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Stage I: Existence. [4] This is the beginning. The business is up and running. The primary problems will

be obtaining customers and establishing a customer base, producing products or services, and tracking

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and conserving cash flow. [5] The organization is simple, with the owner doing everything, including

directly supervising a small number of subordinates. Systems and formal planning do not exist. The

company strategy? Staying alive. The companies that stay in business move to Stage II.

• Stage II: Survival. [6] The business is now a viable operation. There are enough customers, and they are

being satisfied well enough for them to stay with the business. The company’s focal point shifts to the

relationship between revenues and expenses. Owners will be concerned with (1) whether they can

generate enough cash in the short run to break even and cover the repair/replacement of basic assets and

(2) whether they can get enough cash flow to stay in business and finance growth to earn an economic

return on assets and labor. The organizational structure remains simple. Little systems development is

evident, cash forecasting is the focus of formal planning, and the owner still runs everything.

• Stage III: Success. [7] The business is now economically healthy, and the owners are considering whether

to leverage the company for growth or consider the company as a means of support for them as they

disengage from the company. [8] There are two tracks within the success stage. The first track is

the success-growth substage, where the small business owner pulls all the company resources together

and risks them all in financing growth. Systems are installed with forthcoming needs in mind. Operational

planning focuses on budgets. Strategic planning is extensive, and the owner is deeply involved. The

management style is functional, but the owner is active in all phases of the company’s business. The

second track is the success-disengagement substage, where managers take over the owner’s operational

duties, and the strategy focuses on maintaining the status quo. Cash is plentiful, so the company should be

able to maintain itself indefinitely, barring external environmental changes. The owners benefit

 

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indefinitely from the positive cash flow or prepare for a sale or a merger. The first professional managers

are hired, and basic financial, marketing, and production systems are in place.

• Stage IV: Take-off. [9] This is a critical time in a company’s life. The business is becoming increasingly

complex. The owners must decide how to grow rapidly and how to finance that growth. There are two key

questions: (1) Can the owner delegate responsibility to others to improve managerial effectiveness? (2)

Will there be enough cash to satisfy the demands of growth? The organization is decentralized and may

have some divisions in place. Both operational planning and strategic planning are being conducted and

involve specific managers. If the owner rises to the challenges of growth, it can become a very successful

big business. If not, it can usually be sold at a profit.

• Stage V: Resource Maturity. [10] The company has arrived. It has the staff and financial resources to

engage in detailed operational and strategic planning. The management structure is decentralized, with

experienced senior staff, and all necessary systems are in place. The owner and the business have

separated both financially and operationally. The concerns at this stage are to (1) consolidate and control

the financial gains that have been brought on by the rapid growth and (2) retain the advantage of a small

size (e.g., response flexibility and the entrepreneurial spirit). If the entrepreneurial spirit can be

maintained, there is a strong probability of continued growth and success. If not, the company may find

itself in a state ofossification. This occurs when there is a lack of innovation and risk aversion that, in turn,

will contribute to stalled or halted growth. These are common traits in large corporations.

Organizational Life Cycle

Superimposed on the stages of small business growth is theorganizational life cycle (OLC), a

concept that specifically acknowledges that organizations go through different life cycles, just

like people do. [11]“They are born (established or formed), they grow and develop, they reach

maturity, they begin to decline and age, and finally, in many cases, they die.” [12] The changes

that occur in organizations have a predictable pattern, [13] and this predictability will be very

helpful in formulating the objectives and strategies of a small business, altering managerial

processes, identifying the sources of risk, and managing organizational change. [14],[15] Because

not all small businesses are looking to grow, however, it is likely that many small companies will

retain simple organizational structures.

 

 

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For those small businesses that are looking to grow, the move from one OLC stage to another

occurs because the fit between the organization and its environment is so inadequate that either

the organization’s efficiency and/or effectiveness is seriously impaired or the organization’s very

survival is threatened. Pressure will come from changes in the nature and number of

requirements, opportunities, and threats. [16]

Four OLC stages can be observed: birth, youth, midlife, and maturity. [17] In the birth stage, a

small business will have a very simple organizational structure, one in which the owner does

everything. There are few, if any, subordinates. As the business moves

through youth and midlife, more sophisticated structures will be adopted, and authority will be

decentralized to middle- and lower-level managers. At maturity, firms will demonstrate

significantly more concern for internal efficiency, install more control mechanisms and

processes, and become very bureaucratic. There are other features as well that characterize the

movement of an organization from birth to maturity, which are summarized in Table

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