Development Stages of Small Businesses and Start-ups

Rating

Development Stages of Small Businesses and Start-ups

As companies grow, they pass through different growth stages. Churchill and Lewis researched five development stages that companies go through as they grow and mature. Every development stage is characterized by different organizational structures, degrees of diversity, complexity, systems' standardization, owner's role, organizational and strategic goals. The five development stages are:

1. EXISTENCE. The main challenge for the business in the first step is attracting the attention of customers and maintaining it. The ability to satisfy rapidly growing financing, time and effort requirements represent some of the dearest risks at this stage.
2. SURVIVAL. To reach this stage, the business has already proven itself in the eyes of its customers. Further challenges here are related to business's ability to manage the effective relationship between revenues and expenses. The owner at this stage still plays a major role in the success of the venture and the business is still in an ongoing struggle for survival. Inability to deliver the initially planned sales figures that have only marginal returns on invested time and capital represent the main risks, which may result in eventual sale or closure of the business.
3. SUCCESS. Once a company reaches this stage, the business owner faces a dilemma – to continue rapid growth of the company and bring it to the next level or to maintain modest growth rates securing certain level of profitability and security for the owner himself. By choosing the growth option, the entrepreneur faces the need to improve efficiency, hire additional managers, and implement coherent systems.
4. TAKE OFF. If the success stage is managed well, the company enters the take off stage where it has to maintain well managed operational and strategic processes to remain successful. The ownership and management of the company have become separated and the owner faces the ability to exit in order to enable company entering maturity stage. The risks in this stage remain around the owner's ability to pass over responsibilities to management team and maintain manageable growth rate. See also the 4 main tensions of start-ups are facing.
5. RESOURCE MATURITY. Main advantages for companies at this stage arise from scale benefits and the attracted talent. To remain successful, the company has to be able to manage coexistence of the entrepreneurial environment and financial discipline enforced by prior growth phase. If unsuccessful, the company may go down the path of ossification, which is characterized by lack of innovation and risk avoidance.

Source: Churchill and Lewis (1983) 'The 5 Stages of Small Business Growth', Harvard Business Review Business Review

		Comments by date▼ Comments by rating Rating
		1 Katie Pawley MBA Consultant, United States
	The Developmental Stages of Firms Involve Ongoing Competing Challenges Existence and Survival are competing challenges that would continue through the duration of the business. One of the challenges of operating a business is the client/customer base. As an entrepreneur I would prefer to acquire an existing business, with an established customer base, since this factor is the critical challenge of any business. The "initially planned sales figures" depend on the client/customer base. Staffing consumes the majority of the business costs and must be allocated conservatively. Perhaps staff can assume multiple roles to maintain "financial discipline" within a smaller growing business, contributing to the "resource maturity" indicated in the sources for this discussion.

		1 Jaap de Jonge Editor, Netherlands
	Scaling Up: 3 Stages of Venture Growth I just noticed an article worth reading by Rayport, Sola and Kupp that deals with exactly this topic. Rayport et al. argue start-up firms should focus on 3 main stages of venture growth (and not only on the typical 1st and 3rd one as explained below): EXPLORATION (±3m-3y): The search for product-market fit. In this stage, the company tests hypotheses about how it will deliver value to customers by solving a problem they have, or by relieving a pain point, until it achieves "product-market fit". EXTRAPOLATION (±1-3y): In this intermediate stage, demand typically increases quickly, and the company strives to generate more revenue at decreasing marginal cost until it achieves "profit-market fit". This is done by exploring profitable growth options and by leveraging economies of scale and scope. According to the authors, it's very important that this phase isn't overlooked in order to demonstrate that 1. There is a lot of demand, and 2. The business firm can increase revenue quickly and every new customer not only brings in additional revenue but this is achieved while incurring only marginal extra cost. This is enabling profitable later growth. In this phase, the authors recommend to focus on "7 CRITICAL CONDITIONS": A robust market Solution repeatability and distinctiveness An effective go-to-market strategy A proven monetization approach Network and density (virality) effects Increasing returns (economies of scale) Substantial capital resources Also companies must have a SYSTEMATIC PROCESS to eliminate any internal constraints of the business model on growth and deploy an AMBIDEXTROUS ORGANIZATION (combining flexibility to change/innovate with exploiting the growing core business). EXPLOITATION (indefinite): in this stage, growth in revenue begins to somewhat level off, and the company has to refine its business model to strengthen its competitive advantage and strives for incremental long-term growth and more stable profits. Source: Rayport J.F., Sola D. and Kupp M. (2023) "The Overlooked Key to a Successful Scale-Up", HBR Jan-Feb 2023, pp. 56-65.