Five Stages of Small Business Growth

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Five Stages of SmaII Business Growth
This framework around smaII business
growth is based on the fact that aII
businesses experience common probIems
that arise at simiIar stages in their deveIopment. FamiIiarity with this
concept aIIows the business owner to attain invaIuabIe insights.
IncIudes case exampIes.
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6ontents
xecutive Summary 4
Stages of SmaII Business Growth 8
xistence
Survival
Success
Take Off
Resource Maturity
riticaI Success Factors 14
Cash
Owner's Abilities
Strategic Planning
Key Management Factors
dditionaI onsiderations 19
ase xampIes 22
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Each stage of growth |s character|zed by a d|fferent |mpetus to growth
and threatened by a d|fferent cr|s|s
Five 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.
STG I
xistence
STG II
SurvivaI
STG III
Success
STG IV
Take Off
STG V
Resource Maturity
rowth achieved
through creativity
Open to crisis of
leadership
rowth achieved
through direction
Open to crisis of
autonomy
rowth achieved
through delegation
Open to crisis of
control
rowth achieved
through coordination
Open to crisis of
bureaucracy
rowth achieved
through
collaboration
Open to various
forms of crises
ge of ompany
YOUNG MTUR
Size and
ompIexity
SM
RG
Source: Churchill & Lewis, The Five Stages of Small Business rowth, Harvard Business Review
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Each stage a|so requ|res a d|fferent management sty|e, a d|fferent
strateg|c focus, and has a d|fferent state of systems and processes
Five 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.
STG I
xistence
STG II
SurvivaI
STG III
Success
STG IV
Take Off
STG V
Resource Maturity
Direct
supervisionthe
owner manages
everyone and
everything
Supervised
supervision
owners becomes
more of an
administrator
FunctionaI DivisionaI ine and staff
xistencemay
experiment with
several value
propositions and
business models
SurvivaI-strong
focus on cash flow
Maintaining
profitable status
quoOR obtaining
resources for
growth
Growth Return on
investment
MinimaI to
nonexistentmost
processes are ad
hoc and not
repeated
MinimaIsystems
and processes
highly dependent on
xcel
Basicrepeatable
processes begin
taking shape, but
are not scalable
DeveIoping
systems becoming
more refined
Maturingconsider
implementing full
RP system
MNGMNT
STY
STRTGI
FOUS
STT OF
SYSTMS ND
PROSS
Source: Steinmetz, Critical Stages of Small Business rowth, Business Horizons
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%he focus of bus|nesses |n 8tage ||, 8urv|va|, |s to opt|m|ze cash f|ow
Stage II - Survival
STG I
xistence
STG II
SurvivaI
STG III
Success
STG IV
Take Off
STG V
Resource
Maturity
OVRVI
Reaching this stage demonstrates that the business is a workable business entity
ts value proposition and business model have been testedit 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 expensesi.e. cash flow
Some businesses can stuck in this stagethey 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)
Y QUSTIONS & HNGS
n 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?
AMPLS
"mom and pop stores (example of businesses stuck in this stage)
MNGMNT
STY
Supervised supervision
limited number of employees
supervised by a sales
manager or general foreman
STRTGI
FOUS
Survivaloptimize cash flow
ORGNIZTION
STT
STT OF
SYSTMS &
PROSSS
Systems development is
minimalformal planning
consists of cash forecasting,
at best
BUSINSS &
ONR
Owner is still synonymous
with the business
Owner Business
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|n 8tage |||, 8uccess, sma|| bus|ness owners have an |mportant dec|s|on-
to r|sk |t a|| |n hopes of great success or to ma|nta|n and susta|n
Stage III - Success
STG I
xistence
STG II
SurvivaI
STG III
Success
STG IV
Take Off
STG V
Resource
Maturity
OVRVI
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
Y QUSTIONS & HNGS
Do choose Option A) continue to invest and grow the company or Option B) maintain
the business and begin to disengage?
AMPLS
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)
MNGMNT
STY
Functionalfunctional
managers take over certain
duties performed by the
owner
STRTGI
FOUS
Option A) maintaining
profitable status quo
Option B) et resources for
growth
ORGNIZTION
STT
STT OF
SYSTMS &
PROSSS
Systems installed bearing
forthcoming needs,
operational planning in the
form of budgets, strategic
planning is extensive
BUSINSS &
ONR
Option A) Option B)
Owner Business
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6ash |s a cr|t|ca| |nput to success |n the beg|nn|ng stages, as we||
dur|ng the %ake 0ff phase to fue| acqu|s|t|ons and market|ng spend
Critical 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).
STG I
xistence
STG II
SurvivaI
STG III
Success
STG IV
Take Off
STG V
Resource Maturity
Size and
ompIexity
RVNT
OR NTUR
BY-PRODUT
RITI
TO SUSS
Cash
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s the owner grows |ts bus|ness, there |s a c|ear trade-off |n cr|t|ca|
between the owner's ab|||ty to execute versus h|s ab|||ty to de|egate
Critical Success Factors - Owner's Abilities
The owner needs to recognize the need to delegate and relinquish responsibilities to
ensure the company's continued growth.
STG I
xistence
STG II
SurvivaI
STG III
Success
STG IV
Take Off
STG V
Resource Maturity
Size and
ompIexity
RVNT
OR NTUR
BY-PRODUT
RITI
TO SUSS
Owner's ability to execute
Owner's ability to delegate
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Key
Management
Factors
dd|t|ona||y, we have |dent|f|ed 8 key management factors-4 company
factors and 4 owner factors
Critical Success Factors - Key Management Factors
FinanciaI Resources-including and
borrowing power
PersonneI 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 GoaIs-for himself and for the
business
Owner's OperationaI biIities-in doing
important jobs, such as marketing,
innovation, producing, and managing
distribution
Owner's ManageriaI biIity-including
willingness to delegate responsibility and
to manage the activities of others
Owner's Strategic biIities-for looking
beyond the present and matching the
strengths and weaknesses of the
company with his goals
OMPNY FTORS ONR FTORS
1
2
3
4
5
6
7
8
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%hough |t |s a |ong and d|ff|cu|t process to reach 8tage 5, there are
numerous |ucrat|ve ex|t opportun|t|es a|ong the way
volution of Small Companies
STG I
xistence
STG II
SurvivaI
STG III
Success
STG IV
Take Off
STG V
Resource Maturity
To avoid bankruptcy, companies need to maintain their entrepreneurial culture by
continuing to innovate and staying relevant.
nter
Stage
nter
Stage
nter
Stage V
nter
Stage V
Sell
Assets
o
Bankrupt
Business is open!
Sell at a
loss
o
Bankrupt
Stuck in
Stage
Stuck in
Stage
o
Bankrupt
Sell at a
profit ($)
Drop back
to Stage
o
Bankrupt
Sell at a
profit ($$)
Drop back
to Stage
Operate
Drop back
to Stage V
o
Bankrupt
Sell or
merge($$$)
Growth
Growth
Growth
Growth
Growth
May be triggered
from large market
change e.g.
disruptive technology
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