The Five Stages Of SME Growth

By

Lydia Gomez

21st Apr 2017

7 min read

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What companies go through from inception to sustainability

Business is a big word. Or more appropriately, it is a word that means big things — big ideas, plans, revenue, growth and presence.

For many business owners, the growth trajectory from the point of inception, right until the period of sustainability, can become a journey that provides valuable insights on what works and what doesn’t in the world of small and medium sized enterprises (SMEs).

While each business can be entirely different in nature, their growth phases display similar patterns based on their specific stages of development. Last year, at Leaderonomics, we developed a CEO accelerator programme, called the Leadership Dojo. We had the opportunity to get up-close and personal with almost 20 CEOs who ran varying sizes of businesses.

 
This might interest you: Lessons From 4 CEOs in MDEC’s Leadership Dojo
 

What we learnt was that there is a pattern and formula for business growth. From the start-up stage till the IPO or exit stage, there is an organisational development element and also an owner development piece.

In the organisational piece, there are numerous constraints faced but if we look at it in a macro sense, it is very similar. Leaderonomics CEO, Roshan Thiran, wrote a piece on the four constraints faced by organisation, which can be referenced at: 4 Constraints Preventing Your Organisation From Becoming World-Class

 

The research

As I was having a conversation recently with Roshan, he shared with me a Harvard Business Review (HBR) magazine article written by Neil C. Churchill and Virginia L. Lewis depicting the five stages of growth for an SME and I thought parts of it were relevant to the Malaysian SME context.

Let’s take a look at these stages and see what it takes for companies to make it through to the fifth and most desired phase of growth. The five stages are below:

 

Stage I: Existence

At the point of inception, business owners conceptualise the big idea, test the market and determine what products and services they need to deploy to become an authentic organisation.

It is during this high-octane phase that the most amount of energy is spent – determining the target audience for an organisation’s product or service, understanding market dynamics and believing in the longevity of a business plan.

It is also in this start-up phase that small organisations see the leanest reporting lines; owner-operators frequently run the show themselves, setting the tone for culture and targets.

They often work directly with all employees, keeping systems – as well as formal, complex strategies – out of the picture until the business proves that it can sustain itself. This simplicity of process can be both a blessing and a curse.

Leaderonomics went through a similar phase where our co-founders, Roshan together with Ang Hui Ming, would spend countless hours working directly with customers, vendors and with each employee to teach, incubate and drive new products and services. They would also handle finances, manage cash flow and work from Starbucks to build content, a website and even marketing collaterals.

Some companies, however, experience a hit at this point, forcing them to close or sell the business when investor money or capital runs out because they have failed to secure the targeted client or consumer base.

In fact, research in Malaysia shows that more than 90% of organisations fail at this stage.

Stage II: Staying alive

Companies that make it to this phase are those that have demonstrated that there is demand for their product or service, and that this market is the key to ensuring their survival in the next business stage. In other words, these companies have shown viable business models that can compete within the greater market.

According to HBR, the key challenge in this phase relates to revenue and expenses: “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 labour?”

At this stage, the company operates in a manner only slightly more complex than Stage I: direction still comes from the owner, while managers are put in place to ensure that targets are met; concerns are still centred around revenue and profitability.

This is one of the toughest stages to be in. Every day, operational issues are the centre of attention. It was the same at Leaderonomics when we were in this stage.

As a social enterprise, our key metric and measurement was our social impact. But to remain sustainable, revenue and expenses were our key secondary metrics.

Also, when I dialogue with numerous CEOs who are in this stage, many of them feel helpless and crippled by the daily grind to keep the organisation afloat. And whilst some organisations transition from this phase to Stage III, many get stuck in this virtuous and unending cycle.

 

Stage III: Success

Here, success can come with a conundrum: do companies continue with its stable and profitable business? Or, do they make the most out of their achievements thus far and begin to scale and grow?

This phase is divided into two sub-stages: Success-Disengagement (D) and Success-Growth (G).

Companies at the D stage are described as those that have ‘attained true economic health, have sufficient size and product-market penetration to ensure economic success, and earn average or above-average profits’.

This means that the company would most likely choose to stay this way, which then creates the need to hire managers who would maintain smooth-sailing business based upon linear company goals. HBR states: “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.

While hands-on and involved in previous stages, owners of companies in this stage would likely be more distant, after handing over daily operations to other managers.

Over at the G stage, are companies that harbour ambitions for growth. This means that while the owner gathers all its resources to invest in expansion, the organisation also has to ensure that the business stays profitable and its talent pool is developed to meet the demands of the next stage of growth.

Hiring managers, according to HBR, have to act with the company’s future strategy in mind, and not so much the current business, as the owner now takes on heavily strategic parts of the business that would drive the intended growth for the company.

Stage IV: Take off!

At the G stage are companies that have the intent to take the business to the next level – however, if the venture fails, G companies should be able to detect this in time to scale back to D stage and stick to what is currently working best before incurring losses.

HBR specifies that Stage IV companies should address two pertinent issues: delegation and cash.
Here, owners must know if they are capable of delegating responsibility to others in order to improve the overall effectiveness of a now complex, and growing enterprise. And, if they have the capacity to see mistakes being made.

At this stage, where growth is intense and necessary for bigger gains, owners must ascertain if there is enough cash to manage changing demands and investments.

Businesses become increasingly segmented at this stage, with the creation of departments and divisions which, according to HBR, are usually in sales or production.

 
Related post: How You Can Gain From The SME CEO Conference 2017
 

 

Stage V: Sustainability

As companies enter this stage, management becomes decentralised, and systems are well-developed. The owner and the business are now comfortably apart from each other and the business has reached a stage where it has more than enough financial resources and executive talent.

One of the speakers at the upcoming SME CEO Conference on April 26 is one of the co-founders of Jobstreet. Jobstreet was bought over by Seek Asia, and is one of the few SMEs that have managed to get to this stage.

Suresh Thiru, who is today the CEO of Seek Asia, has seen the highs and lows of getting an organisation through the various stages till it becomes sustainable and successful.

It wasn’t easy and one that only few entrepreneurs succeed in. Recently, Jack Ma, China’s most successful entrepreneur, shared how his Alibaba team had a painful growth process.

Yet, it endured and with an unorthodox business model, differentiated culture and solid structures and processes, together with Jack’s leadership, they managed to overcome the odds to take his SME to greatness.

 

Final thoughts

Outside of Jobstreet, we have seen companies like EcoWorld grow from a start-up into an RM8 billion business in four years. Datuk Chang Khim Wah, CEO of EcoWorld will also be sharing his success secrets in the upcoming SME CEO conference. If you carefully analyse their story, you will see similarities to the five stages and their growth patterns. Some of their growth is accelerated whilst others take more time.

The difference between the accelerated growth and the slow growth organisation is undermined by two key areas – owner challenges and organisational constraints. Owner challenges include their personal clarity of goals for self and the business and also how they can grow into better leaders, and upgrade their capability to drive operations and business strategy.

Organisational issues include factors like their business model, culture, processes and structure and other factors like financial resources and people issues. And so, the SME CEO who addresses these key challenges would likely accelerate growth.

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