Business Life Cycle 5: Resource Maturity

The Company has the advantage of its small size in Stage 5, which allows flexibility of response and the entrepreneurial spirit. Management is decentralized, adequately staffed, and experienced. Systems are extensive and well developed. The owner and the business are completely separate, both financially and operationally.

The enterprise must expand the management force fast enough to eliminate the inefficiencies that growth can produce and professionalize the company by the use of such tools as budgets, strategic planning, management by objectives and standard cost systems—and do this without stifling its entrepreneurial qualities.

There are eight factors that determine the company’s success or failure. They either relate to the enterprise or to the owner. Those that relate to the enterprise are:

1.      Financial resources, including cash and borrowing power.

2.      Personnel resources, relating to the number and quality of people.

3.      Systems resources in terms of the degree of sophistication.

4.      Resources, including customer relations, market share, supplier relations, manufacturing and distribution processes, technology and reputation.

The four factors that relate to the owner are as follows:

1.      Owner’s goal for himself or herself and for the business.

2.      Owner’s operational abilities in doing important jobs such as marketing, inventing, producing and managing distribution.

3.      Owner’s managerial ability and willingness to delegate responsibility and to manage activities of others.

4.      Owner’s strategic abilities for looking beyond the present and matching strengths and weaknesses of the company with his or her goals.

At this Stage the company has the advantages of size, financial resources and managerial talent. If it can preserve its entrepreneurial spirit, it will be a formidable force in the market. If not, it may enter a stage of ossification.  Ossification is characterized by a lack of innovative decision making and the avoidance of risks. A sizable market share, buying power, and financial resources will keep the enterprise viable until a major change occurs in the environment. It is usually the company’s rapidly growing competitors that notice the environmental change first.

Business Life Cycle 4: Take-Off

At Stage 4 the key problems are how to grow rapidly and how to finance growth. The most important questions are:

1. 1. Can the owner delegate responsibility to others to improve the effectiveness of a fast growing and complex enterprise? Will it be true delegation with controls on performance?

2.      Will there be enough cash to satisfy the great demands growth brings?

3.       Is cash flow eroded by inadequate expense controls?

4.       Are there ill-advised investments brought about by owner impatience?

Systems, strained by growth, have become more refined and extensive by this stage. The owner and the business have become separate, yet the business is still dominated by both the owner’s presence and ownership control.

If the owner rises to the challenges of a growing company, it can become big business. If not, it can usually be sold—at a profit—if the owner recognizes his or her limitations soon enough.

 

Too often owners are unsuccessful at this stage either because they try to grow too fast and run out of cash or are unable to delegate effectively enough to make the company work. Functional Leaders (managers) must be very competent.

Retrenching and continuing as a successful and substantial company may be one option if the company fails to make the big time. Or it may drop back to Stage 3. If the problems are too extensive, it may drop all the way back to survival stage or even fail.

Source: The Five Stages of Small Business Growth by Neil C. Churchill and Virginia L. Lewis.

Business Life Cycle: Stage 3--Success

You know you're at Stage 3 if the business:

• has sufficient size and product-market penetration
• earns average or above average profits.

At Stage 3 you may call your business a success;  it has reached true economic health.The good news is that the company can stay at this stage indefinitely. You should have functional managers in place, performing some of the duties that once were yours. Although cash is plentiful, you must remain careful that you reserve cash in prosperous times so that the company has the ability to withstand the inevitable rough times.

At Stage 3, you now have options. They are:
     A. Use the company as a platform for growth or
     B. Use the company as a means of financial support so that you may            
         completely or partially disengage from the company.

Option A is not on the table if the enterprise is in a small or medium-sized, slowly growing community or if it is a franchise with specific territorial boundaries.

If you take Option A, consider the following advice.

• Make sure the basic business stays profitable so that you will not run  out  of  cash before you get the new revenue stream up and running.
• Meet the needs of the growing business by hiring managers with an eye to  the company’s future rather than its current condition.
• Install systems with attention to forthcoming needs.
• Create and execute strategic plans.

Going on a lengthy vacation or completely disengaging are not options. Obviously, you must remain active in all phases of the company’s affairs.

Or you may choose the Option B—to become disengaged from the company. In this case you will be in an excellent position to:

• Start up new enterprises
• Run for political office
• Pursue hobbies and other interests outside maintaining the business

If the company does not remain profitable at this stage, retrenchment to Stage 2: The Survival Stage may be possible to avoid bankruptcy or a distress sale.

Source: The Five Stages of Small Business Growth by Neil C. Churchill and Virginia L. Lewis

Business Life Cycle: Stage 2--Survival

The good news is that companies at Stage 2 have enough customers to meet expenses and must continue to work to keep them. However, very few systems are in place and the only planning being done is forecasting cash income.

With a limited number of employees, the owner is still carrying out all the primary functions of the business. As the company grows, a general manager and sales manager may be brought on board. Their roles are to carry out the well-defined orders of the owner.

In Stage 1 the key issue was mere existence. Now the issue is the relationship between revenues and expenses.

 

The main issues at Stage 2 are:

• Can we generate enough cash flow to stay in business?
• Can we finance growth to a size that is sufficiently large, given our industry and market niche?

If the enterprise does not grow enough in size and profitability to move on to Stage 3, it may remain at survival stage for some time. This makes survival very iffy. No one should want to be in business to merely survive.

Earning marginal returns on invested time and capital, businesses become Zombies—the walking dead. They are not generating enough profit to pay a decent wage to the owner and employees, nor is revenue enough to sustain growth.

In this the case, the Stage 2 business may eventually die. If the owner is lucky, the enterprise may develop enough economic viability to be sold, usually at a slight loss. Or it may fail completely and drop from sight.

Taken from The Five Stages of Small Business Growth by Neil C. Churchill and Virginia L. Lewis.

Stage 1: Business Life Cycle

There are basically five stages of business growth. Regardless of the industry or the number of years in business, there are common characteristics to each stage of growth. Some businesses may remain at Stage 1 for several years before the owners figure out how to catapult to the next level.

Stage 1:  Existence

At this stage the owner does everything and directly supervises subordinates.  The owner is the business, performs all important tasks, and is the major supplier of energy, direction, and capital. Systems and formal planning are minimal to nonexistent. The company’s strategy is simply to remain alive. Key questions are:

·        Can we get enough customers, deliver our products or services, and provide our services well enough to become a viable business?

·        Can we expand from one key customer or pilot production process to a much broader sales base?

·        Do we have enough money to cover the considerable cash demands of this start-up phase?

 Businesses fail at this stage for several reasons:

·        The owners cannot accept the demands that the business places on their time, finances, and energy

·        The start-up capital runs out

·        The business never gains sufficient customer acceptance or product capability to become viable.

The companies that remain become Stage 2 enterprises. Stay tuned for the description of that stage next week. This week and for the next four weeks, I’ll be posting about the five stages of small business growth.

Source: The Five Stages of Small Business Growth by Neil C. Churchill and Virginia L. Lewis.