009.
Voluntary administration gives Krispy Kreme Australia a chance to restructure and close
the unproftable stores while allowing the proftable stores to continue to operate.
Adapted from an article by Michael Evans, Sydney Morning Herald 2 November 2010
Case Study
1. Draw the life-cycle of Krispy Kreme Australia and label the features and challenges of
each stage.
2. Focus on the post-maturity stage. Can KKA ‘reinvent’ itself as a proftable business?
3. What factors in the external business environment would have reduced the demand
for doughnuts?
4.20
Activities
Voluntary
cessation is when the owner
closes the business by free
will
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Involuntary cessation
Involuntary cessation refers to the forced ending of a business. Tis usually happens because
the business is simply unable to pay its debts and a creditor takes legal action to wind the
business up, or, in other words, end it. A creditor is a person who is owed money by the
business, and if the business is not able to pay that creditor what it owes within the agreed
period, that person has the right to ask a court to end the business and make the payment out of
the assets of the business.
Liquidation
Te legal process of winding up a business is called liquidation. Liquidation means turning
assets such as land, equipment and so on into cash. Te cash will then be distributed to the
creditors. Some of the creditors may have secured loans. A bank, for example, may have a
mortgage over land. A mortgage is a secured loan where the asset being purchased is used to
guarantee the repayment of the loan. Secured lenders are paid frst. Any cash lef over is then
distributed to the unsecured creditors. If there is not enough money, these creditors may, for
example, receive 50 cents for every dollar they are owed by the business.
While businesses are liquidated, a sole trader running a business may be made bankrupt.
Debtors become bankrupt when a creditor (or even the debtor themselves) asks a court to
declare the debtor bankrupt. Te court will then decide how the debtor’s assets are to be
distributed.
It is not just the shareholders of the business who experience
problems when a company is liquidated. Te shareholders
lose the money they invested in purchasing the shares.
Limited liability means their loss is limited to this. But
other stakeholders also experience problems. Suppliers, for
example, may not be paid in full for inventory or stock they
have supplied to the company. Even if some portion of the
debt is eventually paid, the supplier will have to wait a long
time and this may put pressure on the supplier’s cash fow.
Employees and managers, of course, will also experience
problems. First, they will lose their jobs, and employees with
very specialised skills may fnd it difcult to get another job without training courses. Second, it
is possible they may not get all their entitlements such as holiday pay and long service leave.
Customers of the liquidated company may also experience problems. If the company is a
manufacturer supplying component parts to other businesses, there will be a disruption in
supply and the need to fnd new sources. Te owners of land or premises leased by the company
will also experience not only loss of payment by the liquidated company but also loss from the
delay in re-leasing the premises. Investors who have fnanced the lease of equipment to the
company may also experience loss due to non-payment of the lease payments in the last months
of the liquidated company but also potentially by having to sell the leased equipment with loss
of value.
When a company is liquidated all the stakeholders in that business experience problems.
Liquidation
means turning assets such
as land and equipment into
cash
Customers of
liquidated businesses can
experience problems
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4.22
Research the current Australian regulations about bankruptcy and debate the following:
Tat bankrupts get it too easy.
Debate
4.21
Using Australian business to illustrate the concept of liquidation
Austech Institute for Further Education was a cookery school. It went into voluntary
liquidation in March 2010. Te College was founded in Blacktown with 10 students in
2002. It had a history of rapid growth and by 2007-2008 the business had sales of over
$30 million and nearly 1 400 students. At the time, education was one of Australia’s major
export industries.
At that time a qualifcation in hairdressing or cookery almost guaranteed permanent
residency status in Australia and many students were more concerned with gaining
residency than cookery qualifcations. When the Labor government was elected in 2007,
it started to tighten up the regulations, and this put many businesses such as Austech
Institute for Further Education under a great deal of pressure.
Te pressure on Austech became more severe following a 2008 audit by state regulators
who found that the business did not have enough kitchens for its 1 700 students and that
some students were enrolled for more than a year before they had any experience in a
kitchen.
Te regulator, the Vocational Education Training Accreditation Board, found Austech was
in breach of state and federal standards and ordered the business to refund $2 million in
fees to some 350 students, but the NSW Administrative Decisions Tribunal gave Austech a
second chance.
Austech’s chief executive Kharak Bajwa blamed bad publicity about attacks on Indian
students and changes to migration rules for the failure of the business.
Te students were found placement in similar courses under the Tuition Assistance
Scheme, or refunded their unused course fees through the Education Services for Overseas
Students Assurance Fund.
Adapted from an article in the Australian of March 23, 2010 by James Robertson and Bernard Lane
Case Study
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Worksheet 4.1
Business Growth and Decline
1. Simplify the business life-cycle diagram by selecting the 2 main challenges of each stage and the strategies
needed to keep businesses competitive in each stage.
2. Design 4 advertisements, in random order, for a business at each stage of the business life cycle. Do not
label the stages and then see if your learning partner can identify the stages correctly.
3. Funeral directors advise families who are experiencing the death of a loved one. Imagine you are a Business
Cessation Counsellor. What advice would you include on your website?
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Literacy development: learning to analyse
You will maximise your marks in the HSC if you can efectively respond to the specifc instructions to ‘outline’, or
‘describe’, or ‘evaluate’ and so on. ‘Analyse’ and ‘evaluate’ are higher order skills. Not everyone can do them well.
You need to learn how to do them well. In this activity you will develop skills in ‘analysing’.
Tere are two key aspects to analysing. Te frst part is to identify the parts of whatever it is you are
analysing. Te parts of the value chain are things like inbound logistics, operations, service and so on. Whenever
you use a specialist term such as ‘operations’, you need to underline the term and explain its meaning in the
sentence that follows.
Te second part is the hard bit. Analysing is concerned with showing the relationships between the parts
and the goals that the business activity, or strategy, was designed to achieve. Why, for example, did Woolworths
focus on cost-cutting in the part of the value chain concerned with inbound logistics? Cost cutting improved the
competitive position of Woolworths compared to Coles.
Format
1. Begin with an introductory
sentence. Tis sentence sets
out the main idea of what
you are writing about.
2. Identify components and the
relationship between them.
3. Sometimes a concluding
sentence might be helpful.
Example
Several factors infuence the marks a student of Business Studies might
receive in the HSC. Some of the most important are the amount of study the
student does, the quality of the teaching and the availability of appropriate
resources.
Tere is a very strong relationship between the amount of study time and the
fnal HSC marks. Te simple fact is that students need to be well-organised
and to regularly revisit material if they want to achieve high marks.
Tere is also a signifcant relationship between quality teaching and higher
marks. Tere is signifcant research that supports this relationship.
However, it is very difcult for students to receive high marks without the
assistance of appropriate resources.
A number of factors contribute to higher marks in Business Studies.
Analyse scaffold
Difculty: High
Mark Range: 4-10
Defnition: Identify components and the relationship between them; draw out and relate the
implications.
Comments: Tere are four stages in this verb form:
1. Defning each component by naming it
2. Identifying the relationships between each component
3. Explaining how each component is related to another
4. Stating the implications or consequences of these relationships.
Example Analyse the factors that influence Business Studies
marks in the HSC
Scaffold
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1. Begin with an introductory
sentence, setting out the
main idea.
2. Identify components and the
relationship between them.
3. Provide a concluding
sentence if it seems helpful.
A number of factors determine the interdependence between a business and
its environment. Tese include government, competitors and employees. Te
business environment refers to all the factors that infuence the operation of
a business.
Te relationship between a business and government is particularly
signifcant. Governments supply the infrastructure businesses need to
conduct their operations. Businesses provide taxes that contribute to the
government’s capacity to provide infrastructure.
Competitors are each trying to better meet the needs of a similar group
of customers. Te types of benefts a competitor ofers their customers
strongly infuences other competitors, because they will lose customers
if they cannot ofer equal or better benefts. Tere is an equally strong
relationship in the pricing policies of competitors. Te price charged by one
infuences the others.
Another factor is the interdependence between a business and its
employees. Te employees rely on the business for challenging work and
rewards. Te business relies on the employees to operate the business.
Factors such as government, competitors and employees infuence the
interdependence of a business with its environment.
Model
Writing task
Analyse the factors that contribute to business decline.
(200 - 300 words)
Task rubric
In your answer you will be assessed on how well you:
* demonstrate knowledge and understanding relevant to the question
* use relevant business case study/studies
* communicate using relevant business terminology and concepts
* present a sustained, logical and cohesive response
Tink about possible introductory sentences you might use. Write down three possible sentences.
Example Analyse the factors that determine the
interdependence between a business and its
environment
Scaffold and verb unpacking have been adapted from work done by the Science Teachers’
Association of NSW.
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
RedPeg Publishing Preliminary Business Studies
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1. ‘Cullen and Baker’ is a solicitors’ partnership.
Tis business provides clients with:
(a) advice
(b) service
(c) goods
(d) help
2. Richard Branson is a well-known entrepreneur.
Entrepreneurship is related to:
(a) risk
(b) innovation
(c) choice
(d) proft
3. Spanline Pty Ltd is a well-known home extension
company.
From its name we know it is:
(a) a sole trader
(b) a public company
(c) a SME
(d) a private company
4. Rob and Lynne Hain produce fne wool and fat
lambs on their Cooma property.
Tis partnership belongs to which industry
sector?
(a) Primary
(b) Secondary
(c) Tertiary
(d) Quaternary
5. Qantas is Australia’s major airline.
It could be classifed as:
(a) government enterprise, large and national
(b) global, large and public
(c) SME, secondary and private
(d) public, quinary and national
6. Which is not a characteristic of a business in the
growth phase of the lifecycle?
(a) Rapid increase in sales
(b) Increasing competition
(c) Cash problems develop
(d) Market for product is saturated
7. Te strategy of introducing a new idea that relates
to a product or service or way of doing something is
(a) change
(b) innovation
(c) a brain-wave
(d) entrepreneurship
8. Jim’s Lawnmowing franchise specialises in home
garden maintenance.
Tis business belongs to which industry sector?
(a) Secondary
(b) Tertiary
(c) Quaternary
(d) Quinary
9. Jessica is 18 and very conscious of a healthy lifestyle.
Tere is a range of businesses responding to her
needs.
Which of the following environmental infuences is
impacting on these businesses?
(a) Social
(b) Legal
(c) Cultural
(d) Consumer tastes
10. Te introduction of an Emissions Trading Scheme
(ETS) would have a signifcant impact on Australian
mining companies.
Tis is an example of which external environmental
infuence?
(a) Economic
(b) Geographic
(c) Political
(d) Technological
Topic 1 Revision
Multiple choice
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Short Answers
1a. Outline one economic and one social role of businesses.
Economic
Social
1b. Discuss two factors that infuence a business owner’s choice of legal structure.
1c. Explain how changes in the external business environment have contributed to the growth of the
quaternary and quinary industries in Australia.
2a. Explain the meaning of the termv ‘business life cycle’.
2b. A retail business has moved into the maturity stage of the business life cycle. Analyse two strategies
that management could use to meet the challenges of remaining competitive.
2c. Describe two problems that arise for stakeholders when companies go into liquidation.
3a. Outline the life cycle of Austech I.F.E (page 100).
3b. Describe how stakeholders have been afected by the voluntary liquidation of Austech I.F.E.
3c. Explain why Austech I.F.E went into voluntary liquidation.
Extended Response
1. Using specifc examples, discuss the nature of business and its role in society in a changing business
environment.
2. Using specifc examples, discuss two ethical issues raised in the case study on Austech I.F.E (page 100).
Syllabus questions
1. Go to page 13 of the syllabus. Under Nature of Business there are two main sections, Outcome and Content.
Content is divided into two sections - Students learn to and Students learn about. You will notice that under
Outcome and Students learn to the requirements are structured as questions. Have a go at answering them.
You can access the Stage 6 Business Studies syllabus from the Board of Studies NSW website:http://www.boardofstudies.nsw.edu.au/syllabus_hsc/pdf_doc/business-studies-st6-syl-from2012.pdf
ISBN 978-0-9775849-4-9 © 2012 Don Sykes & Kim Crawford - www.redpeg.com.au
doc_609832393.pdf