business life cycle case study

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5 Stages Of The Business Life Cycle & How To Prepare For Each

Want to know more about the business life cycle? Explore these five main stages, learn how to prepare for each of them and see real-life examples.

Did you know that around 20% of startups fail during the first year of operations?

Understanding the key stages of the business life cycle is essential to ensuring that your business avoids that fate.

It is important to identify at which stage of the business life cycle your enterprise is, because that will define the direction of your operations and inform your company’s strategic planning. 

In this post, we will cover the evolutionary process of an average business, from the inception of the business idea to its decline, and explore how the business life cycle is different from business growth .

We will also identify examples and discuss the most important areas to focus on during each stage of the life cycle.

Let’s jump right in!

Table of Contents

What Is A Business Life Cycle?

A business life cycle is a cyclical representation of the stages an average business goes through from seeding to decline and renewal.

This evolutionary overview helps entrepreneurs and leaders optimize growth through the key stages, increasing the value of their business.

Stages Of Business Life Cycle vs. Business Growth:  How Are They Different?  

The main differences between the stages of a business life cycle and business growth are the way their stages are categorized and the way in which they are utilized.

While sometimes used interchangeably, these terms represent different takes on the evolution of a business, are used by different types of business owners and each have a distinct set of stages.

Take a look at the key differences between the two in the table below:

As shown above, a small and medium sized business owner will value and strive to achieve the four business growth stages: startup, growth, expansion and maturity. This is done in a bid to harness prolonged growth and keep their brand relevant for years to come.

Meanwhile, serial entrepreneurs will track the business life cycle as they aim to receive maximum profits for their business once it has reached its peak.

What Are The 5 Stages Of A Company Life Cycle?

The evolution of entrepreneurial ventures spans various phases, from planting the seeds of a business idea to reaching maturity and in some cases, decline. The five cyclical stages in a business’s existence are:

1. Seed & Development

Your business’s life cycle begins with an idea. Before your business has sprouted to life, you are ready to plant your business seed and nurture it to success.

Called the seed stage in reference to seed funding, it is during this phase that entrepreneurs search for the investors that will financially support their startup .

During this period, you’ll need to ask yourself whether your business idea will provide both short-term return-on-investment (ROI) and long-term profits.

Goal: Making an estimate of your idea’s business feasibility – that is, if it’s worth developing into an actual business.

Challenge : 42% of startups fail due to a lack of demand for their products or services. As such, identifying and pursuing a market niche that offers sustainable demand is the main challenge at the seed stage.

What to focus on:

• Reach out to investors: Financial support at this stage is crucial, so try to find individuals or organizations that may be interested in your project enough to provide monetary assistance. This will involve a great deal of market and economic research to establish the project’s feasibility.
• Create a business plan: It is always important to analyze and firmly establish the strengths, weaknesses, opportunities and threats your business may encounter in the market you intend to enter. The financial foundation of your launch will be a large factor in the success of your business, so try to plan that as much as possible, to the very last detail.
• Garner advice and opinion from professionals: Experienced industry specialists and entrepreneurs you may have access to, as well as business associates, friends and colleagues who are competent in this regard, can provide valuable insight and opinions on the potential of your business idea. Inquire about their main takeaways from the seed funding stage of their own projects and the biggest obstacles they had to overcome. 
• Consider the market and your role in it: Ask yourself if the market is ready to accept your business and if your concept, product, service or idea can fill an existing need in the market. How can your idea soothe the pain points of your prospective customers and clients?

At the startup stage of the business lifecycle, you’ll need funding from investors, banks or your own back pocket.

Regardless of where your funding comes from, extreme flexibility, adaptability and resourcefulness are your best friends at this stage. It’s a period of testing, failing and trying again.

The startup stage is usually marked by:

• Adapting your business model to the changing perspectives of the market and the feedback of your first customers
• Learning how to turn a profit
• Outlining your strategy and work processes
• Business formation and incorporation

Due to so many changes and alterations, you may feel a sense of confusion at this stage. Resist the urge to dwell on it, trust the process and power your way through: difficulties are natural at this stage and the path will be much clearer soon enough.

Goal : Making your business operational, sustainable and, most of all, profitable.

Challenge : Only 15.8% of businesses manage to move from the startup stage to the growth stage within a year. The main challenge of this stage is to develop a business model that will turn a profit, attract new customers and retain employees. 

• Establish a business structure: At the beginning of the startup stage, your employees are likely wearing many hats. Everybody does a little bit of everything, which is a prerogative for any new enterprise, but a corporate structure must exist in order for the company to keep growing beyond this phase.
• Consistently implement new ideas: During the startup phase, you spend your time meeting people and coming up with new ways to sell your products or services. Listening to customer feedback and trying new ideas will provide clarity on what aspect of your product(s) or service(s) to focus on in the future. 
• Figure out a sustainable cash flow: This is the right time to come up with a business model that provides a consistent cash flow that will, in turn, provide consistent growth and the ability to retain old employees and hire new ones.
• Face and overcome various challenges: Managing cash reserves and sales expectations, while establishing a customer base and a market presence are some of the biggest trials you will have to confront with decisiveness at this particular stage of the business life cycle. 

3. Growth 

At the growth stage of the business life cycle, your enterprise begins to solidify its place in the market. Your business strategy begins to settle and your clients are able to explain your business model to other prospects.

Businesses at this stage tend to have:

• Customers and clients of 7+ years
• Strong cash flow and profits
• Low turnover

This is the path toward making the most of your business potential: as you grow into the role of your company’s leader, a competent team of highly-qualified individuals should take over a number of big responsibilities.

Goal : Maximizing your profits and your customer base; creating a solid, intricate corporate and team structure. Achieving this would support your business in making the jump from growth to maturity, something only 30% of firms achieve each year.

Challenge : Addressing the new demands of your business, such as attending to new customers, expanding your workforce, m anaging revenue and o utperforming the competition. 

• Turn your focus inward: The key point here should be building a team by hiring quality people to run segmented operations. As the manager of your business, you should spend time on whatever helps the company grow and anticipate barriers that could decelerate this growth. Through a well-established recruitment process, create order and cohesion with clearly defined objectives.
• Strengthen your customer relationships: Your high-profile employees should take a more proactive stance toward client relationships as well as internal processes. Both experienced senior leaders and workers at lower levels should partake in helping your clients become advocates, thus pushing your enterprise to grow even further.
• Require investments: To deliver your business into the maturity stage, the growth phase needs investment. Outside investment capital is what you will likely have to require through either investors or debt. In the case of the former, you will gain advisors and give up equity. With the latter, you retain equity and sign personal guarantees with banks for funding. 

4. Maturity

The main characteristics of a business at the maturity stage are:

• Annual growth of around 5%
• Tenured employees of around 8 years
• Branches or subsidiaries

This is the period of the biggest level of security you as a business manager may feel since starting out. This security stems from professional management running a daily business, stable annual profits and relative predictability of the overall business situation. 

Your business is consistent and dependable, can defend its market position and expand into new verticals through the sheer power of brand recognition. This, alongside a strong cash position, makes your business attractive for acquisitions and mergers.

As a decision-maker, this may leave you with two choices: to reinvest in your company and its sustainability, or to exit and cash out to begin new ventures.  

Goal : Deciding the future of your business and your involvement in it. Over half of businesses at this stage will remain in the maturity phase year-on-year as they maximize profits and assess their options.

Challenge : Analyzing the potential benefits and drawbacks of each choice and making an informed decision.

• Expanding the business: Before deciding on this step, ask yourself if the business can sustain more growth. What are the market opportunities, if any, for another expansion? Can you cover the possible failure financially? Are you, as a leader, fit to navigate the challenges that new expansion would bring?
• Finding an exit strategy: This step will require a great deal of internal and external company position analysis. You, along with the management team, must communicate the right information at the right time, to the right people. You can perform this exit through a partial or full sale of the business. How the sale process will turn out will depend on the type of business you have and the decisions you make about moving forward.

5. Renewal/Decline

After a period of stability and success, a business may start to decline in revenue, profits, internal structure and external brand reputation .

A sure sign of any company’s decline is when leaders and owners no longer show an inclination toward investing in people or technology, but instead look at what they can take from the business as they plan their withdrawal.

However, renewal efforts should really begin before the decline phase sets in – good business leaders should be able to anticipate the change in business and market beforehand. 

Goal : Reinventing your business by innovating and reinvesting or cashing out.

Challenge : T aking an honest, timely look and identifying the spectrum on which your business falls – investing and expanding or selling and exiting.

• Assemble a team of people who are experts on mergers and acquisitions:  This should include accountants, lawyers, investment bankers and other relevant parties who can see to it that the merger process checks all legal and financial boxes.
• Talk with sales and marketing about reinvesting: They can help figure out how to meet emerging changes in the market and whether there is capacity within the company to meet these changes. This might include modifying current offerings or inventing a completely new business model, which is both time-consuming and costly. 

3 Real-Life Business Life Cycle Examples

Having looked at each of the five business life cycle stages in depth, let’s analyze some real world examples of businesses and their owners who either got it right or wrong.

1. Blockbuster

Founded in 1985, Blockbuster’s rapid early-life growth led to the video rental chain operating with nearly 3,600 stores in 1993. Having reached growth and maturity within just eight years, Blockbuster was subject to a merger worth $8.4 billion in 1994.

Over the next decade, Blockbuster continued its market domination and reaches peak maturity. However, the rise of Netflix, paired with failed takeover bids for Hollywood Video and Circuit City, led to falling sales.

Blockbuster had reached its infamous decline.

By 2010, the company had filed for bankruptcy and as of 2023 there is just one Blockbuster store remaining , located in Oregon.

Elon Musk’s earliest ventures are a blueprint for successful business life cycle management. Having founded the online business directory Zip2 in 1995, he sold the company just four years later for $307 million .

However, it was PayPal where Musk made his billions. Originally named X.com (a URL which now leads to Twitter ), the online payments company was founded by Musk in 1999.

Following a merger with Confinity, rapid growth and a name change to PayPal, the business was sold to eBay for $1.5 billion in 2002.

A gigantic deal at the time, PayPal’s market value spiked to $362 billion 2021 before slumping to $70 billion in 2023 – perhaps 20 years after Musk sold his stake PayPal has finally reached its decline stage.

3. Linktree

Founded in 2016, Linktree is a link in bio tool, allowing businesses and content creators to advertize all of their content in one place.

Today, Linktree is used by over 35 million users, and its most recent valuation places the company at $1.3 billion .

Linktree continues to grow by adding new features like payments and Shopify integration, and only time will tell if its owners choose to sell once it reaches maturity.

Business Life Cycle Stages: Takeaways

Understanding the business life cycle and your position in it makes it that much easier to predict pending roadblocks and, with careful planning, stay one step ahead of these challenges.

The 5 stages of the business life cycle are:

• Seed and development
• Renewal/Decline

Business aims, strategies and objectives are not set in stone – they change as your business and the surrounding market change. Being aware of what stage of the business life cycle you’re at can help with anticipating what’s coming around the bend.

The key takeaways across all stages of the business life cycle include:

• Consider your business’s place in the market
• Establish your company’s business structure
• Listen to feedback and adjust your business model
• Find a sustainable cash flow
• Turn your focus inward toward recruiting quality people and delegating key duties 
• Expand the business or find an exit strategy
• Reinvest to innovate or sell to maximize profits

The mixture of business acumen, instinct and the ability to interpret the signs of change in your environment will all impact the precision of your decision-making when moving from stage to stage.

Regardless of what life cycle stage your business is experiencing, our team of expert consultants are on hand to guide you through its decision-making complexities. Contact us online , call us at (800) 206-9413 or fill in our request a quote form below to learn more about our bespoke consulting services.

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CEO & Founder

Gabriel is a hands-on leader and digital expert focused on providing strategies that grow brands online. He has worked with Fortune 500 companies and reputable startups, including Google, Microsoft, SONY, NFL, NYU, P&G, Fleet Bank and NASA. In addition to columns in Forbes, Entrepreneur, The New York Times and American Express, Gabriel has made numerous media appearances, from Bloomberg and Reuters to ABC News and CNN.

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Product Life Cycle (PLC) | Stages and Case Study of Apple

• What is Product Life Cycle (PLC)?

Product Life Cycle (PLC) is a model that illustrates how a product progresses through stages during its time on the market. It serves as a tool for businesses to understand how their products evolve and how to manage them efficiently. This concept plays a role in making decisions regarding product development, marketing strategies, pricing strategies, and distribution channels. In today’s paced world of business and innovation, it is crucial to grasp the Product Life Cycle (PLC).

Key takeaways from Product Life Cycle (PLC): The PLC is a concept in marketing and product management that helps businesses plan strategically and make informed decisions about their products. This cycle represents the stages that a product goes through starting from its introduction to its decline in the market. Understanding these stages allows companies to adapt their strategies effectively maximizing profits and ensuring long-term success for their products. Knowing the Product Life Cycle (PLC) enables businesses to derive the most from their marketing mix (product, price, place, promotion) and to make the distribution of resources appropriate for their products. By proper management of the product life cycle, businesses can gain a competitive advantage and make the best investment out of their money.

Table of Content

How Does Product Life Cycle (PLC) Work?

Stages of product life cycle (plc), 1. introduction, 3. maturity, case study of product life cycle of apple, importance of the product life cycle, advantages of product life cycle, challenges of product life cycle, strategy for product life cycle, international product life cycle, when to use the product life cycle, product life cycle (plc) – faqs.

The Product Life Cycle (PLC) tracks a product’s journey from introduction to decline. Before launch, a product goes through design and development. The PLC itself begins when the product hits the market (introduction). Here, marketing is key to building awareness and overcoming initial resistance. If successful, the product enters a growth stage with rising sales and brand recognition. Marketing efforts may shift to maintaining momentum. Eventually, the market becomes saturated (maturity). Competition intensifies, and companies may focus on cost-efficiency and product improvement. Finally, sales decline (decline), and the product may be withdrawn or replaced with a newer innovation. Understanding the PLC helps businesses tailor strategies for each stage, maximizing profits and a product’s lifespan.

The introduction stage signifies the entry of a product into the market. The initial stage is typically associated with an increase in sales since it involves introducing the product to consumers. During this phase, businesses incur expenses for marketing and research and development (R&D) as they strive to raise awareness and stimulate demand for their product. Companies need to invest in marketing and create distribution channels to ensure that their product is easily accessible to customers. The objective is to establish a presence in the market and generate interest. During this phase, pricing strategies often revolve around two approaches:

• Penetration pricing, where a lower price is initially offered to gain market share,
• Skimming pricing, where a higher price is charged at first to recover development costs.

The growth stage witnesses a surge in sales as consumers become more aware of the product’s existence and its advantages. This growth is fueled by word-of-mouth favourable reviews and effective marketing campaigns. In this phase, businesses strive to expand their market share by scaling up production and distribution. With the increasing demand, competition may intensify as new players try to capitalise on the opportunity. As the product gains recognition, pricing strategies might shift towards a competitive approach. Companies may also introduce variations or extensions of the product aimed at market segments.

The maturity stage represents the peak of sales and market penetration for the product. Competition typically reaches its point during this period, and attention shifts from attracting customers to retaining existing ones. Price stability and product differentiation become a feature of this stage. Ongoing marketing endeavours aimed at maintaining both market share and brand loyalty. Companies frequently make investments in improving their products, adding features, and implementing marketing campaigns to ensure their products remain relevant and competitive. Furthermore, they may explore opportunities in markets.

In the decline phase, sales of the product start to decrease due to changing consumer preferences, market saturation, or the emergence of alternatives. Companies must decide whether to discontinue the product or continue selling, it with marketing efforts. As existing inventory price reductions or discounts may be necessary, some companies may choose to reinvent or rebrand the product or find markets to extend its life cycle. Ultimately, the decision to withdraw or revive the product depends on its profitability and how well it aligns with the company’s strategy.

Introduction Phase

During the phase from 2007 to 2008, Apple introduced the iPhone, which brought about a significant transformation in the smartphone industry. To generate awareness and create excitement surrounding their product, Apple invested heavily in marketing and promotional activities. The innovative design and user-friendly interface of the iPhone captured the interest of tech enthusiasts. Capitalising on this wave of enthusiasm, Apple implemented a pricing strategy that involved charging prices initially.

Growth Stage

In the years that followed from 2009 to 2012, the iPhone experienced growth. Apple expanded its range of offerings by introducing models like the iPhone 3G, 4, and 4S. The launch of the App Store in 2008 played a role in fueling this growth by creating an ecosystem that catered to both developers and users alike. To meet increasing demand, Apple focused on scaling up production and distribution, while establishing partnerships with telecom carriers worldwide. Product differentiation also played a role during this stage as Apple offered storage capacities and introduced new features such as improved cameras and faster processors.

Maturity Phase

By 2013, the iPhone had reached maturity as it faced competition from Android-based smartphones. The market became saturated with options for consumers to choose from. To keep its position in the market, Apple put a lot of emphasis on improving its products. Released a series of iPhones, including the 5, 6, 7, and 8 models. They also introduced the Plus and SE versions. Alongside this, Apple carried on with its marketing campaigns that aimed to build brand loyalty and make sure customers were satisfied. Moreover, they expanded into markets, which helped solidify their position as a leading smartphone company.

Declining Stage

In years (2019 onwards), the iPhone entered a stage of decline where it faced obstacles, like market saturation and the rise of competitors. To tackle these challenges, Apple has adjusted its pricing strategies and introduced the affordable iPhone SE. Additionally, the company has heavily invested in services, like Apple Music, Apple TV+, and Apple Arcade to diversify its revenue streams and keep customers engaged. By focusing on refreshing its products and building an ecosystem around its devices, Apple has been able to prolong the lifespan of the iPhone and minimize the impact of market decline.

• Strategic Decision-Making: This will enable businesses to make informed decisions in regard to marketing, pricing, and product development by pinpointing the specific stage of a product: introduction, growth, maturity, or decline. For instance, during the introduction phase, heavy marketing is required to propagate brand awareness, while in the maturity stage, focus might shift to cost reduction and retention strategies for customers.
• Market Planning and Risk Management: Business establishments can perceive the market trends and plan their strategies accordingly because of their clear conception of the PLC. These proactive measures can assist in reducing the risks involved during product launches and ensuring that the most promising features are exploited.
• Product Innovation and Development: PLC framework helps businesses pinpoint opportunities for product innovation and development. As the product approaches maturity, firms will be able to introduce new features or new product lines based on customer feedback and changes in the market in order to remain competitive.
• Resource Allocation and Optimization: The PLC helps businesses allocate resources efficiently. During the introduction stage, when sales are low, heavy investment might be required in marketing. As the product reaches maturity and sales stabilize, resources can be shifted towards research and development for the next generation of products.
• Customer Satisfaction and Retention: Resource Allocation and Optimization: Customer Enjoyment and Retention: Understanding the customer needs and preferences at each PLC stage enables businesses to tailor marketing message and product offering to the customer’s desire in a bid to, in most cases, retain the customer before the maturity stage where competition may be cut-throat.
• Informed Decision-Making: The PLC model guides business decisions in the most effective way. If a company knows exactly where its product line falls within the PLC (whether at introduction, growth, maturity, or decline), then it allows for more specifically targeted marketing strategies, prices, and resource planning. For example, during the introduction stage, heavy marketing efforts might be called for brand recognition, while in the maturity stage, the efforts can be diverted to cost-effectiveness and brand differentiation.
• Improved Sales Forecasting: With the help of the historical sales data and industry trend analysis from the perspective of the PLC, businesses can make better sales extrapolation and eventually estimation. This helps inventory management, production scheduling, and resource allocation. For example, forecasting low sales during the decline stage would help decide a company whether or not to invest in product innovation or phase out the offering.
• Strategic Resource Allocation: The PLC assists businesses in resource allocation across their product portfolio. During the introduction and growth stages, resources might be directed towards marketing and sales to fuel product adoption. As a product reaches maturity, resources might shift towards customer service and production efficiency.
• Product Innovation and Development: Understanding the PLC can help businesses identify opportunities for product innovation and development. As a product hits maturity and competition begins to intensify, this product life cycle structure could trigger an examination of feature additions, product improvements, even new product lines in the efforts to hold onto market share.
• Profit Maximization : Businesses that strategically adjust to each PLC stage will keep their product going in order to maximize their profits. Some measures may include cost cuts during the maturity phase or product modifications in order to explore new markets during the declining phase.

The product life cycle (PLC) presents a roadmap of the product from launch to decline. It has notable value but, while each stage is vital, overcoming specific challenges is present at each. The difficulties businesses face at each stage of the PLC:

1. Introduction Stage:

• Market Awareness: Introducing a new product in the product saturated market is challenging. A brand, as well as its offering, must create awareness through a marketing strategy.
• High Initial Costs: At this stage, most of the expenditure was induced through research, development, and the initial production runs for most companies. It is important to balance and cover these costs with pricing strategies.
• Limited Distribution: Retailers may be unwilling to stock the company products especially with unproven recognition. Creating goodwill is one steep mountain.

2. Growth Stage:

• Company up with Demand: Businesses are faced with the challenge of scaling production to meet the overwhelming surge in demand from potential customers.
• Managing Rapid Growth:  Rapid growth also comes with a price, a price that the internal resources have a hard time coping with. In recruiting as well as training hired staff, stock keeping, and quality control.
• Competition: The success of the developed product attracts competition into the prospective market. The next frontier is to differentiate the product with its brand, innovation, and customer service.

3. Maturity Stage:

• Slow Sales Growth: Given a market that is beginning with a slowdown in market opportunities, it becomes increasingly saturated. Businesses must find ways to stall the maturity stage for long enough through means of product improvements, launching new marketing campaigns, or even penetrating a new market segment.
• Cost Pressures: Companies find a case presented by the increase in competition, where it is most likely a price war. One must be wary of different prices, and the product offers can sometimes be equal for different prices.
• Innovation Fatigue: Customers get used to the product and want it different. A business has to innovate to remain relevant.

4. Decline Stage:

• Falling profits: Sales and profits continue to erode, making it hard to continue investment in the product.
• Reducing cost: there is a need to look for cost channels into production or even outsourcing.
• Product Cannibalization: The entry of new products might end up eating into the market that the degenerating product was previously enjoying. Proper planning and positioning are required to avoid this.

These challenges can be prevented and strategies to handle them worked out in advance, thus optimizing the product life cycle for profitability.

The product lifecycle (PLC) is a key idea in marketing. It gives the stages through which a product passes since it is being introduced onto the market till its eventual decline. To maximize success and profitability of the product it is essential to understand this cycle and make specific strategies for different parts of it.

Four Stages of the Product Life Cycle (PLC):

• Introduction: This stage is marked by slow sales growth and high marketing costs, wherein efforts are to create awareness among consumers about benefits of a product and develop strong brand image.
• Growth: With the increase in consumer adoption rates, sales volume experiences a sharp rise leading to higher profits. At this point, companies should concentrate on expanding their market share as well as building loyalty among customers for their brands which may allow them even raise prices slightly if necessary.
• Maturity: When market saturation occurs along with no more sales growth; competitors become more aggressive thus mandating differentiation strategies or/and innovation. Usually these involve reducing costs; extending product lines while exploring alternative promotional channels among others.
• Decline: Due to changes in customer preferences as well release of new technologies that make some products obsolete; sales will dwindle followed by profits. In such cases organizations can opt to rake maximum possible earnings without pushing them back into further development; modify their offerings entirely so they best fit current needs and wants or even quit altogether.

Developing a good product strategy requires understanding the present stage of the product life cycle (PLC) through research and analysis. Companies need to be adaptable, allowed to adjust based on market changes, with long-term vision incorporating strategies to extend the PLC, such as innovation and new markets.

By understanding the Product Life Cycle (PLC) and implementing well-defined strategies for each stage, businesses can ensure their products achieve optimal market performance and maximize their return on investment.

The International Product Life Cycle (IPLC) is a tool for explaining how a product moves from one stage to the other in the different countries of the world market. The IPL is an extension of the product life cycle. While the latter emphasizes increased complexities at every stage, the former involves traversing the characteristics of each market.

International business can take advantage of using the concept of the International Product Life Cycle (IPLC) to design marketing plans and production concepts clearly and adequately approach issues surrounding the product. In other words, with the recognition of the stages in the different markets, a business can design and focus on a designated approach to the market and its surrounding dynamics.

Benefits of International Product Life Cycle

• Develop effective Global Marketing Planning
• Optimize Global Production and Sourcing Planning
• Entry Mode Strategies of International Expansion
• Life Cycle Extension of Products within Different Markets

Stages in the International Product Life Cycle

The product life cycle of the IPLC is a replica of the traditional product life cycle, and it generally includes four key stages:

• Introduction: The product is launched in a new international market, often the developed home country first. Here, the attention is on the building of an awareness level; an image for the brand is established and the education of the potential customer in regard to product features and benefits is made.
• Growth: When the product has started to be revolutionary in its initial market, it then gets introduced into the other countries. This stage involves the exponential sales development, the increased competition, and the demand for really effective production and distribution channels.
• Maturity: The period during which a product reaches peak sales in established markets, hence the focus shifts to sustaining its market share and profitability. Companies may engage in price competition, product improvements, or new marketing campaigns to keep the product’s life cycle going.
• Decline: Sales begin to slow down because of market saturation, new technologies, or changing consumer preferences. Perhaps companies must consider product redesigns, cost-cutting measures, or exiting the market altogether.

The International Product Life Cycle (IPLC) framework acknowledges that successful product launches abroad require considerations of several aspects: the right market selection based on economic development, infrastructure, and cultural preferences; adapting the marketing mix (message, price, distribution, and promotion) to resonate with each market’s nuances; and, lastly, as the product matures across different markets, so may production and sourcing strategies, which can even engage in outsourcing to clock in at the optimal costs achievable.

• Establishing Competitive Advantage: If you are going to introduce a brand new killer application, comprehension of the PLC will enable you to stage the entry. With proper marketing campaigns, you will be able to convey that your new product shakes the market or provides a big improvement over the previous offerings.
• Developing a Winning Price Strategy: PLC plays an important role in the determination of the appropriate prices. You could probably give introductory premium pricing a thought, should you be in the introduction stage to recover development costs and position the product as high-end. When the product enters the growth stage and begins to meet stiff competition, you could use competition or competitive pricing strategies. Finally, during maturity, you may cut prices or use bundled offerings as effective tactics.
• Developing a Targeted Marketing Approach: The PLC will dictate what you say in marketing and to whom with your marketing. In the introduction stage, you’ll primarily be looking to increase brand awareness and aid in educating potential customers on your product’s value. During the growth stage, it may switch to building brand loyalty in existing markets, or secure the same in new markets. Maturity often focuses on maintaining share and fending off competition.
• React Proactively Before Decline: The PLC framework helps you to anticipate the decline of a product and to act in response proactively. You can look toward products’ innovation, trying to find new markets to expand into or looking to phase out a product for the introduction of new products.

Understanding the PLC and its different stages businesses can make educated decisions regarding optimization of the marketing mix (product, price, place, and promotion) , strategic resource allocation towards high-growth products, and the opportunities to develop new products in order to extend the life cycle of a product.

The Product Life Cycle (PLC) is a framework that helps businesses navigate their product’s complex journey in the market. By understanding the four stages of introduction, growth, maturity, and decline, companies can make choices regarding product development, pricing, marketing, and distribution. Effectively managing a product throughout its life cycle can lead to success and a competitive advantage in today’s dynamic business environment.

What is Product Life Cycle?

Product life cycle refers to the journey taken by a product since it was released into the market up to the time it is taken off from the shelves. It has four main stages which include introduction, growth, maturity, and decline. These concepts are used by companies when making decisions on marketing, sales, and investment for each stage of their products.

Why Product Life Cycle is Important?

Businesses need to understand the product life cycle since it provides direction on how to change the marketing, pricing and resource allocation depending on whether the product is new, growing, mature or declining. Doing this enables them make more money and be able to plan for future products.

What are the Four Stages of Product Life Cycle?

There are 4 stages in its life cycle i.e. introduction, growth, maturity and decline. During introduction stage, a product is launched and its awareness is created among the people. In growth phase, sales of product goes up while market also broadens. Maturity is reached at this point where there is stiff competition among different firms for customers thus most companies concentrate on retaining their loyal buyers so as not lose them to other similar businesses operating within the same industry or sector. In decline phase, sales reduce either because old age catches up with it or when another newer one replaces it altogether.

How to Manage Product Life Cycle?

The effective management of a product’s life cycle requires knowing what stage it is at and adjusting the strategy to suit. This could entail increasing marketing efforts during the introductory phase, streamlining production for efficiency when the product reaches maturity, or planning for its retirement as demand wanes. Moreover, you can continuously enhance your offering by utilising customer feedback and data throughout its lifespan.

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What is the business life cycle (the five stages of business).

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The Business Life Cycle

The Business Life Cycle is a strategy roadmap that tracks a company's growth, maturity, and decline. The Business Life Cycle is split into five stages and provides strategic insights at each stage.

Stage One: Development and Startup

The first stage of any business life cycle is the development and startup stage. This critical phase lays the groundwork for the business's future journey , making it essential for potential investors and stakeholders to understand.

Conceptualization of the Business Idea

At the heart of any business lies a unique idea or solution . This is the seed that, when properly nurtured, grows into a successful enterprise. Entrepreneurs identify a gap in the market or an unmet need that their product or service can fulfill. The conceptualization process also involves thinking about how the product or service will differ from competitors. This phase is characterized by creativity, innovation, and risk-taking.

Take, for instance, the genesis of Airbnb. The founders, unable to afford their rent, identified a unique solution – turning their living room into a bed and breakfast for attendees of a local conference. This innovative concept laid the foundation for a multi-billion dollar business.

Planning and Feasibility Study

Once the idea is in place, the next step involves conducting a feasibility study and crafting a solid business plan. This includes market research to gauge demand, analyzing competition, establishing pricing, and mapping out operational needs. It helps determine whether the business idea can be viable in real-world scenarios.

In the case of Airbnb, the founders validated their concept by hosting three guests during the conference. The success of this 'prototype' gave them the confidence to proceed.

Role of Early-stage Financing

Financing plays a pivotal role in the startup stage. Businesses typically don't generate a profit at this point, making external financing necessary. Funding may come from a variety of sources including personal savings, family and friends, angel investors, or venture capitalists. This seed funding enables businesses to carry out their plans, develop their product or service, and bring it to market.

Airbnb initially bootstrapped their venture, but as their idea gained traction, they attracted funding from Y Combinator, a renowned startup accelerator, marking their official entry into the world of venture capital.

Risks and Challenges in the Development and Startup Stage

Despite the excitement and potential rewards, the startup stage presents numerous risks and challenges. The business model might be unproven, the market could be unpredictable, and the competition fierce. There's always the risk of running out of funds before the business can generate a sustainable income. Moreover, attracting customers and convincing them to trust a new brand can also be challenging.

Airbnb faced its share of challenges in its early days, from being an unknown entity in a well-established hotel industry to struggling to secure its initial users. However, their innovative marketing tactics and robust user experience helped them overcome these hurdles.

Case Study: Successful Business During the Startup Stage

Airbnb serves as a compelling case study of a successful business during the startup stage. Their unique idea coupled with their understanding of the market allowed them to disrupt the traditional lodging industry.

Airbnb's success during the startup stage was due to a combination of factors: a unique and scalable business idea, a comprehensive feasibility study, timely acquisition of early-stage financing, and the resilience to navigate initial risks and challenges. Their journey encapsulates the dynamic and multifaceted nature of the development and startup stage in the business life cycle.

Stage Two: Growth

As a business starts to find its feet, it enters the growth stage. The enterprise expands, market share increases, and profits start to accumulate. Sound cash flow management is crucial in this phase as the inflow and outflow of cash determine the survival and expansion of the company.

Consider the meteoric growth of Facebook. After it went public in 2012, Facebook had the capital to grow significantly, acquiring companies like Instagram and WhatsApp, and diversifying its revenue streams .

Stage Three: Maturity

Once a business has carved out a comfortable market position and exhibits stable recurring revenue, it has reached maturity. At this juncture, businesses must be inventive in exploring new opportunities for growth while effectively managing assets and resources.

For instance, Microsoft, a tech giant, reached maturity years ago but continues to innovate with ventures like Azure and Microsoft Teams . Microsoft’s ongoing success demonstrates the importance of strategic planning during the maturity stage.

Stage Four: Decline or Renewal

Not all businesses remain prosperous indefinitely. Whether due to market saturation, increased competition, or external factors, a business may face a decline. However, strategies like cost-cutting, diversification, and market penetration can help reverse the downward trend . Private equity firms can step in, providing the needed capital and expertise to restructure and revamp the business.

Take the example of LEGO, which faced a severe decline in the early 2000s . Through restructuring and a renewed focus on its core product, LEGO navigated through the decline, demonstrating an inspiring renewal story.

Stage Five: Exit or Succession

Eventually, all businesses reach a stage where original owners or stakeholders might choose to exit. Choosing the right exit strategy—be it acquisition, Initial Public Offering (IPO), or management buyout—is critical. This is where investment bankers excel, assisting in orchestrating the optimal exit.

Family-owned businesses, like Walmart, underscore the importance of succession planning . From Sam Walton, the founder, to his son Rob Walton, and now his grandson-in-law, Greg Penner, Walmart's leadership has smoothly transitioned through generations, maintaining a consistently strong market presence.

Understanding the business life cycle can guide financial and investment strategies at each stage. This knowledge proves invaluable for finance professionals, aiding in the evaluation of business potential and growth opportunities. Keep honing this understanding to thrive in the ever-changing business landscape.

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Business Life Cycle

It depicts the progression of a firm from its early start-up phase

What Is A Business Life Cycle?

• Phases Of Business Life Cycle
• Phase 1: Start-Up/Launch

Phase 2: Growth

• Phase 3: Shake-Out

Phase 4: Maturity

Phase 5: decline/life cycle extension.

A business cycle depicts the progression of a firm from its early start-up phase to its maturity over a period of time.

Every firm goes through these phases, but the exact duration of the stage cannot be determined. 

Each phase is identifiable by looking at certain variables like:

Management strategies and priorities change along with the phases of business cycles. 

While evaluating a company from an investment perspective, it is essential to identify at what stage of its business life cycle the company is in, as it will directly affect the forecast inputs.

Key Takeaways

Business cycle progresses through startup, growth, shake-out, maturity, and decline phases.

Each phase's characteristics, financials, and management strategies vary, impacting investment decisions

Phases of Business Life Cycle

The business cycle of any company can be categorized into five stages:

• Launch/Start-Up
• Life-Cycle Extension

Each stage has its unique characteristics and challenges, which can be used to identify at what stage the company currently stands at. 

The phases of the business life cycle are compared organizations to the life cycle of living organisms. 

A vital feature of the organizational life cycle is that there is no specific duration allotted to each phase of the corporate life cycle, unlike the life cycles of organisms.

This comparison originated as early as the 1890s by the economist Alfred Marshall . Almost 60 years later, American economist Kenneth E. Boulding also suggested that organizations pass through a life cycle largely similar to organisms.

After this, there has been constant research and development in identifying and interpreting an organizational life cycle. 

Understanding the organizational life cycles of a company can help us understand the management's thought process and make a better investment call. 

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Phase 1: Start-up/Launch

The start-up phase is the very initial stage of the firm. At this stage, the business can be in various positions financially.

For startups, creating a Minimum Viable Product (MVP) is essential to test the product idea's viability and gather feedback from early customers. Further, while developing it the MVP cost can significantly impact the startup's overall budget and can play a major role in the startup's success or failure.

There are a few common factors in all the start-up phases. First, the businesses have very high expenses, and most expenses are focused on operating and customer acquisition, like advertising.

Another factor is that most of the capital raised is equity capital, as the companies are not creditworthy enough for bank loans or only eligible for high-yield debt.

The firm is not profitable at this stage, and the cash flow is negative. 

There are a few ways to categorize the life cycle of the start-up/launch phase, as explained below.

Pre-Seed Funding Stage

The pre-seed funding round, also known as the pre-seed capital or pre-seed money, is the first instance of capital raising for a start-up. The amount required is relatively low as the business model is the only thing being developed.

At the pre-seed stage, the start-up has only raised non-institutional funding to fund its operations. At this stage, friends, family, and own equity is the only type of capital that has been infused into the firm.

Timing is essential at this stage. If the time taken is too much, the start-up will not survive in the long run.

The pace of the pre-seed funding depends on the start-up's initial expenses. At this stage, the company is still pre-revenue and focuses most of its cash on developing the product or idea.

The amount of pre-seed capital will decide the further goal of the firm. In the majority of the cases, the only investors in a pre-seed round are the founders themselves.

Seed Funding Stage

This is the first official stage of funding that the start-up raises. The term " seed funding " refers to sowing a seed to help grow the company. At this point, the company is too young to get debt funding.

At this point, start-ups usually dilute their equity in exchange for seed capital. Angel investors, Venture Capitalists (VCs), and equity-based crowdfunding are usually the types of investors funding this stage.

The seed-funding VC involves a higher level of risk than regular VC funding rounds as the company is still at a very early stage.

The proceeds from the seed round are used in:

• Product development
• Market research

This is essentially the R&D phase: trying to find the product-market fit and fine-tuning the product to the inputs obtained through market research and product testing. Funding is also spent on fine-tuning the business model.

This stage is also usually pre-revenue but depends on the industry, sector, the vision of the founders, and, most importantly, the available funding.

Early Stage

At the early stage, the firm finally has a product that it can roll into the market.

In this stage, the operating costs drastically increase as new expenses like more salaries and advertising start to add up.

At this stage, a start-up also needs strategic investors who do not just contribute equity but also bring value to the organization, like connections and expertise which will help them expand.

Before this stage, all the funding was for:

• Operational
• R&D expenses

Still, the start-ups will require funds to roll out products into the market and other allied activities at this stage.

This is the most crucial stage for a start-up as inflows other than funding start to come in. An early-stage start-up is no longer pre-revenue.

At this stage, the founders must be prepared for aggressive marketing and expansion, and if this stage is successful, then only the start-up will be able to function as a business.

It is rare for the company to be profitable at this stage.

Growth Stage

The growth stage is when there is a certain level of product recognition and brand value. At this stage, the start-up still requires funding raised at very high valuations.

The firm will still require outside funding to fule large-scale CAPEX .

Series B and Serie C funding are raised at this stage.

1. Series B Funding: 

Series B round is done once the start-up has grown past its developmental stage. The product has some market visibility, and the company has no obligations to meet the market demand.

Series B funds are used to increase market presence and coverage through supply chains and marketing spending and to improve and expand the workforce.

2. Series C Funding:

At this stage, the start-up already has a successful product and established a user base with empirical growth.

The Series C funds are used for the expansion of the firm. Inorganic growth, like acquisitions, is usually funded by Series C capital. This is the most mature and capital-intensive stage for a start-up.

Usually, after this stage, the business stops being a start-up as they start showing profits and positive cash flows.

The growth phase of the business cycle is when companies start to become profitable, and small amounts of free cash flows begin to show.

The growth can be fielded by internal accruals or by raising debt. It all depends on the firm's profitability and the set capital structure . Usually, at this stage, it is a combination of both internal accruals and debt funding.

As the product/service starts to gain traction, the sales growth is very high and is usually followed by margin expansion. However, the growth in profits always lags behind the growth in sales.

It is counter-intuitive for a company in the growth stage to have a lot of free cash flow in hand, as most of the profits should be reinvested to fuel more growth.

The company balance sheet starts to look a little stronger but still has a lower net cash balance due to high investing cash outflows. As a result, the firm can appear weaker on the liquidity and current ratios.

Debt is usually used to fund significant CAPEX as they still need to spend a lot on advertising and hiring better talent. 

In growth, stage management is entirely focused on fueling growth.

Royal Caribbean Cruises ( RCL ) is a luxury tourism company providing holiday cruise services and is in the growth stage of its business cycle. 

RCL reinvests 100% of its profits, pays no dividends, and has a high level of debt; they have lower free cash flows.

Phase 3: Shake-out

The shake-out phase of the business cycle is also known as the consolidation phase. In the consolidation phase, the business becomes one of the market leaders and takes away market share from the smaller players.

At this stage, the free cash flow generation increases as the company become more efficient.

Debt levels start to go down significantly, but that entirely depends on the industry; e.g.,  a steel manufacturing company, even in its shake-out stage, will have a high debt because that is how the industry operates.

There still is a high level of sales growth, but the bottom line outgrows the top line. As the firm becomes more efficient, the margins start expanding while the expenses begin to decrease.

As more scale is achieved, brand recognition, an established efficient framework, and supply chains are established. The efficiency ratios like asset turns and inventory turnovers also improve drastically, making the balance sheet very strong.

As the company's balance sheet strengthens, the short-term and long-term debt gets better rated as they have more cash to service that debt.

If the company is publicly listed, multiple expansion also happens at this stage as a further effect of re-rating. Multiple expansion is when the valuation multiples like the Price-to-earnings (P/E), Price-to sales (P/S), and Price-to- book value (PB) start to swell up.

The multiples start to increase because buying volumes go up for higher-quality companies.

The profitability ratios like ROE and ROIC also start to grow, indicating the business is generating a higher return on its invested capital .

The dividend payout also starts to grow as the firm keeps generating more cash than its reinvestment needs.

The primary focus of the management at this stage is to fule growth but also, at the same time, focus on making its operations more efficient.

Amazon ( AMZN ) is an excellent example of a firm in its consolidation phase.

Even though Amazon is one of the biggest companies in the world, due to the sheer size and growth of the e-commerce industry and its new business vertical of Saas through  AWS , Amazon is still in the consolidation phase of its life cycle.

The maturity phase is very self-explanatory. Growth slows down, and the sales grow at a very steady level closer to the industry or economic growth rate.

The margins and free cash flow are at their highest. The major reason for the rapid growth in free cash flows is because the CAPEX stabilizes, which is a significant cash outflow.

The dividend payouts are at their highest, attracting many buyers. A mature firm usually trades at a premium multiple. 

At this stage, the growth cannot come from organic elements, so inorganic expansion like M&A is the only way for the firm to grow at a higher rate than the industry or economy . 

The majority of the capital allocation of a mature firm either happens in Mergers and Acquisitions or for enhancing shareholder value through buybacks and dividends.

Mature firms usually have low levels of debt, and the debt they have on their books is of the highest quality, usually AAA or AA rated.

The major focus of the management is to keep their market share stable while growing at a sustainable rate.

Sherwin-Williams ( SHW ) is the world's most extensive paints & coatings company. It is an excellent example of how a mature company fuels growth. 

The majority of its capital is allocated towards buybacks and M&A, which is the only way for a mature firm to grow.

Please refer to the following article by Marcellus to understand how a firm grows in its mature vs. consolidation phase.  Sherwin Willams vs. Asain Paints

Walmart ( WMT ) will serve as an alternative example to Sherwin-Williams. Walmart cannot fuel inorganic growth with M&A as its business model is not structured to support acquisitions. 

The only way for Walmart to grow organically is if it chooses another geographical area with no presence or a lower level of market penetration.

This is the final phase of the business life cycle. At this stage, profits, cash flows, and sales of a business start declining as a company begins to lose its competitive advantage .

The company starts losing clients as its product becomes more commoditized or redundant due to changing trends.

If a company is listed at the decline stage, a PE rerating happens as it starts losing its competitive advantage and market share to its competitors.

The main focus of the management at this stage should be on changing the firm's positioning to adapt to the current scenario. Innovation is the critical element necessary for a life cycle extension to happen.

Innovation can usually come in several ways. It can be through product innovation, where the firm can either introduce a new product or change the existing product to fit the current market demand.

Nokia is right now at the decline stage of its business life cycle.

The reason for the decline of Nokia is that the management was unable to accept the changing environment; thus, the firm went into a decline phase, still struggling for life cycle extension.

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Agile Software Development Life Cycle: Case Study

Learn more about our agile software development life cycle from our Mitsubishi case study.

Any software development project, either big or small, requires a great deal of planning and steps that divide the entire development process into several smaller tasks that can be assigned to specific people, completed, measured, and evaluated. Agile Software Development Life Cycle (SDLC), is the process for doing exactly that – planning, developing, testing, and deploying information systems. The benefit of agile SDLC is that project managers can omit, split, or mix certain steps depending on the project’s scope while maintaining the efficiency of the development process and the integrity of the development life cycle. 

Today, we are going to examine a software development life cycle case study from one of Intersog’s previous projects to show how agility plays a crucial role in the successful delivery of the final product. Several years back, we worked with Mitsubishi Motors helping one of the world’s leading automotive manufacturers to develop a new supply chain management system. With the large scope of the project, its complex features, and many stakeholders relying on the outcomes of the project, we had to employ an agile approach to ensure a secure software development life cycle.

Business Requirements

Mitsubishi Motors involves many stakeholders and suppliers around the world, which makes its supply chain rather complex and data-heavy. That is why timely improvements are crucial for the proper functioning of this huge system and a corporation as a whole. Over the years of functioning, the old supply chain has been accumulating some noticeable frictions that resulted in the efficiency bottlenecks, and Intersog offered came ups with just the right set of solutions to make sufficient solutions that would help Mitsubishi ensure a coherent line of communication and cooperation with all the involved suppliers.

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Previously, Mitsubishi used an outdated supply chain management system that involved a large number of spreadsheets that required a lot of manual input. Considering a large number of stakeholders, the problem of synchronization has been a pressing one as well – different stakeholders would input the data at different speeds and at different times of day, which created a degree of confusion among suppliers. Though the system has been sufficient for a long time, the time has come to eliminate all the redundancies and streamline data input. 

The legacy system has been partially automated and ran on the IBM AS400 server, which allows for impressive flexibility, but it no longer sufficed for Mitsubishi’s growing needs. The main requirement, thus, was to create a robust online supply chain solution that would encompass the entire logistics process starting with auto parts and steel suppliers and ending with subcontractors and car dealerships around the world. That being said, Mitsubishi did not want to completely change the system, they opted for overhaul, and we came up with the idea of an integrated web application that was meant to function in conjunction with a DB2 base that was already used on the IBM AS400 server. 

IT Architecture and Agile SDLC

Mitsubishi employs a series of guidelines and rules on how to build, modify, and acquire new IT resources, which is why Intersog had to be truly agile to adapt to the client’s long-established IT architecture. Adapting to the requirements of the client, and especially to the strict regulations of the IT architecture of large corporations like Mitsubishi requires knowledge, flexibility, and strong industry expertise. Each software development company has its own architecture standards and frameworks for building new systems but many face difficulties when working with the existing systems and modifying them to the new requirements.

Intersog has no such problems. We approached Mitsubishi’s case with strong industry expertise and flexibility to account for all the client’s needs and specifications of the existing system. Obviously, following the client’s architecture regulations requires a profound understanding of said regulations, which is why information gathering is an integral phase of the software development life cycle.

Requirements Gathering

The requirements gathering phase can take anywhere from just a couple of days to several weeks. Working with complex and multi-layered legacy systems like the one used by Mitsubishi requires serious analysis and information gathering. In the case of Mitsubishi, our dedicated team had to gain a clear understanding of how the legacy system functions, create new software specifications, map out the development process, gather and create all the necessary documentation, track all the issues related to the functioning of the legacy system, outline the necessary solutions, and allocate all the resources to achieve the project’s goals in the most efficient manner. 

Working on the Mitsubishi project, our team has been gathering all the required information for up to 4 weeks. This included a profound examination of the legacy system, mapping out all of its flaws and specifications, bridging the gaps between the current state of the system and the requirements of the client, and outlining the development process. 

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The design stage includes all the integral decisions regarding the software architecture, its makeover, the tech frameworks that would be used in the system’s rework. During this stage, developers discuss the coding guidelines, the tools, practices, and runtimes that will help the team meet the client’s requirements. Working with large corporations like Mitsubishi, a custom software development team has to work closely with the company’s own developers to better understand the specifics of the architecture and create a design that reflects all the requirements. 

After all the requirements are gathered, we initiated the design stage based on all of the client’s specifications and came up with a number of solutions that matched Mitsubishi’s specs:

• Convenient data model meant to optimize data duplication;
• Permission system that differentiated the users by their access levels;
• Appealing user interface mockup to improve the comfortability of user-system interaction;
• Integration with the legacy RPG system;
• Notifications for the partners to keep them up with the important activities.

This set of essential solutions has been discussed and approved in the course of the design stage that lasted for 2 months. During this stage, Intersog and Mitsubishi development teams worked closely to come up with the solutions that matched the client’s requirements to the tee. Proper functioning of the supply chain is vital for the entire corporation, which is why it was critical to do everything flawlessly. 2 months might seem like quite a timeline, but for this case study on software development life cycle, it was not that long considering how complex Mitsubishi’s legacy system was. 

Solution Development

After approving the solution design, the team can move to develop those solutions. That’s the core of the entire project, a stage at which the teams meet the goals and achieve the outcomes set during previous stages. The success of the development stage depends heavily on how good a job the teams did during the design stage – if everything was designed with laser precision, the team can expect few if any, surprises during the development stage. 

What happens during the development stage is the teams coding their way towards the final product based on decisions that have been made earlier. With Mitsubishi, we followed the guidelines we came up with earlier and implemented a set of essential solutions:

• We built a convenient data model that minimizes the risk of human error by reducing redundant and repetitive data entry and duplication. 
• Improved Mitsubishi’s security system to differentiate the users by their level of access and give them the respective level of control over the data.
• Added the notifications for the users so that they could react to the relevant changes faster.
• Designed an appealing and comfortable user interface using the AJAX framework to make the user-system interaction more comfortable and time-efficient. 
• Deployed the platform running on the IBM AS400 server with the integration of DB2 databases.
• Integrated the existing RPG software into the new system.
• Migrated the existing spreadsheets and all the essential data into the new system.

All of these solutions took us 6 months to implement, which is rather fast for a project of such scale. Such a time-efficiency was possible only thanks to the huge amount of work we’ve done throughout the research and design stages. The lesson to learn from these software development life cycle phases for the example case study is that the speed of development would depend heavily on how well you prepare. 

Depending on the scale of the project, you might be looking at different timelines for the development stage. Small scale projects can be finished in a matter of weeks while some of the most complicated solutions might take more than a year to finish. In the case of the Mitsubishi project, it was essential for the client to get things done faster. Rushing things up is never a good idea, but you can always cut your development timeline by doing all the preparation work properly and having a clear understanding of what needs to be done and in which order.

Quality Assurance                   

Quality assurance is as vital for your project’s success as any other stage; this is where you test your code, assess the quality of solutions, and make sure everything runs smoothly and according to plan. Testing helps you identify all the bugs and defects in your code and eliminate those in a timely manner. Here at Intersog, we prefer testing our software on a regular basis throughout the development process. This approach helps us to identify the issues on the go and fix them before they snowball into serious problems. 

That’s it, quality assurance is a set of procedures aimed at eliminating bugs and optimizing the functioning of the software solutions. Here at Intersog, we run both manual and automated tests so that we can be truly sure of the quality of solutions we develop for our clients. With Mitsubishi, we ran tests throughout the development process and after the development stage was over. It took us an additional month to test all the solutions we’ve developed, after which we were ready for the implementation stage.

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Integration and Support

Following the testing, and once we are sure all the solutions work flawlessly, the development team gets to the implementation stage. Also known as the integration stage, this is where we integrate the new solution into the client’s pre-existing ecosystem. Basically, you are putting new gears into a complex mechanism that has been functioning for many years, and it is essential to make sure all of those gears fit perfectly. 

With such a complex system as the one employed by Mitsubishi and a vast amount of accumulated data, our developers had to be incredibly precise not to lose anything. We are talking about surgical precision because Mitsubishi’s suppliers amassed thousands upon thousands of spreadsheets full of critical data on supplies, material and product deliveries, accounting data, and more. All of that had to be carefully integrated with the new automated solution. 

After 2 months, the solutions have been fully integrated with Mitsubishi’s existing ecosystem. Intersog usually backs the clients up by offering support and maintenance services to ensure flawless functioning of the system over time, but this time, our client was fully capable of maintaining the new system on their own. As said, Mitsubishi has its own development team that is able to take care of the system maintenance, so that our cooperation was finished after the integration stage. 

Final Thoughts and Outtakes

A software development life cycle depends on many factors that are unique for each company. In the case of Mitsubishi, we’ve managed to get things done in just under a year, which is rather fast for a project of such an immense scale. Different projects have different life cycles, and it depends on the scale, the client’s ability to explain their needs, and the development team’s ability to understand those needs, gather all the necessary information, design the appropriate set of solutions, develop said solutions, ensure their quality, and implement them fast.

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The Business Case for Life Cycle Thinking

Year of Publication

This report is a compilation of success stories from diverse businesses the world over, illustrating the important role that life cycle thinking (LCT) has played in improving both companies’ environmental credentials and commercial results.

United Nations Environment Programme

Mathieu carey, alexander david koch, case study, data.

Purpose of Measurement:

Understanding the Problem

Impact theme(s):

Material Flows

This report is a compilation of success stories from diverse businesses the world over, illustrating the important role that life cycle thinking (LCT) has played in improving both companies’ environmental credentials and commercial results. The case studies presented are all testament to the myriad situations in which life-cycle approaches can help companies, large and small, overcome the challenges of the 21st Century to create win-win scenarios.

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Business Life Cycle

The five stages of a business' life

What is the Business Life Cycle?

The business life cycle is the progression of a business in phases over time and is most commonly divided into five stages: launch, growth, shake-out, maturity, and decline. The cycle is shown on a graph with the horizontal axis as time and the vertical axis as dollars or various financial metrics. In this article, we will use three financial metrics to describe the status of each business life cycle phase, including sales , profit , and cash flow .

Image: CFI’s FREE Corporate Finance Class .

Phase One: Launch

Each company begins its operations as a business and usually by launching new products or services . During the launch phase, sales are low but slowly (and hopefully steadily) increasing. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. However, as revenue is low and initial startup costs are high, businesses are prone to incur losses in this phase.

In fact, throughout the entire business life cycle, the profit cycle lags behind the sales cycle and creates a time delay between sales growth and profit growth. This lag is important as it relates to the funding life cycle, which is explained in the latter part of this article.

Finally, the cash flow during the launch phase is also negative but dips even lower than the profit. This is due to the capitalization of initial startup costs that may not be reflected in the business’ profit but that are certainly reflected in its cash flow.

Phase Two: Growth

In the growth phase, companies experience rapid sales growth. As sales increase rapidly, businesses start seeing profit once they pass the break-even point. However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales. Finally, the cash flow during the growth phase becomes positive, representing an excess cash inflow.

Phase Three: Shake-out

During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either approaching market saturation or the entry of new competitors in the market . Sales peak during the shake-out phase. Although sales continue to increase, profit starts to decrease in the shake-out phase. This growth in sales and decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit.

Phase Four: Maturity

When the business matures, sales begin to decrease slowly. Profit margins get thinner, while cash flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement .

However, it’s important to note that many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets. This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace.

Phase Five: Decline

In the final stage of the business life cycle, sales, profit, and cash flow all decline. During this phase, companies accept their failure to extend their business life cycle by adapting to the changing business environment. Firms lose their competitive advantage and finally exit the market.

Corporate Funding Life Cycle

In the funding life cycle, the five stages remain the same but are placed on the horizontal axis. Across the vertical axis is the level of risk in the business; this includes the level of risk of lending money or providing capital to the business.

While the business life cycle contains sales, profit, and cash as financial metrics, the funding life cycle consists of sales, business risk, and debt funding as key financial indicators. The business risk cycle is inverse to the sales and debt funding cycle.

At launch, when sales are the lowest, business risk is the highest. During this phase, it is impossible for a company to finance debt due to its unproven business model and uncertain ability to repay debt. As sales begin to increase slowly, the corporations’ ability to finance debt also increases.

As companies experience booming sales growth, business risks decrease, while their ability to raise debt increases. During the growth phase, companies start seeing a profit and positive cash flow, which evidences their ability to repay debt.

The corporations’ products or services have been proven to provide value in the marketplace. Companies at the growth stage seek more and more capital as they wish to expand their market reach and diversify their businesses.

During the shake-out phase, sales peak. The industry experiences steep growth, leading to fierce competition in the marketplace. However, as sales peak, the debt financing life cycle increases exponentially. Companies prove their successful positioning in the market, exhibiting their ability to repay debt. Business risk continues to decline.

As corporations approach maturity, sales start to decline. However, unlike the earlier stages where the business risk cycle was inverse to the sales cycle, business risk moves in correlation with sales to the point where it carries no business risk. Due to the elimination of business risk, the most mature and stable businesses have the easiest access to debt capital.

In the final stage of the funding life cycle, sales begin to decline at an accelerating rate. This decline in sales portrays the companies’ inability to adapt to changing business environments and extend their life cycles.

Understanding the business life cycle is critical for investment bankers, corporate financial analysts, and other professionals in the financial services industry. You can benefit by checking out the additional information resources that CFI offers, such as those listed below.

Additional Resources

Thank you for reading this guide on the 5 stages of a business or industry life cycle. To help you advance your career, check out the additional CFI resources below:

• Corporate Development
• Careers in Corporate Development
• Diffusion of Innovation
• M&A Process Overview
• See all valuation resources
• See all commercial lending resources
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Focus on the business case throughout the project life cycle

by Charl Buys Apr 1, 2020

by Charl Buys | Apr 1, 2020

How many business cases are presented for approval, and then filed away once the project is underway, never to see the light of day again?  If this is the situation in your company then please reconsider your approach – in this article we explain why.

Introduction.

The common perception prevails that the business case for a capital project, or programme, is a formal document which is presented to the authorising body during the capital application process, and then, once authorised, filed in the project file. If this is the practice in your company, please reconsider your approach… Much value can be added by focusing on the business case throughout the project life cycle.

In this article, I illustrate the importance of the business case document and why it remains relevant during all phases of the project. To understand the purpose, reason and focus of the business case during the various phases of the project life cycle, it is paramount to first define and discuss the relevant concepts. The purpose and function of the business case during each of the phases are subsequently discussed.

Relevant concepts

Projects and programmes.

The Project Management Institute defines a project as follows (PMI, 2013a): “A project is a temporary endeavour undertaken to create a unique product, service, or result. The temporary nature of projects indicates that a project has a definite beginning and end. The end is reached when the project’s objectives have been achieved or when the project is terminated because its objectives will not or cannot be met, or when the need for the project no longer exists.”

Some projects form part of programmes, and some do not. A programme is seen as a “group of related projects managed in a coordinated way to obtain benefits and control not available from managing them individually” (PMI, 2013b).

The  project life cycle  is regarded as the series of phases that a project passes through from its initiation to its closure.

Business case

According to 20/20 Business Insight Ltd, (2020) the “ business case captures the reasons for initiating a project or task.” It thus contains enough information to enable an organisation’s authorisation body to make an informed decision regarding the business fit and desirability to proceed with the project, or not.

The business case therefore documents the justification for the undertaking of a project or programme. It is typically based on the estimated cost of project development and implementation in comparison to the anticipated business benefits and savings to be gained, with due awareness of project and business risks. Irrespective of whether the project business case is termed in your company, be it a project brief, a project charter, a project justification or project economic rationale, the purpose is to present justification for project start-up and initiation.

The business case forms the foundation upon which the project and business plans are subsequently built.

Role players during the project life cycle

Van Heerden (2018) defines the major roles and responsibilities in the owner project management team using an interrelated triangle, as shown in Figure 1.   The four major role players are the business, project, engineering and operations managers.

Figure 1:  The owner project management team (van Heerden, 2018)

When it comes to the business case, the project sponsor also plays an important role and must be included in the team, as depicted in Figure 2. The sponsor has ultimate accountability for the project and represents the project itself, it’s nature and character to the external stakeholders (Van der Walt, 2015) .

Figure 2: The role of the sponsor on a capital project (Van der Walt, 2015)

Benefits of business case analysis

Companies frequently use business case development, or business case analysis, for project selection. Business case development analyses how fulfilling the business case for the project will implement the corporate strategy and sustain the competitive advantage of the company (20/20 Business Insight Ltd, 2020).

The business case can be further refined by incorporating additional details, including roles and responsibilities, project schedule, major milestones, market development , etc. to guide your venture through the entire project life cycle.   This should include the operating entity as well as the elements required to dispose of the facility at end-of-life.

The project management plan is not complete without the business case as a key component. Following the completion of the implementation phase, a post-project evaluation (PPE) will usually be held to measure the project’s indicated benefits against those set out in the business case.

The business case also forms the basis for implementing the business strategy and the creation of the correct delivery system (Buys, 2018).   It is furthermore regarded as the basis for setting the performance metrics of the personnel responsible for delivering the results.

Composition of the business case

Organisations typically have a standardised approach and format for compiling and presenting a project business case. Key elements of a business usually include:

• Justification: Reasons or justification for the project, with emphasis on the implementation of the business strategy;
• Options analysis: A brief description of the different options considered and the final recommendation;
• Benefits: Benefits expected from the implementation of the venture, expressed in measurable terms against the as-is situation;
• Risk analysis: Formal risk management methodology and a summary of key risks and opportunities of   the project;
• Project cost: Total expected project cost as extracted from the project plan;
• Schedule: A summary of the project schedule and major milestones;
• Metrics: Financial metrics including ROI, IRR, NPV and Payback Period including a sensitivity analysis of the major variables; and
• Specific request: A clear statement of exactly what the authorising body is asked to approve.

Owner of the business case

The business case is the guiding document for the project sponsor throughout the venture, the engineering manager during the development process and the project manager during the implementation process. It is the justification for their activities and a benchmark against which the project benefits will be measured. As the primary owner of the business case, the sponsor is responsible for ensuring the continued viability of the project and that the benefits defined in the business case are realised.

The business case is also the key document of the project portfolio management process and is the document used by the organisation’s project investment committee to ensure that the available capital is optimally employed.

The same business case document becomes the key document for the business manager and the operations manager during the commissioning stage and the operations phase.  

Project life cycle

Let us start by first discussing the project life cycle. We, at OTC, differ from the view expressed in the Project Management Institute’s Project Management Body of Knowledge, or PMBOK ® , (PMI, 2013a) regarding the definition of the project life cycle. From a contractor or construction point of view, the project life cycle can be defined as in the PMBOK ® namely: Conception and Initiation, Definition and Planning, Launch or Execution, Performance and Control, and lastly Project Close, as depicted in Figure 3.

Figure 3: PMBOK 5 phases of a project (PMI, 2013a)

However, from a business owner’s, or business development, point of view, we realised that one should focus on the whole project life cycle during the development of a project, and not only on the initial capital or construction phase, as is the focus of PMBOK ® .

At OTC, we define the project life cycle phases as follows: Initiation, Front-end Loading (FEL), Execution, Commissioning, Operation and Closure, as illustrated in the OTC Stage-Gate Model in Figure 4. In this case, Closure does not refer to project closure, but the decommissioning and dismantling on the project infrastructure at the end of beneficial operation.

The focus and function of the business case during each of these phases are discussed in the sections that follow.

Figure 4: OTC 5 phases of a project (Van Heerden and Lourens, 2015)

Virtually anybody in an organisation can initiate a new project. However, it is from a business management perspective that the original business case must be developed, focusing mainly on a needs and opportunity analysis and the long-term sustainability thereof. A sustainable business is one that is profitable, has a minimal impact on the environment and is socially acceptable.

At this stage no definitive information is available and the whole business case will be built on viable assumptions and factored estimates. The focus of the business case during this phase of the project is to answer the question: Is the idea worth pursuing?

Front-end Loading

From Figure 4, the Front-end Loading phase of a project is split into three stages, namely Prefeasibility, Feasibility and Planning. During the three stages of FEL, the business case accuracy is improved as more detail and accurate information becomes available. Nevertheless, at the end of Prefeasibility, the typical capital uncertainty is in the order of plus/minus 50%. The focus of the business case is now on answering the questions:

• Is this the right business to be in? and,
• Have we looked extensively for solutions?

During Feasibility, various value-creating processes are followed (van Heerden, 2017) and at the end of Feasibility, the uncertainty is reduced to plus/minus 30%. The focus of the business case during this stage is on answering the question: Do we have the optimal solution for creating value?

Uncertainty is reduced to plus/minus 10 to 20% at the end of Planning, when the final investment decision is made. The focus of the business case now changes to answering the questions:

• Do we have the optimal level of scope definition? and,
• Are we ready to execute the project?

During the FEL phase, the most accurate economic model possible is built and the project is optimised for return on investment taking life-cycle costing into account.

For projects that are capital constrained, the project is optimised within these constraints and normally broken up into phases to reach the ultimate objectives while mitigating expenditure.

Implementation

The Implementation phase consists of two stages, namely Delivery and Commissioning.

During project implementation, the business case is used as a control document for project governance and asset capitalisation, and is used to set up the operating business code of accounts.

At the end of the Delivery stage the only question that must be answered is: Are we ready for a safe start-up? And at the end of Commissioning the question that must be answered is: Do the business and the technical solutions work as designed?

During the Operations phase which typically constitutes 80 to 90% of the lifespan of a project, the original business case is now converted into two documents, namely the business strategy and the budget. The business case is kept up to date and used to justify any changes, modifications or additions to the current business.

The key question to be answered now becomes: H ow do we maximise stakeholder value?

Before entering the closure phase of a venture, the original closure plan that was part of the business case needs to be updated with the latest information on the site reuse analysis and reuse plan. Lastly, the business exit strategy needs to be updated and then implemented.

The last questions to answer are:

• How do we exit the markets that were served during the years of operations? and
• H ow do we close the facility and minimise the negative impact on all stakeholders?

Concluding remarks

In this article, we’ve highlighted the importance of the business case in every project and how the focus shifts during the five phases of the project life cycle. During each of the phases, the business case endeavours to answer the following questions:

• Initiation: Is the Idea worth pursuing?
• Front-end Loading: Is this the right business to be in and have we looked widely for solutions? Do we have the optimal solution for creating value? Do we have the optimal level of scope definition and are we ready to execute?
• Implementation: Do the business and the technical solutions work as designed?
• Operations: How do we maximise stakeholder value?
• Closure: How do we exit the markets that were served during the years of operations? How do we close the facility and minimise the negative impact on all stakeholders?

By making sure that the correct question or questions are answered at each stage of the project life cycle, the team will ensure that maximum value is added to all stakeholders involved in the project.

20/20 Business Insight Ltd. (2020) The business case . Available from: https://2020projectmanagement.com/resources/project-documentation/the-business-case .   Accessed 16 March 2020.

Buys, C.P. (2018) Structuring the Business to the Project Opportunity. Available from: https://www.ownerteamconsult.com/structuring-the-business-to-the-project-opportunity/ . Accessed 16 March 2020

PMI (Project Management Institute). (2013a) A guide to the project management body of knowledge (PMBOK® guide), 5th edition. Project Management Institute, Inc., Newtown Square, Pennsylvania.

PMI (Project Management Institute). (2013b) The standard for program management, 3rd edition. Project Management Institute, Inc., Newtown Square, Pennsylvania.

van der Walt, D. (2015) The role of the project sponsor . Available from: https://www.ownerteamconsult.com/the-role-of-the-project-sponsor/ . Accessed 16 March 2020.

van Heerden, F.J. & Lourens, D. (2015) The project stage-gate model – an owner’s perspective . Available from: https://www.ownerteamconsult.com/the-project-stage-gate-model-an-owners-perspective/ . Accessed 16 March 2020.

van Heerden, F.J. (2017) Value Chain Optimisation . Available from: https://www.ownerteamconsult.com/value-chain-optimisation/ . Accessed 16 March 2020.

van Heerden, F.J. (2018) Introduction to Engineering Management. Available from: https://www.ownerteamconsult.com/introduction-to-engineering-management/ . Accessed 16 March 2020.

Consulting Partner

Charl has over 40 years experience in engineering and business management. He has worked in the steel industry and over 30 years in petrochemical and xTL sectors. More...

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Business Model Innovation Through the Lens of Time: An Empirical Study of Performance Implications Across Venture Life Cycles

• Original Article
• Open access
• Published: 28 October 2021
• Volume 73 , pages 339–380, ( 2021 )

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• Elena Freisinger 1 ,
• Sven Heidenreich   ORCID: orcid.org/0000-0003-2278-0610 2 ,
• Christian Landau 3 &
• Patrick Spieth 4  

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Current literature suggests that the innovation of a business model is among the most important success factors for organizations and has a positive influence on their performance. What is not yet clear, however, is how this relationship unfolds during an organization’s life cycle. We posit that business model innovation strongly contributes to firm performance in earlier phases, but ultimately gets less important. We therefore collected data on 250 organizations in Germany and used structural equation modeling for analytical purposes. We make the following two main contributions to the literature: (1) We confirm recent findings about the positive impact of business model innovation on performance; (2) we provide first empirical evidence for the important role of life cycle stages as moderator with regard to this relationship. With respect to the latter, our findings show that business model innovation is an important pathway of organizations, especially in their early years of existence, yet somewhat diminishing over time. In conclusion, this study opens new research avenues by extending and incorporating explanations for the life cycle theory and business model innovation.

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1 Introduction

Novel business models appear to play an important role in disrupting entire industry dynamics and changing “the way people live, work, consume, and interact with each other” (Demil et al. 2015 , p. 2). Uber, for example, a new venture founded in 2009, bypassed the traditional licensing system of taxi companies by offering a location-based app that allows individuals to hire a private on-demand driver (de Jong and van Dijk 2015 ). Similarly, bitcoin-based business models successfully disrupted the way traditional banking institutes made business for decades (de Jong and van Dijk 2015 ). Anecdotal evidence shows that profitable business models do not necessarily entail a better or more innovative product, but change the game of the industry (Afuah 2014 ). Hence, it is not surprising that design of successful novel business models have turned into a key strategic priority for managers in multiple industries (Chesbrough 2007 ; Johnson et al. 2008 ; Massa et al. 2017 ). Managers of incumbent firms and entrepreneurs are increasingly using the business model concept in order to understand and to rethink novel ways on how to achieve their company’s goals (Laudien and Daxböck 2017 ; Massa et al. 2017 ). Yet, not only in practice but also in academia, business models are a largely discussed topic spanning almost all disciplines of economics, e.g., technology and innovation management (e.g. Tripsas and Gavetti 2000 ; Tucci and Massa 2013 ), strategy (e.g. Casadesus-Masanell and Zhu 2013 ; Suh et al. 2020; Teece 2010 ), and sustainability (e.g. França et al. 2016 ; Klein et al. 2021; Snihur 2016 ). Ever since the concept has firstly been brought to academia, business model innovation (BMI) is considered as a source of competitive advantage (Casadesus-Masanell and Zhu 2013 ; Demil and Lecocq 2010 ; Teece 2010 ) that ultimately leads to financial performance (Foss and Saebi 2017 ). This prominent link is somewhat the crux, but also the cornerstone of business model research.

Up until 2021, research on BMI is still very much on the rise fueled through recent empirical studies showing that BMIs are a source of competitiveness and competitive advantage (Clauss et al. 2019 a; Teece 2010 ; Wirtz et al. 2010 ), with “the potential to improve enterprise performance” (Lambert and Davidson 2013 , p. 676) or even change the market equilibrium (Trabucchi et al. 2019 ). As a result, in the last twenty years, a growing body of literature is showing a strong interest in BMI denoted as a “new subject of innovation, which complements the traditional subjects of process, product, and organizational innovation” (Zott et al. 2011 , p. 1032). However, besides many others, especially the effect-side of BMI has been paid considerable attention to, but a systematic understanding on how BMI contributes to firm success is still lacking (Foss and Saebi 2017 ). So far, only a handful studies were able to describe this widely-stated association but mainly in a correlational way and without considering the dimension of time (Foss and Saebi 2017 , 2018 ). Yet, almost twenty years after the advent of business model research, it is still not clear, whether BMI is beneficial to the firm at all (Foss and Saebi 2017 , 2018 ). What we know so far is largely based upon empirical studies that investigate how different business model designs contribute to performance effects (e.g., Wei et al. 2014 ; Zott and Amit 2007 , 2008 ). Current studies have shown that environmental factors, e.g., environmental dynamism (Pati et al. 2018 ), environmental turbulence (Schrauder et al. 2018 ), and environmental resource munificence (Zott and Amit 2007 ) influence the relationship. Yet, besides a handful studies, effect-side BMI research has failed to examine contextual factors, such as firm age, firm size, firm characteristics as well as a firm’s focal value proposition. First empirical studies acknowledge that performance implications differ across firms in their early or late life cycle stages in case of a more efficiency-centered business model design (Brettel et al. 2012 ), a paucity of studies, however, remains investigating the impact of the innovativeness of the business model on performance implications for new ventures and more established firms. In a similar vein, research has so far lacked to account for different firm-types, i.e., product- or service-oriented firms, and how their engagement in BMI and the resulting performance implications varies for new and more mature ventures.

In order to improve our understanding, this paper explores the prominent relationship between BMI and firm performance by (1) providing a systematic literature review of empirical studies investigating this relationship, (2) presenting further empirical evidence on the beneficial character of BMI, (3) examining the moderating influence of early and late life cycle stages, and (4) comparing the findings for product- and service-oriented BMIs. We therefore collected data on 250 new and more mature ventures in Germany and used structural equation modeling for analytical purposes. We make the following two main contributions to the literature: (1) we add further evidence to the body of knowledge of effect-side research of BMI, and (2) we bring new contingency factors into the discussion. The paper first gives a systematic literature review, followed by hypotheses derivation. The next section emphasizes the study’s research design and methodology, afterwards we present our results. The last section draws these findings together, discusses its implications for theory, as well as for practice, and concludes with limitations and avenues for further research.

2 Systematic Literature Review

2.1 systematic literature review of the effect-side of bmi research.

In order to grasp the amount of current knowledge on the relationship between BMI and firm performance, we conducted a systematic literature review using the procedure suggested by Denyer and Tranfield ( 2009 ). By executing a systematic search in three scientific databases, namely in EBSCO Business Source Complete, Elsevier-Science Direct, and Scopus, we not only focused on the search term “business model innovation”, but also included the expression(s) “business model design”, “business model development”, “business model renewal” or “business model change” which are used interchangeably for the same phenomenon (Foss and Saebi 2017 ). The search terms had to be included either in the title, the abstract, or in the keywords of peer-reviewed articles between 2000 and December 2020 and by that we identified 1676 articles after removing duplicates. In a next step, we applied an objective criterion (Denyer and Tranfield 2009 ) to assess the relevance of each study. More specifically, we excluded articles which were not ranked A+, A, or B in the VHB-JOURQUAL Footnote 1 ranking to ensure quality as well as theory-focused work. However, we included all articles from the Journal of Business Models, a journal devoted to establishing the discipline of business models as a separately recognized core discipline to get a thorough picture of the literature. This resulted in a total of 397 articles. Furthermore, we reviewed and coded the remaining articles using the MAXQDA software and eliminated publications without a primary focus on BMI; 260 articles were eventually deemed as a fit for our research purpose. We again reviewed and assigned these articles into the categories of antecedents, process, construct, and effects. We found a large volume of published studies describing the role of organizational and individual antecedents ( n  = 85), research investigating the act of designing and implementing BMIs ( n  = 75), and investigations into the construct itself ( n  = 75). However, only a small proportion of studies has devoted its attention to the effect-side of BMI ( n  = 40), yet with a certain increase in recent years (for an overview see Table  1 ).

What we know about BMI performance relationship is largely based upon four types of empirical studies that investigate how BMI impacts performance. The first type encompasses the activity system view (Zott and Amit 2010 ) and investigates how different design themes (Zott and Amit 2007 ) impact performance variables such as firm performance (Brettel et al. 2012 ; Wei et al. 2017 ), technological innovation performance (Hu 2014 ), start-up’s growth performance (Balboni et al. 2019 ), or small and medium-sized enterprise (SME) performance (Pati et al. 2018 ). Another stream of effect-side research, the element-based view (Clauss et al. 2019 b) connects the innovativeness of the business model with different outcomes, such as strategic flexibility (Spieth and Schneider 2016 ), internal corporate venturing performance (Futterer et al. 2018 ), and again firm performance (Clauss et al. 2019 a). A third type of studies examines the effects of different aspects that come along with BMI, such as different types of revenue models (Konya-Baumbach et al. 2019 ), product- and service-orientation (Visnjic et al. 2016 ), or technology and consumer orientation in BMIs (Guo et al. 2020 ), as well as business model adoption (Karimi and Walter 2016 ) and business model imitation behavior (Frankenberger and Stam 2020 ). While these study entail an inside-firm perspective, the fourth type and more recent research shift to a customer-oriented view and examine the effects of BMI on customer satisfaction (Clauss et al. 2019 b), adoption intention (Futterer et al. 2020 ), and brand loyalty (Spieth et al. 2019 ).

With respect to potential benefits, these studies point to the fact that BMI is a powerful predictor for firm performance (Cucculelli and Bettinelli 2015 ; Karimi and Walter 2016 ; Visnjic et al. 2016 ). However, many questions remain in this young field of study. First, while the majority of the studies connects different business model designs with firm performance, more research is needed examining the impact of the innovativeness of business models within the element-based view. There are relatively few current studies that indeed present first evidence for the beneficial character but replicating these studies in different contexts might shed new light on the most prominent statement in the BMI literature. Second, while few studies have integrated contingency and moderating variables in their research, there are many factors that may influence the strength of that effect. Current studies have shown that environmental factors, e.g., environmental dynamism (Pati et al. 2018 ), environmental turbulence (Schrauder et al. 2018 ), and environmental resource munificence (Zott and Amit 2007 ), influence the relationship. Yet, besides a handful studies, effect-side BMI research has failed to examine contextual factors, such as firm age, firm size, firm characteristics as well as a firm focal value proposition. Yet, in combination with an element-based approach, the exploration of contextual factors holds the potential to deepen our understanding of the BMI performance relationship. Previous studies have indicated that BMI performance relationship is especially contingent on the factor time (Balboni et al. 2019 ; Foss and Saebi 2017 ; Pati et al. 2018 ), but a clear understanding of the impact on the effect strength is still missing. In the following, we will first discuss the core assumptions of BMI research and subsequently develop an understanding on how different life cycle stages affect this relationship and discuss how this relationship might further vary for product- and service-oriented BMIs.

2.2 Business Model and Business Model Innovation

For a long time, business models have mainly been used as a template or narrative device to understand and communicate a firm’s current activities by managers (Massa et al. 2017 ). In 2003, Mitchell and Coles moved the idea of managers having the ability to purposefully change a business model into the spotlight (Foss and Saebi 2017 ). By adding the additional dimension of innovation (Foss and Saebi 2017 ), business models have eventually become a potential unit of innovation that “complements the traditional subjects of process, product, and organizational innovation” (Zott et al. 2011 , p. 1032). A business model is a formal conceptual representation of a company (Massa et al. 2017 ) and thereby reflects the “design or architecture of the value creation, delivery, and capture mechanisms” of a firm (Teece 2010 , p. 172). In terms of conceptualization, two dominant views have emerged (Clauss et al. 2019 b): the activity system perspective (Casadesus-Masanell and Ricart 2010 ; Zott and Amit 2010 ) views business models as holistic systemic structures that encompass all activities of a company as well as how and when these activities are carried out (Zott and Amit 2010 ); the element-based perspective approaches the business model construct as a modular set of elements consisting of three (Bocken et al. 2013 ; Clauss 2017 ; Spieth and Schneider 2016 ) or of four elements (Baden-Fuller and Haefliger 2013 ; Futterer et al. 2018 ; Johnson et al. 2008 ; Osterwalder et al. 2010 ). This understanding is rooted in the dynamic perspective on business models (e.g., Casadesus-Masanell and Ricart 2010 ; Demil and Lecocq 2010 ; Martins et al. 2015 ), which refers to dynamic interactions among various business model elements (Casadesus-Masanell and Ricart 2010 ; Demil and Lecocq 2010 ). In the following, we will draw on latter one as the element-based view is generally considered as the cornerstone for BMI research (Clauss 2017 ; Futterer et al. 2018 ; Spieth and Schneider 2016 ). According to the element-based view, business models consists of four interrelated elements, namely (1) value offering, (2) internal value creation, (3) external value creation, and (4) financial architecture (Futterer et al. 2018 ) that capture a firm’s foundational processes (Foss and Saebi 2017 , 2018 ; Saebi et al. 2017 ). The first element, which reflects the value offering of a company, comprises the products and services offered to the target market (Demil and Lecocq 2010 ; Yunus et al. 2010 ), the internal value creation element integrates the methods, processes, structures, and competencies within the company’s value chain (Demil and Lecocq 2010 ; Dubosson-Torbay et al. 2002 ; Osterwalder et al. 2005 ), the third element—the external value creation—describes the relationships with external partners, stakeholders, and distribution channels (Kindström 2010 ; Yunus et al. 2010 ) and the financial architecture element constitutes the company’s revenue mechanisms and cost structure (Chesbrough 2007 ; Osterwalder et al. 2005 ; Yunus et al. 2010 ).

BMI itself is a transformation process that purposely alters the key elements of a business model (Bucherer et al. 2012 ; Clauss et al. 2019 a; Tucci and Massa 2013 ) and nontrivial changes to these key elements of a firm’s business model eventually result in a BMI (Foss and Saebi 2017 ). Firms can either innovate single elements or introduce a whole new business model (Foss and Saebi, 2017 ). While changing “of at least one core element is the necessary condition for BMI to be given, the sufficient condition is represented by a subsequent change of the BM’s underlying logic” (Futterer et al. 2018 , p. 2). Since even the change of one core element induces (minor) changes in other elements as well (Demil and Lecocq 2010 ; Johnson et al. 2008 ), innovating only one element often requires reconfigurations of the business logic and thus may constitute BMI (Foss and Saebi 2017 ). In case of established firms, BMI is deemed either the change of an established business model (Amit and Zott 2012 ; Zott and Amit 2013 ) or the creation of a new innovative business model that is added to their portfolio (Snihur and Tarzijan 2018 ). For new ventures, BMI is typically the creation of a new innovative business model (Foss and Saebi 2018 , 2017 ). Eventually, the reference point for the innovation is either its newness to the firm or its newness to the industry (Foss and Saebi 2017 ).

3 Conceptual Development

3.1 business model innovation and firm performance.

Innovation means “doing something new”, e.g., developing new products, new processes, new markets (Schumpeter 1934 ), and now new business models (Taran et al. 2015 ). In new product contexts, innovation is considered as the extent a new product differs from already existing ones (e.g., Cillo et al. 2010 ; Cooper and Kleinschmidt 1987 ; Danneels and Kleinschmidtb 2001 ), meaning innovativeness is the difference between old and new (Garcia and Calantone 2002 ). More precisely, innovativeness covers the amount of newness relative to a certain base, such as the world, the industry, the firm, or the perception of the customer (Calantone et al. 2006 ; Garcia and Calantone 2002 ). In case of business models, innovativeness captures the relative amount of newness to the focal firm (e.g., Osterwalder et al. 2005 ; Spieth and Schneider 2016 ) or to the industry (Amit and Zott 2012 ; Snihur and Tarzijan 2018 ) depending on the perspective. Hence, following the interpretation that business models are attributes of real firms, being innovative in doing business means executing value-adding activities such as value creation and/or value capture (Massa et al. 2017 ) in the core elements of a business model, namely value offering, internal value creation, external value creation, and financial architecture.

According to Lepak et al. “value creation depends on the relative amount of value that is subjectively realized by a target user (or buyer) who is the focus of value creation—whether individual, organization, or society—and that this subjective value realization must at least translate into the user’s willingness to exchange a monetary amount for the value received” (Lepak et al. 2007 , p. 182). The value creation is typically described in the most integral part of a business model in the value offering element that comprises the products and services offered to the target market (Futterer et al. 2018 ). Such changes optimize the resources and competencies employed more toward customers’ preferences and are more tailored toward customers’ needs, enhancing customer satisfaction (Futterer et al. 2020 ). By innovating the value creation in a way that it delivers greater value to the target market a company is able to outperform its competitors (Normann and Ramirez 1994 , 1993 ; Porter 1985 ). Furthermore, business models also describe the value capture domain: “value may be captured by the use of resources with attributes that make them difficult to imitate, through the source’s own use of creative destruction before competitors can use the innovation, and through methods of resource management” (Lepak et al. 2007 , p. 189). Value creation in business models is reflected in the internal value chain, relationships with external partners, and the financial architecture of a company; i.e., all activities necessary to monetize the value created (Massa et al. 2017 ). Hence, being more innovative in the respective business models elements, leads to cost reduction, process optimization, accessing new markets, and eventually to financial performance improvements (Foss and Saebi 2017 ). This indicates a positive link between business model innovativeness and financial performance improvements.

Therefore, we assume the following—

BMI has a positive effect on firm performance.

3.2 Business Model Innovation and Life Cycle Stages

While prior research often emphasizes BMI as the holy grail for achieving firm performance, more recent research indicates that innovated business models are not always necessarily better than existing business models, such that positive performance implications often strongly depend on contingency factors (Casadesus-Masanell and Ricart 2010 ; Futterer et al. 2020 ; Kranich and Wald 2018 ). Understanding the contingency mechanisms that unfold BMI into positive firm performance implications is of utmost importance for many firms. Yet, effect-side BMI research neglected to thoroughly discuss contingency factors of this valuable relationship. So far, recent research acknowledges that the performance implications of firms might differ across early and late life cycle stages depending on the business model design, i.e., either novelty- or efficiency-based, they have chosen (Brettel et al. 2012 ). Yet a more in-depth understanding is still missing. Both, young ventures and more established firms possess a unique bundle of resources and capabilities depending on their individual life stage that provide benefits and weaknesses (Carr et al. 2010 ). These benefits and weaknesses have an influence on the ventures capability to create and capture value from its BMI (Pati et al. 2018 ). Organizations grow in a predictable pattern (Hanks et al. 1993 ) and move through different life cycle stages (e.g., Gaibraith 1982 ; Kazanjian 1988 ; Laudien and Daxböck 2017 ; Quinn and Cameron 1983 ; Smith et al. 1985 ). Every venture’s life begins with a startup or birth stage, moves through certain growth stages, and ends with a form of maturity or with the decline of an organization (Hanks et al. 1993 ). Due to conceptual vagueness and a lack of distinctness concerning the individual stages (Hanks et al. 1993 ), scholars typically differentiate the early and late life cycle stages of ventures (e.g., Brettel et al. 2012 ; Dodge et al. 1994 ; Engelen et al. 2010 ).

More established firms have typically gained some form of stability and execute a viable and working business model. These firms typically capture more value from their experiences, well-functioning processes, established routines and long-term partnerships (Kotha et al. 2011 ). In case of more established SMEs—or firms in their later life cycle stages—BMI means either the change of an existing business model (Amit and Zott 2012 ; Zott and Amit 2013 ) or the creation of a new innovative business model that is added to its portfolio (Snihur and Tarzijan 2018 ). This may happen due to several reasons, e.g., new entrants in the market (Dewald and Bowen 2010 ), disrupting power of new technologies (Sabatier et al. 2012 ) or a general emphasis on innovation in a company (Sorescu et al. 2011 ). Firms in their later life cycle stages have already gained a good sense of their environment, such as their market, customers, and partners (Zahra and George 2002 ). However, changing an existing business model, like Xerox did when switching from selling copiers to leasing them (Chesbrough and Rosenbloom 2002 ), comes also with idiosyncratic challenges for the innovating firm, such as path dependencies, organizational inertia, new management processes, and types of organizational learning (Tucci and Massa 2013 ). The performance effects realized through a BMI might get mitigated by the transition process the company undergoes.

In contrast, new ventures, or firms in their early life cycles stages, are typically created to pursue unexploited opportunities (Dahlqvist and Wiklund 2012 ), are characterized by smaller firm size, lower age, a more uncertain environment and a different structure (Brettel et al. 2012 ), and have to take on a long journey before overcoming their liability of newness (Stinchcombe 1965 ). In new ventures, business models are an important device to narrow down the initial entrepreneurial idea into a describable opportunity (George and Bock 2011 ). In case of new ventures, BMI means the deployment of an innovative business model right from their inception (Foss and Saebi 2017 ). The reference point for innovation in this case is the industry. Uber, for example, outperformed established taxi companies, that offered the traditional licensing system, by providing a location-based app and a taxi service via private drivers (de Jong and van Dijk 2015 ). By being more innovative with their business models than their competitors, they are doing better in creating and capturing value, which ultimately leads to greater firm performance. We argue that this effect is stronger for young ventures in their early life stages for several reasons. First, new ventures tend to have a stronger business sense with less complex decision-making mechanisms, less inefficiencies in their processes, and less rigid structures (Thornhill and Amit 2003 ). Furthermore, younger ventures deploy an atmosphere of creativity and have clearer information channels (Zaheer and Bell 2005 ). New ventures have not yet built formalized processes and standardized work procedures (Engelen et al. 2010 ), since they have to constantly adapt to new and unknown situations (Roure and Keeley 1990 ). These characteristics of ventures in their early years of existence suggest that they are in a more favorable position to benefit from innovation-related opportunities (Rosenbusch et al. 2011 ), BMI being one of them. While many new business models fail, before a new one becomes viable, these new ventures with their innovative business models are sources of abnormal returns (Tucci and Massa 2013 ).

Hence, we conclude that early stage firms might create and capture greater value from BMI and transform it into performance.

In early stages, BMI has stronger effects on firm performance than in later stages.

3.3 Business Model Innovation and Product- and Service-oriented Firm Types

Previous studies have already identified that BMI has a different impact on performance implications, depending on whether BMIs are product- or service-oriented (e.g., Visnjic et al. 2016 ; Visnjic Kastalli et al. 2013 ). However, previous studies have not yet determined how these effects unfold in early and late stages of a venture’s life.

Service-oriented firms are characterized by intangible products and focus on a more people-oriented business (Masurel and Van Montfort 2006 ). In their early life cycle stages their diversification of object types, clients, and activities is typically rather small (Masurel and Van Montfort 2006 ) and it is crucially important to implement and market their innovative business model. In the later stages, service-oriented firms have typically gained broader diversification, more stable relationships with their customers, and deal with a larger variety of markets, clients, as well as sectors (Masurel and Van Montfort 2006 ). Hence, BMI becomes less important for service-oriented firms, due to other value drivers with greater impact in later stages. In contrast to service-oriented firms, ventures with a greater focus on more tangible assets engage more in product innovation, which is considered as one of the main drivers of value creation (Visnjic et al. 2016 ). However, sole product innovation is deemed less profitable than product innovation embedded in the appropriate business model (Chesbrough and Rosenbloom 2002 ; Teece 2010 ). Product-oriented firms in their early stages normally focus on prototyping, thereby enhancing the design of products and establishing a first production process (Gaibraith 1982 ). However, the main introduction of the product into a market happens at a later stage of the life cycle where the venture is more mature and established (Lumpkin and Dess 1995 ).

The relationship between BMI and firm performance in early and late life cycle stages differs for product- and service-oriented firm types, namely

In case of product-oriented ventures, the performance effect of BMI is significantly higher in later than in earlier stages

In case of service-oriented ventures, the performance effect of BMI is significantly higher in earlier than in the later stages

The proposed research model is depicted in Fig.  1 .

Research Model

4 Data and Analysis

4.1 data and sample.

In order to answer our research question, we collected data from ventures in German-speaking countries via a cross-sectional research design. With this research design we respond to a former call of Foss and Saebi ( 2017 ) who have suggested “to collect cross-sectional data on business model changes and regress those data against business or corporate performance” (p. 212). Cross-sectional designs have been proven to be a valid approach when investigating the link between BMI and venture performance (e.g., Futterer et al. 2020 ). Yet, cross-sectional designs always have some limitations with regard to establishing causality. In order to alleviate confounding effects surrounding causality that may arise due to a delay of BMI effects on performance outcomes, we assessed the independent variable of BMI at the time of business formation, and the respective dependent variable “firm performance” at the time of the survey. Our sample needs to consist of the key decision makers within their respective ventures, which are considered to be the top management team or the founder(s) of the venture. This is necessary since the key decision makers are those who shape a firm’s strategic orientation (Talke et al. 2011 ) and, hence, the business model. We, therefore, invited entrepreneurs from the most prominent entrepreneurship directories in Germany (e.g., Bundesverband Deutsche Startups, Gründerszene.de, deutsche-startups.de), Switzerland, Austria, and Lichtenstein (Angellist) to participate in our study in 2017. We collected data via a self-administered survey in the months from April to June, including the first approach and one reminder email. We sent an Email to 3884 individual entrepreneurs containing the link to our online-survey or, when no direct contact information was available, to the venture’s e‑mail address and included the information that had to be forwarded to the key decision maker. We advised the respondents to think about their focal venture when answering the question—bearing in mind that entrepreneurs might have more than one venture. Thereby, 268 questionnaires were returned to us. In sum, eighteen returned questionnaires had significant missing values and straight-liners that we deleted, thereby resulting in 250 respondents and an overall response rate of 6.9%. On average, the 250 ventures were founded in 2014 (3 years old) and conducted mostly business in the IT or service industry, which we assessed by the NACE ( N omenclature statistique des a ctivités économiques dans la C ommunauté e uropéenne) scale. NACE is a four-digit classification of economic activities in the European Community and the participants were asked to self-categorize their venture. Since the service industry has proven to be an adequate research context for studies in the BMI context (Laudien and Pesch 2019 ), we also consider our sample as appropriate for our investigation. 61.60% of all ventures had less than 5 employees, 19.60% had 6–10 employees, 9.60% had 11–15 employees and 9.20% had more than 16 employees. The average founder in our study is thirty-four years old, male (84%), obtained a university degree, has about 5 years of start-up experience, funded about 2.40 prior start-ups of which 0.55 failed. Concerns about survival bias are mitigated by the fact that every company can be listed in the public entrepreneurship database. Consequently, immature and young companies are also included. Table  2 presents descriptive statistics and zero-order correlations among all variables used in the analyses.

4.2 Variables and Method

We drew on established measures (see the Appendix for the main constructs and items) and applied seven-point Likert-type scales except where otherwise stated. We also pre-tested the questionnaire with a group of twelve experts, namely PhD researchers working in the economics department at university, thereby ensuring face validity and clarity (Churchill 1979 ).

Business model innovation Business Model Innovation

is operationalized as a molar third-order hierarchical construct adapted from Futterer et al. ( 2018 ) with four formative second-order elements (Chin 2010 ): (1) value offering, (2) internal value creation, (3) external value creation, and (4) financial architecture, enclosing thirty-two items that Futterer et al. ( 2018 ) derived from established scales. The first element, value offering architecture, builds on the following scales: the novelty-centered business model design by Zott and Amit ( 2007 , 2008 ), product superiority to the customer by Lee and Colarelli O’Connor ( 2003 ), and market newness by Dahlqvist and Wiklund ( 2012 ). The items for the second element, internal value creation architecture, are adapted from Gatignon et al. ( 2002 ), whereas the third item, external value creation architecture, was operationalized with items adapted by the market newness scales of Lee and Colarelli O’Connor ( 2003 ), as well as supplier involvement of Chen and Paulraj ( 2004 ). Finally, the fourth element, financial architecture, mainly builds on items adapted by Spieth and Schneider ( 2016 ), and supplemented by items from Chesbrough ( 2007 ), Dubosson-Torbay et al. ( 2002 ), as well as Yunus et al. ( 2010 ). We asked the founders to think about the moment of the foundation of the company and indicate how innovative their business model was. All items were measured according to a seven-point Likert scale anchored by “strongly disagree” and “strongly agree.”

Firm Performance

In general, new ventures do not need to publicize their financial data in financial reports (Wang et al. 2017 ) and surveying the key informants of the new ventures is a common approach (Anderson and Eshima 2013 ; Kraus et al. 2012 ). In accordance with this, we assessed firm performance via the respondents’ subjective assessments; they were taken from a synthesis used by Vorhies and Morgan ( 2005 ) and comprise previous measures regarding their customer satisfaction (Fornell et al. 1996 ), profitability (Morgan et al. 2002 ), and market effectiveness (Vorhies and Morgan 2003 ) and are commonly used in effect-side research of BMI (e.g., Balboni et al. 2019 ; Nunes and Do Val Pereira 2020 ). In studies that are based on the key-informant approach due to the absence of mandatory financial reports this scale entails all components a key informant, such as the founder of the venture, is able to assess. All scales were designed as seven-point scales and we estimated overall firm performance as a reflective second-order construct, comprising the three first-order latent performance factors, thereby building a type I hierarchical component model (Hair et al. 2018 ).

Organizational Life Cycle Stage

The moderating variable in our research model, organizational life cycle stage, was operationalized by using the scale of Brettel et al. ( 2012 ) who adapted a five-stage classification scheme from Lumpkin and Dess ( 1995 ). In accordance with this, we followed the approach of Brettel et al. ( 2012 ) and provided an explanatory sentence for each stage. The five stages included (1) startup/conception and development, (2) commercialization/market entry, (3) growth, (4) consolidation, and (5) maturity/diversification. Similar to Brettel et al. ( 2012 ), as well as Engelen et al. ( 2010 ), we built two groups, namely early and later stages. The first one included the stages (1) startup/conception and development, as well as (2) commercialization/market entry. The latter one incorporated the last three stages (3) growth, (4) consolidation, and (5) maturity/diversification. Table  3 gives an overview of the stage classifications.

Control Variables

The relationship between BMI and performance depends on several variables for which we included control variables: age, sex, and education of the key respondents as well as firm size measured according to the number of employees. Although all the firms included in our study were relatively young ventures, the firm size might still influence the relationship between BMI and firm performance.

Common Method Bias

In order to control for common method bias, procedural and statistical remedies were combined (Podsakoff et al. 2012 ). We applied proximal and psychological separation between our independent and dependent variable to reduce the respondents’ ability to use a similar response pattern (Podsakoff et al. 2003 ). Statistical remedies included Harman’s single factor test (Podsakoff et al. 2003 ), the Lindell-Whitney marker variable test (Lindell and Whitney 2001 ), and Kock’s collinearity test (Kock 2015 ). All the independent and dependent variables were included in an exploratory factor analysis, resulting in a total variance of 35.55%, that is below the common threshold of 50% (Podsakoff et al. 2003 ). Next, we applied the Lindell-Whitney marker variable test by integrating the measurement inventory of team trust (Bansal et al. 2004 ) in the model as a theoretically unrelated latent variable (Lindell and Whitney 2001 ). The highest path coefficient turned out to be 0.15, which is below the common threshold of 0.30. In addition, we applied a full collinearity test and found that all the variance inflation factors (VIFs) of the latent constructs in our model were not higher than 3.30 (Kock 2015 ). This indicates that common method variance should not be a concern in our model.

Statistical Procedures

We used structural equation modeling (SEM) to test our research model as this statistical technique allows assessing complex models with different relationships simultaneously (Reinartz et al. 2009 ). More specifically, we applied partial least squares (PLS) SEM that combines indicators to build composite variables (Lohmöller 1989 ), which are designed to be the proxies for the constructs under investigation (Rigdon 2016 ). We have chosen PLS-SEM over covariance-based techniques for several reasons. First, since our study focuses on prediction rather than exploration, indeterminacy is less suitable in a covariance-based approach and more suitable in a PLS approach (e.g. Dijkstra 2014 ). Second and most important, contrary to CB-SEM approaches, PLS-SEM is capable of modeling type IV higher-order constructs (Chin 2010 ), which are present in our research model. PLS-SEM has recently been applied to entrepreneurship studies (e.g. Radosevic and Yoruk 2013 ), in BMI research (Futterer et al. 2018 ), innovation research (Heidenreich et al. 2016 ), and to other management topics (for an overview, see Hair et al. 2011 ). For statistical analyses, SmartPLS 3 (Ringle et al. 2015 ) was used to estimate the inner and outer model parameters by applying a path weighting scheme (Chin 1998 ). We also employed non-parametric bootstrapping (Chin 1998 ; Tenenhaus et al. 2005 ) with 5000 replications and mean replacement as missing value-algorithm, as well as individual-level change pre-processing, to obtain the standard errors of the estimates.

The higher-order latent variable BMI was set up by using the hierarchical component model approach (Lohmöller 1989 ; Tenenhaus et al. 2005 ). In order to handle the measurement issues of higher-order models in PLS-SEM, researchers can apply the repeated indicators approach, the two-stage approach, or the hybrid approach (Becker et al. 2012 ). In a simulation study, Becker et al. ( 2012 ) found that the repeated indicators approach provides better results when it comes to parameter estimates and lower-order construct scores than the other two techniques. Only in certain cases, the approach is particularly problematic: For example, when assessing reflective-formative and formative-formative hierarchical component models (HCM) or when the higher-order construct (HOC) has one or more antecedent latent variables (Becker et al. 2012 ). Similar to our research model, the reflective-formative-formative BMI construct is exogenous and the dependent variable—firm performance—is a reflective-reflective HCM; we draw in both cases on the repeated indicators approach. It assigns all indicators of the lower-order constructs to the measurement model of the HOC (Lohmöller 1989 ; Wold 1982 ) and can also be applied to third-order HCM (e.g., Wetzels et al. 2009 ). Nevertheless, additional technical considerations need to be considered. First, the indicators at the lower level should not vary strongly when it comes to their number (Becker et al. 2012 ); second, the measurement models of the HOCs needs to be evaluated in terms of the relationship with their lower-order components (LOC); third, this necessitates additional attention to the collinearity, significance, and relevance of the relationships between the HOCs and LOCs (Hair et al. 2018 ). We now proceed to evaluate the structural and the measurement models.

5.1 Evaluation of the Measurement Model

In a first step, we evaluated the hierarchical measurement models of the constructs under investigation, thereby following the criteria and procedure pointed out by Hair et al. ( 2017 ). The eight first-order constructs of the molar higher-order construct BMI, as well as the three first-order constructs of the dependent variable firm performance, all have a reflective nature, which means that internal consistency reliability, convergent validity, and discriminant validity need to be evaluated (Hair et al. 2017 ). In terms of internal consistency and reliability, composite reliability values all exceed the threshold of 0.70 (Henseler et al. 2009 ) and the same applies for the Cronbach’s alpha values, which are all above 0.70. When it comes to convergent validity, all the indicator loadings of the reflective constructs are well above the threshold value of 0.70 and further analysis shows that the indicator loadings squared are above 0.50 (Hair et al. 2017 ). The average variance extracted values are all above the required minimum level of 0.50 (Fornell and Larcker 1981 ). In terms of discriminant validity, the values of the heterotrait-monotrait ratio of correlations (HTMT)—with the highest one turning out to be 0.862—are also below the threshold of 0.9 (Gold et al. 2001 ; Teo et al. 2008 ). As stated above, in terms of HOCs, the measurement models are evaluated according to their relationship with its lower-order components, thereby accounting for the same evaluation criteria and thresholds. Consequently, the HOC firm performance, which is likewise a reflective construct, was assessed and the above stated measurement criteria were all met. However, in reflective-reflective or formative-reflective HCMs conceptual and empirical redundancies are expected and, hence, discriminant validity between HOCs and LOCs is of no relevance (Hair et al. 2018 ). In a next step, the measurement criteria of the second-level constructs—that is, the four business model elements, as well as the first-level construct BMI itself, which are all operationalized as formative constructs—are assessed in terms of their relationships with their corresponding LOCs. Consequently, the measurements models are evaluated with regards to potential collinearity issues, as well as the significance and relevance of formative indicators (Chin 2010 ). In terms of collinearity, the VIFs were assessed (Cassel et al. 1999 ; Diamantopoulos and Winklhofer 2001 ) and found to be uniformly below the threshold value of 5 (Hair et al. 2013 ). We, therefore, conclude that collinearity is not an issue in this model. Next we analyzed the outer weights for their significance and relevance by applying a complete bootstrapping procedure using 5000 bootstraps (Hair et al. 2017 ). In terms of significance levels, we found that all the formative constructs’ relationships with their LOCs are significant at a 1% level. All criteria in terms of formative measurement models are therefore met. Appendices 1–4 and Fig.  2 give an overview of the measurement models and their indicators. Considering the results of all the reflective and formative constructs, we found that they exhibit satisfactory levels of quality. Therefore, we could proceed with the evaluation of the structural model.

Results of PLS-SEM

5.2 Evaluation of the Structural Model

The main research goal of this study was to empirically examine the relationship between BMI and firm performance. We, therefore, collected primary data and used SmartPLS 3 (Ringle et al. 2015 ) to test the hypotheses by examining the path coefficients and significances of the structural model. Fig.  2 illustrates the results of the structural model. Again, we followed the procedure outlined by Hair et al. ( 2017 ). With respect to the inner model, no VIF value exceeded the threshold of 5—in fact, the highest value turned out to be 2.441, thereby indicating that multicollinearity should not be a concern. The R‑squared value in the structural model for the relationship between BMI and firm performance turned out to be 0.247 with an effect size f 2 of 0.159. The blindfolding procedure resulted in Q‑squared values above 0 for all endogenous constructs, thereby indicating predictive relevance. BMI has a positive effect on firm performance ( β  = 0.336, p  < 0.001), thereby confirming Hypothesis 1. Furthermore, the life cycle stage of a firm negatively moderates the positive relationship of BMI with firm performance ( β  = −0.154, p  < 0.01), thereby supporting Hypothesis 2. We also studied the moderating relationship by using a separate interaction analysis. Thereby, we used latent variable scores and standardized the predictors prior to the analysis to account for multicollinearity (Aiken and West 1991 ). Table  4 and Fig.  3 show the results of the analysis. The two-way interaction of BMI and life cycle stage is significant and negative ( β  = −0.483, p  = 0.019).

Illustration of the Moderating Effect of Life Cycle Stages

In a next step, we tested for differences between product- and service-oriented BMIs and we again conducted two separate interaction analyses, one for product-oriented and another for service-oriented firms. The interaction analysis shows that product- and service-oriented ventures exhibit different performance implications across life cycle stages. However, as Table  5 and Fig.  4 indicate, the difference between early and late stages is not statistically significant in product-oriented ventures ( β  = −0.435, n. s.) and therefore, Hypotheses 3a is not supported. On the contrary, in the case of service-oriented ventures, the performance effect of BMI is significantly higher in the earlier than in the later stages ( β  = −0.529, p  = 0.025), thereby providing support for Hypotheses 3b.

Illustration of Moderating Effects of Life Cycle Stages in Different Firm Types. a  Product-oriented firms. b  Service-oriented firms

5.3 Additional Analysis

In addition to our research framework, we have calculated an additional analysis as we wanted to determine the relative importance of each element of BMI in early and late life cycle stages. It has been noted that the often stated, yet vaguely described relationship between BMI and performance relationship is difficult to study, due to its complexity (Foss and Saebi 2017 ). This complexity stems from the “multiple complex links” (p. 212) between the business model elements and the performance implications that are not only intertwined, but also unfold differently over time. In addition, previous studies have also identified that elements of BMI have a different impact on performance (Schneider et al. 2013 ). In order to determine the innovation contribution of each business model element in each life cycle stage, we conducted four separate interaction analyses. Table  6 and Fig.  5 show the empirical results and graphic illustration of how each BMI element takes effect on performance in different life cycle stages.

Illustration of Moderating Effects of Life Cycle Stages in Elements. a  Value Offering Innovation. b  Internal Value Creation Innovation. c  External Value Creation Innovation. d  Financial Architecture Innovation

6 Discussion

6.1 theoretical implications.

Academic research has, thus far, claimed that BMI is a strong driver of firm performance (Foss and Saebi 2017 ). However, an important, but largely overlooked research issue is if and to which extent BMI differs in firm performance across different life cycle stages, namely the early and late stages of a venture’s life. Hence, this study strives to add to BMI and life cycle theory by making the following contributions: (1) Our research confirms recent findings on the positive impact of BMI on firm performance, (2) it provides first empirical evidence about the moderating role of life cycle stages on the relationship between positive BMI and performance, and (3) it investigates for the first time how this relationship differs for product- and service-oriented firms.

First, this study found evidence for the hypothesized positive relationship between BMI and firm performance. This finding is in line with previous research in the academic realm (Brettel et al. 2012 ; Cucculelli and Bettinelli 2015 ; Futterer et al. 2018 ; Kim and Min 2015 ; Zott and Amit 2007 ). We contribute to current literature by confirming that more innovation in business models will, indeed, result in higher performance (Foss and Saebi 2017 ).

Second, the life cycle stage’s moderation of a venture brings an important factor into the discussion about the performance advantages of BMI. We thereby extend and challenge extant literature on the outcomes of BMI (Cucculelli and Bettinelli 2015 ; Zott and Amit 2007 ) by providing—for the first time, to the best of our knowledge—empirical evidence for the impact of BMI on firm performance in early and late life cycle stages. More specifically, the more innovative a business model becomes, the higher are the performance implications for ventures in their earlier stages. In accordance with these results, previous studies have demonstrated that BMI leads to firm performance in the earlier stages of entrepreneurial firms (Brettel et al. 2012 ; Cucculelli and Bettinelli 2015 ; Zott and Amit 2007 ). Perhaps the most striking finding is that in the cases of more established ventures; an increase in BMI does not automatically lead to higher rates of performance. This result has not yet been previously described and extends current research on the outcomes of BMI that assumes a positive relationship (Foss and Saebi 2017 ). Although anecdotal evidence shows that established companies like Xerox, Gilette, or Apple successfully innovated their business model and were rewarded with higher performance rates than before. Our findings suggests that the performance implications are not tied to the innovativeness of the business model. An explanation for this phenomenon might be that BMI in firms in their later life cycle phases is a positive trigger in the beginning, but that the value creation and capture mechanisms do stem from their existing assets rather from the innovativeness of the BMI itself. In contrast to more established firms, newly founded ventures often operate in niche markets, serve other customers than incumbents, employ novel resources, and are in a situation where they can play actively with their new business models (Tucci and Massa 2013 ). Further, firms in their early stages are highly centralized in their founder (Chandler and Hanks 1994 ), who is able to monitor and steer the BMI process. A comparison of these results with those of other studies confirms that companies with a high level of control have a higher innovation-input-output ratio (e.g., Duran et al. 2016 ). In similar vein, compared to their later stages, new ventures are less formalized and departmentalized in their earlier stages (Hanks et al. 1993 ) and are, therefore, much more flexible (Jaworski and Kohli 1993 ). After surviving the liability of newness, the business model of firms in their early stages is the central asset for creating and capturing value, and ultimately to generate performance implications. By providing empirical evidence, we extend the life cycle theory with the phenomenon of BMI and conclude that relying only on the innovativeness of the implemented business model in the later stage of a venture’s life, will not enhance organizational performance.

Third, our results deliver first empirical evidence on how the interaction effect of life cycle stages differs in the case of product- and service-oriented firms. We found contradictory results. In the case of service-oriented ventures, a more innovative business model especially pays off in early stages, but performance declines during the later stages like we expected. However, in the case of product-oriented ventures, our results show that BMI is important in both stages with no statistical difference between early and late stages. A possible explanation might be that in the event of market acceptance, a venture’s main goal is to establish itself in the market (Abernathy and Utterback 1982 ; Moore and Tushman 1982 ) and in later stages, ventures aim to maintain their market position by developing a second generation of their product (Kazanjian 1988 ; Moore and Tushman 1982 ). In both cases, an innovative business model designed around their focal products might help leverage their customer adoption. Besides being the first study to investigate how the relationship between BMI and firm performance differs for product- and service-oriented firms, we also extend existing knowledge with regards to the life cycle theory.

Fourth, when it comes to the individual contribution of business model elements in each life cycle, our findings of the additional analysis are mostly in line with the main analysis. More specifically, the innovation of all business model elements pays off more in a venture’s early life than in its later stages; this means that ventures in their early stages need to have greater pressure for BMI, ultimately leading to firm performance. However, in the event of value offering, as well as internal and external value creation, the innovation of the elements in later stages leads to smaller performance implications. A possible explanation might be that firms in their later stages have already gained market acceptance of their offering (Kazanjian 1988 ; Moore and Tushman 1982 ), they have gained a status of formalization with efficient and implemented processes (Churchill and Lewis 1983 ; Gaibraith 1982 ), and they have established stable relationships with their partners and customers (Masurel and Van Montfort 2006 ). After gaining stability and reducing uncertainty for the first time, a change in these offerings, processes, and relationships might lead to confusion and inefficiencies, and ultimately to decreased performance. However, an innovation of the financial architecture element contributes to venture performance in both stages. This is in accordance with current research. In the BMI domain, prior research has shown that efficiency-centered business models, that is, business models designed to reduce transaction costs, enhance firm performance (Zott and Amit 2007 , 2008 ), especially in later stages of organizational life (Brettel et al. 2012 ). By first investigating how business model elements impact on firm performance in different life cycle stages, we extend existing knowledge by adding a more fine-grained analysis, which has only been marginally investigated thus far (Schneider and Spieth 2014 ). Thereby, we laid the groundwork for disentangling the business model construct into its sub-elements with a certain emphasis on the different life cycle stages of ventures.

6.2 Managerial Implications

These findings may help managers and entrepreneurs to understand how to leverage a new business model to success. In line with earlier studies (Cucculelli and Bettinelli 2015 ; Zott and Amit 2007 ), research has found that BMI is an important predictor of performance implications in organizations. Our findings show that a more innovative business model makes a stronger contribution toward organizational performance than a less innovative one. A key policy priority for managers should, therefore, be to design and implement an innovative business model. Second, our results show that especially in the early stages of an organization’s life cycle, an innovative business model entails a unique selling point and is a key asset in a successful growth process. The more a venture grows, the less important an innovative business model becomes as other factors gain in importance. Within this context, this study shows that the individual life cycle stage of an organization has an important impact on the performance outcomes of BMI and should, therefore, be carefully assessed. Third, our results point out that managers of organizations have to take their firm type—either a product-oriented or a service-oriented venture—into account. According to our findings, especially in the earlier stages, a service-oriented venture has, to a certain extent, emphasize the design and development of a rather innovative business model. In later stages, however, a very innovative business model might lead to decreased performance. In case of product-oriented ventures, an innovative business model is highly important in both stages. In sum: We advise managers and entrepreneurs to not only carefully assess the innovativeness of their ventures’ business models, as well as its elements, by, for example, using the measurement inventory of Futterer et al. ( 2018 ), but to also assess, respectively, each life cycle stage the venture is currently passing through by using the framework of Kazanjian ( 1988 ). Furthermore, the venture’s main offering, which is either a service or a product, must be taken into account for the best possible organizational performance outcome.

7 Limitations and Avenues for Future Research

The findings derived from this study make several contributions to the current literature. However, as with any study, this one also has its limitations. First, we conducted a cross-sectional investigation of the relationship between BMI and performance in the new ventures domain to empirically examine the positive implications. Although using cross-sectional data is a common approach in BMI research (Futterer et al. 2018 ), such approach might suffer from several limitations. The most important one for our investigation might be tied to a potential delay of performance effects of BMI. While we did account for potential confounding effects due to such delay within our measurements, future research might replicate our findings employing a longitudinal sample to completely rule out any confounding effect in this regard by establishing true causality. Second, both the independent and dependent variable were assessed by the same instrument, i.e., survey, and respondent. To minimize potential problems due to common method bias, we applied procedural and statistical measures to rule out common method variance as effectively as possible. However, again replicating our findings by a longitudinal study with secondary data might provide additional support for our results. Furthermore, in terms of the moderating role of a firm’s life cycle stage, a longitudinal design might provide additional insights and a more fine-grained analysis of the complex mechanisms of BMI and the growth process of a firm. Third, in similar vein, we split our dataset into two stages of a venture’s life, namely early and late stages. Although it has provided initial insights into the moderating role of lifecycle stages on firm performance during BMI, it also comes with a lack of information. We therefore encourage scholars to examine the growth process of a new venture in each stage to link their individual growth pattern with the relationship between BMI and performance. A more fine-grained analysis might shed more light on the prominent relationship and produces viable insights in the underlying mechanism on how performance effects unfold over time. Forth, our study was not able to account for the amount of structural change brought about by the innovation of a business model in an established company. Although we split our dataset into early and late stages, the latter stage does not resemble established companies, since our dataset entails only young and older new ventures, but not established companies. When it comes to directions for future research, further studies might explore the relationship investigated in established companies with a special emphasis on the stages of maturity, diversification, and decline. This might result in worthwhile contributions to research on the life cycle theory and BMI. Fifth, an arguable weakness of this study is the founders’ self-evaluation of performance as a dependent variable, which makes these findings less generalizable. Although new ventures do not need to publicize their financial data (Wang et al. 2017 ) and surveying the key informants of the new ventures is a common approach (Anderson and Eshima 2013 ; Kraus et al. 2012 ), future research might work with secondary data, such as the amount of investments a venture receives during its growth process as an indicator for third-party’s trust in its potential to validate and strengthen our findings.

The VHB-JOURQUAL Rating is a journal ranking of the German scientific community. The scientific quality of a journal is defined as the extent to which the journal in question advances business administration as a scientific discipline. The categories A and B in this ranking do largely correspond with the categories 4 and 3 in the ABS journal ranking.

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Freisinger, E., Heidenreich, S., Landau, C. et al. Business Model Innovation Through the Lens of Time: An Empirical Study of Performance Implications Across Venture Life Cycles. Schmalenbach J Bus Res 73 , 339–380 (2021). https://doi.org/10.1007/s41471-021-00116-6

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How to Optimize Compensation through Business Cycles: A Case Study

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• Talent strategy hinges on a strong value proposition. Survey results from Deloitte Consulting and Empsight indicated organizations should consider enhancing their employee value proposition to attract, motivate, engage and retain top talent, particularly in dynamic labor markets.
• Consider economic and market conditions. By aligning compensation strategies with these conditions, organizations might incentivize performance, maintain employee engagement and achieve business objectives.
• Flexibility is key. Organizations should consider staying true to a long-term compensation strategy, while maintaining flexibility to adapt to unforeseen market dynamics. 

Imagine if you walk into your CHRO’s office and they tell you the CFO is bearish for the next two calendar years. In fact, the CFO believes the company will face headwinds in the foreseeable future. The CHRO turns to you, saying they want to retain the organization’s critical workforce by using all possible levers, without irreparably damaging the overall workforce and balancing the uniqueness of each of your operating units. What would be your short-term, medium-term and long-term actions to satisfy this request?

To help address that premise, Deloitte Consulting and Empsight partnered to conduct a survey across 249 organizations to understand how compensation strategy aligns with overall business objectives during different economic and labor market conditions. The survey explored various aspects of compensation strategy, including how compensation strategies are adjusted in response to different economic conditions, the role of employee feedback in shaping it, and its impact on employee motivation and engagement .

Understanding Business Cycles from Economic Conditions

To begin answering your CHRO’s question, you remind them that business cycles resulting from varying economic conditions are broken down into five phases: growth, steady state, headwinds, contraction and recovery. These can be attributed to factors such as labor market demand, gross domestic product (GDP) growth, interest rates and consumer spending.

Comprehending the different phases of economic conditions is likely crucial for organizations to best adapt their compensation programs. Deloitte and Empsight explored the five economic conditions affecting compensation (as seen below in Figure 1). ln reviewing the survey results, it became increasingly apparent that different business units of the same organization may occupy different economic phases.

In terms of economic conditions, nearly 50% of the organizations reported experiencing steady state, followed by 25% experiencing a growth phase. The largest industry represented in the study was insurance (11%), closely followed by manufacturing (10%).

Impact of Economic Conditions on Compensation Strategies

Your CHRO gently reminds you they are aware of business cycles, and that they wanted to understand your opinion of how the business cycles should impact your compensation strategy.

The Deloitte-Empsight research illustrated that total rewards should be the primary focus across business cycles, not just compensation. For example, organizations across economic conditions are either implementing or contemplating the integration of traditional monetary awards with non-monetary benefits to reinforce their balanced total rewards strategies. The emerging trends indicate a shift toward compensation strategies that prioritize long-term sustainability and employee development over short-term financial incentives. This could be a response to the changing expectations of the workforce and a recognition of the importance of resilience in organizational success.

Key survey findings on this perspective include:

• An emphasis on above-market salaries. Currently, offering above-market salaries is most prevalent among organizations during the growth phase (43%) but less so during reduction (18%). The emerging trend shows a notable decrease in the emphasis on above-market salaries during recovery, suggesting organizations might be considering a recalibration of salary strategies post-challenge. This could possibly be due to financial constraints or a shift in focus toward more sustainable compensation practices.
• Increased merit and promotions. There’s a significant current emphasis on increased merit and promotions during growth (40%), which is expected to decrease across all phases, according to emerging trends. This could reflect a more cautious approach to compensation strategies, possibly in anticipation of economic uncertainties or as a lesson learned from navigating past challenges.
• Bonus opportunities. The current use of bonus opportunities (27%) and equity awards (19%) are highest during the growth phase. However, emerging trends suggest decreased reliance on these variable compensation elements and a complete halt during reduction. This may indicate a strategic shift toward more predictable, stable compensation methods in uncertain times.
• Non-monetary benefits. The current emphasis on non-monetary benefits, particularly strong in growth (49%) and recovery (50%), correlates with emerging trends that continue to highlight their importance across all phases, albeit at a slightly lower overall future projection (10%). This suggests that while non-monetary benefits remain a key element of compensation strategies, organizations might be recalibrating the extent to which they rely on these benefits in the future.
• Keeping compensation strategy constant. Overall, organizations are leaning toward a “stable” compensation strategy (see Figure 2). The study found 58% of organizations are keeping their compensation strategy constant, followed by 18% of organizations that are revising their strategy to align to business cycle or aligning their strategy with long-term business goals. However, organizations indicated the reduction and recovery phases helped refocus their compensation strategies with long-term business goals and organizational financial performance.

Note: Percentages in figure do not total 100% since multiple responses were allowed.

Labor Market Impact: Tight vs. Cooling Labor Market 

Before you can move on, the CFO walks into the office where you and the CHRO are meeting, exclaiming this tight labor market is causing them to pay higher than budget for the new VP of treasury. Your CHRO turns to you and asks how you have factored the labor market conditions into your recommendation. You proceed to remind the CHRO and CFO that it’s important to understand the difference between a tight labor market and one that is cooling. These terms encapsulate the fluctuating supply-and-demand dynamics for labor, which in turn influence the total rewards strategy and overall employee value proposition .

A tight labor market refers to a situation when the economy is performing well and businesses are expanding — hence, leading to a low unemployment rate coupled with a high demand for labor that exceeds the available supply. In such economic conditions, employers often face challenges in attracting and retaining talent due to the competitive environment. Employees have more leverage as compared to employers, leading to upward pressure on wages and benefits. Organizations that are in a tight labor market generally shift toward a balanced total rewards strategy (see Figure 3). Across all phases, prioritizing career development opportunities and increasing base pay are consistent strategies.

Conversely, a cooling labor market is generally marked by a shift toward a higher unemployment rate and a decrease in demand for labor relative to its supply. This scenario often arises from economic downturns, technological changes or consumer behavior shifts. In a cooling labor market, the power balance shifts toward employers, as the pool of available talent expands and competition for talent increases.

Organizations in recovery (86%) increasingly utilize career development opportunities as part of their total rewards strategy. This suggests that irrespective of the business cycle, organizations are investing in employee growth and development is a critical lever for attraction and retention — especially critical in post-reduction, where organizations aim to rebuild and drive growth. The strategy to increase base pay is most favored by organizations during steady state (55%) and recovery (50%) phases, but a decrease in preference is seen during headwinds and reduction. This indicates that while competitive base pay is crucial, its feasibility as a strategy likely varies with the organization’s financial health and market conditions.

The use of retention awards for select jobs or individuals is notably high among organizations during recovery (64%), potentially indicating a strategic focus on retaining critical talent essential for recovery and growth. This targeted approach might allow organizations to maintain key competencies and skills crucial for navigating out of challenging periods.

Organizations indicated career development and progression opportunities are critical levers to engage high performers during a cooling labor market (see Figure 4). Additionally, providing clear communication about compensation policies is seen as a significant strategy, especially during headwinds (57%) and recovery (64%). This may allude to the notion that transparency and managing expectations become even more crucial during periods of uncertainty or when the organization is navigating back to stability and growth. Finally, prioritizing high performers for any available pay increases is a common strategy across organizations, albeit with moderate variation across phases. This approach might underscore the importance of recognizing and rewarding top talent, even in a cooling labor market, to retain key contributors to organizational success.

Staffing Practices

As for current-state staffing practices, most surveyed organizations focused on strategic hiring for key positions and diversity, equity and inclusion (DEI) initiatives. Strategic hiring for key positions is consistently prioritized across all phases, with its importance peaking during reduction (82%) and recovery (86%). This suggests that even in challenging times, organizations focus on securing critical talent necessary for immediate needs and future growth.

DEI initiatives remain a high priority across all business cycles, with a notable emphasis during growth (77%). This indicates organizations recognize the value of a diverse and inclusive workforce as a driver of resilience and innovation, regardless of economic conditions.

Enhancing Your Employee Value Proposition

To better optimize compensation through business cycles, survey results indicated organizations should consider enhancing their employee value proposition to attract, motivate, engage and retain top talent, particularly in dynamic labor markets. By aligning compensation strategies with economic and market conditions, organizations might incentivize performance, maintain employee engagement and achieve their business objectives.

Finally, a common thread across all phases indicated organizations may consider staying true to a long-term compensation strategy, while maintaining flexibility to adapt to unforeseen market dynamics.

Keeping focused on the organization’s rewards philosophy and talent strategy, while incorporating innovation in their programs, may help prepare organizations for economic fluctuations and the future of work.

Editor’s Note: Additional Content 

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics: 

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Can AI Deliver Fully Automated Factories?

• Daniel Kuepper,
• Leonid Zhukov,
• Namrata Rajagopal,
• Yannick Bastubbe

Recent advances are helping to overcome the technical hurdles to “lights-out” manufacturing.

In the foreseeable future, technology will cease to be a bottleneck for lights-out transformations, which dramatically reduce the need for human workers inside factories. As technology improves, the decision to pursue this goal will primarily depend on the factory’s economic considerations. Manufacturers that embrace automation and demonstrate agility in overhauling their operational strategies will be best positioned to capitalize on this wave.

For the last few decades, the manufacturing sector has eagerly anticipated the arrival of fully automated factories. In these factories, production would be seamlessly orchestrated by a network of high-tech robots, intelligent machines, and sensors, tackling widespread labor shortages while significantly reducing operating costs. With minimal human intervention, they could theoretically operate in complete darkness, earning the moniker “lights-out factory.”

• DK Daniel Kuepper is managing director and senior partner of BCG, based in Cologne. He is a Fellow of the BCG Henderson Institute.
• LZ Leonid Zhukov is a vice president of data science at BCG, based in New York. He is the director of the BCG Henderson Institute’s Technology and Business Lab and of BCG’s AI Institute.
• NR Namrata Rajagopal is a BCG consultant, based in Mumbai, and an Ambassador of the BCG Henderson Institute.
• YB Yannick Bastubbe is a BCG principal, based in Berlin.

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