Stage Right

Make smarter management decisions by knowing what stage your company's in.
Magazine Contributor
6 min read

This story appears in the April 1997 issue of Business Start-Ups magazine. Subscribe »

For Darlene Pinkowski, all the business world's a stage. When she's mulling over strategies for Actoras Consulting Group Inc., the 20-person Schaumburg, Illinois, management consulting firm she co-founded, a key question is: What stage of growth is this business in?

At the start-up stage in 1993, Actoras consisted of two employees and an idea. At that point, Pinkowski's goal was to give the company a reason for existence. "The first important stage was picking our strategy," she says, "who we are, where we want to be, how we are going to get there."

The next two years, the goal was to fine-tune marketing and generate sales. After that, with revenues growing consistently, the company was ready to move into a new phase aimed at increasing capacity.

"In 1996, we spent money internally, bringing in more skilled people and setting up practice areas so we could provide services across industries," says Pinkowski. "Now in 1997, we're back to marketing and sales and, more specifically, recruiting."

Experts in small-business growth say Pinkowski is on the right track in trying to relate her management decisions to her business's position in the cycle of growth. The idea is that it takes different tools to succeed when you're starting out than it does after you've become more established. Fitting the cycle of a business's life into sequential stages of growth can help entrepreneurs be alert to problems they're likely to encounter, prepare with the proper skills and resources for each stage, and realize when old ways of doing things are no longer appropriate.

Growth-Stage Models

The best-known business growth model is L.E. Greiner's five-stage model, first publicly described by him in a 1972 Harvard Business Review article. Greiner views growth as a series of changes forced by crises.

In Phase 1, called Growth Through Creativity, Greiner describes a Crisis of Leadership. At this stage, a youthful organization's founder must begin to delegate authority and accept nonfounder managers. Surviving the first crisis propels the organization into Phase 2, Growth Through Direction, where the crisis is one of autonomy. Phases 3, 4 and 5 describe growth through delegation, coordination and collaboration, respectively.

The main problem with Greiner's model from an entrepreneur's viewpoint is that it is designed for large organizations. Entrepreneurial stage-watchers prefer to use a model developed in 1983 by N.C. Churchill and V.L. Lewis, also published in the Harvard Business Review.

"This model specifically pays attention to small business," says Kelin Gersick, co-author of Generation to Generation: Life Cycles of the Family Business (Harvard Business School Press). "It's not just looking back at huge corporations and how they got there."

Churchill and Lewis base their model on Greiner's and, like him, describe five stages: existence, survival, success, takeoff and, finally, resource maturity. But they concentrate on the early, perilous days when problems of raising cash and delivering product threaten the company regularly. Their theory is aimed at high-growth companies with the idea that rapid expansion often creates a mismatch between a company's capabilities and its needs.

Other models focus on different issues. In 1990, E.G. Flamholz modeled the process of delegating authority in the book Growing Pains: How to Make the Transition From an Entrepreneurial to a Professionally Managed Firm (Jossey-Bass). Around the same time, R.K. Kazanjian identified problems specific to four stages: conception and development, commercialization, growth and stability.

Kazanjian says, for instance, that resource acquisition and technology development are critical at first, while internal controls are central to the final, stable stage.

The Churchill and Lewis model seems to work best for entrepreneurs. "The thing I like about that model is that they not only identify five stages but very clearly articulate the crises that accompany that growth," says Charles Matthews, director of the University of Cincinnati's Small Business Institute. Matthews also finds the model easy for entrepreneurs to grasp.

Matthews teaches students to use the model for analyzing other small businesses as well as running their own enterprises. It helps mainly by suggesting what problems are likely to arise and where action may be needed.

An early-stage entrepreneur who had studied Greiner's and Churchill and Lewis' models would not worry much about problems with internal controls and red tape. Instead, attention would focus on delivering product and raising cash because these are problems common to early stages. Indicators like this can make all the difference to a harried entrepreneur, Matthews says.

"Growing a business is one of the hardest things entrepreneurs do," Matthews says. "Things change, and you have scarce resources, including time. So any tool that helps you prioritize your commitments is valuable."

Model Mapping

Of course, models are only representations of the real world, so they have their limits. For one thing, the growth path of an actual business is unlikely to exactly follow the graphs used in these models.

"It's not going to be a nice, smooth curve," Matthews says. And some models, Churchill and Lewis' in particular, don't even define growth.

Deciding where you are is crucial because many businesses spend extended periods of time in the critical existence and survival stages, Matthews says. Some never move on, and if a manager in one of these companies tries to make decisions based on later-stage considerations, it could prove disastrous.

The biggest complaint about growth-stage models is that they are too general and don't take into account factors important to specific companies. For instance, the intricacies of family-owned businesses are largely ignored by these models. "Issues of family dynamics and communication and relationships will shape the business life cycle dramatically," contends Gersick, "and generally are not considered in these models."

One key question in older family businesses is whether the next generation of family members has the skills necessary to run a growing company. The answer to this question may be more important in deciding whether to bring in professional management than whether the enterprise is in the right phase as determined by a growth-stage model.

Maybe the biggest obstacle to business-growth models for entrepreneurs is they generally don't like them. After all, if they'd followed the conventional wisdom, many entrepreneurs would never have created their own ventures in the first place. That's exactly Pinkowski's major reservation.

"I don't think you're going to be able to apply any model to a true entrepreneur," Pinkowski says. "We're all visionaries."

Growth Curve

Models of business growth are taught in most college-level entrepreneurial courses and are frequently referred to by management consultants when deciding on courses of action to recommend to their clients. Even with all their limits, however, business-growth models can be helpful in providing snapshots of the problems likely to fill an entrepreneur's viewfinder.

Pinkowski doesn't feel her business fits any model particularly well, but she still uses the image of a business growing through stages to help her strategize. For instance, after dealing with marketing and sales in 1995 and capacity issues in 1996, she's now facing marketing once again as a critical concern. And she welcomes the growth, whether it fits a model or not: "Hopefully," she says, "in 1998 we can keep that going."

Mark Henricks is an Austin, Texas, writer specializing in business topics.

Contact Sources

Actoras Consulting Group Inc., 935 N. Plum Grove Rd., Ste. A, Schaumburg, IL 60173, (847) 517-4448;

Kelin Gersick, c/o Lansberg, Gersick & Associates, 100 Whitney Ave., New Haven, CT 06510, (203) 497-8855.

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