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Monday, December 1, 2008
The business life cycle of a UMA

Modern theory has for some time equated a business to a living life form:
• they seem to exhibit lives of their own;
• they require feeding to continue growing; and.
• they even develop their own personalities.

Their life cycle follows four distinct phases: introduction, growth, maturity, and decline.
These phases have distinguishable characteristics featuring challenges unique to each of them, notes Martin le Roux, Business Development Manager, Centriq Insurance
“Knowing in what specific phase of the life cycle an Underwriting Management Agency (UMA) is, for example, should equip entrepreneurial owners and professional managers alike with some degree of insight into what they need to focus on both now and into the future.”
<crosshead>Introduction phase
<text> During this phase the main goal is to survive and stay in business. Most companies will have to work hard to create a brand presence and overcome the challenge of broader market acceptance. And although a UMA may have to face this challenge, it would probably have an advantage over other types of start-ups as a UMA principal typically has a market reputation developed while working for a corporate insurance company. The pursuance of one specialised niche opportunity or business line, which is a distinct characteristic of a UMA, can furthermore assist in overcoming these challenges. This phase is characterised by relatively low sales, which are hopefully growing.
“It is a well known fact,” he says, “that most businesses that fail during the introduction phase do so as a result of cash flow problems. This is typically due to a combination of low sales volumes and relatively high fixed costs such as salaries and rent.
“This is compounded by inadequate credit and other internal controls often associated with start up businesses, where cash due to the business is not collected timeously. It is therefore critically important that the business plan outlines working capital requirements prudently before starting up and that the business manages its cash flows diligently thereafter.”
For obvious reasons it is during this phase that a business makes most of its mistakes as it tests its products or services in the market place.
The main focus of a business in this phase should be on establishing a customer base and market presence along with tracking and conserving cash flow. It is also during this phase that marketing needs to be extra aggressive and concentrated as the business needs to position itself as the authority in the market. To sustain the business in this phase, the business needs to have energy, initiative, excitement, innovation, and significant reserves of resilience to weather those unplanned eventualities that are guaranteed to occur.

Growth phase
During this stage, the business has normally acquired the resources it needs to operate. It has started to establish its brand and sales volumes are rising at a rate that significantly exceeds an increase in expenditure. The business will eventually “turn the corner” and start making profits.
Le Roux adds that the major challenges faced by growing businesses include dealing with the constant changes and issues that are now coming to the fore and are all equally competing for time and money. This phase is sometimes characterised by tempting opportunities that distract from the core niche the business focuses on. It is during this phase of the cycle that really effective management is required to manage the distractions while “sticking to the knitting”.
Where appropriate the original business plan may need to be refined. Greater resources and more staff may be required to cope with the higher volume. Management will need to guard against the tendencies of excessive cost control to prevent the risk of deterioration in service standards resulting from the added workloads. New staffing incorporates challenges to the culture of the business, which may evolve from a “family type business” to a more professional culture.
“Management needs to retain focus on marketing to maintain brand awareness,” he adds, “while at the same time prioritising the focus on improving efficiencies through systems integration, process design and training. In this way the business will be enabled to effectively service the increased volume without significantly increasing its staff.”

Maturity phase
During the maturity stage, income and profit will continue to increase for a while, and then gradually level off. The business will have settled into more of a routine. Profit margins will more than likely deteriorate due to increased competition, the need to replace capital assets, and increased expenses.
This stage of the life-cycle is often referred to as the “the make-it-or-break-it stage”. If the business can sustain itself in the maturity phase and more importantly promote new growth, then the chances are good that it will last well into the future. “It is vital during this phase that managers focus on strategically engineering the business to continually re-invent itself,” notes Le Roux. “New product development, supply chain integration and diversification, mergers and acquisitions are often the result of businesses’ attempts to give effect to this.”
The need to re-invent itself introduces risks similar to that faced in the start up phase, in that this is often uncharted territory and the risk of incorrect business decisions increases due to the lack of experience.  To mitigate this, the business should vigorously investigate the opportunities and obtain advice from the relevant experts. It is best to concentrate on opportunities that complement their existing experience and capabilities.
“The largest risk associated with this phase is that management either become complacent, or remain so involved in the operations of the existing business, that they fail to focus on strategically directing the business to re-invent itself. Should management not do this, a decline may be inevitable.”
It is at this phase of the business cycle that a UMA principal should consider introducing professional managers into the business, which allow the principal to extract themselves from the day to day operations and allow their entrepreneurial flair to guide the business in exploiting opportunities going forward. This approach will also potentially address another business risk, one of succession planning. “Up until this phase the UMA principal has been largely responsible for the positioning of the business,” he explains, “owns the majority of the relationships, and is the proprietor of most of the expertise.” As a result this poses a significant risk to the sustainability of the business and may even result in loss of business where clients perceive that sustainability may be an issue. The introduction of professional managers should also form part of the succession plan.

Decline phase
During the decline stage of a business, income as well as profit will continue to erode as competitors pilfer customers through better service; lower prices and/or better products. In short, the business loses its competitive edge, which could be as a result of inertia, a lack of new ideas, skills shortages or other similar problems.
“The biggest challenge faced during this phase of the business life cycle is for the business to re-invent itself within critical time frames,” he says. The business has regressed back into survival mode, where the race to re-invent itself is pitted against the time it has left with declining market share. This phase may be characterised by retrenchments and may ultimately result in a forced buy out by a competitor at lower than desired prices.
In arriving at this phase, the business either didn’t focus on re-positioning during the maturity stage, or the actions taken did not have the desired outcome. The challenge is essentially the same as the maturity phase, except that there is less time and more pressure to get it right.

“The various stages of the business life cycle may not occur in the exact chronological order as depicted above,” says Le Roux. Some businesses will simply go from start-up to decline followed by exit. Other business may also select to avoid expansion into other products/markets and find that they are able to remain modest and stay in the established or maturity phase. “Whether a business is a success or a failure fundamentally depends on its management’s ability to adapt to the various phases of its life cycle.” What management chooses to focus on today will change in the future. Understanding where the business currently is on the life cycle can help management anticipate upcoming challenges and make the best decisions for the business.
Lastly, while these are probably applicable to all businesses to a degree, here are some often quoted tips for business owners that may prove useful especificall to smaller entrepreneurially owner managed businesses:
• Keep score: have an intricate knowledge of the daily, weekly and monthly numbers and financial trends in the business. Make sure that focus is given to keeping current on cash flow.
• Set goals: this is an essential part of business success.
• Use high impact marketing: don’t waste time on ineffective marketing.
• Monitor trends: no business exists in a vacuum. Keep abreast of current issues and trends.
• Sharpen selling skills: this is a high return area for business improvement.
• Find the best practices: every industry has its own best practices that are tried and true.
• Motivate staff: Staff members that are talented as well as motivated can hugely improve the business. Learn what motivates employees to higher levels of performance.
• Know your limits: manage the business’s resources optimally and get assistance in areas of weakness.
• Take a break: often the best way to improve a business and for owners/management to re-ignite their passion and drive for the business is for them to take some leave.

Copyright © Insurance Times and Investments® Vol:21.11 1st December, 2008
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