Five Developmental Stages of Your Small Business

02-September-2012
02-September-2012 21:59
in Small Business Strategy
by Colin Smith

Small business owners are generally a pretty competitive group of people.  They like to know how they compare to the competition in their marketplace and where they are in relation to where they should or could be.  It’s hard to make a comparison from the outside looking in.  In my experience, the most fruitful question a small business owner can ask is “are we growing”?  If small businesses aren’t growing, they are deteriorating.  Value is being destroyed and it may be time to change tactics or change businesses.  An important supplementary question is how do I know if we are growing?  You might think that this is obvious but an upturn in turnover might have nothing to do with improvements in the business.  Sometimes, the numbers can grow in spite of the business.

The academics would have us believe that small businesses pass through five distinct phases of development, each with its own characteristics, objectives and risks.  Each has a typical management style as well.  A Business owner can know how they are progressing by identifying themselves in this schema.  It’s not our intention to suggest that it is right or wrong to be at Stage 1 instead of Stage 5. The key is to understand where you are and what you need to do to get to the next stage, if that's your goal.  So, at what stage is your business?

Stage 1: Existence

Characteristics

In Stage 1, the business owner is essentially the business. They perform all the important tasks and provide the lion's share of the time and energy to run the business. Organization in Stage 1 is simple: only a few employees or family members do the work. Minimal or no formal systems exist, and decisions are often made ad hoc. There is often no formal strategy at this stage other than to do whatever is necessary to keep the business alive.

Stage Objectives 

Among the challenges a business owner faces at start-up are attracting customers and delivering products and services well enough for the business to become viable. As the business grows, it must then seek to expand its customer base and generate enough cash to cover the financial demands of the start-up phase.

Risks

The dangers of failure are greatest at this stage. The main risk is failure to attract enough customer acceptance to become viable. The result of failure is that the owner is forced to close the business when the start-up capital runs out. Selling at this stage invariably means selling at a loss.

Just about every small business owner I have ever worked with overestimates sales and the timing of sales. They suffer from "sales hallucination" with their projections.  This optimism would be a good thing if it wasn’t so dangerous.  Once the expenses outrun sales and the cash runs out, that's it. The reason that 90% of small businesses fail is they are undercapitalized. Thus thorough, realistic business plans are a crucial component of success in Stage 1.

Stage 2: Survival

Characteristics

In this stage, the management style is the same as in Stage 1: the owner still performs all or most of the important tasks. The practice also still has a minimal number of employees who are under the direct supervision of the owner. The extent of formal systems is minimal, and decision-making is basically ad hoc. The major strategy remains survival, and the owner is still essentially the business

Stage Objectives

At this stage, the business has demonstrated that it is a viable entity. One of the main challenges is maintaining capital assets, generating a consistent profit and enough cash to cover the repair and replacement of capital assets as they wear out.  In Stage 2, cash is king. The business must be able to generate enough cash to stay in business and finance growth to a size that is sufficiently large to earn an economic return on assets and labour.

Risks

In survival stage, the business is probably earning only small returns on invested time and capital. This can cause the owner to give up early and exit their industry, sometimes selling the practice at a slight loss or small gain.   The majority of small businesses don’t pass this stage. The owner can manage to eek out a living for years, but the business never really approaches its full potential.

Stage 3: Success

Characteristics.

In the success stage, the business is large enough to have functional managers who relieve the owner of handling most or even all duties. Basic financial, marketing, and distribution systems exist, and planning in the form of budgets, which supports functional delegation. The major strategy is to maintain profitability as market and industry conditions evolve over time.

It is at this point that the business owner must decide either to maintain the status quo or to grow. If growth is the choice, the owner is responsible for marshalling resources to grow through such means as increased marketing and sales and/or new offices and satellite locations. Managers must be on-board who will embrace this strategy, sometimes entering into partnerships with third parties or even other businesses.  Alternatively, the owner may decide on an exit plan for the business.

Stage Objectives

At Stage 3, the business is viable and has sufficient size and market penetration to ensure solid, above-average profits. Your business can stay at this stage indefinitely unless market or industry changes destroy your niche, or ineffective management erodes the businesses competitive advantages.  The owner, then, is faced with a decision to expand the business or to keep it stable and profitable, often in order to provide an income base for the owner's next entrepreneurial project.

Risks

If the commitment to small business development is weak or the strategy poorly executed, the success stage may well simply focus on maintaining the current position of the business. This often means a return for the business back to the survival stage, which may ultimately produce an exit action or insolvency. Both success with no aspiration to grow further or success with a growth plan involve risk.  The major strategies with the growth choice should be to put investment ahead of revenue by adding key team members and considering the addition of other locations as well.

Stage 4: Take-off

Characteristics.

The owner's management style is now one of delegation of responsibility to strategically recruited employees. These key employees must be competent to handle a growing and complex business. The business is now divided into functional areas, such as operations, marketing and finace and its formal systems in each functional area are maturing. Strategic and operational planning is now performed by the key employees, often without much involvement from the business owner..

Stage Objectives

Perhaps the main challenge at this stage is how to grow rapidly and finance rapid growth. The business must have the right people, including a strong manager who has relieved the owner of day-to-day operating decisions. Management must then be committed to continuing investment ahead of revenue and to determining when to add additional key strategic personnel.  At this point, the owner may still choose to sell the business at a substantial profit. But assuming the major strategy is to grow the practice, enough cash must be generated to satisfy the demands of ongoing growth.

Risks

There are new dangers at take-off stage: growing too fast,  running out of cash or an inability to delegate effectively enough to make the large business run smoothly. This usually results in an unwanted forced exit or retrenching to a previous stage.

Stage 5: Resource Maturity

Characteristics.

At this point, the management style has evolved to a hierarchy with professional managers and staff. The owner and the business have become almost completely separate. The formal systems are extensive and sophisticated. The major strategy is to optimize return on investment.

Stage Objectives

The key challenge in this stage is to consolidate and control the financial gains due to rapid growth. Additionally, a choice must be made to retain the advantages of its relatively small size and entrepreneurial spirit, such as the flexibility to adapt and evolve in the face of changes in the marketplace or industry in which your small business operates. The challenge of when and how to expand the management staff also remains.

Risks

Dangers lurk at every stage, including this one. One of the main ones is "ossification".  This is marked by lack of innovation and the avoidance of risk. Standing still is a recipe for failure in today's rapidly changing and competitive market, so growth must be continual, or your small business is exposed to the risk of folding, selling, merging, or retrenching to a previous stage.

Conclusion

As your small business proceeds through the various stages, you  must continually be evaluating your personal and business goals, your own managerial and operational abilities (such as sales and marketing), your strengths and weaknesses, and likes and dislikes. Are you willing to delegate? Do you have the ability to look beyond the present and match the strengths and weaknesses of the business to an effective strategy for the achievement of your goals?

Small Business Owners must also honestly evaluate their businesses financial resources, including available cash and borrowing power. Does the business have the depth and quality of management and staff to succeed and grow? Are the systems resources adequate and efficient enough to provide the information needed to plan and track results and opportunities and to plan future direction?

If you can manage the stages correctly, you can enjoy great, sustained success and look forward to a very prosperous ending to a productive career in your chosen field.  If you desire this outcome for you and your business but aren't sure how you can make it happen, call Continuous Business Planning today and let us help you take your business from wherever you might be today to wherever you want to go.

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