Five Stages of Small Business Growth

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Five Stages of Small Business Growth

This framework around small business growth is based on the fact that all businesses experience common problems that arise at similar stages in their development. Familiarity with this concept allows the business owner to attain invaluable insights. Includes case examples.

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Contents

• Executive Summary 4

• Stages of Small Business Growth 8

- Existence

- Survival

- Success

- Take Off

- Resource Maturity

• Critical Success Factors14

- Cash

- Owner’s Abilities

- Strategic Planning

- Key Management Factors

• Additional Considerations19

• Case Examples22


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Each stage of growth is characterized by a different impetus to growth and threatened by a different crisisFive Stages of Small Business Growth – Overview

As a company evolves through each stage, it is critical for the owner to know when to give up control and delegate responsibilities.

STAGE I

Existence

STAGE II

Survival

STAGE III

Success

STAGE IV

Take Off

STAGE V

Resource Maturity

Growth achieved through creativity

Open to crisis of leadership

Growth achieved through direction

Open to crisis of autonomy

Growth achieved through delegation

Open to crisis of control

Growth achieved through coordination

Open to crisis of bureaucracy

Growth achieved through collaboration

Open to various forms of crises

Age of CompanyYOUNG MATURE

Size andComplexity

SMALL

LARGE

Source: Churchill & Lewis, The Five Stages of Small Business Growth, Harvard Business Review

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Each stage also requires a different management style, a different strategic focus, and has a different state of systems and processesFive Stages of Small Business Growth – Defining Characteristics

As each stage requires a different management style, it is common for the management team to also change as the company grows from small to enterprise.

STAGE I

Existence

STAGE II

Survival

STAGE III

Success

STAGE IV

Take Off

STAGE V

Resource Maturity

Direct supervision—the owner manages everyone and everything

Supervised supervision—owners becomes more of an administrator

Functional Divisional Line and staff

Existence—may experiment with several value propositions and business models

Survival—strong focus on cash flow

Maintaining profitable status quo—OR obtaining resources for growth

Growth Return on investment

Minimal to nonexistent—most processes are ad hoc and not repeated

Minimal—systems and processes highly dependent on Excel

Basic—repeatable processes begin taking shape, but are not scalable

Developing—systems becoming more refined

Maturing—consider implementing full ERP system

MANAGEMENTSTYLE

STRATEGICFOCUS

STATE OFSYSTEMS AND

PROCESS

Source: Steinmetz, Critical Stages of Small Business Growth, Business Horizons




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The focus of businesses in Stage II, Survival, is to optimize cash flowStage II – Survival STAGE I

Existence

STAGE II

Survival

STAGE III

Success

STAGE IV

Take Off

STAGE V

Resource Maturity

OVERVIEW

• Reaching this stage demonstrates that the business is a workable business entity

• Its value proposition and business model have been tested—it has customers and satisfies them sufficiently with its products or services to retain them

• The key problem will shift from mere existence to the relationship between revenues and expenses—i.e. cash flow

• Some businesses can stuck in this stage—they earn marginal returns on invested time and capital; eventually, they go out of business when the owner gives up, or retires, or sells it (usually at a slight loss)

KEY QUESTIONS & CHALLENGES

• In the short run, can we generate enough cash to break even and to cover the repair or replacement of our capital assets as needed?

• Minimally, can we generate enough cash flow to stay in business and to finance growth to a size that is sufficiently large, given our industry and market niche, to an economic return on our assets and labor?

EXAMPLES

• “mom and pop” stores (example of businesses stuck in this stage)

MANAGEMENT STYLE

Supervised supervision—limited number of employees supervised by a sales manager or general foreman

STRATEGIC FOCUS

Survival—optimize cash flow

ORGANIZATIONAL STATE

STATE OF SYSTEMS &

PROCESSES

Systems development is minimal—formal planning consists of cash forecasting, at best

BUSINESS & OWNER

Owner is still synonymous with the business

Owner Business




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In Stage III, Success, small business owners have an important decision—to risk it all in hopes of great success or to maintain and sustainStage III – Success STAGE I

Existence

STAGE II

Survival

STAGE III

Success

STAGE IV

Take Off

STAGE V

Resource Maturity

OVERVIEW

• At this stage, the owner is running a successful business and has options for growth

• Option A) the owner can expand the business

• Owner takes the cash and the established borrowing power of the company and risks it all to finance the continued growth of the company

• A key activity is to develop managers to meet the needs of the growing business

• Option B) the owner can maintain the business’s success and existing operations, so he can disengage and re-focus his energies on alternate activities (e.g. start a new company, run for political office, pursue a hobby, retire early, etc.)

• The company can stay at this stage indefinitely, providing environmental change does not destroy its market niche or ineffective management reduces its competitive abilities

KEY QUESTIONS & CHALLENGES

• Do I choose Option A) continue to invest and grow the company or Option B) maintain the business and begin to disengage?

EXAMPLES

• The virtual, minimal effort companies advocated by Tim Ferriss in the Four Hour Work Week (example of companies that choose option B in this stage)

MANAGEMENT STYLE

Functional—functional managers take over certain duties performed by the owner

STRATEGIC FOCUS

Option A) – maintaining profitable status quo

Option B) – Get resources for growth

ORGANIZATIONAL STATE

STATE OF SYSTEMS &

PROCESSES

Systems installed bearing forthcoming needs, operational planning in the form of budgets, strategic planning is extensive

BUSINESS & OWNER

Option A) Option B)

Owner Business




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Cash is a critical input to success in the beginning stages, as well during the Take Off phase to fuel acquisitions and marketing spendCritical Success Factors – Cash

There is little criticality of cash in Stage III, because the company has a profitable and sustainable business model (for its current scale).

STAGE I

Existence

STAGE II

Survival

STAGE III

Success

STAGE IV

Take Off

STAGE V

Resource Maturity

Size andComplexity

RELEVANTOR NATURALBY-PRODUCT

CRITICALTO SUCCESS Cash





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As the owner grows its business, there is a clear trade-off in critical between the owner’s ability to execute versus his ability to delegateCritical Success Factors – Owner’s Abilities

The owner needs to recognize the need to delegate and relinquish responsibilities to ensure the company’s continued growth.

STAGE I

Existence

STAGE II

Survival

STAGE III

Success

STAGE IV

Take Off

STAGE V

Resource Maturity

Size andComplexity

RELEVANTOR NATURALBY-PRODUCT

CRITICALTO SUCCESS

Owner’s ability to execute

Owner’s ability to delegate





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KeyManagement

Factors

Additionally, we have identified 8 key management factors—4 company factors and 4 owner factorsCritical Success Factors – Key Management Factors

Financial Resources—including and borrowing power

Personnel Resources—relating to numbers, depth, and quality of people, particularly at the management and staff levels

Systems Resources—in terms of the degree of sophistication of both information, planning, and control systems

Business Resources—including customer relations, market share, supplier relations, manufacturing and distribution processes, technology, and reputation

Owner’s Goals—for himself and for the business

Owner’s Operational Abilities—in doing important jobs, such as marketing, innovation, producing, and managing distribution

Owner’s Managerial Ability—including willingness to delegate responsibility and to manage the activities of others

Owner’s Strategic Abilities—for looking beyond the present and matching the strengths and weaknesses of the company with his goals

COMPANY FACTORS OWNER FACTORS

1

2

3

4

5

6

7

8THIS IS A PARTIAL PREVIEW



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Though it is a long and difficult process to reach Stage 5, there are numerous lucrative exit opportunities along the wayEvolution of Small Companies

STAGE I

Existence

STAGE II

Survival

STAGE III

Success

STAGE IV

Take Off

STAGE V

Resource Maturity

To avoid bankruptcy, companies need to maintain their entrepreneurial culture by continuing to innovate and staying relevant.

Enter Stage II

Enter Stage III

Enter Stage IV

Enter Stage V

Sell Assets

GoBankrupt

Business is open!

Sell at a loss

GoBankrupt

Stuck in Stage II

Stuck in Stage III

GoBankrupt

Sell at a profit ($)

Drop back to Stage III

GoBankrupt

Sell at a profit ($$)

Drop back to Stage II

Operate

Drop back to Stage IV

GoBankrupt

Sell or merge($$$)

Growth

Growth

Growth

Growth

Growth

May be triggered from large market

change – e.g. disruptive technology




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Five Stages of Small Business Growth

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