Introduction

Categorizing the growth patterns of small businesses in a systematic way can initially seem like an overwhelming task due to their wide-ranging differences in size, capacity, organizational structure, and management style. However, upon closer examination, it becomes apparent that these businesses encounter common challenges at specific stages in their development. This article presents a framework that identifies these stages and offers insights into the nature, characteristics, and issues faced by businesses at each juncture.

Stage I: Existence

Key Problems: The primary challenges revolve around acquiring customers, fulfilling product or service orders, and securing startup capital.

Characteristics: At this stage, businesses are typically simple in structure, heavily reliant on the owner’s involvement, and lack sophisticated systems and formal planning.

Strategic Focus: Survival is the main objective.

Stage II: Survival

Key Problems: The focus shifts from mere existence to managing the delicate balance between revenues and expenses, as well as maintaining healthy cash flow.

Characteristics: The organization remains relatively simple, with few employees, and the owner directly oversees operations.

Strategic Focus: The primary goal is to remain in business while financing modest growth.

Stage III: Success

Key Decision: Owners face a critical choice—whether to leverage the company’s achievements for further growth (III-G) or use it as a means of personal support (III-D).

Characteristics (III-D): The business enjoys economic health, employs competent managers, and has rudimentary systems in place.

Characteristics (III-G): The focus is on consolidating resources for growth, including financial and human capital.

Strategic Focus (III-D): Maintain the status quo, potentially selling the business.

Strategic Focus (III-G): Risk resources for rapid expansion.

Stage IV: Take-Off

Key Problems: Challenges include managing rapid growth, financing it, transitioning from owner-centric to decentralized management, and maintaining cash flow.

Characteristics: The organization becomes more decentralized, with refined systems and a growing management team.

Strategic Focus: The primary objective is to manage and sustain rapid growth effectively.

Stage V: Resource Maturity

Key Concerns: This stage involves consolidating and controlling the financial gains achieved through growth while preserving the advantages of small-business flexibility and entrepreneurial spirit.

Characteristics: The organization boasts advanced systems, decentralized management, and a solid managerial team.

Strategic Focus: The goal is to retain entrepreneurial spirit while leveraging available resources for long-term success.

Conclusion

This framework provides entrepreneurs with a valuable tool for understanding the current challenges they face and the future requirements as they progress through various stages of business development. It also highlights the changing importance of factors such as cash, personnel, and systems across these stages. Armed with this knowledge, business owners can make informed decisions and better prepare themselves and their companies for the challenges and opportunities that lie ahead on their entrepreneurial journey.

by

Neil C. Churchill

and

Virginia L. Lewis

From the Magazine (May 1983)

A version of this article appeared in the May 1983 issue of Harvard Business

Reference

Neil C. & Virginia L (1983, May). The Five Stages of Small-Business Growth