Great leaders don’t wait for predictable crises to occur, they avoid them by acting before they happen.
Understanding the common problems associated with growing a business is an important topic for both aspiring and struggling small business owners.
The purpose of this article is to help small business owners, investors, advisors and managers anticipate common problems experienced when growing a business, so they can best direct the organization’s energies and resources to establish a thriving business consistent with the owner’s goals and objectives for the business.
In May of 1983, Neil C. Churchill and Virginia L. Lewis published “The Five Stages of Small Business Growth” in the Harvard Business Review, a paper that challenged accepted theories about small business growth, which only considered the size of a growing business. Churchill and Lewis proposed five- (5) stages of small business growth: (i) “existence,” (ii) “survival,” (iii) “success,” (iv) “take-off,” and (v) “resource maturity.” Each stage, which is achieved based on a combination of attributes, such as size, diversity of operation, and business complexity, requires different organizational dynamics with regard to: (a) management style, (b) organizational structure, (c) systems development and (d) owner involvement.
During the first stage of growth, the “existence” stage, the focus of the business is on three- (3) things: generating cash, expanding the business’ customer base, and delivering quality products and services. The company’s focus is proving its business model. During the “existence” stage, the owner is extremely “hands-on” and directly supervises subordinates. Systems are informal and rudimentary. The owner is ostensibly the business. To move to the next stage, the business owner(s) must not only have a sound business idea, but also be able to meet the demands of the business, which consumes tremendous amounts of the owner’s time, finances, and energy. The majority of aspiring business owners, unfortunately, cannot meet these demands and the business does not survive. Businesses that continue to grow move onto the “survival stage.”
When a business has reached the “survival stage,” it has a sufficient number of satisfied customers. The main challenge of the business becomes managing its revenues and expenses to meet the company’s cash flow needs, break-even sales, requirements for capital expenditures and ability to fund its further growth.
The organization’s structure and systems remain basic in nature. The company may have a few employees, but the owner must still be very involved in the business and the reputation of the business continues to be synonymous with the owner. The focus of business planning is on cash flow forecasting.
A good example of a survival stage business is a small “mom and pop” business. It may generate an adequate return, but if the business is not scalable it will remain a “mom and pop” business. For some business owners, being a “mom and pop” business was their objective for starting the business, but most business owners are looking for more.
The third stage of business growth is the “success” stage. Characteristics of a small business in the third stage of its growth is one of stability and profitability. Cash flow is good, established systems are in place, and the owner has delegated duties, functions and responsibilities to competent managers. The organization’s focus is on strategies and budgets to maintain consistent business performance.
Successful business owners are presented with a choice: to enjoy the fruits of their labors and focus on lifestyle choices, or to continue to grow the business. A successful franchise with an absentee owner is an example of the former.
If the owner desires to grow a business beyond the “success” stage, the business has entered the fourth stage of a business known as the “take-off” stage. Challenges for a business that is “taking off” is sustainable growth and the best way to finance that growth. Organizational traits of a small business that reaches the “takeoff” stage of development are sound systems, procedures & controls, highly competent managers, and decentralized structures. Sales, financial, operational and strategic plans drive the organization. While the owner’s presence in the organization remains significant because the business owner still holds the majority of the stock, the owner’s role becomes less vital to the performance of the business.
Best-selling authors of The Founder’s Mentality: How To Overcome The Predictable Crises of Growth, Chris Zook and James Allen, argue that a founder should remain engaged with a relentless focus on front line performance, an unambiguous owner mindset, and an insurgent’s clear mission and purpose, as these are key elements to sustainable growth and exceptional business performance.
Often the founder of the business isn’t capable of scaling the business and the company’s investors and/or creditors replace the founder. If the founder or a successor is not able to scale the business, the business will try to maintain the status quo, but it must be able to successfully adapt to changes in the marketplace. If not, it could regress. Actually, this can happen at any point of the business’ trajectory. If the business is able to scale, however, it has reached the fifth and final stage of small business growth: “resource maturity.”
When a business has reached the final stage of small business growth, it enjoys the advantages of size, a strong balance sheet, and exhibits best practices with regard to its systems, procedures and controls. The company has the resources to engage in detailed strategic, financial and operational planning, and is run by a talented management team. At this point in the company’s evolution, the separation between the owner and the business is very clear.
If the company can maintain its entrepreneurial spirit and leadership position it will become entrenched in the marketplace. Today’s tech companies, for example, appear to be “resource mature” businesses that are able to grow without limits. If the business cannot maintain its leadership position in the marketplace, however, it will slip into what the authors describe as the “ossification” stage, usually characteristic of a mature business that isn’t innovative, avoids risks, and is resistant to change.
In sum, Churchill’s and Lewis’ five stages of small business growth provide important insights to owners, consultants, investors and managers about where a business is, where it’s going, and the best way to get where it wants to go. To aid in the analysis of the most important characteristics influencing small business growth the authors have identified the following eight- (8) ownership and business factors:
Ownership Factors –
1. The owner’s goals and objectives for starting the business;
2. The owner’s business prowess and acumen when it comes to things like inventing, sales, marketing, production, leadership, management, etc.;
3. The owner’s ability to effectively delegate to others; and
4. The owner’s strategic thinking when it comes to seeing into the future and positioning the resources of the business to meet the owner’s goals and objectives.
Business Factors –
1. Financial resources, including its available cash and ability to borrow;
2. Talent acquisition as it relates to the number, depth, and quality of its managers and front-line supervisors;
3. The business’ planning, information and control systems; and
4. The business’ resources as it relates to things like technology, manufacturing & distribution processes, supplier relations, market share, customer focus, which collectively comprise the company’s unique selling proposition (USP.)
As a business begins its growth trajectory, the previously mentioned ownership factors are critical, but then decrease in terms of importance, while the importance of the above business factors increase. The reliance on the owner is paramount to the success of a growing organization, but as the company scales the owner’s delegation, leadership, and management abilities become more important.
During the “success” stage, the owner becomes torn between kicking back and enjoying the company’s success and aggressively scaling the business. Cash is most critical at the start of the business and then again when it scales. As the business expands, the success of the business becomes much more reliant on business factors. The importance of people, planning, and process increases as the business grows.
Critics of models like the five stages of small business growth argue that they are great for teaching concepts, but real life tests our abilities to manage the growth of a small business in practice.
In practice, flexibility and adaptability are essential at every stage of a small business’ growth. Different businesses can take different paths and there are infinite combinations of variables that are mixed, matched, layered, and timed differently; albeit, the five stages of small business growth provide leaders, advisors, investors and managers with framework to assess and adjust the owner’s and business’ focus as a small business grows.