Stages of Growth

Understanding the small business growth stagesThe five stages that small businesses may go through: existence, survival, success, take-off, and resource maturity. can be invaluable as a framework for anticipating resource needs and problems, assessing risk, and formulating business strategies (e.g., evaluating and responding to the impact of a new tax). However, the growth stages will not be applicable to all small businesses because not all small businesses will be looking to grow. Business success is commonly associated with growth and financial performance, but these are not necessarily synonymous—especially for small businesses. People become business owners for different reasons, so judgments about the success of their businesses may be related to any of those reasons.B. Kotey and G. G. Meredith, “Relationships among Owner/Manager Personal Values, Business Strategies, and Enterprise Performance,” Journal of Small Business Management 35, no. 2 (1997): 37–65. A classic study by Churchill and Lewis identified five stages of small business growth: existence, survival, success, take-off, and resource maturity.Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. Each stage has its own challenges.

• Stage I: ExistenceA business is up and running, and the strategy is to stay alive..Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. This is the beginning. The business is up and running. The primary problems will be obtaining customers and establishing a customer base, producing products or services, and tracking and conserving cash flow.Darrell Zahorsky, “Find Your Business Life Cycle,” accessed October 7, 2011, sbinformation.about.com/cs/marketing/a/a040603.htm. The organization is simple, with the owner doing everything, including directly supervising a small number of subordinates. Systems and formal planning do not exist. The company strategy? Staying alive. The companies that stay in business move to Stage II.
• Stage II: SurvivalA business is viable, and the focus shifts to revenues and expenses..Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. The business is now a viable operation. There are enough customers, and they are being satisfied well enough for them to stay with the business. The company’s focal point shifts to the relationship between revenues and expenses. Owners will be concerned with (1) whether they can generate enough cash in the short run to break even and cover the repair/replacement of basic assets and (2) whether they can get enough cash flow to stay in business and finance growth to earn an economic return on assets and labor. The organizational structure remains simple. Little systems development is evident, cash forecasting is the focus of formal planning, and the owner still runs everything.
• Stage III: SuccessA business is economically healthy. The owners are considering leveraging the company for growth or using the company as a means of support while disengaging..Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. The business is now economically healthy, and the owners are considering whether to leverage the company for growth or consider the company as a means of support for them as they disengage from the company.Shivonne Byrne, “Empowering Small Business,” Innuity, June 25, 2007, accessed October 7, 2011, innuity.typepad.com/innuity_empowers_small_bu/2007/06/five -stages-of-.html. There are two tracks within the success stage. The first track is the success-growth substageAn owner risks all resources in financing growth., where the small business owner pulls all the company resources together and risks them all in financing growth. Systems are installed with forthcoming needs in mind. Operational planning focuses on budgets. Strategic planning is extensive, and the owner is deeply involved. The management style is functional, but the owner is active in all phases of the company’s business. The second track is the success-disengagement substageAn owner’s operational duties are assumed by managers. The focus is on maintaining the status quo., where managers take over the owner’s operational duties, and the strategy focuses on maintaining the status quo. Cash is plentiful, so the company should be able to maintain itself indefinitely, barring external environmental changes. The owners benefit indefinitely from the positive cash flow or prepare for a sale or a merger. The first professional managers are hired, and basic financial, marketing, and production systems are in place.
• Stage IV: Take-offA business becomes increasingly complex. The owner must decide how to grow rapidly and finance growth..Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. This is a critical time in a company’s life. The business is becoming increasingly complex. The owners must decide how to grow rapidly and how to finance that growth. There are two key questions: (1) Can the owner delegate responsibility to others to improve managerial effectiveness? (2) Will there be enough cash to satisfy the demands of growth? The organization is decentralized and may have some divisions in place. Both operational planning and strategic planning are being conducted and involve specific managers. If the owner rises to the challenges of growth, it can become a very successful big business. If not, it can usually be sold at a profit.
• Stage V: Resource MaturityA business has demonstrated success. There is a strong chance of continued growth and success if entrepreneurial spirit can be maintained..Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,” Harvard Business Review 61, no. 3 (1983): 30–44, 48–50. The company has arrived. It has the staff and financial resources to engage in detailed operational and strategic planning. The management structure is decentralized, with experienced senior staff, and all necessary systems are in place. The owner and the business have separated both financially and operationally. The concerns at this stage are to (1) consolidate and control the financial gains that have been brought on by the rapid growth and (2) retain the advantage of a small size (e.g., response flexibility and the entrepreneurial spirit). If the entrepreneurial spirit can be maintained, there is a strong probability of continued growth and success. If not, the company may find itself in a state of ossificationIf innovation is lacking, risk aversion is prevalent, and the entrepreneurial spirit is gone, a business may exhibit stalled or halted growth.. This occurs when there is a lack of innovation and risk aversion that, in turn, will contribute to stalled or halted growth. These are common traits in large corporations.

Organizational Life Cycle

Superimposed on the stages of small business growth is the organizational life cycle (OLC)The four stages that organizations go through in their development: birth, youth, midlife, and maturity., a concept that specifically acknowledges that organizations go through different life cycles, just like people do.Carter McNamara, “Basic Overview of Organizational Life Cycles,” accessed October 7, 2011, http://managementhelp.org/organizations/life-cycles.htm. “They are born (established or formed), they grow and develop, they reach maturity, they begin to decline and age, and finally, in many cases, they die.”“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. The changes that occur in organizations have a predictable pattern,Robert E. Quinn and Kim Cameron, “Organizational Life Cycles and Shifting Criteria of Effectiveness: Some Preliminary Evidence,” Management Science 29, no. 1 (1983): 33–51. and this predictability will be very helpful in formulating the objectives and strategies of a small business, altering managerial processes, identifying the sources of risk, and managing organizational change.“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html.^,Yash P. Gupta and David C. W. Chin, “Organizational Life Cycle: A Review and Proposed Directions for Research,” The Mid-Atlantic Journal of Business 30, no. 3 (December 1994): 269–94. Because not all small businesses are looking to grow, however, it is likely that many small companies will retain simple organizational structures.

For those small businesses that are looking to grow, the move from one OLC stage to another occurs because the fit between the organization and its environment is so inadequate that either the organization’s efficiency and/or effectiveness is seriously impaired or the organization’s very survival is threatened. Pressure will come from changes in the nature and number of requirements, opportunities, and threats.“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html.

Four OLC stages can be observed: birth, youth, midlife, and maturity.Carter McNamara, “Basic Overview of Organizational Life Cycles,” accessed October 7, 2011, http://managementhelp.org/organizations/life-cycles.htm. In the birthA business is small and has a simple organizational structure; the owner does everything. stage, a small business will have a very simple organizational structure, one in which the owner does everything. There are few, if any, subordinates. As the business moves through youthA business is medium-sized. It has some departments, a few rules, and is prebureaucratic. and midlifeA business has many departments, is bureaucratic, and has policy and procedure manuals., more sophisticated structures will be adopted, and authority will be decentralized to middle- and lower-level managers. At maturity, firms will demonstrate significantly more concern for internal efficiency, install more control mechanisms and processes, and become very bureaucratic. There are other features as well that characterize the movement of an organization from birth to maturity, which are summarized in Table 1.6 "Organizational Life Cycle Features".

A small business will always be somewhere on the OLC continuum. Business success will often be based on recognizing where the business is situated along that continuum and adopting strategies best suited to that place in the cycle.

Industry Life Cycle

The industry life cycle (ILC) is another dimension of small business evolution, which needs to be understood and assessed in concert with the stages of small business growth and the OLC. All small businesses compete in an industry, and that industry will experience a life cycle just as products and organizations do. Although there may be overlap in the names of the ILC stages, the meaning and implications of each stage are different.

The industry life cycleThe life stages that characterize an industry. refers to the continuum along which an industry is born, grows, matures, and eventually experiences decline and then dies. Although the pattern is predictable, the duration of each stage in the cycle is not. The stages are the same for all industries, but every industry will experience the stages differently. The stages will last longer for some and pass quickly for others; even within the same industry various small businesses may find themselves at different life cycle stages.“Industry Life Cycle,” Inc., 2010, accessed June 1, 2012, www.inc.com/encyclopedia/industry-life-cycle.html. However, no matter where a small business finds itself along the ILC continuum, the strategic planning of that business will be influenced in important ways.

According to one study, the ILC, charted on the basis of the growth of an industry’s sales over time, can be observed as having four stages: introduction, growth, maturity, and decline.“Industry Life Cycle,” Inc., 2010, accessed June 1, 2012, www.inc.com/encyclopedia/industry-life-cycle.html. The introductionAn industry is in infancy; significant cash is required, and profits are usually negative. stage“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. finds the industry in its infancy. Although it is possible for a small business to be alone in the industry as a result of having developed and introduced something new to the marketplace, this is not the usual situation. The business strategy will focus on stressing the uniqueness of the product or the service to a small group of customers, commonly referred to as innovators or early adopters. A significant amount of capital is required. Profits are usually negative for both the firm and the industry.

The growthAn industry in which significant capital is required, economies of scale kick in, and many firms are profitable. stage“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. is the second ILC stage. This stage also requires a significant amount of capital, but increasing product standardization may lead to economies of scale that will, in turn, increase profitability. The strategic focus is product differentiation, with an increased focus on responding to customer needs and interests. Intense competition will result as more new competitors join the industry, but many firms will be profitable. The duration of the growth stage will be industry dependent.

The maturityA business is very large, very bureaucratic, and top-management heavy. An industry in which there is competition from late entrants and where the marketing focus is on differentiation. stage“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. will see some competition from late entrants that will try to take market share away from existing companies. This means that the marketing effort must continue to focus on product or service differentiation. There will be fewer firms in mature industries, so those that survive will be larger and more dominant. Many small businesses may move into the ranks of midsize or big businesses.

The declineAn industry that is triggered by product or service innovation. The industry becomes obsolete, sales suffer, and many companies leave. stage“Organizational Life Cycle,” Inc., 2010, accessed October 7, 2011, www.inc.com/encyclopedia/organizational-life-cycle.html. occurs in most industries. It is typically triggered by a product or service innovation that renders the industry obsolete. Sales will suffer, and the business goes into decline. Some companies will leave the industry, but others will remain to compete in the smaller market. The smaller businesses may be more agile for competing in a declining industry, but they will need to carefully formulate their business strategies to remain viable.