Five Stages of Business Growth

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This document introduces a framework for entrepreneurs to use when building and navigating their business from a nascent, startup state to an enterprise with a global footprint. This framework is based on the fact that all businesses experience common problems that arise at similar stages in their development.

Familiarity with the Five Stages of Business Growth allows the business owner and business consultant to develop invaluable insights, including:
*Knowing what to focus on at what stage
*Appropriate management style at each stage
*Anticipation of key challenges at various points
*Critical success factors through the company?s progression
*Involvement of owner at various stages
*Evaluation of impact from governmental regulations and policies

This presentation also includes case examples.

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Five Stages of Business Growth

  1. 1. Business Framework Five Stages of Business Growth This framework around small business growth is based on the fact that all businesses experience common problems that arise at similar stages in their development. Familiarity with this concept allows the business owner to attain invaluable insights. Includes case examples. Find our other documents at http://flevy.com/seller/learnppt
  2. 2. 3 Contents • Executive Summary • Stages of Small Business Growth - Existence - Survival - Success - Take Off - Resource Maturity • Critical Success Factors - Cash - Owner’s Abilities - Strategic Planning - Key Management Factors • Additional Considerations • Case Examples
  3. 3. 5 Each stage of growth is characterized by a different impetus to growth and threatened by a different crisis Five Stages of Small Business Growth – Overview As a company evolves through each stage, it is critical for the owner to know when to give up control and delegate responsibilities. STAGE I Existence STAGE II Survival STAGE III Success STAGE IV Take Off STAGE V Resource Maturity  Growth achieved through creativity  Open to crisis of leadership  Growth achieved through direction  Open to crisis of autonomy  Growth achieved through delegation  Open to crisis of control  Growth achieved through coordination  Open to crisis of bureaucracy  Growth achieved through collaboration  Open to various forms of crises Age of Company YOUNG MATURE Size and Complexity SMALL LARGE Source: Churchill & Lewis, The Five Stages of Small Business Growth, Harvard Business Review
  4. 4. 7 Contents • Executive Summary • Stages of Small Business Growth - Existence - Survival - Success - Take Off - Resource Maturity • Critical Success Factors - Cash - Owner’s Abilities - Strategic Planning - Key Management Factors • Additional Considerations • Case Examples
  5. 5. 9 The focus of businesses in Stage II, Survival, is to optimize cash flow Stage II – Survival STAGE I Existence STAGE II Survival STAGE III Success STAGE IV Take Off STAGE V Resource Maturity OVERVIEW • Reaching this stage demonstrates that the business is a workable business entity • Its value proposition and business model have been tested—it has customers and satisfies them sufficiently with its products or services to retain them • The key problem will shift from mere existence to the relationship between revenues and expenses—i.e. cash flow • Some businesses can stuck in this stage—they earn marginal returns on invested time and capital; eventually, they go out of business when the owner gives up, or retires, or sells it (usually at a slight loss) KEY QUESTIONS & CHALLENGES • In the short run, can we generate enough cash to break even and to cover the repair or replacement of our capital assets as needed? • Minimally, can we generate enough cash flow to stay in business and to finance growth to a size that is sufficiently large, given our industry and market niche, to an economic return on our assets and labor? EXAMPLES • ―mom and pop‖ stores (example of businesses stuck in this stage) MANAGEMENT STYLE Supervised supervision— limited number of employees supervised by a sales manager or general foreman STRATEGIC FOCUS Survival—optimize cash flow ORGANIZATIONAL STATE STATE OF SYSTEMS & PROCESSES Systems development is minimal—formal planning consists of cash forecasting, at best BUSINESS & OWNER Owner is still synonymous with the business Owner Business
  6. 6. 11 The fourth stage of Growth, Take Off, is where a small business grows into a medium or enterprise-size company Stage IV – Take Off STAGE I Existence STAGE II Survival STAGE III Success STAGE IV Take Off STAGE V Resource Maturity OVERVIEW • The focus in this stage is to grow rapidly and finance this rapid growth • Growth is usually a combination of organic and inorganic (i.e. acquisitions), which may require significant financing • This is pivotal junction in the company’s life • If the owner is successful, the company can grow into a big business • If not, it is usually sold at a profit, assuming the owner recognizes his or her limitations soon enough • The management team often changes from the previous stage—it takes a different mindset and skill set to be successful in this stage than the previous • In fact, usually, the original founder/entrepreneur is replaced (voluntarily or involuntarily) by the company’s investors or creditors with someone may experienced in running a larger scale enterprise KEY QUESTIONS & CHALLENGES • Can the owner delegate responsibility to others to improve the managerial effectiveness of a fast growing and increasingly complex enterprise? • Will there be enough cash to satisfy the great demand growth brings (which often requires a willingness of the owner to tolerate a high debt-to-equity ratio) EXAMPLES • (2010 examples) Facebook, Zynga MANAGEMENT STYLE` Divisional—organization is de-centralized, usually in sales or production STRATEGIC FOCUS Growth ORGANIZATIONAL STATE STATE OF SYSTEMS & PROCESSES Systems are becoming more refined and extensive, both operational and strategic planning are being done and involve specific managers BUSINESS & OWNER Owner Business
  7. 7. 13 Contents • Executive Summary • Stages of Small Business Growth - Existence - Survival - Success - Take Off - Resource Maturity • Critical Success Factors - Cash - Owner’s Abilities - Strategic Planning - Key Management Factors • Additional Considerations • Case Examples
  8. 8. 15 As the owner grows its business, there is a clear trade-off in critical between the owner’s ability to execute versus his ability to delegate Critical Success Factors – Owner’s Abilities The owner needs to recognize the need to delegate and relinquish responsibilities to ensure the company’s continued growth. STAGE I Existence STAGE II Survival STAGE III Success STAGE IV Take Off STAGE V Resource Maturity Size and Complexity RELEVANT OR NATURAL BY-PRODUCT CRITICAL TO SUCCESS Owner’s ability to execute Owner’s ability to delegate Source: Churchill & Lewis, The Five Stages of Small Business Growth, Harvard Business Review
  9. 9. 17 Key Management Factors Additionally, we have identified 8 key management factors—4 company factors and 4 owner factors Critical Success Factors – Key Management Factors Financial Resources—including and borrowing power Personnel Resources—relating to numbers, depth, and quality of people, particularly at the management and staff levels Systems Resources—in terms of the degree of sophistication of both information, planning, and control systems Business Resources—including customer relations, market share, supplier relations, manufacturing and distribution processes, technology, and reputation Owner’s Goals—for himself and for the business Owner’s Operational Abilities—in doing important jobs, such as marketing, innovation, producing, and managing distribution Owner’s Managerial Ability—including willingness to delegate responsibility and to manage the activities of others Owner’s Strategic Abilities—for looking beyond the present and matching the strengths and weaknesses of the company with his goals COMPANY FACTORS OWNER FACTORS 1 2 3 4 5 6 7 8
  10. 10. 19 Utilizing this framework, the business owner should adjust resources at each stage to avoid and minimize potential problems Preparing for and Avoiding Future Problems At each stage of growth, different skill sets and resources are emphasized. This is why some experienced people from large companies fail to make good as entrepreneurs or managers of small companies—they may be good at delegating, but not good at doing. Therefore, it is critical for an owner to recognize different sets of needs at each stage of growth. The owner should carefully evaluate the following questions to best prepare and avoid future problems as the organization grows:  Do I have the ability and diversity of people needed to manage a growing company?  Do I have now, or will I have shortly, the systems in place to handle the needs of a larger, more diversified company?  Do I have the inclination and ability to delegate decision making to my managers?  Do I have enough cash and borrowing power along with the inclination to risk everything to pursue rapid, aggressive growth?
  11. 11. 21 Contents • Executive Summary • Stages of Small Business Growth - Existence - Survival - Success - Take Off - Resource Maturity • Critical Success Factors - Cash - Owner’s Abilities - Strategic Planning - Key Management Factors • Additional Considerations • Case Examples
  12. 12. 23 Case Examples – Exceptions to the Framework? The following 2 slides illustrate case examples of small business categories that, at first, may appear to be exceptions to this framework—however, you will find that The Five Stages of Small Business Growth apply to these businesses as well Small Business Categories: • Franchises • Web Startups
  13. 13. 25 Web start-ups rely tremendously on Venture Capital funding to propel through the high growth Take Off stage Case Example – Web Start-ups To avoid bankruptcy, companies need to maintain their entrepreneurial culture by continuing to innovate and staying relevant. START-UPS STAGE I Existence STAGE II Survival STAGE III Success STAGE IV Take Off STAGE V Resource Maturity  Develop initial site and launch beta release  Obtain initial customers through grass roots marketing  Testing market idea with rapid iterative modifications  With a slightly refined product and existing customers, seek out Series A funding  Funding from Series A to hire first employees to continue product development  At this point, many web startups have no plans to monetize (which is a big difference from other small businesses)  Service or product has reached a defining milestone – e.g. reach critical mass, broke sales threshold  Running low on capital, need to look for Series B continue the momentum in growth thus far or risk going bankrupt  With Series B, fund rapid growth – including massive marketing efforts, acquisitions of younger web start- ups  Many web start-ups at this point are also looking to be acquired  Web startup is now a successful  Considers IPO exit strategy
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