Understanding the 5 Stages of Business Growth
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Posted by: Lucid Content Team
Scaling a business is a weighty goal, and fledgling small businesses face challenges that are determined by a range of variables—business and industry type, leadership and management capability, business size, technology and infrastructure capability, and market volatility, to name a few.
And yet, market analysts have identified some key patterns in the growth phase of small businesses of all types—patterns that, if studied and anticipated, can give you a roadmap to the growth stages of your current or future small business venture.
Here we’ll identify the steps of company growth, giving you a clearer idea of what to expect in your current or future small business growth.
The 5 stages of business growth
From a neighborhood restaurant with a small five-person waitstaff to a $15 million startup tech, small businesses of all types experience the same stages of business growth. These growth phases are:
- Establish existence: This is the first phase of a business and involves delivering the initial product or service offering, securing customers and clients, and consistently delivering the product or service.
- Survive to thrive: In this phase of company growth, the business has established that it has a viable product or service. Its focus has shifted to retaining the existing customer base and building consistency in its product or service offering.
- Build on success: Businesses at this stage face a new line of decision-making. They use existing clientele and accomplishments to continue to scale up or direct the company to a sustainable level with new personnel that allows more hands-off ownership.
- Identify expansion: In this phase, companies look for ways to rapidly expand and finance that expansion.
- Reach maturity: Companies in the maturity phase have managerial talent, well-developed systems, and substantial financial resources—their chief concern is how to manage their financial gains and maintain their entrepreneurial spirit.
Having an understanding of the framework of business growth is a powerful tool in preparing for your business expansion. Let’s take a deeper dive into each phase of growth.
Stage 1: Establish existence
Setting up a viable business means first having a valuable product or service. Company ownership should be wholly focused on establishing their first clients or customers and should be asking themselves some key questions:
- Are we able to find enough customers, deliver our products, and provide service well enough to be a profitable business?
- Are we able to expand from our key early clientele to a more extensive, broader sales base?
- Do we have enough capital and cash resources to support this startup phase?
Businesses in this phase are straightforward—the ownership performs most if not all duties and may hire out or contract subordinates who they directly supervise. Formal systems and sophisticated processes are minimal or nonexistent, and the primary focus is to stay alive.
Unsurprisingly, companies in this phase are volatile, and many companies don’t make it out of this phase as ownership fails to receive a commensurate return on their time, energy, and capital investment.
Ownership at this level requires nimble and flexible decision-making—establishing a customer base that may not be your ideal clientele can make the difference in building a bedrock cash flow that supports your business while you continue to grow.
Additionally, companies in this stage may find a higher demand for an ancillary product or service than their initial or main product or service offering. For example, a neighborhood restaurant may find higher traffic during lunch than at dinner and may decide to focus resources on serving their lunchtime clientele. In any case, agile decision making is crucial in this growth stage.
Stage 2: Survive to thrive
Companies in the survival stage have proven that they have a profitable product or service and have an established customer base. Their focus needs to shift to retaining customers and addressing the relationship between revenue and expenses. Ownership in this growth phase should be asking themselves these questions:
- In the short term, are we able to generate enough revenue to cover the repair or replacement of our capital assets as they age or break down?
- Are we able to at least generate enough revenue to remain in operation and still support growth to the point that gives us a return on our time and energy investment?
The surviving business is still defined by its owner and may have a small supporting cast of managers or overseers. However, this supporting cast functions mainly as executors of the owner’s well-defined mission, rather than autonomous decision-makers. As such, the business is still defined primarily by its ownership, and systems development is minimal.
Surviving businesses are still vulnerable—they may stay at this stage for extended periods as they earn marginal returns or go out of business when the owner retires or gives up. They could also fold entirely or go on to be sold, sometimes at a fair or exorbitant price, and sometimes at a loss to the owner. Companies who make it through the survival phase can move on to the next stage.
Stage 3: Build on success
By this stage, the company is a proven viable business model. The company is consistently gaining new business, retaining existing business, and has systems in place. The primary concern of ownership at this growth stage is whether to exploit the company’s accomplishments to continue to expand or keep the company sustainable and profitable while ownership scales back their hands-on engagement.
Company owners in the success phase, though less vulnerable than at earlier stages, still have important decisions to make. Some common questions success-level ownership considers may include:
Would scaling right now give us higher or lower margins?
Say, for example, you’re the owner of a wine production facility, and you self-manage logistics and shipping. Scaling up, in this case, might mean expanding your delivery to handle global orders. It’s possible, then, that global shipping, while serving more clientele, may deliver a lower margin per unit due to increased labor costs and increased shipping costs. Does that lower margin make sense for you to pursue?
Would scaling right now continue to deliver a quality product or service?
Many luxury and crafts-focused products experience this conflict of priority: Does increased production equate to the same level of quality that built our success?
For example, a chef and restaurant owner may get an opportunity to distribute their special sauce in grocery stores nationwide. The initial product offering—a homemade sauce from a passionate chef—is what built the success. A mass-produced version of the sauce manufactured in a factory likely won’t deliver the same product to consumers. Is our chef okay with distributing an inferior product with his name on it, and is the increased revenue worth the tradeoff? In every case, it depends on the goals of ownership and the demands of the market.
Are there any other commitments or ventures where I could be experiencing a higher return on my time and energy?
Sometimes company owners realize they’d like to step back from their company and spend more time with their family. Sometimes they may feel inspired to start a new business venture, born of the knowledge and experience of their current venture. Sometimes they may decide that they’d like to run for public office. In all cases, these owners must determine if they are going to use their successful business as a platform for growth and expansion or as a support vehicle for their other endeavors.
Analyze and manage risk and strategize growth opportunities with an <strong>Ansoff matrix</strong>.Learn more
Stage 4: Identify expansion
If a company owner decides to go the direction of growth, then the expansion phase brings the new priority of rapid expansion and means of financing that expansion. The key concerns of expansion-minded owners include:
Are there responsibilities that can be delegated to managers or other personnel? Can we maintain the effectiveness of management during rapid growth? Owners must be able to delegate tasks as the company becomes increasingly complex and as demands scale with the business.
Will there be enough cash to support the high demands that expansion brings? Answering “no” to this question comes with a whole host of undesirable outcomes, including making rushed and desperate investments, collecting too much debt, or just burnout.
Companies in the “identifying expansion” stage are fully developed: They have departments or divisions and separations between sales and production, and the organization is decentralized.
The company is at a pivotal point: Ownership that can effectively navigate the rapid growth phase can find themselves in big business. If not, the company may scale back to become a sustainable, smaller-scale company, or it may even be sold off. Also on the table: New company ownership or creditors may opt to remove the original owner or entrepreneur and replace them with management talent that steers the expansion phase.
Stage 5: Reach maturity
Companies in the maturity phase have successfully scaled, and now their primary focus is on consolidating revenue gains from rapid expansion and maintaining the young spirit. Mature companies have done their strategic planning, have a talented management team, and have separated ownership from the company, both financially and operationally.
The biggest risks of companies at this phase are entering a low-risk state of sustainability and neglecting innovation in the process, a state called ossification. Mature businesses must remain adaptive, anticipating market changes and using their market share to affect market changes.
As you join a growing business or start your own business, keeping this framework in mind will help you prepare for every phase of your growth and eliminate the biggest obstacle in entrepreneurship—uncertainty. Taking control of your company’s future is as simple as knowing what to expect as you grow.
When you're ready to build your business, review our 4 best practices.Read now
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