Every small business dreams of growing into that $100MM midsize company–and every midsize company dreams of even grander sales. As a company grows, it traverses through distinct stages of growth. In fact, there are specific characteristics that define companies at a each growth stage. Knowing, understanding, and anticipating these characteristics will best prepare any business for that stage and help navigate it to its next level.
There are several time-tested business frameworks that focus on this topic of SMB growth. These are the same frameworks management consulting firms use when advising clients on their growth challenges. In this article, we will discuss 3 such frameworks. Please note each framework is associated with a specific document that is available for sale on Flevy.
Five Stages of Business Growth
Let’s first start with the framework, the Five Stages of Business Growth. This framework is based on the fact that all businesses experience common problems that arise at similar stages in their development. It is geared more towards the unique aspects of the business, and not the industry.
Familiarity with the Five Stages of Business Growth allows the business owner and business consultant to develop invaluable insights, including:
- Knowing what to focus on at what stage;
- Appropriate management style at each stage;
- Anticipation of key challenges at various points;
- Critical success factors through the company’s progression;
- Involvement of owner at various stages; and
- Evaluation of impact from governmental regulations and policies.
Each stage of growth is characterized by a different impetus to growth and threatened by a different crisis. Refer to the image below to visualize what the five stages are and how they differ.
Each stage also requires a different management style, a different strategic focus, and has a different state of systems and processes. For instance, in the initial stage of “Survival,” the owner manages everything and everyone. There are no defined business processes–most processes are ad hoc and not repeated. The management and reporting of the organization becomes more complex as the organization grows; by Stage 3, “Success,” management is organized Functionally; by Stage 4, “Take Off,” it is Divisional; lastly, in the final “Resource Maturity” stage, it is Line and Staff. By the last stage, the organization is considering implementing a full Enterprise Resource Management (ERP) system to better manage its systems and processes.
For more information on this framework, go here: https://flevy.com/browse/business-document/five-stages-of-business-growth-249
Consolidation Curve (or Endgame Curve)
The Consolidation Curve, or Endgame Curve, is a framework based on the theory that all industries consolidate and follow a similar course through the 4 stages of: Opening, Scale, Focus, and Balance & Alliance. This framework is based on a study of 25,000 firms globally, representing 98% of the global market cap, conducted by the global strategy consulting firm AT Kearney.
Whereas the previous framework isolates characteristics of the business, the Consolidation Curve framework places the business within the context of its industry. For instance, this framework shows that merger actions and consolidation trends can be predicted. When the industry is in the Scale phase, growth is fueled by M&A activity rampant across the industry, as the biggest players are vying for market share.
The Consolidation Curve is best visualized by looking at the combined market share of the top 3 players. Refer to the diagram below for this depiction.
Using the Consolidation Curve as guidance, a business can strengthen its consolidation strategies and facilitate merger integrations. A niche player can also determine the appropriate niche strategy to use and when is the best time to be acquired. Every major strategic and operational move should be evaluated with regard to the industry’s stage in the Consolidation Curve. Likewise, endgames positioning also offers a guide for portfolio optimization.
The duration of the curve varies from industry to industry. For instance, the automotive industry has been around for 100+ years and only at the end of stage 2 (Scale). With that said, it typically lasts 20-25 years.
A critical implication of this framework is that for a business to survive through the industry’s evolution, it must acquire or merge. It cannot solely rely on organic growth. Here are some additional growth implications:
- This is no optimal or maximum company size–to survive, company must just continuously grow.
- Organic growth is not the route to successful growth. Mergers are inevitable if a business wants to outgrow its competition.
- There are few protectable niche markets–as all industries become global, niche players will be consolidated during the Focus and Balance & Alliance stages.
- There are successful niche strategies at various stages of the curve that companies can adopt.
- Each stage implies specific strategic and operational imperatives.
- Learning how to successfully integrate an acquisition or merger partner is quickly becoming a core competence of successful endgame players (i.e. a top 3 company).
- Companies should strive to optimize their aggregate portfolio of subsidiaries and business units across the different stages.
- A merger or acquisition should advance the resulting entity along the curve.
There are many savvy business owners who are intuitively aware of the pattern outlined by this framework. They then pick out industries and in the early Opening Stage and launch businesses within those industries. Their goal is merely to be acquired in the following Scale stage, so that they can quickly cash out.
For more information on this framework, go here: https://flevy.com/browse/business-document/consolidation-endgame-curve-framework-201
All businesses–whether small, medium, or large–face the challenge of achieving sustainable growth. Growth is commonly inhibited by a lack of breakthrough ideas, balancing cost-out and margin trade-offs, and execution challenges.
This last framework document presents a number of accepted management models related to Growth Strategy. You can consider this a more comprehensive toolkit on the topic.
As a business grows, it must traverse 3 horizons of growth, each with a different focus:
- Horizon 1: Extend and defend the core business.
- Horizon 2: Build emerging businesses.
- Horizon 3: Create viable options for future growth.
Each horizon has different objectives and requires different executives to manage and foster its growth. For instance, the initial phase requires Strong Operational Managers and Leaders. The last phase requires Visionaries and Unconventional Thinkers.
For more information on the general topic of growth strategy, check out this document: https://flevy.com/browse/business-document/growth-strategy-208
The above document includes business concepts and analysis models utilized by top tier management consulting firms. It frames the various horizons of the “growth challenge,” and dives into various strategy frameworks for growth–from Porter’s Five Forces to Blue Ocean. It also includes case examples, a full growth strategy initiative breakdown, and tabulation of key growth strategy work products.
Please share your experiences and theories of SMB growth in the comments below. Thanks.