What are the developmental stages of a company?

This question helps a lot of business owners understand more or less where their business stands and where it should or could be. Moreover, knowing the answer to this question gives them a clear idea of what to focus on when developing their business. The stages do not always depend on the age of the business as much as they do on the scale of the business in terms of services and/or products, and quality offered by the company. A great example will be the sneakers company Bathu. Additionally, they depend on tangible and intangible resources that it possesses such as the number of branches, customer base, reputation, technology, level of expertise, management and operational methods, strategic planning, and so much more. But we will only discuss a few in this article.

Please note that the following are used interchangeably in this article.

“Client” and “Customer”
“Company” and “Business”
“Phase” and “Stage”
“Asset” and “Resources”
“Reccession” and “Decline”

Early researchers have developed frameworks as an attempt to classify the stages of business development. However, the Harvard Business Review[1] suggests that these frameworks are not entirely accurate and that not all companies need to go through all the stages suggested by them. This still applies to the era we are in. 

Furthermore, it is important to note that each stage has the challenges that it brings upon the business. Some of these challenges include but are not limited to, resource mismanagement, a vast pool of competitors, geopolitical conflicts, poor customer service, market scarcity, litigations, and high uncertainty in terms of internal operations. These will be mentioned at the appropriate stages in this article. 

I have extracted information from  various sources to come up with a somewhat universal model of the development stages. This is based on the common facts that most of them mentioned. 

The stages are fundamental idea, start-up, growth, expansion, maturity, and decline.

In this article, I will not be giving specifics such as how many staff members, how much income or assets determine the stage in which the company is. I believe that in this day and age with the way that technology is replacing humans, these numbers highly depend on the nature of the business. 

The fundamental idea

The basic building block of any business is always an idea. Ideas are produced when the observer realises or even encounters a problem and wants to bring solutions to tackle it for anyone else who encounters the same problem. Sometimes, these ideas come out of pure creativity where you want everyone around the world to experience your talent. Once you have an idea in mind, I recommend that you write it down with all the details you can think of. This way you can always revisit the notes, and with more information that you find, you will be able to edit and polish the idea further. Numerous successful companies started as a mere thought and ended up taking a whole different route while maintaining their primary objective. In rare cases, some companies move completely away from this objective.  

The fundamental idea is executed by the originating individual or a group of creative, disciplined, and determined people that transform this idea into a reputable and viable business through a strategic plan or a business model. This is why I am a big fan of the saying “there are no bad ideas”. Many ideas that were initially a laughing stock turned out to be successful businesses such as Netflix. Read the full story here.

The common questions to ask yourself at this stage:

Is this idea realistic?
How much data do I have to reassure myself?
Did I consider the pros and cons?
What do my family and friends think about the idea?
Is it easy to explain?

During this stage, the company or business does not yet exist, only the ideas and plans. When these ideas and plans are executed, they may or may not lead to the startup phase. 

Start-up

The correct spelling is “start-up”, according to the Oxford English Dictionary. The hyphen exists because it is a compound noun.

We all hear this term especially during this pandemic, where it has become more popular. 

What does it mean?

Investopedia defines a start-up as a small company that is “founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand.” And another definition is “a company working to solve a problem where the solution is not obvious and success is not guaranteed” as Neil Blumenthal[2] stated. Or it is “a small business that has just been started” as defined by the Cambridge Dictionary.

From these definitions, what I understood is that a start-up essentially is a transformation from an idea to solve problems into an actual establishment that has begun solving these problems and readjusting its methods according to the demand of the market, without knowing whether these methods or the service will be successful or not. The characteristics of start-ups range from the customer base to the initial revenues, to the quality of service, and the market acceptance. The stage is quite intense because you do not have enough data to make accurate decisions yet. 

The U.S. Small Business Administration also pointed out the fact that start-ups need between $2000 to $5000 to launch. In South Africa, it costs between R5 000 to R750 000 ($360 to  $54 000). Opening up a business in Europe can cost anything between €10 to €1000 ($13 – $1300). I believe there are no limits or clear minimums on how much you need to launch. It all depends on how many resources you have access to, the location, the nature of your business and how you will utilise these resources over time. This stage has a lot of uncertainty; the company is barely trying to survive. That is why this start-up stage is often referred to as the survival or seed stage. Funding comes from relatives, friends, loans, crowdfunding, and/or co-founders. 

Furthermore, 25% of companies already fail at this stage before reaching 5 years of age because of the pressure they receive and unpreparedness of the company in terms of delivering the service that they promise[3]. In South Africa, only about 27% of start-ups were considered “successful” in 2017[4]. This stage has a lot of confusion in it as you are still trying to figure out which products or services should you be offering. This blurriness is often temporary and goes away if you put in constant effort into research to know your full capabilities and match them with your customers’ demands[4].

It has been proven that the involvement of the business owner (you), has a great and usually positive impact on the development of the business at this stage. You will be performing multiple tasks at once: both administrative and executive. In fact, you are the sales, finances, marketing, production, distribution, IT department, and the list goes on. You need to learn when to let go of some responsibilities and delegate them to a skilled team. This often scares some business owners as they know that the company is not making enough profit to hire professionals; they see it as a lost investment. That is true. It is then up to the owner to know when the right time is. You have to act as soon as possible because not having this team might incur more loss than anticipated leading towards the death of the company. 

Remember, as always, to reach the next stage, you need to know the risks. Do not rush into it. Take the time to calculate the risks of having higher revenues and profits, what will be the company’s spending limits, what will the company be spending on in the first place? 

The common questions to ask yourself at this stage:

Who will use my products and services?
How will I fund this business?
What am I trying to achieve with this?
Am I prepared? 
What are the strategies I will apply?

Growth 

The growth or scaling stage is when there is less confusion as to what to serve and to whom. Your operations are much more organised than in the start-up phase. Revenues and other resources are managed better as their percentages also tend to increase. Because there is more clarity, the company can deliver service with satisfaction to the customers. The main focus is on effectiveness, efficiency, profitability and adaptability. And this is done with the help of technology, sales and marketing, accounts management, admin and other executive teams.

This stage is when concepts such as shareholders, corporate culture, agility, adaptability, equities, and dividends are introduced. The company manages to make enough profit to pay out dividends to its shareholders. Not all companies tackle such a practice on this stage yet though, because it becomes difficult for the company to manage its cash flow if it does not have stable revenues. Due to this fact, it is a challenge to make sure that the shareholders are satisfied and that the company is still able to sustain its operations. If your operations are very well organised, you can pull this off.  

In terms of cash flow, breaking even should not be a new concept as you have had enough data to know how your pricing affects your revenue and profits. Even at this seemingly stable stage, the company will still encounter challenges that might greatly impact it. Common issues are competition, customer’s trust and interest, and financial resources.

It is crucial to understand that competition can be both harmful and beneficial to your company. You need to study your competitors closely to know their next moves. This is where innovation is born within the company. This competition pushes you to be better than the competitors and simultaneously deliver your service in a more interesting and new way. Be warned, this is the silent approach that competition uses to drain your resources. You start to invest more in beating your competition instead of developing the service and product as intended in your primary organisational goals. The ideas you bring into your service and products are no longer interesting to the customers because they become “overdone”. You may wonder, “but my competitors are also innovating, why aren’t their customers tired of their innovations as well?”. Because of the point mentioned earlier, you lost touch of the primary organisational goals and your products and services are making less sense to the customers. So, innovate responsibly. 

The common questions to ask yourself at this stage:

Who can I trust as a partner?
How will I save funds?
What aspect of the business should I improve?
How can I innovate? 

For this stage, the company is pulling its resources just to exist. Funding comes from relatives, friends, shareholders, and business partners. 

Expansion  

By definition, expansion is when “the economy moves from a trough to a peak” according to Investopedia[5]. And also “when the company takes product development and customer development to the next level” as stated by Scott Maxwell[6].

I like to call this stage “the rooting” stage because the company develops its roots in the business world. It now focuses on partnerships, collaborations, shares, and sometimes branching out or franchising. You as the owner are worried less about how day-to-day operations are carried and rather put your focus on planning the future of the company. You might wonder, “what is the difference between growth and expansion?”. I would say, the number of competitors, level of customer’s confidence, publicity, and of course tangible and intangible assets. In the expansion stage, these numbers are usually higher.

This stage is when concepts such as partners, supply chain, investors, opportunities, franchises, and equity markets are developed. These concepts can be implemented as soon as the start-up or growth stage but usually, they put the business owner under a lot of pressure. 

Expansion is in simpler terms is when the company has developed a higher level of confidence in its customers because the quality of the products and services are known to them. The customers position your company compared to others based on the criteria that matter to them. This positioning process also affects the sort of message that will be spread about the company. One of the most effective marketing strategies is word-of-mouth. This word must be as positive as can be. This is where protecting the company’s reputation by all means, within reason, plays a big role. The company will have to make sure that rumours spread on social media are debunked as soon as possible, make sure that the products and services comply with standards and the law. There is a lot of effort to be put into this.

With the expansion, the competition becomes very interesting because, for some companies, competitors are considered less as “enemies” or “rivals” but rather potential investments. This is where my favourite terms “mergers and acquisition (MA)” come into play. This process can happen from this stage to the maturity stage. Franchising, mergers, ventures, acquisitions, etc., aid the company in preparation for the maturity stage. 

Note: the difference between MAs and ventures is that the MAs are two or more organisations becoming one consolidated organisation. Ventures, on the other hand, are often temporary alliances/partnerships where organisations or investors create a new business together. 

In terms of partnerships, be careful when it comes to splitting shares and revenue portions equally with seemingly trustworthy partners. The best way to do this is to determine exactly what each partner brings as a contribution to the success and development of the company before assessing any shares or ownership distribution. Partners should not only enjoy the assets but also take care of the liabilities and responsibilities of the company[7]. It is imperative to understand how equities and  shares work before making any regrettable decisions that might impact the life of the business. A short introduction on equity can be found here: Investing in stocks for beginners.

Issues you may encounter in this stage (and others) are litigation, geopolitical conflicts and poor customer service. Your business will struggle if these problems are combined. You may be able to avoid litigations by fighting legal battles and stay on the right side of the law. You may improve customer service by solidifying the operations, training staff, act upon customer reviews and more. External factors though, such as geopolitical conflict are beyond your control and there is not a lot you can do about them. 

The common questions you ask yourself at this stage:

How to open a new branch?
What are shares?
What are my contingency plans?
Am I on the right side of the law?
What is our position from the customer’s perspective? 

Maturity 

A company is considered mature when the “product has reached its pinnacle in sales and the volume sales growth tend to stagnate”. This is a highly challenging stage because when mishandled, it can cause the collapse of the company.  

In other words, the company is very well known for its products and services, and that it has a big influence on the industry. Although, this is also where the number of sales begins to slowly reach its peak as the company is heading towards its possible recession. The maturity stage can last a few years or even decades depending on the level of interest that the customers have in the services and products that you offer. Companies tend to prolong this phase to avoid the recession stage as much as they can. Unfortunately, though, this practice does get costly. As the company is losing its customers’ attention, it also loses many other sources of income it used to rely on. A simple example would-be investors who are pulling out of the company because the founder, who used to be their close partner, is retiring.  

This stage is when concepts such as operational excellence, networking, stock exchange, market cap, methodologies, negative growth are developed.  

Surely by this stage, the company has a definitive corporate culture that not only makes it distinguishable from other companies but also highlights the methods and style of operations that drive the day-to-day activities within the company. Methodologies are applied when it comes to how to manage human resources or even develop the newest software that the company will sell. Great examples of methodologies are Six Sigma. Six Sigma can be used both as a metric and methodology that can help increase productivity. Read more about Six Sigma

The common questions to ask yourself at this stage:

What methodologies suit my business?
What is negative growth?
How much room for errors is there?
Am I prepared? 
Is the business reaching the Decline stage?

Decline

Everything that is created always dies. It is simply how the universe works. Big companies such as J.C Penny, Edcon, Greyhound and Blockbuster have reached this stage. And this stage does not happen for only one reason; it is a combination of factors that are beyond the company’s control. 

The business is no longer considered profitable in any way as the sales keep on dropping. Products are reduced to clear, investors and stakeholders pull out of the company, branches close down, there is now a higher cost to maintain assets. The business is no longer part of the competition and does not affect the current industry affairs. This will eventually lead to the exit of the business completely.

The decline stage sounds like a sad event, and yes, most of the time, it is but not always. Sometimes a business dies to give way to the creation of a new business with new concepts and models. 

This is why some owners analyse in advance how the business can be transferred or transformed. That is where concepts such as valuation, trusts, insolvency, bill of sale, revival, brokers, and escrow are developed. 

The decline stage is not always a “lose-lose” situation. Sometimes  the owners can decide to sell the business to at least get back a portion of what they invested. The business might still exist but probably under different new management and corporate culture. Although, this is not always the case because not everyone wants to buy a failing and dying business. Ultimately, you will only rely on the valuation of assets which might also not bring much back after they’re sold. This will push the company to file for bankruptcy and exit the market.   

The common questions to ask yourself at this stage:

How do I sell my business?
What is the valuation of my business?
Can I still revive the business?
What caused the decline? 
How to file for bankruptcy?

In conclusion… 

We have to remember that companies start with ideas. These ideas, with the support of business plans, strategies and resources, may lead to the beginning of a start-up. This Start-up stage can develop to reach the Growth stage where operations are much more organised and the customer’s needs are met. The Expansion stage follows the Growth stage where the business is well established in terms of service and has a stable cash flow. Additionally, the business is even considering options for new branches. After the Expansion, the next probable stage is the Maturity stage where the company has a large customer base and can influence the industry that it is in. Following this, comes the Decline stage. This stage is where the business exits the market due to various factors. 

There is not a straight answer to the question “what are the development stages of a business?” because not all companies will go through each stage and/or chronologically. This was my attempt to give you a pathway, I hope it helps you decide the next step for your company. 

Useful links

Many companies can help you develop your idea from name registration to establishment to marketing and more.

Here are a few of them in South Africa

References

  1. Harvard Business Review. (1983, May). The Five Stages of Small Business Growth.  https://hbr.org/1983/05/the-five-stages-of-small-business-growth
  1. Blumenthal, N. (n.d). Neil Blumenthal Quotes. https://www.brainyquote.com/authors/neil-blumenthal-quotes
  1. Petch, N.(2016, September). The Five Stages Of Your Business Lifecycle: Which Phase Are You In?. https://www.entrepreneur.com/article/271290
  1. SME South Africa. (2017, November). Black Startups In SA Are Struggling. https://smesouthafrica.co.za/17740/Black-Startups-In-SA-Is-Up-Survey.  
  1. Investopedia. (2021, January). Expansion. https://www.investopedia.com/terms/e/expansion.asp#:~:text=Expansion%20is%20the%20phase%20of%20the%20business%20cycle%20when%20the,to%20more%20than%20a%20decade
  1. Maxwell, S. (2009, September). What Is Expansion Stage?. https://openviewpartners.com/blog/what-is-expansion-stage/#.YB2VXpdxfIU.

Rennie, S.(2016, January). An Insider’s Guide to Today’s Music Biz.https://www.linkedin.com/learning/an-insider-s-guide-to-today-s-music-biz-1-the-big-picture/introduction.