5 Stages of Small Business GrowthDECEMBER 2016

Contents

1. What it is

2. Stages overview

3. Takeaways

What it is

There are common problems for small businesses o Harvard Business Reviewo Neil C. Churchill & Virginia L.

Lewis

Arise at similar development stages

Similarities organized into framework

Builds understanding of nature, characteristics & problems

Range -- corner dry cleaner to $20M software (40% growth rate)

Framework helps assess challenges o New computer systems

upgrades, train managers

Business Stages

1. Existence

2. Survival

3. Success

4. Take-Off

5. Resource Maturity

What It Is

Anticipate key requirements at various points o Require time commitment for startup

ownerso Need for delegation & changing

manager roles o Companies’ becoming larger & more

complex

Evaluate impact of government regs & policies

Aid accountants & consultantso Diagnose & matching solutions to

smaller, relevant enterpriseso Strategic planning for 30-year-

old,100-person manufacturing coo Budgeting = coordination & operating control

o Cash flow planning for six-month-old and 20-person business

Researchers identified 5 stages

What it is

Existence

Main problems◦ Customer acquisition

◦ Product delivery

Key challenges◦ Attract enough customers

◦ Delivery products

◦ Provide good service

◦ Expand > one key customer

◦ Cover cash demands

Survival

Workable business entity◦ Enough customers

◦ Sufficient customer satisfaction

Shift from existence ◦ Revenue & expense relationship

Key challenges◦ Generate enough break even cash

◦ Cover expense repairs/replace capital assets

◦ Minimal cash flow to survive

◦ Finance growth to sufficient size & earn ROI

Survival

Simple organization

Limited employees managed◦ Sales director◦ Foreman

Managers◦ No independent decisions◦ Carry out defined orders

Systems◦ Minimal◦ Formal plan = cash forecasting

About survival

Business = owner

Survival

Might grow next phase

Or remain at survival stage◦ Marginal ROI

End when owner◦ Surrenders

◦ Retires

Such businesses◦ “Mom and pops”

◦ Manufacturing with limited sales

◦ May be sold or fail

Success

Challenges◦ Exploit accomplishments &

expand◦ Keep stable & profitable ◦ Base for owner’s other

activities

Questions◦ Use company as growth

platform◦ Support means for owners

◦ Disengage partially or completely

◦ Start new enterprises◦ Pursue politics or hobbies◦ Business status quo

Success Substage III-DSuccess-Disengagement Substage

◦ True economic health

◦ Sufficient size & product penetration = success

◦ Average or above average profits

◦ Stay at substage

◦ Environmental change doesn’t ruin niche?

◦ Ineffective management reduce competitiveness?

◦ Functional managers assume duties

◦ Competent, acceptable quality, upward potential v. goals

Plentiful cash & avoiding drain & protect rainy day

Success Substage III-DProfessional managers on board

◦ Controller & production manager

Basic financial, marketing & production systems

Operational planning & support functional delegation

Owner/functional managers monitor strategy

◦ Maintain status quo

Business & owner start to separate◦ His other actions supplant◦ Other managers’ presence &

roles

Success Substage III-D

Many companies stay here forever

◦ Niche no support growth especially

◦ Professional services businesses

◦ Small & medium sized in slow growth communities

Choice route

◦ Adaptable to environmental changes

◦ No adapt = end/marginally surviving

◦ Continue, sell or merged at profit

◦ Growth stimulus

Success Substage III-D

Many companies stay here forever

◦ Niche no support growth especially◦ Professional services businesses

◦ Small & medium sized in slow growth communities

Choice route

◦ Adaptable to environmental changes◦ No adapt = end/marginally surviving

◦ Continue, sell or merged at profit

◦ Growth stimulus

Substage III-G•Profitability pace with cash demands

•Develop managers to meet business needs

•Hire managers with future perspective

•Critical install systems for coming needs

•Operational planning• Form of budget• Extensive strategy planning & owner

invested

•Ownership• Deeply involved in strategy • More active in all company affairs v.

disengagement

Take-Off

Key problem◦ Grow rapidly◦ Finance growth

Challenges◦ Delegation◦ Cash

Delegation◦ Responsibly◦ Improve managerial

effectiveness◦ True delegation & performance

controls◦ Willingness to make mistakes◦ Delegation v. abdication

Take-Off

Cash

Enough vs. growth demands◦ Tolerate high debt-equity ratio

◦ Cash flow not eroded

◦ Bad expense controls

◦ Ill-advised investments from impatience

Take-Off

Decentralized organization

Divisionalized sales/production

Key managers = very competent

◦ Handle growing & complex environment

Systems, growth strained, become

◦ More refined & extensive

Operational & strategic planning

◦ Involves specific managers

Take-OffOwner & business separate reasonably

Dominated by owner’s presence & stock control

Pivotal point◦ Owner rises financially & operationally

◦ Becomes big business◦ Sold profitably, if owner recognizes limits soon

Growth achievement◦ Original management replaced on own/or not◦ Voluntarily or involuntarily

Retrenching◦ Continue as successful earlier stage company◦ Fall to Survival/possibly fail

MaturityGreat concerns

◦ Consolidate & control financial gains v. rapid growth

◦ Retain small size advantages◦ Response flexibility◦ Entrepreneurial spirit

Expand management force = eliminate growth ineffectiveness

Professionalize tools = budgets, strategic planning, MBO, cost systems

◦ Retain entrepreneurial qualities◦ Decentralized management, full

staffed & experienced

Systems extensive & well developed

Owner & business separate, financially & operationally

What It Is

Anticipate key requirements at various points o Require time commitment for startup

ownerso Need for delegation & changing

manager roles o Companies’ becoming larger & more

complex

Evaluate impact of government regs & policies

Aid accountants & consultantso Diagnose & matching solutions to

smaller, relevant enterpriseso Strategic planning for 30-year-

old,100-person manufacturing coo Budgeting = coordination &

operating controlo Cash flow planning for six-month-old

and 20-person business

5 Stages of Small Business GrowthDECEMBER 2016