Bender and Ward (2002) identify the main four phases of the company life cycle. Accordingly we need to know how realistic this model is. Does it have any practical application? Can we consider this as a perfect model? There is a lot of criticism regarding this model. Different writers have different views on the company life cycle. It could be argued that there is no inevitability in the company life cycle. It can even be said that there is no logical reasons for this to happen in corporate business.
In large corporations where ownership and management are separated and renewable, these factors do not apply. There are examples of businesses which have followed all the four stages of life cycle. There are also examples of businesses which have failed to recognize the ultimate decline stage and have not chosen to end the life of the business and have forced by debt into liquidation. Well there are endless possibilities on a company life cycle and no model is perfect. Accordingly we will see if the Bender and Ward model comes anywhere near to practical application.
We will see if the model can prove itself, or to what extent it is applicable. As we know there are four phases of the company life cycle, but in this assignment we will concentrate on the growth phase. We will evaluate a company in the growth phase to try and prove the extent of applicability of the growth phase in the Bender and Ward model. Considering the features and characteristics of the growth phase the study will be carried out. We will also take a look at the maturity stage as the company may be on the verge of maturity.
We will evaluate the financial strategy of one major company over the period of start up to growth. The company I have selected for this assignment is ‘Amazon. com’. This company is in its growth stage and heading towards maturity. Looking at the life cycle diagram, the company ‘Amazon. com’ is slightly at the end of the growth stage. The study carried here is quantitative and qualitative. There will be more concentration on evaluation of financial data, figures and ratios. Financial data covering a period of last five years will be used.
According to this model the are four stages in the company life cycle, which are the Start up stage, Growth, Maturity and decline stage. In this assignment we will concentrate on the growth stage as we will be comparing and evaluating the model with the performance of a company in the growth stage. Bender and Ward (2002)During the growth stage a business will attract more attention from its competitors. It may also become subject to takeover attempts. For businesses which survive the start up stage and move into growth, typical features may be summarized as follows.
The business risk remains high. The financial risk should still be kept as low as possible. Funding may be coming from equity investors. Dividends will be being paid but at a relatively low level. Future growth prospects remain high as does the price/earnings ratio. Profits are low and the share price will be growing volatile. Bender and Ward (2002)Financial risk is low as the source of funding is growth equity investments. High retention ratio of existing profit levels for funding the growth.
Rights issues, Bonus issues and share splits are carried out in this stage. The company is listed on the stock exchange or Equity funding can be raised by private placement (without inviting the public to invest in the company) Many private equity institutions have portfolios including pre-IPO companies, which have raised private funding as a second stage of their development prior to flotation. Above mentioned situations are observed in the growth stage of the life cycle by Bender and Ward.
The model surely is helpful to understand the most probable ways a firm may act in this stage. But we are not 100% sure. This approach is the attachment to rational analysis. The uncertainty factor is not considered in this model. The possibilities are numerous. By introducing new products, developing existing products and seeking new markets businesses seek to prolong the growth period. Yet the corporate world is highly unpredictable and volatile. It is never a smooth run through the life cycle.
While in the growth stage, the company might suddenly go to the decline stage and might bounce back to the growth stage. It is highly difficult to predict the life cycle. Accordingly strategies can be formed and executed. The concept is useful to a certain extent, as a company has to go through any of the stages of the life cycle sooner or later. Even though companies don’t go through the stages in the sequence given. But it is useful for the top management to identify stages and act accordingly to succeed. Bender and Ward (2002)