The Five Stages of Small
Business Growth
by Neil C. Churchill and Virginia L. Lewis
Harvard Business Review
Reprint 83301
HBR
MAY JUNE 1983
The Five Stages of Small Business Growth
Neil C. Churchill and Virginia L. Lewis
ategorizing the problems and growth pat- tion, which could be of great help to a profitable,
terns of small businesses in a systematic way mature, and stable business like a funeral home but
Cthat is useful to entrepreneurs seems at first of no help at all to a new, rapidly growing, high-tech-
glance a hopeless task. Small businesses vary widely nology enterprise.
in size and capacity for growth. They are charac- Finally, the framework aids accountants and con-
terized by independence of action, differing organiza- sultants in diagnosing problems and matching solu-
tional structures, and varied management styles. tions to smaller enterprises. The problems of a 6-
Yet on closer scrutiny, it becomes apparent that month-old, 20-person business are rarely addressed
they experience common problems arising at similar by advice based on a 30-year-old, 100-person manu-
stages in their development. These points of similar- facturing company. For the former, cash-flow plan-
ity can be organized into a framework that increases ning is paramount; for the latter, strategic planning
our understanding of the nature, characteristics, and and budgeting to achieve coordination and operating
problems of businesses ranging from a corner dry control are most important.
cleaning establishment with two or three minimum-
wage employees to a $20-million-a-year computer
software company experiencing a 40% annual rate of DEVELOPING A SMALL BUSINESS
growth. FRAMEWORK
For owners and managers of small businesses, such
an understanding can aid in assessing current chal- Various researchers over the years have developed
lenges; for example, the need to upgrade an existing models for examining businesses (see Exhibit 1). Each
computer system or to hire and train second-level uses business size as one dimension and company
managers to maintain planned growth. maturity or the stage of growth as a second dimen-
It can help in anticipating the key requirements at
various points e.g., the inordinate time commit-
Neil C. Churchill is distinguished professor of account-
ment for owners during the start-up period and the
ing and director of the Caruth Institute of Owner-Managed
need for delegation and changes in their managerial
Business at Southern Methodist University. He has
roles when companies become larger and more com-
authored or coauthored three other articles for HBR, the
plex.
most recent two being:  Don t Let Inflation Get the Best
The framework also provides a basis for evaluating
of You (March April 1982) and  Choosing and Evaluating
the impact of present and proposed governmental
Your Accountant (with Louis A. Werbaneth, Jr., May June
regulations and policies on one s business. A case in
1979). Virginia L. Lewis is a senior research associate of the
point is the exclusion of dividends from double taxa- Caruth Institute at SMU.
Copyright © 1983 by the President and Fellows of Harvard College. All rights reserved.
EXHIBIT 1
Growth Phases
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
Size of
organization
5
Crisis of?
Large
4
Crisis of
red tape
5
3 Growth
Crisis of through
control collaboration
4
2
Growth
Crisis of
through
autonomy
coordination
3
Growth
1
through
Crisis of
delegation
leadership
2
Growth
through
Small
direction
1
Growth
through
creativity
Age of
Mature
organization
Young
Evolution stages Revolution stages
of product line, and rate of change in products or
EXHIBIT 2
Growth Stages production technology.
To develop a framework relevant to small and grow-
Stage I Stage II Stage III Stage IV Stage V
ing businesses, we used a combination of experience,
Existence l Survival Success Take-off Resource
Maturity
a search of the literature, and empirical research. (See
Slze,
the second insert.) The framework that evolved from
dispersion
complexity
this effort delineates the five stages of development
Large
shown in Exhibit 2. Each stage is characterized by an
Disengage Grow
index of size, diversity, and complexity and described
by five management factors: managerial style, organ-
izational structure, extent of formal systems, major
strategic goals, and the owner s involvement in the
business. We depict each stage in Exhibit 3 and de-
scribe each narratively in this article.
Small
Stage I: Existence
In this stage the main problems of the business are
Age of
organization Young Mature
obtaining customers and delivering the product or
service contracted for. Among the key questions are
the following:
Can we get enough customers, deliver our prod-
ucts, and provide services well enough to become
sion. While useful in many respects, these frame- a viable business?
works are inappropriate for small businesses on at
Can we expand from that one key customer or
least three counts.
pilot production process to a much broader sales
First, they assume that a company must grow and
base?
pass through all stages of development or die in the
attempt. Second, the models fail to capture the im-
Do we have enough money to cover the consid-
portant early stages in a company s origin and growth.
erable cash demands of this start-up phase?
Third, these frameworks characterize company size
largelyintermsof annual sales (althoughsomemen- The organization is a simple one the owner does
tion number of employees) and ignore other factors
everything and directly supervises subordinates, who
such as value added, number of locations, complexity
should be of at least average competence. Systems
HARVARD BUSINESS REVIEW May June 1983 3
EXHIBIT 3
Characteristics of Small Business at Each Stage of Development
Stage I Stage II Stage III-D Stage III-G Stage IV Stage V
Existence Survival Success- Success- Take-off
Resource Maturity
Disengagement Growth
Direct Functional Functional Divisional Line and staff
Management Supervised
style supervision supervision
Organization
Extent of formal Minimal to Minimal Basic Extensive
Developing Maturing
nonexistent
systems
Existence Survival Get resources Growth Return on
Major strategy Maintaining
investment
profitable for growth
status quo
Business and
owner*
*Smaller circle represents owner. Larger circle represents business.
and formal planning are minimal to nonexistent. The size that is sufficiently large, given our industry and
company s strategy is simply to remain alive. The market niche, to earn an economic return on our
owner is the business, performs all the important assets and labor?
tasks, and is the major supplier of energy, direction,
The organization is still simple. The company may
and, with relatives and friends, capital.
have a limited number of employees supervised by a
Companies in the Existence Stage range from
sales manager or a general foreman. Neither of them
newly started restaurants and retail stores to high-
makes major decisions independently, but instead
technology manufacturers that have yet to stabilize
carries out the rather well-defined orders of the
either production or product quality. Many such
owner.
companies never gain sufficient customer acceptance
Systems development is minimal. Formal planning
or product capability to become viable. In these cases,
is, at best, cash forecasting. The major goal is still
the owners close the business when the start-up
survival, and the owner is still synonymous with the
capital runs out and, if they re lucky, sell the business
business.
for its asset value. (See endpoint 1 on Exhibit 4). In
In the Survival Stage, the enterprise may grow in
some cases, the owners cannot accept the demands
size and profitability and move on to Stage III. Or it
the business places on their time, finances, and en-
may, as many companies do, remain at the Survival
ergy, and they quit. Those companies that remain in
Stage for some time, earning marginal returns on
business become Stage II enterprises.
invested time and capital (endpoint 2 on Exhibit 4),
and eventually go out of business when the owner
Stage II: Survival
gives up or retires. The  mom and pop stores are in
In reaching this stage, the business has demonstrated
this category, as are manufacturing businesses that
that it is a workable business entity. It has enough
cannot get their product or process sold as planned.
customers and satisfies them sufficiently with its
Some of these marginal businesses have developed
products or services to keep them. The key problem
enough economic viability to ultimately be sold,
thus shifts from mere existence to the relationship
usually at a slight loss. Or they may fail completely
between revenues and expenses. The main issues are
and drop from sight.
as follows:
Stage III: Success
In the short run, can we generate enough cash to
break even and to cover the repair or replacement of The decision facing owners at this stage is whether
our capital assets as they wear out? to exploit the company s accomplishments and ex-
Can we, at a minimum, generate enough cash pand or keep the company stable and profitable, pro-
flow to stay in business and to finance growth to a viding a base for alternative owner activities. Thus, a
4 HARVARD BUSINESS REVIEW May June 1983
EXHIBIT 4
Evolution of Small Companies
Stage I Stage II Stage III Stage IV Stage V
Existence Survival Success Take-off
Resource Maturlty
Operate
Sell or
merge
Success
x+++
Failure
Make it Retrench
x++
(7)
Fail
Head for growth
Sell
Operate
x+
Disen- Re-
Regroup for
Sell or Suc-
gage trench
Sufficiently
cess- Growth
merge
fully (6)
(3)
Fold
Minimally Con-
Unsuc-
(5)
Prosper (2) tinue
cess-
Adapt
Fall
fully
way back
Not
X-
Fail
Exist
adapt
(4)
Sell
Retrench xB
xA
Fail
Sell
(1)
Fold
Fold Fold
Fold
xB xB xB xB
xA = Sell assets x+ = Sell at a profit = Adapt and continue as is, = Change in strategy
x = Sell at a loss x++ = Sell at a greater profit = temporarily or permanently xB = Bankruptcy
key issue is whether to use the company as a platform place. Planning in the form of operational budgets
for growth a substage III-G company or as a means supports functional delegation. The owner and, to a
of support for the owners as they completely or par- lesser extent, the company s managers, should be
tially disengage from the company making it a sub- monitoring a strategy to, essentially, maintain the
stage III-D company. (See Exhibit 3.) Behind the dis- status quo.
engagement might be a wish to start up new As the business matures, it and the owner increas-
enterprises, run for political office, or simply to pur- ingly move apart, to some extent because of the
sue hobbies and other outside interests while main- owner s activities elsewhere and to some extent be-
taining the business more or less in the status quo. cause of the presence of other managers. Many com-
Substage III-D. In the Success-Disengagement sub- panies continue for long periods in the Success-Dis-
stage, the company has attained true economic engagement substage. The product-market niche of
health, has sufficient size and product-market pene- some does not permit growth; this is the case for
tration to ensure economic success, and earns aver- many service businesses in small or medium-sized,
age or above-average profits. The company can stay slowly growing communities and for franchise hold-
at this stage indefinitely, provided environmental ers with limited territories.
change does not destroy its market niche or ineffec- Other owners actually choose this route; if the
tive management reduce its competitive abilities. company can continue to adapt to environmental
Organizationally, the company has grown large changes, it can continue as is, be sold or merged at a
enoughto,inmanycases,requirefunctionalmanagers profit, or subsequently be stimulated into growth
to take over certain duties performed by the owner. (endpoint 3 on Exhibit 4). For franchise holders, this
The managers should be competent but need not be of last option would necessitate the purchase of other
the highest caliber, since their upward potential is franchises.
limited by the corporate goals. Cash is plentiful and If the company cannot adapt to changing circum-
the main concern is to avoid a cash drain in prosperous stances, as was the case with many automobile deal-
periods to the detriment of the company s ability to ers in the late 1970s and early 1980s, it will either fold
withstand the inevitable rough times. or drop back to a marginally surviving company (end-
In addition, the first professional staff members point 4 on Exhibit 4).
come on board, usually a controller in the office and Substage III-G. In the Success-Growth substage,
perhaps a production scheduler in the plant. Basic the owner consolidates the company and marshals
financial, marketing, and production systems are in resources for growth. The owner takes the cash and
HARVARD BUSINESS REVIEW May June 1983 5
Looking back on business development models
Business researchers have developed a number of models over the last 20 years that seek to delineate stages of
corporate growth.
Joseph W. McGuire, building on Lawrence L. Steinmetz theorized 3
the work of W.W. Rostow in eco- that to survive, small businesses Indirect control. To grow and sur-
nomics,* formulated a model that must move through four stages of vive, the company must learn to del-
saw companies moving through growth. Steinmetz envisioned each egate tasks to key managers and to
five stages of economic develop- stage ending with a critical phase deal with diminishing absolute rate
ment: that must be dealt with before the of return and overstaffing at the mid-
company could enter the next dle levels.
1 stage.ż His stages and phases are
Traditional small company. as follows: 4
Divisional organization. At this
2 1 stage the company has  arrived
Planning for growth. Direct supervision. The simplest and has the resources and organ-
stage, at the end of which the izational structure that will enable it
3 owner must become a manager by to remain viable.
Take-off or departure from existing learning to delegate to others.
conditions.
2
4 Supervised supervision. To move
Drive to professional management. on, the manager must devote atten-
tion to growth and expansion, man-
5 age increased overhead and com-
Mass production marked by a  dif- plex finances, and learn to become
fusion of objectives and an interest an administrator.
in the welfare of society.
*W.W. Rostow, The Stages of Economic Growth
C. Roland Christensen and Bruce R. Finally, Larry E. Greiner proposed a
(Cambridge, England: Cambridge University Press,
Scott focused on development of or- model of corporate evolution in
1960).
ganizational complexity in a busi- which business organizations move Joseph W. McGuire, Factors Affecting the Growth of
Manufacturing Firms (Seattle: Bureau of Business Re-
ness as it evolves in its product-mar- through five phases of growth as
search, University of Washington, 1963).
ket relationships. They formulated they make the transition from small
! C. Roland Christensen and Bruce R. Scott, Review of
three stages that a company moves to large (in sales and employees) Course Activities (Lausanne: IMEDE, 1964).
żLawrence L. Steinmetz,  Critical Stages of Small Busi-
through as it grows in overall size, and from young to mature.Il Each
ness Growth: When They Occur and How to Sur-
number of products, and market phase is distinguished by an evolu-
vive Them, Business Horizons, February 1969,
coverage:! tion from the prior phase and then p. 29.
Il Larry E. Greiner,  Evolution and Revolution as Or-
by a revolution or crisis, which pre-
ganizations Growth, HBR July August 1972,
1 cipitates a jump into the next
p. 37.
One-unit management with no spe- phase. Each evolutionary phase is
cialized organizational parts. characterized by a particular mana-
gerial style and each revolutionary
2 period by a dominant management
One-unit management with func- problem faced by the company.
tional parts such as marketing and These phases and crises are shown
finance. in Exhibit I.
3
Multiple operating units, such as di-
visions, that act in their own behalf
in the marketplace.
6 HARVARD BUSINESS REVIEW May June 1983
EXHIBIT 5
Management Factors and the Stages
Stage I Stage II Stage III-D Stage III-G Stage IV Stage V
Exlstence Survlval Success- Success- Take-off Resource
Growth Maturity
Dlsengagement
Critical
to the
Owner's ability to do
company
Cash
Matching of
business and
personal goals
Important
but
managed
Modestly
People  quality
irrelevant Business
and diversity
or a resources
natural
Strategic
by-
planning
product
Systems and
controls
Owner's
ability to
delegate
the established borrowing power of the company and Delegation. Can the owner delegate responsibility
risks it all in financing growth. to others to improve the managerial effectiveness of
Among the important tasks are to make sure the a fast growing and increasingly complex enterprise?
basic business stays profitable so that it will not Further, will the action be true delegation with con-
outrun its source of cash and to develop managers to trols on performance and a willingness to see mis-
meet the needs of the growing business. This second takes made, or will it be abdication, as is so often the
task requires hiring managers with an eye to the case?
company s future rather than its current condition. Cash. Will there be enough to satisfy the great
Systems should also be installed with attention to demands growth brings (often requiring a willingness
forthcoming needs. Operational planning is, as in on the owner s part to tolerate a high debt-equity
substage III-D, in the form of budgets, but strategic ratio) and a cash flow that is not eroded by inadequate
planning is extensive and deeply involves the owner. expense controls or ill-advised investments brought
The owner is thus far more active in all phases of the about by owner impatience?
company s affairs than in the disengagement aspect The organization is decentralized and, at least in
of this phase. part, divisionalized usually in either sales or pro-
If it is successful, the III-G company proceeds into duction. The key managers must be very competent
Stage IV. Indeed, III-G is often the first attempt at to handle a growing and complex business environ-
growing before commitment to a growth strategy. If ment. The systems, strained by growth, are becoming
the III-G company is unsuccessful, the causes may be more refined and extensive. Both operational and
detected in time for the company to shift to III-D. If strategic planning are being done and involve specific
not, retrenchment to the Survival Stage may be pos- managers. The owner and the business have become
sible prior to bankruptcy or a distress sale. reasonably separate, yet the company is still domi-
nated by both the owner s presence and stock control.
This is a pivotal period in a company s life. If the
Stage IV: Take-off
owner rises to the challenges of a growing company,
In this stage the key problems are how to grow rapidly
both financially and managerially, it can become a big
and how to finance that growth. The most important
business. If not, it can usually be sold at a profit
questions, then, are in the following areas:
HARVARD BUSINESS REVIEW May June 1983 7
About the research
We started with a concept
the processes that pro- The second change was in To test the model, we ob-
the stages or horizontal tained 83 responses to a
of growth stages emanat- duce them, and the rate
ing from the work of Stein- component of the questionnaire distributed to
of change in these tech-
metz and Greiner. We framework. From pre- 110 owners and managers
nologies.
made two initial changes sent research we knew of successful small compa-
based on our experiences that, at the beginning, the nies in the $1 million to
Thus, a manufacturer with
with small companies. entrepreneur is totally ab- $35 million sales range.
$10 million in sales, whose
sorbed in the business s sur- These respondents partici-
products are based in a
The first modification was vival and if the business sur- pated in a small company
fast-changing technical envi-
an extension of the inde- vives it tends to evolve management program and
ronment, is farther up the
pendent (vertical) variable toward a decentralized had read Greiner s article.
vertical scale ( bigger in
of size as it is used in the line and staff organization They were asked to identify
terms of the other models)
other stage models - see Ex- characterized as a  big as best they could the
than a liquor wholesaler
hibit I to include a compos- business and the subject phases or stages their com-
with $20 million annual
ite of value-added (sales of most studies. The result panies had passed
sales. Similarly, a company
less outside purchases), was a four-stage model: (1) through, to characterize
with two or three operating
geographical diversity, and Survival, (2) Break-out, (3) the major changes that
locations faces more com-
complexity; the complexity Take-off, (4) Big company. took place In each stage,
plex management prob-
variable involved the and to describe the events
lems, and hence is farther
number of product lines that led up to or caused
up the scale than an other-
sold, the extent to which dif- these changes.
wise comparable company
ferent technologies are in-
with one operating unit.
volved in the products and
A preliminary analysis of First, the grow-or-fail hy- Second, there existed an Finally, several responses
the questionnaire data re- pothesis implicit in the early stage in the survival dealt with companies that
vealed three deficiencies in model, and those of others, period in which the entre- were not started from
our initial model: was invalid. Some of the preneur worked hard just scratch but purchased
enterprises had passed to exist- to obtain enough while in a steady-state sur-
through the survival period customers to become a true vival or success stage (and
and then plateaued-remain- business or to move the were either being misman-
ing essentially the same product from a pilot stage aged or managed for
size. with some marginally into quantity production at profit and not for growth),
profitable and others very an adequate level of qual- and then moved into a
profitable, over a period of ity. growth mode.
between 5 and 80 years.
Number of
Revision
Stage Companies Percentage
We used the results of this
research to revise our pre-
liminary framework. The re- I Existence 0 0.0%
sulting framework is shown
II Survival 17 20.5
in Exhibit 11. We then ap-
III Success
plied this revised frame-
Disengagement 15 18.1
work to the questionnaire
Growth 33 39.8
responses and obtained re-
sults which encouraged us
IV Take-off 10 12.0
to work with the revised
V Resource-mature 1 1.2
model:
Unclassifiable
Lack of data 6 7.2
John A Welsh and Jerry F
White,  Recognizing and Deal-
Joint venture 1 1.2
ing With the Entrepreneur,
Total 83 100.0%
Advanced Management Jour-
nal, Summer 1978.
8 HARVARD BUSINESS REVIEW May June 1983
provided the owner recognizes his or her limitations KEY MANAGEMENT FACTORS
soon enough. Too often, those who bring the business
to the Success Stage are unsuccessful in Stage IV, Several factors, which change in importance as the
either because they try to grow too fast and run out business grows and develops, are prominent in deter-
of cash (the owner falls victim to the omnipotence mining ultimate success or failure.
syndrome), or are unable to delegate effectively We identified eight such factors in our research, of
enough to make the company work (the omniscience which four relate to the enterprise and four to the
syndrome). owner. The four that relate to the company are as
It is, of course, possible for the company to traverse follows:
this high-growth stage without the original manage-
1. Financial resources, including cash and borrow-
ment. Often the entrepreneur who founded the com-
ing power.
pany and brought it to the Success Stage is replaced
2. Personnel resources, relating to numbers,
either voluntarily or involuntarily by the company s
depth, and quality of people, particularly at the
investors or creditors.
management and staff levels.
If the company fails to make the big time, it may
3. Systems resources, in terms of the degree of
be able to retrench and continue as a successful and
sophistication of both information and plan-
substantial company at a state of equilibrium (end-
ning and control systems.
point 7 on Exhibit 4). Or it may drop back to Stage III
4. Business resources, including customer rela-
(endpoint 6) or, if the problems are too extensive, it
tions, market share, supplier relations, manu-
may drop all the way back to the Survival Stage
facturing and distribution processes, technology
(endpoint 5) or even fail. (High interest rates and
and reputation, all of which give the company a
uneven economic conditions have made the latter
position in its industry and market.
two possibilities all too real in the early 1980s.)
The four factors that relate to the owner are as
Stage V: Resource Maturity
follows:
The greatest concerns of a company entering this
1. Owner s goals for himself or herself and for the
stage are, first, to consolidate and control the finan-
business.
cial gains brought on by rapid growth and, second, to
2. Owner s operational abilities in doing impor-
retain the advantages of small size, including flexibil-
tant jobs such as marketing, inventing, produc-
ity of response and the entrepreneurial spirit. The
ing, and managing distribution.
corporation must expand the management force fast
3. Owner s managerial ability and willingness to
enough to eliminate the inefficiencies that growth
delegate responsibility and to manage the ac-
can produce and professionalize the company by use
tivities of others.
of such tools as budgets, strategic planning, manage-
4. Owner s strategic abilities for looking beyond
ment by objectives, and standard cost systems and
the present and matching the strengths and
do this without stifling its entrepreneurial qualities.
weaknesses of the company with his or her
A company in Stage V has the staff and financial
goals.
resources to engage in detailed operational and stra-
tegic planning. The management is decentralized, As a business moves from one stage to another, the
adequately staffed, and experienced. And systems are importance of the factors changes. We might view the
extensive and well developed. The owner and the factors as alternating among three levels of impor-
business are quite separate, both financially and op- tance: first, key variables that are absolutely essential
erationally. for success and must receive high priority; second,
The company has now arrived. It has the advan- factors that are clearly necessary for the enterprise s
tages of size, financial resources, and managerial tal- success and must receive some attention; and third,
ent. If it can preserve its entrepreneurial spirit, it will factors of little immediate concern to top manage-
be a formidable force in the market. If not, it may ment. If we categorize each of the eight factors listed
enter a sixth stage of sorts: ossification. previously, based on its importance at each stage of
Ossification is characterized by a lack of innovative the company s development, we get a clear picture of
decision making and the avoidance of risks. It seems changing management demands. (See Exhibit 5.)
most common in large corporations whose sizable
market share, buying power, and financial resources
keep them viable until there is a major change in the VARYING DEMANDS
environment. Unfortunately for these businesses, it
is usually their rapidly growing competitors that The changing nature of managerial challenges be-
notice the environmental change first. comes apparent when one examines Exhibit 5. In the
HARVARD BUSINESS REVIEW May June 1983 9
early stages, the owner s ability to do the job gives life while planning a new house on Maui for long vaca-
to the business. Small businesses are built on the tions involves considerable risk. To make a realistic
owner s talents: the ability to sell, produce, invent, or decision on which direction to take, the owner needs
whatever. This factor is thus of the highest impor- to consider the personal and business demands of
tance. The owner s ability to delegate, however, is on different strategies and to evaluate his or her mana-
the bottom of the scale, since there are few if any gerial ability to meet these challenges.
employees to delegate to. Finally, business resources are the stuff of which
As the company grows, other people enter sales, success is made; they involve building market share,
production, or engineering and they first support, and customer relations, solid vendor sources, and a tech-
then even supplant, the owner s skills thus reduc- nological base, and are very important in the early
ing the importance of this factor. At the same time, stages. In later stages the loss of a major customer,
the owner must spend less time doing and more time supplier, or technical source is more easily compen-
managing. He or she must increase the amount of sated for. Thus, the relative importance of this factor
work done through other people, which means dele- is shown to be declining.
gating. The inability of many founders to let go of The changing role of the factors clearly illustrates
doing and to begin managing and delegating explains the need for owner flexibility. An overwhelming pre-
the demise of many businesses in substage III-G and occupation with cash is quite important at some
Stage IV. stages and less important at others. Delaying tax
The owner contemplating a growth strategy must payments at almost all costs is paramount in Stages
understand the change in personal activities such a I and II but may seriously distort accounting data and
decision entails and examine the managerial needs use up management time during periods of success
depicted in Exhibit 5. Similarly, an entrepreneur con- and growth.  Doing versus  delegating also re-
templating starting a business should recognize the quires a flexible management. Holding onto old
need to do all the selling, manufacturing, or engineer- strategies and old ways ill serves a company that is
ing from the beginning, along with managing cash entering the growth stages and can even be fatal.
and planning the business s course requirements
that take much energy and commitment.
The importance of cash changes as the business
AVOIDING FUTURE PROBLEMS
changes. It is an extremely important resource at the
start, becomes easily manageable at the Success
Even a casual look at Exhibit 5 reveals the demands
Stage, and is a main concern again if the organization
the Take-off Stage makes on the enterprise. Nearly
begins to grow. As growth slows at the end of Stage
every factor except the owner s  ability to do is
IV or in Stage V, cash becomes a manageable factor
crucial. This is the stage of action and potentially
again. The companies in Stage III need to recognize
large rewards. Looking at this exhibit, owners who
the financial needs and risk entailed in a move to
want such growth must ask themselves:
Stage IV.
Do I have the quality and diversity of people
The issues of people, planning, and systems gradu-
needed to manage a growing company?
ally increase in importance as the company pro-
gresses from slow initial growth (substage III-G) to
Do I have now, or will I have shortly, the systems
rapid growth (Stage IV). These resources must be
in place to handle the needs of a larger, more
acquired somewhat in advance of the growth stage so
diversified company?
that they are in place when needed. Matching busi-
Do I have the inclination and ability to delegate
ness and personal goals is crucial in the Existence
decision making to my managers?
Stage because the owner must recognize and be rec-
onciled to the heavy financial and time-energy de-
Do I have enough cash and borrowing power
mands of the new business. Some find these demands
along with the inclination to risk everything to
more than they can handle. In the Survival Stage,
pursue rapid growth?
however, the owner has achieved the necessary rec-
onciliation and survival is paramount; matching of Similarly, the potential entrepreneur can see that
goals is thus irrelevant in Stage II. starting a business requires an ability to do something
A second serious period for goal matching occurs very well (or a good marketable idea), high energy, and
in the Success Stage. Does the owner wish to commit a favorable cash flow forecast (or a large sum of cash
his or her time and risk the accumulated equity of the on hand). These are less important in Stage V, when
business in order to grow or instead prefer to savor well-developed people-management skills, good in-
some of the benefits of success? All too often the formation systems, and budget controls take priority.
owner wants both, but to expand the business rapidly Perhaps this is why some experienced people from
10 HARVARD BUSINESS REVIEW May June 1983
large companies fail to make good as entrepreneurs side capital almost from the beginning. The providers
or managers in small companies. They are used to of this cash, usually venture capitalists, may bring
delegating and are not good enough at doing. planning and operating systems of a Stage III or a
Stage IV company to the organization along with an
outside board of directors to oversee the investment.
APPLYING THE MODEL The resources provided enable this entity to jump
through Stage I, last out Stage II until the product
This scheme can be used to evaluate all sorts of small comes to market, and attain Stage III. At this point,
business situations, even those that at first glance the planned strategy for growth is often beyond the
appear to be exceptions. Take the case of franchises. managerial capabilities of the founding owner and the
These enterprises begin the Existence Stage with a outside capital interests may dictate a management
number of differences from most start-up situations. change. In such cases, the company moves rapidly
They often have the following advantages: into Stage IV and, depending on the competence of
the development, marketing, and production people,
A marketing plan developed from extensive re-
the company becomes a big success or an expensive
search.
failure. The problems that beset both franchises and
Sophisticated information and control systems high-technology companies stem from a mismatch of
in place. the founders problem-solving skills and the demands
that  forced evolution brings to the company.
Operating procedures that are standardized and
Besides the extreme examples of franchises and
very well developed.
high-technology companies, we found that while a
Promotion and other start-up support such as number of other companies appeared to be at a given
brand identification. stage of development, they were, on closer examina-
tion, actually at one stage with regard to a particular
They also require relatively high start-up capital.
factor and at another stage with regard to the others.
Ifthe franchisor hasdonesoundmarketanalysisand For example, one company had an abundance of cash
hasasolid,differentiatedproduct,thenewventurecan from a period of controlled growth (substage III-G)
move rapidly through the Existence and Survival and was ready to accelerate its expansion, while at
Stages where many new ventures founder and into the same time the owner was trying to supervise
the early stages of Success. The costs to the franchisee everybody (Stages I or II). In another, the owner was
for these beginning advantages are usually as follows: planning to run for mayor of a city (substage III-D) but
was impatient with the company s slow growth (sub-
Limited growth due to territory restrictions.
stage III-G).
Heavy dependence on the franchisor for contin- Although rarely is a factor more than one stage
ued economic health. ahead of or behind the company as a whole, an imbal-
ance of factors can create serious problems for the
Potential for later failure as the entity enters
entrepreneur. Indeed, one of the major challenges in
Stage III without the maturing experiences of
a small company is the fact that both the problems
Stages I and II.
faced and the skills necessary to deal with them
One way to grow with franchising is to acquire change as the company grows. Thus, owners must
multiple units or territories. Managing several of anticipate and manage the factors as they become
these, of course, takes a different set of skills than important to the company.
managing one and it is here that the lack of survival A company s development stage determines the
experience can become damaging. managerial factors that must be dealt with. Its plans
Another seeming exception is high-technology help determine which factors will eventually have to
start-ups. These are highly visible companies such be faced. Knowing its development stage and future
as computer software businesses, genetic-engineer- plans enables managers, consultants, and investors to
ing enterprises, or laser-development companies make more informed choices and to prepare them-
that attract much interest from the investment com- selves and their companies for later challenges. While
munity. Entrepreneurs and investors who start them each enterprise is unique in many ways, all face
often intend that they grow quite rapidly and then go similar problems and all are subject to great changes.
public or be sold to other corporations. This strategy That may well be why being an owner is so much fun
requires them to acquire a permanent source of out- and such a challenge.
HARVARD BUSINESS REVIEW May June 1983 11
HarvardBusinessReview
HBR Subscriptions Harvard Business Review
U.S. and Canada Outside U.S. and Canada
Subscription Service Tower House
P.O. Box 52623 Sovereign Park
Boulder, CO 80322-2623 Lathkill Street
Market Harborough
Leicestershire LE16 9EF
Telephone: [phone] Telephone: [phone]
Fax: [phone] Fax: [phone]
American Express, MasterCard, Visa accepted. Billing available.
HBR Article Reprints Harvard Business School Publishing
HBR Index and Other Catalogs
Customer Service - Box 230-5
HBS Cases
60 Harvard Way
HBS Press Books
Boston, MA 02163
Telephone: U.S. and Canada [phone]
Outside U.S. and Canada: [phone] or 495-6192
Fax: [phone]
Internet address: [e-mail]
HBS Management Productions Harvard Business School Management Productions videos are
Videos
produced by award-winning documentary filmmakers. You ll find
them lively, engaging, and informative.
HBR Custom Reprints Please inquire about HBR s custom service for quantity discounts.
We will print your company s logo on the cover of reprints,
collections, or books in black and white, two color, or four color. The
process is easy, cost effective, and quick.
Telephone: [phone] or Fax: [phone]
Permissions For permission to quote or reprint on a one-time basis:
Telephone: [phone] or Fax: [phone]
For permission to re-publish please write or call:
Permissions Editor
Harvard Business School Publishing
Box 230-5
60 Harvard Way
Boston, MA 02163
Telephone: [phone]