Growing a Small Business – Five Essential Stages

Five Essential Stages for Growing a Small Business

Small businesses vary widely in their sizes and capacity for growth. Yet most of them experience common problems at similar stages in their development. In order to approach and solve these problems related to growing a business, whether it is a small coffee shop or a software company with a 30% annual rate of growth, we looked for a framework and defined the 5 stages each business goes through, the key issues in each of these stages, and how to approach them.

# Small Businesses

Growing small businesses face some struggles until they reach the last stage of their development – becoming a big company. We divided these steps into five stages; Existence, Survival, Success, Take-off, and Resource Maturity. These stages

# Stage 1: Existence

In this stage, the main problems of the business are obtaining customers and delivering the product or service contracted for. Among the key questions are the following:

The organization is a simple one—the owner does everything and directly supervises subordinates, who should be of at least average competence. Systems and formal planning are minimal to nonexistent. The company’s strategy is simply to remain alive. The owner is the business, performs all the important tasks, and is the major supplier of energy, direction, and, with relatives and friends, capital.

Companies in the Existence Stage range from newly started restaurants and retail stores to high-technology manufacturers that have yet to stabilize either production or product quality.

# Stage 2: Survival

The businesses which reached this stage have demonstrated that they are workable business entities. They have enough customers and satisfy them sufficiently with their products or services. The key problem in this stage shifts from mere existence to the relationship between revenues and expenses.

The main questions one should ask himself are:

  • In the short run, can we generate enough cash to break even and to cover the repair or replacement of our capital assets as they wear out?
  • Can we, at a minimum, 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 earn an economic return on our assets and labor?

At this stage, the organization remains simple and the company has a limited number of employees. The company may grow in size and profitability and move on to Stage 3, or it may remain at the Survival Stage for some time and recover or go out of business.

# Stage 3: Success

At the Success stage, the owner decides whether to keep the company stable and profitable, and disengaging from it by appointing functional managers and increasingly moving apart from the company. Behind the disengagement might be a wish to start up a new start-up, pursue hobbies, or retire while maintaining a running, profitable business. If the owner decides to expand the company and pursue growth – he still has to delegate to others some of the roles of running the company, as he should focus on growth, expansion, and staying relevant among the competitors. The need to be competent in order to handle a growing and complex business environment requires operational and strategic planning that should be done by specific managers.

# Stage 4: Take-off

In this stage, the company grows rapidly and the owner faces new issues he has never dealt with; if the owner rises to the challenges of a growing company, both financially and managerially, the business can become big business. If not, it can usually be sold—at a profit—provided the owner recognizes his or her limitations soon enough. Too often, those who bring the business to the Success Stage are unsuccessful in Stage IV, either because they try to grow too fast and run out of cash or are unable to delegate effectively enough to make the company work. The knowledge of how to raise equity for your business is a major part of this stage. Entrepreneurs who are unfamiliar with the process of raising equity or debt can easily ruin their future profits.

# Stage 5: Resource Maturity

In the last stage, the greatest concerns of a company are first, to consolidate and control the financial gains brought on by rapid growth and, second, to retain the advantages of small size, including flexibility of response and the entrepreneurial spirit. The corporation must expand the management force fast enough to eliminate the inefficiencies that growth can produce and professionalize the company by use of such tools as budgets, strategic planning, management by objectives, and standard cost systems—and do this without stifling its entrepreneurial qualities.

The company now has the advantages of size, financial resources, and managerial talent. If it can preserve its entrepreneurial spirit, it will be a formidable force in the market. If not, it may enter a stage of smugness; a lack of innovative decision making, and avoidance of risks which will cause it to be irrelevant as soon as a major change in the environment occurs.

# Key Factors for a Successful Business

Several factors, which change in importance as the business grows and develops, are prominent in determining ultimate success or failure.

There are eight factors, of which four relate to the enterprise and four to the owner. The four that relate to the company are as follows:

  1. Financial resources, including cash and borrowing power.
  2. Personnel resources, relating to numbers, depth, and quality of people, particularly at the management and staff levels.
  3. Systems resources, in terms of the degree of sophistication of both information and planning and control systems.
  4. Business resources, including customer relations, market share, supplier relations, manufacturing and distribution processes, technology, and reputation, all of which give the company a position in its industry and market.

The four factors that relate to the owner are as follows:

  1. Owner’s goals for himself or herself and for the business.
  2. Owner’s operational abilities in doing important jobs such as marketing, inventing, producing, and managing distribution.
  3. Owner’s managerial ability and willingness to delegate responsibility and to manage the activities of others.
  4. Owner’s strategic abilities for looking beyond the present and matching the strengths and weaknesses of the company with his or her goals.

As a business moves from one stage to another, the importance of the factors changes. In the early stages, small businesses are built on the owner’s talents: the ability to sell, produce, invent, etc. This factor is thus of the highest importance. The owner’s ability to delegate, however, is on the bottom of the scale at this point in time.

As the company grows, other people enter sales, production, or engineering and support the owner’s skills – thus reducing the importance of this factor. At the same time, the owner must spend less time doing and more time managing. He or she must increase the amount of work done through other people, which means delegating. The inability of many founders to let go of doing and to begin managing and delegating explains the demise of many businesses.

Finally, business resources are the stuff of which success is made; they involve building market share, customer relations, solid vendor sources, and a technological base, and are very important in the early stages. In later stages, the loss of a major customer, supplier, or technical source is more easily compensated for. Thus, the relative importance of this factor is shown to be declining.

# Summary

A company’s development stage determines the managerial factors that must be dealt with. Its plans help determine which factors will eventually have to be faced. Knowing its development stage and future plans enable managers, consultants, and investors to make more informed choices and to prepare themselves and their companies for later challenges. While each enterprise is unique in many ways, all face similar problems and all are subject to great changes. That may well be why being an owner is so much fun and such a challenge.

Taken from the article appeared in the May 1983 issue of Harvard Business Review.

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