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The Five Stages of Small Business Growth

June 15, 2022
Carynn Tey
6-8 MIN

Small businesses are all incredibly unique, differentiated by the markets they serve, the opportunities they exploit, management styles, access to production channels, potential for growth, and a million other ‘little’ characteristics that make them seem impossible to analyze as a group.

The truth is that small businesses undergo stages of growth and generalizations can be made about the pressures that businesses, even across different industries, face in similar stages. The Five Stages of Business Growth is a framework developed by researchers Neil C. Churchill and Virginia L. Lewis and is useful for anticipating the needs of your business or even researching strategies employed by other businesses for use in dealing with current problems. Drawing references from businesses in the same stage of growth ensures that their problems are relevant, and methods are applicable to you.

Stage 1: Existence

As the name suggests, this stage is focused around building a sustainable business. Businesses in this stage typically still need to acquire their primary customer base and stabilize delivery of their product(s) or service(s). Key aspects of this stage include

·       Direct oversight of the business by the owner

·       Direct supervision of employees by the owner

·       Minimally established processes and systems within the business structure if any

Businesses in the existence stage are primarily concerned with the survival of the business and overcoming the high costs of a startup. In order to grow past this stage, the business needs both a sustainable customer base and reliable production of quality goods.

If a business fails in the existence stage, it typically disappears altogether.

Stage 2: Survival

Once a business has successfully established itself and proven that it is capable of sustaining operations by providing satisfactory goods and/or services to a large enough customer base, it has reached the survival stage. Key aspects of a business in the survival stage include

·       A simple organizational structure, perhaps with a general manager or sales manager that works under the direct guidance of the owner

·       Still minimally established processes and systems. Ideally, the business should be able to produce short-term cash forecasts

Businesses here are still primarily concerned with survival but have pivoted from short-term concerns to long-term planning and expanding profitability. It’s common for businesses to remain in this stage for a while, earning marginal returns on investment.

If a business should fail in the survival stage, it’s possible that it is just sustainable enough to be sold. There is still a significant chance that they will fail completely.

Stage 3: Success

A company that achieves success has managed to achieve long-term sustainability. It has proven its capacity to capitalize on prior achievements and continue expanding into new markets, pivoting as necessary to meet new needs for new customer segments. Such businesses are profitable and key aspects of success include

·       Sufficient profitability and reliable mechanisms to remove the need for direct owner oversight.

·       Established systems for regular function and processes for both regular function and further development of the business.

Owners who reach this stage have to make a pivotal decision about whether they intend to participate actively in propelling the company forward and play a part in maintaining stability and capitalizing on prior accomplishments or undertaking a process of disengaging from a leadership position. Owners have many reasons for disengaging from a business, typically revolving around pursuing personal interests, projects, or fulfillment.

Substage 3D: Disengagement

If an owner disengages from a business, it is common for them to pursue maintaining business operations, with reduced emphasis on further growth. A well-managed business can remain in this state indefinitely and is typically run by management that has taken over the former obligations of the owner. A primary focus here is on carrying over profits from good times to sustain the business through harder, leaner times.

Sometimes businesses move into the disengagement stage simply because there are no more available opportunities for growth to exploit, which is acceptable. They are nonetheless value-providing businesses that have achieved sustainability.

Substage 3G: Growth

Rather than disengaging, an owner may instead choose to direct a business’s resources towards further growth. If this is the path the business will pursue, it is critical that resources are well managed to prevent overconsumption of resources that are necessary for long-term sustainability. As such, it requires the owners to hire efficient management.

Any established systems should include forecasting to ensure that the business can meet its future needs and take actions anticipatorily rather than reactionarily. It is difficult for an owner to disengage and sustain a business’s growth, since it involves careful strategic planning.

Stage 4: Takeoff

Here, a business’s main focus is to convert excess resources into further growth as efficiently as possible. That means expanding the business’s profitability and then reducing further waste in the growth process.

The most crucial undertakings of a business here are

·       Effective delegation of managerial and oversight responsibilities. This includes true delegation, which means the owner must relinquish their former absolute control and be willing to accept possible mistakes in exchange for the potential and skillsets their professional staff can bring to the table.

·       Effective management of cash. Growth can introduce new strain on a company’s resources as it explores propositions for further expansion. Systems that were introduced earlier in the business’s life cycle must be refined to meet new needs and expectations.

If an owner can successfully manage these two key aspects of takeoff, their business has a good chance of succeeding in its ventures. If not, there is still a great likelihood that the venture is still worth selling so long as it is still solvent and profitable. It is also possible for a business to discontinue plans for further expansion and instead refocus its efforts on sustainable operations.

A business in this stage can experience failure in multiple ways if its losses overwhelm its past successes. It may regress all the way back to survival and have to rebuild systems that have since failed and there is still the chance that it will fail altogether.

Stage 5: Resource Maturity

A company that reaches this stage has essentially accomplished its long-term goals for continuous operations with stable expansion. Since it still is a small business, it retains the advantages of a small business model—most notability the entrepreneurial spirit and the ability to pivot quickly. Its current focuses are on quick expansion, further reduction of inefficiencies, and the establishment of standard cost systems, without losing the aforementioned advantages.

At this point, the owner of the business should have divested themselves of some of the burden of oversight. They should be leaning on the capabilities of their professional and managerial staff to manage daily operations and instead stay focused on the strategic vision of the company, capitalizing on a diversity of ideas to create new innovations.

The main risk facing a company that has achieved resource maturity is ossification. This stage is characterized by a pervasive avoidance of risks and lack of genuine innovation—innovation that marks a substantial change from existing structures. The underlying problem of ossification is the business’s growing inability to adapt to changes in its environment, introducing weaknesses that competitors can exploit.

Business failure is rare for businesses that reach this stage but is usually linked to an inability to respond to some external factor. The business must balance between committing to investments and leaving room to adjust.

Applying the model

If you’re looking to manage your small business more efficiently using these stages, you want to begin by identifying key characteristics that will help you place where you are in development. If you find that you’re consistently worried about your cashflows and still trying to stabilize your profits, you’re in the survival stage, regardless of how old your business might be. Once you’ve identified where you are, it’s easier to then use the dimensions for future growth to draw plans and make decisions.

Recall that progressing through these stages of growth is not time dependent—in fact, transitioning between growth, takeoff, and resource maturity is often a conscious, strategic decision that must take into account the owner’s vision for and commitment to the company.

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