Too often, those who bring the business to the Success Stage are unsuccessful in Stage IV, either because they try to grow too fast and run out of cash the owner falls victim to the omnipotence syndrome , or are unable to delegate effectively enough to make the company work the omniscience syndrome.
It is, of course, possible for the company to traverse this high-growth stage without the original management. If the company fails to make the big time, it may be able to retrench and continue as a successful and substantial company at a state of equilibrium endpoint 7 on Exhibit 4.
Or it may drop back to Stage III endpoint 6 or, if the problems are too extensive, it may drop all the way back to the Survival Stage endpoint 5 or even fail.
High interest rates and uneven economic conditions have made the latter two possibilities all too real in the early s. The greatest concerns of a company entering this stage are, first, to consolidate and control the financial gains brought on by rapid growth and, second, to retain the advantages of small size, including flexibility of response and the entrepreneurial spirit. The corporation must expand the management force fast enough to eliminate the inefficiencies that growth can produce and professionalize the company by use of such tools as budgets, strategic planning, management by objectives, and standard cost systems—and do this without stifling its entrepreneurial qualities.
A company in Stage V has the staff and financial resources to engage in detailed operational and strategic planning. The management is decentralized, adequately staffed, and experienced. And systems are extensive and well developed. The owner and the business are quite separate, both financially and operationally.
The company has now arrived. It 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 sixth stage of sorts: ossification. Ossification is characterized by a lack of innovative decision making and the avoidance of risks. It seems 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 environment. Unfortunately for these businesses, it is usually their rapidly growing competitors that notice the environmental change first.
Several factors, which change in importance as the business grows and develops, are prominent in determining ultimate success or failure. We identified eight such factors in our research, of which four relate to the enterprise and four to the owner.
The four that relate to the company are as follows:. Personnel resources, relating to numbers, depth, and quality of people, particularly at the management and staff levels. Systems resources, in terms of the degree of sophistication of both information and planning and control systems.
Business resources, including customer relations, market share, supplier relations, manufacturing and distribution processes, technology and reputation, all of which give the company a position in its industry and market. As a business moves from one stage to another, the importance of the factors changes. See Exhibit 5. The changing nature of managerial challenges becomes apparent when one examines Exhibit 5.
This factor is thus of the highest importance. At the same time, the owner must spend less time doing and more time managing.
He or she must increase the amount of work done through other people, which means delegating. The inability of many founders to let go of doing and to begin managing and delegating explains the demise of many businesses in substage III-G and Stage IV.
The owner contemplating a growth strategy must understand the change in personal activities such a decision entails and examine the managerial needs depicted in Exhibit 5. The importance of cash changes as the business changes. It is an extremely important resource at the start, becomes easily manageable at the Success Stage, and is a main concern again if the organization begins to grow.
The issues of people, planning, and systems gradually increase in importance as the company progresses from slow initial growth substage III-G to rapid growth Stage IV. These resources must be acquired somewhat in advance of the growth stage so that they are in place when needed. Matching business and personal goals is crucial in the Existence Stage because the owner must recognize and be reconciled to the heavy financial and time-energy demands of the new business.
Some find these demands more than they can handle. In the Survival Stage, however, the owner has achieved the necessary reconciliation and survival is paramount; matching of goals is thus irrelevant in Stage II.
A second serious period for goal matching occurs in the Success Stage. Does the owner wish to commit his or her time and risk the accumulated equity of the business in order to grow or instead prefer to savor some of the benefits of success? All too often the owner wants both, but to expand the business rapidly while planning a new house on Maui for long vacations involves considerable risk.
To make a realistic decision on which direction to take, the owner needs to consider the personal and business demands of different strategies and to evaluate his or her managerial ability to meet these challenges. Finally, business resources are the stuff of which success is made; they involve building market share, customer relations, solid vendor sources, and a technological base, and are very important in the early stages.
In later stages the loss of a major customer, supplier, or technical source is more easily compensated for. Thus, the relative importance of this factor is shown to be declining. The changing role of the factors clearly illustrates the need for owner flexibility. An overwhelming preoccupation with cash is quite important at some stages and less important at others.
Delaying tax payments at almost all costs is paramount in Stages I and II but may seriously distort accounting data and use up management time during periods of success and growth. Holding onto old strategies and old ways ill serves a company that is entering the growth stages and can even be fatal.
Even a casual look at Exhibit 5 reveals the demands the Take-off Stage makes on the enterprise. This is the stage of action and potentially large rewards. Looking at this exhibit, owners who want such growth must ask themselves:. Do I have now, or will I have shortly, the systems in place to handle the needs of a larger, more diversified company? Do I have enough cash and borrowing power along with the inclination to risk everything to pursue rapid growth? Similarly, the potential entrepreneur can see that starting a business requires an ability to do something very well or a good marketable idea , high energy, and a favorable cash flow forecast or a large sum of cash on hand.
These are less important in Stage V, when well-developed people-management skills, good information systems, and budget controls take priority. Perhaps this is why some experienced people from large companies fail to make good as entrepreneurs or managers in small companies. They are used to delegating and are not good enough at doing. This scheme can be used to evaluate all sorts of small business situations, even those that at first glance appear to be exceptions. Take the case of franchises.
These enterprises begin the Existence Stage with a number of differences from most start-up situations. They often have the following advantages:. If the franchisor has done sound market analysis and has a solid, differentiated product, the new venture can move rapidly through the Existence and Survival Stages—where many new ventures founder—and into the early stages of Success.
The costs to the franchisee for these beginning advantages are usually as follows:. One way to grow with franchising is to acquire multiple units or territories.
Managing several of these, of course, takes a different set of skills than managing one and it is here that the lack of survival experience can become damaging. Another seeming exception is high-technology start-ups.
These are highly visible companies—such as computer software businesses, genetic-engineering enterprises, or laser-development companies—that attract much interest from the investment community. Entrepreneurs and investors who start them often intend that they grow quite rapidly and then go public or be sold to other corporations. This strategy requires them to acquire a permanent source of outside capital almost from the beginning.
The providers of this cash, usually venture capitalists, may bring 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. At this point, the planned strategy for growth is often beyond the managerial capabilities of the founding owner and the outside capital interests may dictate a management change.
In such cases, the company moves rapidly into Stage IV and, depending on the competence of the development, marketing, and production people, the company becomes a big success or an expensive failure. Besides the extreme examples of franchises and high-technology companies, we found that while a number of other companies appeared to be at a given stage of development, they were, on closer examination, actually at one stage with regard to a particular factor and at another stage with regard to the others.
For example, one company had an abundance of cash from a period of controlled growth substage III-G and was ready to accelerate its expansion, while at the same time the owner was trying to supervise everybody Stages I or II. Although rarely is a factor more than one stage ahead of or behind the company as a whole, an imbalance of factors can create serious problems for the entrepreneur.
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It is difficult to imagine a large corporation generating this type of energy and support. Devra Gartenstein founded her first food business in In she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.
By Devra Gartenstein Updated January 28, Tip Small businesses are important because they provide opportunities for entrepreneurs and create meaningful jobs with greater job satisfaction than positions with larger, traditional companies. Work For a Small Business.
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