5 Growth Stages of a Small Business
As a small business develops it moves through five growth stages each with its distinctive characteristics. Because the transition from one stage to another requires change, it will be accompanied by some crisis or another.
Crises tend to be disruptive and the problems of change can be minimized if the managers are proactive rather than reactive. Prior knowledge of what generates crises and what to expect in each stage will smooth the process of change.
Stage-1 Existence
In this stage, the main problem of the business is obtaining customers and delivering the product or service contracted for. Among the key questions are can we get enough customers, and deliver our product. Or provide services well enough to become a viable business? Can we expand from one key customer to a much broader sales base?
The organization is the 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 non-existent. The owner is the business that performs all the important tasks and is the major supplier of energy, direction, capital, etc.
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. Many such companies never gain sufficient customer acceptance or product capability to become viable.
Stage-2 Survival
In reaching this stage, the business has demonstrated that it is a workable business entity. It has enough customers and satisfies them sufficiently with its products or services to keep them.
The key problem thus shifts from mere existence to the relationship between revenues and expenses. The main issue will be can they generate enough cash flow to stay in the business. Or can we generate enough cash to break even and to cover the repair of our capital assets as they wear out?
In the survival business, the enterprise may grow in size and profitability. Or it may, as many companies do remain at the survival stage for some time, earning marginal returns on invested time and capital. Therefore go out of business when the owner gives up or retires.
Stage-3 Success
The decision facing owners at this stage is whether to exploit the company’s accomplishments and expand. Or keep the company stable and profitable providing a base for alternative owner activities.
In this stage, the owner consolidates the company and marshals resources for growth. The owner takes the cash and the established borrowing paper of the company and risks it all in financial growth.
As the business matures, it and the owner increasingly move apart to some extent because of the owner’s activities elsewhere and to some extent because of the presence of other managers. Other owners choose this route if the company can continue to adapt to environmental changes. It can continue as is be sold or merged at a profit or subsequently be stimulated into growth.
Stage-4 Take off
In this stage, the key problems are how to grow rapidly and how to finance that growth. The most important questions are will there be enough to satisfy the growth of the great demand brings. Or can the owner delegate responsibility to others to improve the managerial effectiveness of a fast growing fast-growing and increasingly complex enterprise?
The organization is decentralized and at least in part, divisionalized usually in either sales or production. The key managers must be very competent to handle a growing and complex business environment. The systems strained by growth are becoming more refined and extensive.
Both operational and strategic planning is being done and involved specific managers. The owner and the business have become reasonably separate yet the company is still dominated by both the owner’s presence and stock control.
Stage-5 Resource Maturity
Companies that have the advantage of size, financial resources, and managerial talent will be a formidable force in the market if they retain their entrepreneurial spirit. Each stage is characterized by an index of size, diversity, and complexity and is described by five managerial factors- managerial style, organizational structure, the extent of formal systems, and the owner’s involvement in the business.
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