Discussion QuestionReview the article where Churchill and Lewis say there are five stages of business growth.You are asked to assume management of a young business that you quickly see is in the survival stage. Based on the reading, what business and management factors would be critical to taking the business to the next stage?What factors that may have helped get the business to its current stage might actually get in the way of growth to the next stage?Based on the article, your own experience and observations, what, if anything, would you add or remove from their framework? (And, need I add, why?)References are Key and need to be cited
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The Five Stages of Small Business Growth
ENTREPRENEURIAL MANAGEMENT
The Five Stages of Small Business
Growth
by Neil C. Churchill and Virginia L. Lewis
FROM THE MAY 1983 ISSUE
C
ategorizing the problems and growth patterns of small businesses in a systematic way that
is useful to entrepreneurs seems at first glance a hopeless task. Small businesses vary
widely in size and capacity for growth. They are characterized by independence of action,
differing organizational structures, and varied management styles.
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Yet on closer scrutiny, it becomes apparent that they experience common problems arising at similar
stages in their development. These points of similarity can be organized into a framework that
increases our understanding of the nature, characteristics, and problems of businesses ranging from
a corner dry cleaning establishment with two or three minimum-wage employees to a $20-milliona-year computer software company experiencing a 40% annual rate of growth.
For owners and managers of small businesses, such an understanding can aid in assessing current
challenges; for example, the need to upgrade an existing computer system or to hire and train
second-level managers to maintain planned growth.
It can help in anticipating the key requirements at various points—e.g., the inordinate time
commitment for owners during the start-up period and the need for delegation and changes in their
managerial roles when companies become larger and more complex.
The framework also provides a basis for evaluating the impact of present and proposed
governmental regulations and policies on one’s business. A case in point is the exclusion of
dividends from double taxation, which could be of great help to a profitable, mature, and stable
business like a funeral home but of no help at all to a new, rapidly growing, high-technology
enterprise.
Finally, the framework aids accountants and consultants in diagnosing problems and matching
solutions to smaller enterprises. The problems of a 6-month-old, 20-person business are rarely
addressed by advice based on a 30-year-old, 100-person manufacturing company. For the former,
cash-flow planning is paramount; for the latter, strategic planning and budgeting to achieve
coordination and operating control are most important.
Developing a Small Business Framework
Various researchers over the years have developed models for examining businesses (see Exhibit 1).
Each uses business size as one dimension and company maturity or the stage of growth as a second
dimension. While useful in many respects, these frameworks are inappropriate for small businesses
on at least three counts.
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The Five Stages of Small Business Growth
Exhibit 1 Growth Phases
First, they assume that a company must grow and pass through all stages of development or die in
the attempt. Second, the models fail to capture the important early stages in a company’s origin and
growth. Third, these frameworks characterize company size largely in terms of annual sales
(although some mention number of employees) and ignore other factors such as value added,
number of locations, complexity of product line, and rate of change in products or production
technology.
To develop a framework relevant to small and growing businesses, we used a combination of
experience, a search of the literature, and empirical research. (See the second insert.) The
framework that evolved from this effort delineates the five stages of development shown in Exhibit
2. Each stage is characterized by an index of size, diversity, and complexity and described by five
management factors: managerial style, organizational structure, extent of formal systems, major
strategic goals, and the owner’s involvement in the business. We depict each stage in Exhibit 3 and
describe each narratively in this article.
About the Research
We started with a concept of growth
stages emanating from the work of
Steinmetz and Greiner. We made two
initial changes based on our experiences
with small companies.
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The rst modication was an extension ofThe Five Stages of Small Business Growth
the independent (vertical) variable of size
as it is used in the other stage models—
see Exhibit I to include a composite of
value-added (sales less outside
purchases), geographical diversity, and
complexity; the complexity variable
involved the number of product lines sold,
the extent to which different technologies
are involved in the products and the
processes that produce them, and the rate
of change in these technologies.
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Thus, a manufacturer with $10 million in
sales, whose products are based in a fastchanging technical environment, is farther
up the vertical scale (“bigger” in terms of
the other models) than a liquor wholesaler
with $20 million annual sales. Similarly, a
company with two or three operating
locations faces more complex
management problems, and hence is
farther up the scale than an otherwise
comparable company with one operating
unit.
The second change was in the stages or
horizontal component of the framework.
From present research we knew that, at
the beginning, the entrepreneur is totally
absorbed in the business’s survival and if
the business survives it tends to evolve
toward a decentralized line and staff
organization characterized as a “big
business” and the subject of most
studies.* The result was a four-stage
model: (1) Survival, (2) Break-out, (3)
Take-off, (4) Big company.
To test the model, we obtained 83
responses to a questionnaire distributed
to 110 owners and managers of successful
small companies in the $1 million to $35
million sales range. These respondents
participated in a small company
management program and had read
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The Five Stages of Small Business Growth
Greiner’s article. They were asked to
identify as best they could the phases or
stages their companies had passed
through, to characterize the major
changes that took place In each stage, and
to describe the events that led up to or
caused these changes.
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A preliminary analysis of the questionnaire
data revealed three deciencies in our
initial model:
First, the grow-or-fail hypothesis implicit
in the model, and those of others, was
invalid. Some of the enterprises had
passed through the survival period and
then plateaued—remaining essentially the
same size. with some marginally protable
and others very protable, over a period of
between 5 and 80 years.
Second, there existed an early stage in the
survival period in which the entrepreneur
worked hard just to exist- to obtain
enough customers to become a true
business or to move the product from a
pilot stage into quantity production at an
adequate level of quality.
Finally, several responses dealt with
companies that were not started from
scratch but purchased while in a steadystate survival or success stage (and were
either being mismanaged or managed for
prot and not for growth), and then
moved into a growth mode.
Revision
We used the results of this research to
revise our preliminary framework. The
resulting framework is shown in Exhibit II.
We then applied this revised framework to
the questionnaire responses and obtained
results which encouraged us to work with
the revised model:
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The Five Stages of Small Business Growth
* John A. Welsh and Jerry F. White,
“Recognizing and Dealing With the
Entrepreneur,” Advanced Management
Journal, Summer 1978.
Exhibit 2 Growth Stages
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Exhibit 3 Characteristics of Small Business at Each Stage of Development
Stage I: Existence
In this stage the main problems of the business are obtaining customers and delivering the product
or service contracted for. Among the key questions are the following:
Can we get enough customers, deliver our products, and provide services well enough to become a
viable business?
Can we expand from that 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?
The organization is a simple one—the owner does everything and directly supervises subordinates,
who should be of at least average competence. Systems and formal planning are minimal to
nonexistent. The company’s strategy is simply to remain alive. The owner is the business, performs
all the important tasks, and is the major supplier of energy, direction, and, with relatives and
friends, capital.
Companies in the Existence Stage range from newly started restaurants and retail stores to hightechnology manufacturers that have yet to stabilize either production or product quality. Many such
companies never gain sufficient customer acceptance or product capability to become viable. In
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The Five Stages of Small Business Growth
these cases, the owners close the business when the start-up capital runs out and, if they’re lucky,
sell the business for its asset value. (See endpoint 1 on Exhibit 4). In some cases, the owners cannot
accept the demands the business places on their time, finances, and energy, and they quit. Those
companies that remain in business become Stage II enterprises.
Exhibit 4 Evolution of Small Companies
Stage II: Survival
In reaching this stage, the business has demonstrated that it is a workable business entity. It has
enough customers and satisfies them sufficiently with its products or services to keep them. The key
problem thus shifts from mere existence to the relationship between revenues and expenses. The
main issues are as follows:
In the short run, can we generate enough cash to break even and to cover the repair or
replacement of our capital assets as they wear out?
Can we, at a minimum, generate enough cash flow to stay in business and to finance growth to a
size that is sufficiently large, given our industry and market niche, to earn an economic return on
our assets and labor?
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The organization is still simple. The company may have a limited number of employees supervised
by a sales manager or a general foreman. Neither of them makes major decisions independently, but
instead carries out the rather well-defined orders of the owner.
Systems development is minimal. Formal planning is, at best, cash forecasting. The major goal is still
survival, and the owner is still synonymous with the business.
In the Survival Stage, the enterprise may grow in size and profitability and move on to Stage III. Or it
may, as many companies do, remain at the Survival Stage for some time, earning marginal returns
on invested time and capital (endpoint 2 on Exhibit 4), and eventually go out of business when the
owner gives up or retires. The “mom and pop” stores are in this category, as are manufacturing
businesses that cannot get their product or process sold as planned. Some of these marginal
businesses have developed enough economic viability to ultimately be sold, usually at a slight loss.
Or they may fail completely and drop from sight.
Stage III: Success
The decision facing owners at this stage is whether to exploit the company’s accomplishments and
expand or keep the company stable and profitable, providing a base for alternative owner activities.
Thus, a key issue is whether to use the company as a platform for growth—a substage III-G company
—or as a means of support for the owners as they completely or partially disengage from the
company—making it a substage III-D company. (See Exhibit 3.) Behind the disengagement might be a
wish to start up new enterprises, run for political office, or simply to pursue hobbies and other
outside interests while maintaining the business more or less in the status quo.
Substage III-D.
In the Success-Disengagement substage, the company has attained true economic health, has
sufficient size and product-market penetration to ensure economic success, and earns average or
above-average profits. The company can stay at this stage indefinitely, provided environmental
change does not destroy its market niche or ineffective management reduce its competitive abilities.
Organizationally, the company has grown large enough to, in many cases, require functional
managers to take over certain duties performed by the owner. The managers should be competent
but need not be of the highest caliber, since their upward potential is limited by the corporate goals.
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Cash is plentiful and the main concern is to avoid a cash drain in prosperous periods to the
detriment of the company’s ability to withstand the inevitable rough times.
In addition, the first professional staff members come on board, usually a controller in the office and
perhaps a production scheduler in the plant. Basic financial, marketing, and production systems are
in place. Planning in the form of operational budgets supports functional delegation. The owner
and, to a lesser extent, the company’s managers, should be monitoring a strategy to, essentially,
maintain the status quo.
As the business matures, it and the owner increasingly move apart, to some extent because of the
owner’s activities elsewhere and to some extent because of the presence of other managers. Many
companies continue for long periods in the Success-Disengagement substage. The product-market
niche of some does not permit growth; this is the case for many service businesses in small or
medium-sized, slowly growing communities and for franchise holders with limited territories.
Other owners actually choose this route; if the company can continue to adapt to environmental
changes, it can continue as is, be sold or merged at a profit, or subsequently be stimulated into
growth (endpoint 3 on Exhibit 4). For franchise holders, this last option would necessitate the
purchase of other franchises.
If the company cannot adapt to changing circumstances, as was the case with many automobile
dealers in the late 1970s and early 1980s, it will either fold or drop back to a marginally surviving
company (endpoint 4 on Exhibit 4).
Substage III-G.
In the Success-Growth substage, the owner consolidates the company and marshals resources for
growth. The owner takes the cash and the established borrowing power of the company and risks it
all in financing growth.
Among the important tasks are to make sure the
Looking Back on Business
Development Models
basic business stays profitable so that it will not
outrun its source of cash and to develop managers
to meet the needs of the growing business. This
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of Small Business Growth
Business researchers have developed a The Five Stages
second task requires hiring managers with an eye
number of models over the last 20 years
to the company’s future rather than its current
that seek to delineate stages of corporate
condition.
growth.
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Joseph W. McGuire, building on the work
of W.W. Rostow in economics,* formulated
a model that saw companies moving
through ve stages of economic
development:†
1. Traditional small company.
2. Planning for growth.
3. Take-off or departure from existing
conditions.
4. Drive to professional management.
5. Mass production marked by a “diffusion
of objectives and an interest in the welfare
of society.”
Lawrence L. Steinmetz theorized that to
survive, small businesses must move
through four stages of growth. Steinmetz
envisioned each stage ending with a
critical phase that must be dealt with
before the company could enter the next
stage.§ His stages and phases are as
follows:
1. Direct supervision. The simplest stage,
at the end of which the owner must
become a manager by learning to delegate
to others.
Systems should also be installed with attention to
forthcoming needs. Operational planning is, as in
substage III-D, in the form of budgets, but
strategic planning is extensive and deeply
involves the owner. The owner is thus far more
active in all phases of the company’s affairs than
in the disengagement aspect of this phase.
If it is successful, the III-G company proceeds into
Stage IV. Indeed, III-G is often the first attempt at
growing before commitment to a growth strategy.
If the III-G company is unsuccessful, the causes
may be detected in time for the company to shift
to III-D. If not, retrenchment to the Survival Stage
may be possible prior to bankruptcy or a distress
sale.
Stage IV: Take-off
In this stage the key problems are how to grow
rapidly and how to finance that growth. The most
important questions, then, are in the following
2. Supervised supervision. To move on, the
manager must devote attention to growth
and expansion, manage increased
overhead and complex nances, and learn
to become an administrator.
areas:
3. Indirect control. To grow and survive,
the company must learn to delegate tasks
to key managers and to deal with
diminishing absolute rate of return and
overstafng at the middle levels.
improve the managerial effectiveness of a fast
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Delegation.
Can the owner delegate responsibility to others to
growing and increasingly complex enterprise?
Further, will the action be true delegation with
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4. Divisional organization. At this stage the
controls on performance and a willingness to see
company has “arrived” and has the
mistakes made, or will it be abdication, as is so
resources and organizational structure
often the case?
that will enable it to remain viable.
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C. Roland Christensen and Bruce R. Scott
focused on development of organizational
complexity in a business as it evolves in its
product-market relationships. They
formulated three stages that a company
moves through as it grows in overall size,
number of products, and market
coverage:‡
1. One-unit management with no
specialized organizational parts.
2. One-unit management with functional
parts such as marketing and nance.
Cash.
Will there be enough to satisfy the great demands
growth brings (often requiring a willingness on
the owner’s part to tolerate a high debt-equity
ratio) and a cash flow that is not eroded by
inadequate expense controls or ill-advised
investments brought about by owner impatience?
The organization is decentralized and, at least in
3. Multiple operating units, such as
divisions, that act in their own behalf in
the marketplace.
part, divisionalized—usually in either sales or
Finally, Larry E. Greiner proposed a model
of corporate evolution in which business
organizations move through ve phases of
growth as they make the transition from
small to large (in sales and employees)
and from young to mature.|| Each phase is
distinguished by an evolution from the
prior phase and then by a revolution or
crisis, which precipitates a jump into the
next phase. Each evolutionary phase is
characterized by a particular managerial
style and each revolutionary period by a
dominant management problem faced by
the company. These phases and crises are
shown in Exhibit 1.
business environment. The systems, strained by
*W.W. Rostow, The Stages of Economic
Growth (Cambrid …
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