When a business begins to grow, it faces different challenges depending on the stage of business growth. It is therefore necessary for small businesses to understand these stages of growth in business. A good understanding of the different stages of business growth will help any business to position itself for success.
Last week we discussed the traditional business growth strategies which small businesses can leverage on to boost growth. It is believed that every small business will strive to grow except for businesses without vision. However, growth differs in capacity and size depending on the organizational structure of the firm. In spite of disparities in structure and size, it has been observed that businesses face similar growth challenges.
No matter the size and type of business, business manages should have good understanding of the stages of business growth. This will help them to quickly assess current challenges and how to resolve them. For instance, if you anticipate growth beyond your current production capacity, then plan to meet such increasing demand.
In this article, we discussed the following:
- The different stages of business growth
- The challenges a business may likely face at each stage of growth in business
- How to resolve these challenges so it will not affect your business
Key Assumptions of the Study
Before we dive into the stages of business growth, you should take note of the following assumptions.
- Every business must not grow. This implies that all small businesses must not pass through these stages of business growth.
- All growing businesses must not pass through all the stages of business growth. This means that some businesses can stop at a stage, while others may fall back to the previous stage.
- We did not use any specific criteria for measuring growth. Growth in these stages can be measured by the combination of the following:
- Annual turnover
- Expansion to different locations
- No. of employees
- Changes in a product line, product development, and production technology
- The complexity of organizational chart and span of control.
Hence, as a small business manager, you can use some of the above criteria to measure growth stages.
Identifying the Stages of Business Growth
Small businesses are known to undergo seven (7) stages of business growth which could be summarized in the figure below. The seed, startup, growth, established, expansion, maturity, and exit stages.
Each stage of growth in business is important because businesses are known to face different challenges at each stage. They also require different financial management practices at each stage to survive. The purpose of this study is to know which stage your business is and how to intervene for growth. Depending on the business growth strategies you are using.
1. Existence stage of growth in business:
This is also the idea or seed or conception stage. At this stage, the business is just an idea that needs to be tested in the real world. The business owner should get advice and opinion as to the viability of the business idea from different sources. It might require market research, feedback from would-be customers, family, and friends. This is the stage of developing flexible business plans, models, and growth strategies.
Note that some businesses die off at this stage because of fear, procrastination, and lack of capital to take off. To get through this stage, would-be entrepreneurs should seek answers to questions such as:
- What does the market need?
- Does the idea solve the above need?
- Will the market accept my offer for a value?
- What value will the market offer; will it fetch the business profit?
- Does the idea have the potential to sustain and grow the business?
- What business structure will be appropriate to achieve the proposed motive of the business? (Sole proprietorship, partnership, limited liability).
At this stage, the business may encounter a few challenges but the challenges will not directly affect the business. This is because the business is yet to take off. But addressing these challenges would help sustain and grow the business. Some of these challenges are related to the answers to the above questions. Amongst them include the establishment of niche opportunity, gaining market acceptability, and determining an appropriate value for the proposition.
The business owner is advised to do the following at this stage:
- match the business opportunities with the owner’s skills, experience, and passion;
- determine appropriate ownership structure for the business;
- test the feasibility of the idea and seek professional management advice; and
- develop a business plan (you may seek professional advice).
Financially, because the market has not been established, cash flow is not predictable. Hence, finance sources would be from the owner(s) savings, friends, and family. There may be other financial sources to assist the takeoff of the business, such as grants, venture capitalists, and government grants.
2. Start-up Stages of business growth:
This is the stage the business officially takes off. This will happen when you are convinced that the idea is worth pursuing and will be profitable. At this stage, the business would have been registered, suppliers contacted and products developed. All operations to deliver the value proposition to the market have begun.
At this stage, business owners will experience a shift from the initial business plan and model. This is the opportunity to adjust the business plan, test models, and determine what works. There should also be a good communication network between business owner(s) and customers to determine what works better. From the feedback received, you should adjust products and services to meet customer expectations.
Also, the business will encounter the following challenges:
- limited capital to pursue business growth strategies,
- poor staffing and inability to match skill to job
- slow and limited access to market,
- irregular cashflow due to low turnover.
The business owners should penetrate the market to establish a customer base and maintain market presence. Attention should be directed to hiring staff that are skilled to deliver quality value, help track and conserve cash flow.
Financially, because the market is new, cash flow is irregular. Hence, finance sources would be from owner(s) savings, friends and family. There may be other financial sources to assist the business, such as grants, soft loans, supplier’s credit, and government grants.
3. Growth stages of business growth:
Survival stages of a business growth are very critical to any small business. As the name implies, this stage determines if a business will survive or fail. If a business survives this stage, it will eventually grow; else, it will struggle to grow.
Let us assume that your business has taken off; you need to fine-tune your models, growth strategies, and revenue, models. When a business reaches this stage, the business is probably working. At this stage, the business has established a market presence; customers, sales, and profit are rapidly growing. But many businesses fail to pass this stage because this stage comes with many challenges.
At this stage, businesses face stiff competition due to new entrants and consolidation of existing competitors. There is also lack of effective management which could lead to leadership/ communication gap among the staff. Poor staffing from stage two would lead to poor products/ service delivery which may lead to loss of customers. Also, a test in operations may detect defectiveness.
Business owners may seek professional advice or attempt to do the following:
- Establish an effective USP and train staff to maintain operations at controlled level in order to deliver quality.
- Train management staff and advice on the need to delegate functions.
- Hire more efficient staff, if need be, and ensure cordial relationship exist between management and staff.
- Based on what is working, fine-tune the business growth strategies and model to improve operational efficiencies and profit.
- Devise a means of tackling competition.
Financial interventions should include:
- maintaining strict cash flow control,
- identifying key revenue/ profit drivers and devising strategies to manage increasing customers
- introduction of management accounting,
- sourcing of finance if need be.
4. Established stage of growth in business:
At this stage, business is stable with established market and loyal customers. All business operations including human resources, sales, cash, etc, are manageable. However, the business is faced with challenges that could bring it to an end if they are not taken care of. Because the business is stable there may be no innovative product offering.
When at this stage, many businesses are carried away and forget that technology and habits change. As a result, a business can easily fizzle-out if the following challenges are not tackled proactively:
- relentless competition,
- focus on the vision,
- changing taste of customers,
- changing technology & innovations.
Business owners should do the following in line with their business growth strategies and model:
- ensure that the business focuses on its vision and is not swayed by competition.
- focus on improvement in productivity and value creation through technology & innovation.
- embark on research and development.
- use automation, outsourcing and key partnerships to maintain their market share and be relevant in the longrun.
- monitor changes in taste and fashion and change with them.
There should also be strict control of cash flow, introduction of management accounting, and sourcing of finance if need be.
5. Rapid growth stages of business growth
If the interventions specified in stage 3 are effectively implemented, then the business will enter the expansion stage. At this stage, the business which has been established would seek to gain more market share. It will spread out to acquire new customers in different locations or through new distribution channels and increase profit.
This may be through introduction of new products/services or by moving into new market or expanding to new locations. At this stage, the business is beginning to align itself with its sales and marketing models. Also, the business if fully implementing its business growth strategies, and is involved with product development.
The business’ operational model is tied with quality customer service at this stage. It also ought to operate in a proactive, systematic approach instead of a reactive, scattered approach. The business should have trained and qualified managers and their divisions are operating on solid ground.
To fully enter the expansion stage, the following challenges needs to be considered.
- The business requires adequate research and planning before expanding into a new market.
- It should beware of increasing competition so as not to lose focus.
- It should understand its competitors and their strengths and weaknesses, and think of possible merger & acquisition
- Greater accounting management is required.
- More capital is involved; and
- More qualified manpower is required.
Reaching this stage is the dream of every business, hence, business owners should:
- implement effective business growth strategies to establish new markets and new products/ services.
- ensure the business maintains its market share while adventuring into new business by tracking customers, sales, and cash flow.
- consolidating on competitors weaknesses or possibly acquiring them
- build an interconnected management accounting system using ERP (Enterprise Resource Planning) software.
- focus on efficient customer management using CRM (Customer Relationship Management) software.
- ensure adequate funding. The fund can be sourced from banks, government agencies, or public offers.
6. Maturity Stage
After successful expansion, the business is on top of its industry and has reached the maturity stage. To reach this stage, the business would have effectively implemented its business growth strategies and model to the later.
At this stage, the business has a dominating presence in its market, a sustainable market share, and could still be growing. However, growth will not be at a substantial rate as previously experienced. The business owner or shareholders would have to decide on three possible options:
- either expanding the business further to gain more market share,
- sustain the present market share
- think of a possible way of exit.
Most businesses remain at this stage while others that did not manage the stage well fall back. The maturity stage comes with the following challenges.
Though the business is balanced at this stage, it still faces stiff challenges. These challenges are predominantly technical because the business has become huge. They also require adequate attention and effective management if market share will be sustained.
Some of the challenges include:
- issues of negative cash flow from different business locations. (Remember that business is now huge, and administrative costs have greatly increased. e.g. costs of traveling, accommodations, training, holding business meetings, etc)
- increasing competition as taste and technology continues to change,
- the task of managing greater accounting system,
- devising appropriate expansion strategy to penetrate new markets,
- adding new products/ services to its portfolio, and
- finding an appropriate exit strategy, if need be.
- Business owners should seek how to cut down on costs in order to sustain positive cash flow.
- Search and discover new opportunities for expansion and new lines of business.
- Tailor technology with innovation to beat the competition.
- Introduce product differentiation and improve on brand and product design.
- Implement good financial management.
- Maintain positive cash flow and source funds for expansion from suppliers, customers, retained earnings, banks, investors, and government.
7. Exit Stage
At this stage, the business owner or partners or shareholders decides to shut down the business due to some reason. This could be by outright sale or by selling the majority share of the business.
- Valuation of the current worth of the business.
- Dealing with financial and psychological loss/gain from the business.
To effectively exit from a business, business owners should:
- be discouraged from outright sale or closure of the business if there are identified opportunities.
- get advice on a new business line to save the company from financial loss.
- If opportunities exist, get advice with good financial management to maintain positive cash flow,
- source fund for a new product line from suppliers, customers, retained earnings, banks, investors, and government, owing to the assets and reputation of the current business.
- get professional advice on the valuation of the business worth if an exit is inevitable.
There are traditional business growth strategies that we discussed in our previous post. You can implement each of these strategies based on your financial capacity. Also, depending on your industry, other proven strategies exist, give them a try and check what works. In the course of your trial, if you need assistance, we are here to assist you. In today’s article, we identified seven (7) stages of business growth. Each stage comes with challenges that should be understood by business managers. As a business owner or manager, try and identify the stage of your business and take proactive measures. If you need clarification or professional advice on your business, contact us. Do you have any questions or contributions? We are itching to hear from you via the comment box.