Tree representing capital structure and enterprise lifecycle

Decoding Your Business: How the Enterprise Lifecycle Model Boosts Financial Strategy

Nico Varela in Business & Economy December 2025 • 4 min read.

"Navigate growth, maturity, and decline using the hierarchical theory for smarter capital decisions."

In the world of corporate finance, figuring out the best way to structure a company's finances is a puzzle many try to solve. The goal? To keep the cost of capital low and the company's value high. A key piece of this puzzle is understanding capital structure – how a company mixes debt and equity to fund its operations and growth.

New research dives into how the hierarchical theory can explain a firm's capital structure based on its enterprise lifecycle stage. By using the enterprise lifecycle model, businesses can gain valuable insights into how their financial strategies should evolve as they grow, mature, and eventually decline. This approach enables companies to fine-tune their financial decisions, potentially leading to more effective resource allocation and better financial health.

This article breaks down the study's key findings and explores how businesses can apply these insights to make informed decisions about their capital structure. Understanding the interplay between a company’s lifecycle stage and its financial strategy can provide a competitive edge, allowing for smarter investment choices and long-term sustainability.

Understanding the Enterprise Lifecycle Model

Tree representing capital structure and enterprise lifecycle

The enterprise lifecycle model suggests that companies go through distinct phases: growth, maturity, and decline. Each phase presents unique financial challenges and opportunities. Understanding where your company stands in this lifecycle is crucial for making sound financial decisions.

The study used a specific method developed by Park and Chen (2006) to categorize companies into these lifecycle stages. This method was applied to a sample of 81 companies listed on the Tehran Stock Exchange (TSE) over a six-year period (2007-2012). The researchers then analyzed how these companies' capital structures aligned with their respective lifecycle stages.

Growth Phase: Characterized by rapid expansion, increasing revenues, and a high demand for capital. Companies in this phase often prioritize growth over profitability, reinvesting earnings to fuel further expansion.
Maturity Phase: A period of stable growth, strong cash flows, and established market position. Mature companies focus on efficiency, profitability, and returning value to shareholders.
Decline Phase: Marked by decreasing revenues, shrinking market share, and potential financial difficulties. Companies in this phase often struggle to adapt to changing market conditions.

By understanding these phases, businesses can better anticipate their financial needs and adjust their capital structures accordingly. For example, a growth-stage company might rely more on equity financing to fund expansion, while a mature company might prefer debt financing to optimize its capital structure.

Key Takeaways for Business Leaders

This research underscores the importance of aligning financial strategy with the enterprise lifecycle stage. The study revealed that the hierarchical theory better represents growing firms compared to mature ones, suggesting that financial decisions should be tailored to the specific needs and characteristics of each lifecycle phase. Furthermore, the finding that firms were willing to reduce dividends to finance projects highlights a strategic trade-off that businesses should consider when managing their capital structure.

About this Article -

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This article is based on research published under:

DOI-LINK: 10.5267/j.ac.2016.5.001, Alternate LINK

Title: The Role Of The Hierarchical Theory In Explaining The Capital Structure Of The Firms Based On Enterprise Life Cycle Model

Subject: Pharmaceutical Science

Journal: Accounting

Publisher: Growing Science

Authors: Jamal Bahiri Saleth, Abbas Aalizadeh

Published: 2017-01-01

Everything You Need To Know

What is the enterprise lifecycle model and why is understanding it important for my business's financial strategy?

The enterprise lifecycle model describes the distinct stages a company goes through: growth, maturity, and decline. Understanding this model is crucial because each phase presents unique financial challenges and opportunities. Aligning your financial strategies with your current stage – whether prioritizing growth through equity financing in the growth phase or optimizing capital structure with debt in the maturity phase – enables more effective resource allocation and improved financial health. It also helps in making informed investment decisions and fostering long-term sustainability.

How can the hierarchical theory inform my company's capital structure decisions, especially during different lifecycle stages?

The hierarchical theory suggests that firms prioritize funding sources based on cost and availability. The research indicates this theory is particularly relevant for growing firms. During the growth phase, companies often rely on internal funds and equity financing due to higher information asymmetry and risk. As firms mature, they may shift towards debt financing to optimize their capital structure and lower the cost of capital. Understanding this hierarchy and adapting your capital structure accordingly can improve financial flexibility and support strategic objectives.

What specific financial challenges characterize each stage of the enterprise lifecycle model, and how should my company adapt?

During the growth phase, companies face challenges related to rapid expansion, high capital demand, and prioritizing growth over profitability. Adaptation involves reinvesting earnings and possibly using equity financing. In the maturity phase, challenges include maintaining stable growth and maximizing profitability. Companies should focus on efficiency and returning value to shareholders, possibly using debt financing. The decline phase involves decreasing revenues and market share, requiring adaptation through cost reduction, strategic repositioning, or seeking new markets. Companies may need to reduce dividends and streamline operations to navigate financial difficulties.

The study mentions a trade-off between dividends and financing projects. How should my company approach this decision?

The willingness of firms to reduce dividends to finance projects indicates a strategic trade-off that companies should carefully consider. During periods of high-growth opportunities or when facing financial constraints, temporarily reducing dividends can free up capital for reinvestment and strategic initiatives. However, this decision should be balanced against the expectations of shareholders who value consistent dividend payouts. Clear communication and a well-articulated investment strategy are crucial to maintain investor confidence when making such trade-offs. The specific context of the enterprise lifecycle stage should inform this decision.

How was the enterprise lifecycle model applied in the study on the Tehran Stock Exchange (TSE), and what can I learn from their approach?

The study categorized 81 companies on the TSE into growth, maturity, and decline phases using a method developed by Park and Chen (2006). This method was applied over a six-year period (2007-2012), and the researchers then analyzed the correlation between these companies' lifecycle stages and their capital structures. A key takeaway is the importance of empirical validation when applying theoretical models. By examining real-world data, the study confirmed that the hierarchical theory is more applicable to growing firms. Similarly, businesses can benefit from conducting their own assessments and benchmarking against industry peers to refine their financial strategies based on their specific lifecycle stage and market conditions.