Recognize And Manage The 5 Stages Of Small Business Growth

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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A corner dry cleaner and a fast growing software company may not seem very similar, but experience and research has shown that they both go through the same struggles. They may act differently, have different organizations, and use different management styles, but they face common problems that happen at similar stages in their growth.

Understanding the stages of small business growth and inherent problems can help you assess where you are in the growth pattern, and help you anticipate what’s going to be required to succeed. Owners, for example, will have to spend an extraordinary amount of time during start-up, and then they have to learn to begin delegating work and authority as the company grows.

Existence Stage

During start-up, to move from an idea to a business takes customers, cash, and stamina. You do everything. You’re the primary source of capital and energy, and if you have help, you supervise them directly. Your only goal is to exist and survive. Formal planning is seldom a part of the process except for a pro forma business plan which is useful as an exercise, but probably useless as guidance.

At this stage customers are what you need. Not business cards, not letterhead, not a company car. Companies fail at this fledgling stage because they have intricate, detailed product plans and no clue how to identify, attract, and sell customers. A company with a clear marketing plan and a vague product plan is more likely to succeed than the reverse.

Survival Stage

If you make it through start-up, and have proven you have a product that people can and will buy, then survival becomes your primary concern. You have to be able to make enough money to cover your costs. And you need to be able to finance growth.

Mom and Pop businesses rarely grow past this stage. Founders often think of the business as an extension of themselves, and can’t imagine not being at the helm. Owners are satisfied with marginal returns for their effort and investment, and are unable or unwilling to delegate responsibility.

It’s not uncommon for companies to grow broke at this stage. They don’t have enough money to cover the costs of building new products or hiring more people to provide more services. Cash forecasting is job one. Now is the time to start thinking of replacing yourself with someone who knows how to manage a business, not just start one.

Success Stage

Once a company is economically healthy and is generating average or better profits to ensure success, the company can stay at this stage indefinitely. Financial management, organization development, and delegation to a growing management team requires more than seat-of-the pants leadership. Few founders have the temperament to successfully continue to lead an organization beyond this stage.

At this stage, you have to decide if you’re going to disengage or go for growth. Entrepreneurs often have new business ideas they want to try, newly-prominent business leaders think about running for political office, and others simply want to enjoy the benefits of success and pursue hobbies or other outside interests. If you don’t disengage and decide to grow your company you need to focus on using cash and borrowing power to finance the expansion.

Takeoff Stage

If you opt to grow, delegation and financing will become your key problems. You’ll need competent management to handle growth, a complex business, and an evolving business environment. There’s always a danger that the business climate will change, but dramatic change just as you start an aggressive climb can be devastating.

If you fail to grow, you might be able to fall back to “just” a successful company. But companies (think Sun Microsystems ) have found themselves back at the survival stage after an unsuccessful attempt to takeoff.

This is a pivotal time. You need to decide if you want to become a big business or sell the company at a significant profit. Recognizing your own limitations is crucial. Just because you managed, literally and figuratively, to build a successful company doesn’t mean you have what it takes to go forward. Success has a dangerous way of making you feel omnipotent which can lead to rapid expansion you can’t finance or a complexity you can’t manage.

Maturity Stage

Controlling your substantial financial resources will be one your biggest challenges if you manage to create a mature company—you’ll probably have a whole division trying to do just that. But the biggest challenge of all will be cultural. In a rapidly changing world, flexibility and agility are crucial. Improvisation is something jazz bands are good at. Orchestras, not so much.

Airplane manufacturer Lockheed understood that and created a special, in-house design group known as the Skunk Works, which produced the fastest airplane in the world (SR-71), and the highest flying aircraft in the world (U-2).

Knowing what challenges you’re likely to face in the years ahead can help you mitigate their impact. In the words of serial entrepreneur Ben Franklin, “If you fail to plan, you’re planning to fail.”