Although different small businesses have various size and capacity in growth, and operating structures and management systems, they experience similar problems in their development stages.
Stage I Existence
In this stage, the main goals of the business are attracting customers and delivering the product or service. And the business should maintain enough cash flow to afford their start-up demand. As a start-up business, the operating system would be quite direct. The owner directly supervises subordinates, who should have adequate competence. There may not be a clear management system. Workers will take whatever work they have to accumulate the customer base and have more experience. The main goal is to stabilize. Absolutely, there will be some industries have higher enter barrier such as retail stores and high-tech manufacturers. The start-up business in these fields may be running out of money or be purchased by other companies. Those businesses that survived will go to the next stage.
Stage II Survival
In this stage, the businesses are qualified for a workable entity. They maintained the customer base either by good products and satisfying services. From now on, the business would mainly focus on profit. On one hand, having enough profit means the business is on the right track. On the other hand, having enough profit will secure the cash flow for the business to operate and even expand the scale. The operating system is still simple and direct. The company may still have a limited number of employees who will not have the power to make independent decisions. Some businesses may remain at the survival stage for some time, earning marginal returns on invested time and capital. Then the owner will give up or fail completely and disappear. The other businesses will go to the next stage.
Stage III Success
In this stage, the owners need to make decisions about businesses’ future development — maintain companies’ current steady profitability or expand their size. Then the next question is to use the company as a platform for growth or as a means of support for the owners as they completely or partially disengage from the company. Some businesses choose disengagement. After success disengagement, the company has steady profitability and strong enough scale, and a clear operating system. They are able to maintain the status. The other business owners select to generate the resource and realize continuous growth. If it is successful, these companies will go to the next stage.
Stage IV Take-off
In this stage, the businesses mainly focus on how to grow rapidly and how to finance the growth. Cash flow will be the first problem. This requires owners to tolerate a high debt-equity ratio. Next, the operating system gradually becomes complete. The owners have already disengaged with the business, yet the company is still dominated by the owners’ presence and stock control. Often the entrepreneur who founded the company and brought it to the success stage is replaced by the company’s investors or creditors. If the company fails, it may retrench and continue as a successful and substantial company at a state of equilibrium. Or it may drop back to stage III.
Stage V Resource Maturity
In this stage, the biggest concerns are, first, to consolidate and control the financial gains brought on by rapid growth and, second, to retain the advantages of small size. The company in this stage has human resources and financial resources to engage in detailed operational and strategic planning. The management is decentralized. Systems are extensive and well developed. The owner and the business are quite separate both finance and operation. If it can preserve its entrepreneurial spirit, it will be a formidable force in the market. If not, it may enter a sixth stage – ossification. The sixth stage lack of innovative decision making and the avoidance of risks. They will realize the environmental change later than their competitors.
Author: Huilin Liu
The Five Stages of Small Business Growth
Retrieved from: https://hbr.org/1983/05/the-five-stages-of-small-business-growth