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At first, categorizing the difficulties and growth patterns of small firms in a methodical way that is beneficial to entrepreneurs appears to be an impossible undertaking. The size and capability for the expansion of small firms vary greatly. They are distinguished by their freedom of action, diverse organizational structures, and diverse management styles.
However, with closer inspection, it becomes clear that they have comparable issues that arise at similar phases of growth. These similarities can be organized into a framework that improves our understanding of the problems of businesses ranging from a corner dry cleaning shop with two or three minimum-wage workers to a $20 million-a-year computer software company with a 40% annual growth rate.
Such insight may help small business owners and managers identify current issues, such as the need to modernize an existing computer system or employ and educate second-level managers to continue expected development. It can aid in predicting crucial requirements at various stages, such as the excessive time commitment required of owners during the start-up phase and the need for delegation and changes in their positions as businesses get larger and more complicated.
The key issues of the firm at this stage are gaining clients and delivering the product or service agreed for. The following are some of the important questions:
The structure is straightforward—the owner handles everything and personally oversees subordinates, which should be competent. Systems and formal planning are either non-existent or minimal. The company’s aim is to just stay alive. The owner is the business, does all of the main responsibilities, and is the primary source of energy, direction, and capital, together with relatives and friends.
Companies in the Existence Stage include everything from freshly opened eateries and retail stores to high-tech enterprises that have yet to establish either production or product quality. Many of these businesses never achieve enough client acceptability or product capabilities to become successful.
When the start-up funding runs gone, the owners close the firm and, if they’re lucky, sell it for its asset value. In certain circumstances, the proprietors are unable to tolerate the demands placed on their time, funds, and energy by the firm and resign. Those firms that survive become Stage II enterprises.
By reaching this point, the company has proven that it is a viable corporate entity. It has a significant number of clients and adequately satisfies them with its products or services to maintain them. As a result, the primary issue moves from simple existence to the connection between revenues and costs. The following are the primary issues:
The arrangement is still straightforward. A sales manager or a general foreman may supervise a small number of people at the firm. Neither of them takes big decisions on their own but instead follows the owner’s relatively well-defined directions.The development of systems is modest. Formal planning is essentially monetary forecasting. The main aim remains survival, and the owner is still associated with the company.
The firm may expand in size and profitability during the Survival Stage and go to Stage III. Or, like many businesses, it may linger in the Survival Stage for some years, producing meagre returns on invested time and cash before going out of business when the owner gives up or retires.
This category includes “mom-and-pop” establishments as well as manufacturing companies that are unable to sell their product or process as intended. Some of these marginal firms have grown to the point where they may be sold, generally at a little loss. Or they may entirely fail and disappear from view.
At this point, owners must decide whether to capitalize on the firm’s achievements and grow or to maintain the company stable and profitable, creating a foundation for alternative owner activities. As a result, a critical question is whether to use the firm as a growth platform or as a source of support for the owners when they entirely or partially disengage from the company. Behind the disengagement may be a desire to launch new businesses, seek political office, or just pursue hobbies and other outside interests while keeping the firm relatively stable.
The firm has achieved full economic health, has enough size and product market penetration to assure economic success, and makes average or above-average earnings. The firm can remain at this stage indefinitely as long as the environmental change does not destroy its market niche and inadequate management does not impair its competitive capacities.
Organizationally, the firm has grown large enough that, in many situations, functional managers are required to take over certain functions previously undertaken by the owner. Managers should be competent but not of the greatest degree, as their advancement potential is constrained by the company’s aims. Cash is plentiful, and the major worry is to avoid a cash drain during lucrative periods, which would jeopardize the company’s capacity to weather the inevitable tough patches.
Furthermore, the first professional staff members are hired, often a controller in the office and maybe a production scheduler at the factory. The fundamental financial, marketing, and manufacturing processes are in place. Functional delegation is aided by planning in the form of operational budgets. The owner and, to a lesser extent, the company’s management should be keeping an eye on a plan that effectively maintains the status quo.
As the firm evolves, it and the owner grow apart, partly due to the owner’s activities elsewhere and partly due to the involvement of additional management. Many businesses thrive for extended periods of time. Some product-market niches do not allow for expansion. Other owners really choose this road; if the firm can continue to adjust to environmental changes, it can remain as is, be sold or combined at a profit, or be encouraged into expansion in the future. This last option would entail the purchase of additional franchises by franchise holders.
The primary issues at this point are how to develop quickly and how to finance that expansion. The most significant questions, then, are as follows:
The organization is dispersed and, to some extent, dimensionalized—typically in sales or manufacturing. To manage a developing and complicated corporate environment, senior managers must be extremely knowledgeable. Growth is causing the systems to become more sophisticated and comprehensive.
Specific managers are involved in both operational and strategic planning. Although the owner and the business have separated, the firm is nonetheless controlled by the owner’s presence and stock ownership. This is a critical time in the life of a business. If the owner rises to the challenges of a developing firm, both financially and managerially, it has the potential to become a large corporation.
If not, it may generally be sold for a profit if the owner understands his or her limitations early on. Of course, the organization may go through this high-growth stage without the original management. The entrepreneur who started the firm and led it to the Success Stage is frequently replaced, either voluntarily or involuntarily, by the company’s investors or creditors.
The primary priorities of a firm entering this stage are, first, to consolidate and control the financial benefits brought on by rapid expansion and, second, to maintain the advantages of small sizes, such as responsiveness and entrepreneurial spirit. The corporation must rapidly expand its management force in order to eliminate the inefficiencies that growth can cause, as well as professionalize the company through the use of tools such as budgets, strategic planning, management by objectives, and standard cost systems—all while retaining its entrepreneurial qualities.
A Stage V organization has the expertise and financial means to do extensive operational and strategic planning. Management is decentralized, well-staffed, and well-experienced. And the systems are comprehensive and well-developed. The business has now arrived. It benefits from its size, financial resources, and management talent. If it can keep its entrepreneurial spirit, it will be a strong market force. If not, it may reach a sixth type stage: ossification.
Ossification is characterized by a lack of risk-taking and inventive decision-making. It appears to be most frequent in huge firms, whose substantial market share, purchasing power, and financial resources keep them viable until the environment changes dramatically. Unfortunately for these companies, it is generally their fast-increasing competitors who are the first to discover the environmental shift.
Owners of developing businesses must question themselves:
Similarly, the potential entrepreneur may observe that beginning a firm needs the ability to do something exceptionally well (or a solid marketable concept), a high level of enthusiasm, and a positive cash flow prediction (or a substantial quantity of cash on hand). These become less critical in Stage V, when excellent people management skills, information systems, and financial controls take precedence. Perhaps this is why some experienced executives from major corporations struggle to succeed as entrepreneurs or managers in small businesses. They are used to delegating but are not very adept at it.