5 Crucial Stages in Small-Business Development
-By Priyasy Bokadia December 11, 2023 6 min read
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Introduction

No matter how diverse small businesses may seem, they share common patterns of growth and challenges along the way. Recognizing these stages and understanding the corresponding management factors can be a game-changer for entrepreneurs looking to navigate the treacherous waters of business development. In this blog, we will delve into the five stages of small-business growth, as detailed by Neil C. Churchill and Virginia L. Lewis in their groundbreaking 1983 Harvard Business Review article. By exploring these stages, we aim to provide entrepreneurs and SMEs with a comprehensive framework to assess their current situation and plan for the future.

At first glance, trying to categorize the issues and growth paths of small businesses in a way that's helpful to entrepreneurs might seem like an impossible task. But, if you take a closer look, you'll see that they run into a lot of the same problems as they grow. These common challenges can be organized into a sort of roadmap that helps us understand what makes these businesses tick. It doesn't matter if we're talking about a tiny corner dry-cleaning spot or a massive multi-city, multi-chain brand that's growing at 30% every year.

For SMEs, having this understanding can be a real game-changer. It can help them figure out what issues they're dealing with right now, like the need to explore solutions that serve their customers better or hire new managers to handle their planned growth.

Let’s explore the five stages of small business development, shedding light on their characteristics, challenges, and growth strategies.

Image - Characteristics of Small business at each stage

The Five Stages of Small-Business Growth

- Stage I: Existence

The first stage of small business development is the existence stage, where the primary concerns revolve around obtaining customers, delivering products or services, and securing enough capital to cover startup costs. At this point, the owner is directly involved in all aspects of the business. This stage often involves the owner wearing many hats, performing various tasks, and providing the energy, direction, and capital for the business. There are minimal formal systems and planning, and the main goal is to survive. Many businesses in this stage either succeed and move on to the next stage or eventually close if they can't gain sufficient customer acceptance. Key Questions: Can we attract enough customers and deliver our offerings effectively? Can we expand beyond our initial customer base? Do we have enough capital to sustain the business?

- Stage II: Survival

If a business successfully navigates the Existence Stage, it enters Survival. Survival is the second stage, where the business has proven its viability and has enough customers to stay afloat. The primary challenge shifts to managing revenues and expenses to ensure building a profitable business. In this stage, the owner plays a central role in decision-making but might begin limited delegation. Some businesses may stay in this stage for extended periods, while others may move on to the next stage. Key Questions: Can we generate enough cash flow to break even and maintain our capital assets? Can we achieve profitability and growth?

- Stage III: Success

Now, let's talk about Stage III: Success. This is where business owners face a crucial decision: whether to build upon their company's achievements and expand further or maintain a stable, profitable operation that can serve as a base for their other activities. So, the big question here is whether to use the company as a launchpad for growth, which we refer to as a substage III-G company, or as a means of support while the owners partially or completely step back from day-to-day involvement, creating a substage III-D company.

This stage can be further divided into two sub-stages:

- Substage III-D (Success-Disengagement):

In this substage, the company achieves economic health, profitability, and size. The owner begins to disengage from the day-to-day operations, possibly to pursue other interests while maintaining the business.

In this substage, the company has achieved economic health. It has reached a size and market presence that ensures economic success, earning average or above-average profits. Companies in this stage can sustain themselves here indefinitely, provided they can adapt to changing market conditions and maintain their competitive edge.

From an organizational perspective, the company has grown to a point where it often requires functional managers to take up certain duties that were previously handled solely by the owner. Financial resources are usually abundant, and the primary concern shifts to avoiding excessive cash outflows during prosperous periods to ensure the company sustains inevitable rough patches.

Furthermore, this is when the first professional staff members typically join the company. Basic financial, marketing, and production systems are now firmly in place, and operational budgets support functional delegation. The owner begins to disengage from the day-to-day operations while maintaining the business.

- Substage III-G (Success-Growth):

In the Success-Growth substage, the owner decides to consolidate the company and invest resources for expansion. This often involves availing loans, credit cards and financial products to grow the company further.

Among the important tasks in this substage are ensuring that the core business remains profitable so that it doesn't outstrip its source of cash, and developing managers who can meet the growing demands of the business. Plus, hiring managers who are strategically aligned towards growth and taking the business to new heights rather than just its current state, becomes crucial. This is also the time when systems need to be installed with an eye toward future needs.

While operational planning, much like in Substage III-D, takes the form of budgets, strategic planning becomes extensive and deeply involves the owner. During this phase, the owner becomes significantly more active across all aspects of the company's affairs, compared to the disengagement aspect of the preceding phase.

If this growth-oriented strategy proves successful, the III-G company will proceed to Stage IV. In fact, III-G often serves as the initial attempt at growth before a full commitment to a growth strategy. However, if the III-G company encounters obstacles and fails to thrive, the causes of its struggles may be identified in time for it to shift back to III-D. In cases where success remains elusive, retrenchment to the Survival Stage may be a viable option before resorting to bankruptcy or a distress sale.

- Stage IV: Take-Off

Take-off is a critical stage marked by rapid growth and the need to finance that growth. Key challenges include effective delegation and managing cash flow. The organization becomes more decentralized and divisionalized, with competent managers taking on greater responsibilities. Systems become more refined, and both operational and strategic planning are crucial. The owner's role remains significant but may shift from day-to-day operations.

This stage is make-or-break for many businesses. If the owner can rise to the challenges of growth, the company can become a big business. However, if the owner struggles to delegate or manage finances, the company may stall or fail. Often, during this stage, the original management may be replaced by investors or creditors if necessary.

Key Questions: Can the owner delegate effectively to manage rapid growth? Is there sufficient cash flow to support expansion?

- Stage V: Resource Maturity

Resource Maturity is the final stage, where the company focuses on consolidating financial gains and retaining the advantages of its smaller size while enjoying the benefits of a well-established business. The organization is decentralized, staffed with experienced professionals, and equipped with extensive systems. The owner's involvement is minimal compared to earlier stages.

In this stage, the company has reached a level of stability and success that allows it to compete effectively in the market. However, there is a risk of ossification, where the company resists innovation and change. This can be a downfall for large corporations, as smaller, more agile competitors often adapt to changes in the market faster.

Key Questions: Can the company maintain flexibility and an entrepreneurial spirit? Can it eliminate inefficiencies associated with growth?

Conclusion

A company's growth stage determines the management issues it needs to address. Its plans also guide which factors it will have to deal with in the future. Understanding its growth stage and future goals allows managers, consultants, and investors to make better-informed decisions and prepare themselves and their companies for upcoming challenges. While every business is unique in various ways, they all encounter similar problems and undergo significant transformations. That's why being a business owner is both enjoyable and challenging.