Small-scale enterprise growth stages, management factors

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The final stage in small business growth is the resource maturity stage

Kudzai M. Mbaiwa Small Businesses
Understanding the growth stages and management factors of small businesses is vital. This is the first step before extending any support that would address their common challenges. In their 1983 paper, Churchill and Lewis postulate that small businesses vary widely in size and capacity for growth. They are characterised by independence of action, differing organisational structures, and varied management styles.

The authors identified five growth stages that are instructive for appreciating the experiences of local SMEs.

These are the existence stage, survival stage, success stage, take-off stage and resource maturity stage. We expound on these in the Zimbabwean context.

Unpacking Small Business Growth Stages — Existence and Survival

At the first stage, existence, a simple model is in place, the entity is owner run and there are a few subordinates that report directly to him.

Most activity, if not all is done by this owner and he bears the full burden of funding the establishment of enterprise, finding resources to keep it running as a going concern, securing clients, ensuring that products or services are delivered.

It is a largely exploratory stage and there is a lot of pressure to consistently deliver, gain and retain customers and stay afloat.

Systems may be set up but they are usually quite flexible or minimal, if at all existent. Demand on the owner is high, they literally are the business and it takes a great deal of motivation and perseverance to continue.

As such, the rate of failure at this stage is high. Typical examples are the many clothing shops we see spring up in the city, or single store food outlets / takeaways. The key challenge is acceptance by the market.

The second stage, survival, has those businesses that have made it out of stage one, has acquired some customers, has an acceptable product/service that warrants repeat business, and therefore has a semblance of economic viability.

The setup will be entry level formal and the owner or promoter remains fairly hands on though not so much as at the existence stage. He may introduce a supervisor system but still retains control over the business and spends a great deal of energy balancing income and expenses relating to the business.

Good examples of this stage are a small supermarket or a standalone service station — or other business that cannot be guaranteed that product will be sold as planned or services required in the case of a small consulting outfit.

It is thus common for businesses to stay at this stage for long periods of time, sometimes until the promoter gives up. Managing cash flow is the key challenge at this stage.

Unpacking Small Business Growth Stages — Success, Take Off, Maturity

The success stage is perhaps the most exciting, and at this third level, the company will have found a functional economic model, underpinned by an accepted product or service, anchor clients, a defined market and making profit.

The owner will have disengaged from most operations and put in place competent managers, and formal structures at all operational levels. A proper system will have been created, allowing the enterprise to operate efficiently without his constant intervention.

The cash flow situation would by now have greatly improved, and the owner can opt to leverage this for expansion into new fields and can lead this easily as running the core business will have been delegated.

Alternatively, some business owners prefer to maintain that status quo, but stay on the lookout for changes in the environment that could threaten their position, and make the necessary adjustments if any are detected.

This is important because if overtaken by new innovations or practices, a successful business can potentially lapse back to the survival phase or completely fail.

Some indigenous examples that fit this bill are technology innovation companies in both hardware and software business. As such, getting the best talent, to stay competitive, is a notable challenge at this stage.

Stage four is the take-off stage, where growth is now rapid because a winning formula has been found and the demand for resources is higher than what is generated internally.

There is requirement for more deliberate planning at operational and strategic levels; therefore the quality of personnel will matter.

The take off stage is a crossover stage in the life of a business, the point where it can blossom into a big business, or the end of the road of the founder should he elect to sell it.

The twin challenges of financial and personnel resources are major determinants in the path the business will take, and courageous decisions are required here.

Though the owner would by now have separated themselves operationally from the business, they may still have a say and sway in how it moves forward. It will take great boldness and wisdom to allow economic indicators to have pre-eminence, and dictate the next steps.

Often, there will be a need to bring in new, technically apt staff that have capacity to manage a business at that level and beyond, and may necessitate letting go of staff that brought it to that stage.

A strong board of competent directors that preserve and increase shareholder value becomes inevitable.

Examples that match this stage include some fast moving consumer good companies, especially those that manufacture a range of food products or retailers that develop strong brands, enjoy strong demand and through their efficient distribution systems develop national footprint.

The final stage in small business growth is the resource maturity stage, where the greatest challenge is managing the inefficiencies that may come with growth.

The company has to become fully professional, with proper systems and controls, and yet maintaining an entrepreneurial flair. The company will have optimised in size and with that financial resources and human capital. Total separation between it and the owner will exist.

The advantages of small size would ideally be retained and it will be in the company’s best interest to stay aware of changes in the environment, as there will always be the threat of growing competitors.

Interventions for Management Factors Affecting Small Business

We surmise that many small-scale enterprises in present day Zimbabwe fall under stage one and two, with some outliers in stages three to five. This disaggregation by stage is necessary as it informs policy by government and programming or service provision by enterprise development support institutions. Churchill and Lewis further noted cross-cutting factors, which change in importance as the business grows and develops, and are prominent in determining ultimate success or failure. They identified four such factors in their research which relate to the enterprise or company, namely Financial Resources, Personnel Resources, System Resources and Business Resources.

The four factors are an apt summary of the interventions that are necessary regardless the stage any small business is at.

Answers that immediately come to mind for implementation are to ensure that bespoke support exists at every stage of small business growth.

Our present support models for SMEs in Zimbabwe are inflexible to the lived experiences of business owners.

The assumption is that every business behaves the same, and serious resources are only accessible from the success stage. We will share more possible solutions at each stage in next week’s column.

  • Feedback: Twitter @kumub, Email kudzi@investorsaint.co.zw

 

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