Stages of Business Growth
This article presents a condensed overview of the Five Stages of Small Business Growth developed by Neil C. Churchill and Virginia Lewis for an article in the 1983 Harvard Business Review. The five stages are Existence, Survival, Success, Take-off, and Resource Maturity. Not all businesses go through every stage, but depending on your level of ambition it’s a quick read that may help you recognize where you are and how to get to the next level.
At this stage the business is an idea. The owner may or may not have a business plan at this stage, but it is a recommended first step. The owner is working hard to develop a product and or service that customers want. Success at this stage is measured by the development of a customer base that generates enough revenue to offset expenses. Consistent with the term existence, the business is likely doing just that existing. It may generate enough revenue to break even. The owner is experimenting with service offerings and pricing structure that will generate a profit. It is not uncommon in this stage for a business to run at a loss for a period of time. Keeping costs under control is paramount.
Customers at this point are your greatest asset. Customers that refer you to other customers are of even greater value. If you’re able to establish a client base that begins to get you past the break even point you may move on to the next stage; survival. If not, you likely will run out of capital and need to close the doors.
In this stage you have established a service a customer is willing to pay for and an adequate customer base to generate enough revenue to offset your expenses. Going forward the challenge will be to price your services appropriately and generate enough work to earn a profit, so revenue outpaces expenses. Businesses have good times and bad times. You’ll need to begin to develop a reserve during the good times to get you through the eventual bad times. You customer base and reputation has likely grown, and you may need to hire employees to keep up with the demands of a growing customer base.
New challenges come in the form of hiring, training and keeping employees, maintaining equipment, scheduling work, making payroll and managing cash flow. Businesses that eventually advance to the success stage develop systems to manage customer expectations and profitable production as the company grows. In addition, the business will need to find more customers to continue to grow revenue. If successful in this stage, the business begins to thrive, however, this is also where many businesses stall. Typically, the owner is very good at providing the service the customers want, but may not be good at managing a growing a business. Working harder may not be increasing profits, just the amount of time spent working. Moving past this requires the owner to develop business management skills or hire people who assist as needed with financial management, operations, hiring, legal issues, taxes and accounting, risk management, insurance, etc. to get to the next level; success.
In this stage the business has begun to prosper. Systems and processes are in place that guide the business and the owner has been able to delegate control to qualified and trusted employees to run most of the day to day activities. This provides time for the owner to work on refining systems and processes to optimize business growth and profitability.
At this point the owner is receiving a good income from the business. They may choose to pour profits back into the growth of the company or allow the team in place to manage the business while the owner steps away to use profits for funding new ventures. Many entrepreneurs bring businesses to the success stage and then sell to start a new company.
If the goal is to reinvest profits back into the company, this stage opens the door to rapid growth. The success stage has allowed you to develop systems and processes that can be replicated to expand into new markets. The company can bring on and train additional team members and resources to grow the customer base profitably. At this point it is vital that the company has a well-defined business plan guiding growth. Strategies for growth will need to be monitored and refined as the company expands. What may have worked in the earlier stages, may not during rapid growth. Epic growth can become epic fail if it is not managed properly.
Systems may need to be decentralized as processes become more complex. The growth opportunities may require the company to find new funding sources such as venture capital partners or other forms of equity investment to keep up with demand. Your small business may begin to transform into a big company.
The expansion of the take off stage cannot last forever, eventually markets become saturated. The challenge here is to stabilize the company and remain profitable as growth slows. The energy of rapid growth will need to be replaced with new drivers to keep team members inspired. Customization of processes and systems will need to yet again be refined to meet the needs of this new stage for the company.
The company may begin to look at new services and or at purchasing new businesses to increase growth and revenues through different avenues. Departments may be formed to assist with budget development and management. The company will also need to keep fine tuning processes and products to keep up with changes in the industry and customer needs. As a large company you are always at risk from smaller nibbler companies like the one you were in during the success stage. One strategy is to purchase these companies to gain access to their innovations and manage competition.
The intent of the article is to inspire you to think about your current stage of growth and begin planning for your next. Recognizing the stage your business is in will help deal with the challenges and leverage opportunities that come with growth.
Written by: Jim Skiera