The issues and problems of small business growth were the subject of a classic Harvard Business Review article "The Five Stages of Small Business Growth" by Neil Churchill and Virginia Lewis back in 1983.
While the article is now twenty five years old, the basic issues that face a small business as it develops over time haven't changed.
Small Businesses Are Unique, Small Businesses Are The Same
A contradictory sub-heading but I am trying to communicate the fact that each small business is unique in terms of the personality of the owners, managers and employees, the assets and resources it has and the skills and capabilities at its disposal.
But at the same time, the problems of small businesses can be very common.
Virtually all small businesses start by being dependent on one person or a small group of people who eventually have to learn to let go of the detail and discover how to manage the business. This is exactly the point Michael Gerber made in his famous quote "working ON the business rather than working IN the business."
SME - Small and Medium Sized Businesses
Government policy tends to group small businesses in a group it calls SMEs which in the UK & European Union covers businesses that meet various financial thresholds and have up to 250 employees with the threshold for "small" at the 50 employee level.
There is a big difference between the hundreds of thousands of one person businesses in a localised fragmented market, the small business of four employees, the more established business with twenty five employees and the marketing leading business with over two hundred employees.
The Chamberlain & Lewis Five Stages Of Small Business Growth Model
Neil Churchill and Virginia Lewis have developed the five stages of small business growth model to reveal the issues involved at and moving between the stages so before looking at each stage in some detail, the five stages are:
- Resource Maturity
Stage One Existence
In this first stage, the business has to show that it has the ability to:
a) attract customers to buy the products or services
b) deliver the promised services so well that it is paid and picks up repeat business.
Companies that succeed at this level go on to stage two, those that fail because they can't find customers or keep them happy are closed when the business uses up its start-up capital.
Stage Two Survival
The business concept has been proven to work but this stage deals with the issue of whether the business can generate good profits and fund future growth.
Many businesses become stuck at this level, earning a small return on the time and cash invested by the owners but without the cash or drive to move the business forward.
Business is tough even in good times and it becomes vulnerable when times get tougher.
Businesses that generate the cash and have the desire advance to stage three.
Stage Three Success
The business has proven to be viable in stage three so the choice is simple:
- Continue to look for future growth and build a business fit for the future.
- Stay at the current level, perhaps in the comfort zone with the intention of the owner reducing the involvement in the business. The emphasis is on making the business better but not bigger.
Sometimes the choice may be dictated by circumstances. Some businesses operate in a localised area and reach a natural size and expansion would mean opening up in new territories.
Sometimes the business may try to grow but its attempts are not successful so strategy is switched from growth to maintaining the status quo.
Successful growth moves the business into stage four.
Stage Four Take-off
The target is rapid growth and that brings two challenges
- The cash required to fund the growth either from retained profits, sacrifices in the cash withdrawn by the owners, bank borrowings which create extra risk or even diluting the ownership by bringing in venture capital.
- Delegation to a management team recruited for a bigger business.
Failing to deal with both issues will stall the rapid growth and take the business back into Stage Three.
Success creates a big business which requires big business skills, techniques and concepts.
Stage Five Resource Maturity
The company has arrived although it must streamline and strip out the inefficiencies caused by high growth. Management is professional with all the usual big business systems.
Unfortunately whilst these systems are needed to plan, coordinate and control the business, they can take away the entrepreneurial flair and creative innovation which has been the driver for the business growth.
Critical Factors For The Owner In The Growth Model
Neil Churchill and Virginia Lewis identified four factors for the owner which affects how or whether the business will move forward.
- Personal goals for themselves and the business. This is the Primary Aim and Strategic Objective.
- The owner's abilities to do the important tasks themselves - critical in the early stages.
- The owner's ability to manage people successfully and delegate work.
- The owners ability to look at the business from a strategic perspective and see the strengths, weaknesses, opportunities and threats and take the appropriate action.
The Five Stage Model of Small Business Growth gives us a framework to look at where the business is in the stages and the issues involved with moving the business forward.
Big Business Is Not Necessarily Good Business
I believe strongly that you don't want growth just for the sake of being able to say that you manage a £1 million business, £5 million or £25 million.
Provided it is profitable and gives you the return you want from your time and money and you are happy in your work, there is no right size of business, just the right size business for you.
Your business is there to serve you but your task is to make sure that it is successful enough to give you everything you want.
Being stuck in a marginal Stage Two Survival is miserable. The work is hard, the hours are long and the pay is poor.
It is the challenge of business coaching and your other financial advisors to help you to move to a sustainable Stage three business or to help you to move even higher if that its what you want.
I've written a free report I believe you should read if you own your own business - The Profit Tipping Point
So what do you think? Does the Five Stages of Small Business Growth Model fit with your experience?Is Your Business Stuck And Less Profitable Than You Want?
You are invited to take a 30 day trial in my business growth system at www.ProfitableGrowthStrategies.org for $1 or £1. You will discover many ways you can increase your profits by selling more, more often to more customers and there's a specially designed Quick Start program for you to make more money quickly.
Whether you decide to stay as a member is up to you but you've got 30 days to make your own mind up on how much your business can benefit over the long term from improving your knowledge of the strategies for profitable growth.
The Six Steps Profit Formula - Free Report (Click On Image)