Small business development: A perspective on the key phases

This blog briefly describes the business development phases from small business startup to large business expansion. More importantly, it emphasises a number of the substantial business development and running resources.

The late 1980s and early 1990s saw a growth in self-employment and small businesses because of socioeconomic changes. As observed, eventually, several of them failed for various reasons, and many small businesses still continue to fail today. Unavailability of timely financial resources is the main reason for the failure of small businesses. They frequently experience everyday financial hardships and receive little help to replenish their cash reserves. This is because they lack personal resources and also access to financial assistance from banks and other financial institutions.

Entrepreneur alone have to often perform most functions at least during the early stages of the business. Small businesses rarely focus on short-term strategies to ensure their survival since, until they reach a certain point of stability, their entire existence is about surviving. Strategic or long-term planning is nonexistent and frequently useless since, after all, what good is planning for the future if the company might have to shut down next month?

If a small business does not equip itself with the fundamental abilities and information necessary to remain in operation, then they do not deserve to continue operating. Compared to large enterprises, the financing options from banks and financial institutions are typically significantly more limited. Compared to the equity needed to secure them, interest rates are typically greater, and the amounts supplied are frequently smaller. New small businesses just do not have the negotiation leverage to get better terms or lower loan rates.

A three-phase small business development structure

All said and done, and as we all know, every business begins small and grows big. Business development of a small business follows a three-phase structure. While it is not a universal view, this one helps in an understanding of the small business development cycle.Before the first phase even finishes, some new businesses fail or its owners leave or give up. While in other circumstances, the entrepreneur launches company once identifying a viable and expanding market, thereby skipping ahead to the third phase. Phase two is where some people decide to stop, while others with more ambition decide to go on. I’d venture to say that the vast majority, maybe 95% or more, go through these stages as they grow. The table below provides a summary of the three phases.

First Phase: Start-up phase of a business

A new small business’s initial start-up phase is primarily focused on survival and the effort to achieve profitability and break-even point before the working capital runs out. The typical duration of this phase seems to last anywhere between six months and three years on average. However, under rare circumstances, some small businesses may struggle for five years or longer before achieving stability. The personal goals of the entrepreneur are centred on lowering personal financial risk, particularly if personal assets have been pledged as collateral for loans. But there is also a desire for a sense of accomplishment.

During the first phase, there is a tendency to accept any business that can provide even a modest amount of earnings and overhead costs. This marginal approach frequently leads the founder and employees wandering around aimlessly in search of small contributions to profit. This has often a negative impact on profits and almost leaves the founder completely exhausted. In essence, management decisions are made at a strictly operational level with little to no strategic consideration, based on short-term results.

Because of the lack of staff to assign the minor tasks to, the owner ends up working longer unproductive hours to complete the work himself, neglecting the business’s overall management.

Second phase: comparative stability

Entrepreneur feels relieved after his new small business typically achieves a trade level over the break-even threshold for a few months. After surviving startup challenges, the potential for a time of stability and business growth now appears to be on the horizon. This phase typically lasts for one to two years, by which time most energetic entrepreneurs will be ready to expand.

Assessment of the business processes at the operational level is one of the key components of this phase. The entrepreneur can now focus on increasing profitability, lowering operational costs, and eliminating waste. For the first time, he or she can also choose which customers to keep and which to lose, such as problematic or sluggish customers.

Focus points

Now, increasing profit and lowering personal financial exposure are more important than simply surviving. The entrepreneur seeks a return on investment besides a reward for the personal work that has gone into the business. As a result, there is a greater focus on profitability and sustaining profit margins, along with a more discriminating approach to clients. Eventually, slow or lousy opportunities can be turned down in favour of reliable, consistent, and dependable customers, or low-profit tasks can be declined.

“Entrepreneurs, by definition, shift resources from areas of low productivity and yield to areas of higher productivity and yield.”

― Peter F. Drucker, Innovation and Entrepreneurship

In order to keep loyal consumers for the long term, there is also a focus on their demands, and this is accompanied by an attempt to raise quality standards throughout the business. In general, many small enterprises prioritise this phase, although some others can end up in carelessness. While it is okay for some people to only wish to grow their business to the point of basic comfort, the majority have a strong desire to go further. It is also believed that no business can afford to stand still without risking losing its position in the market in today’s rapidly developing technical and economic environment.

The gradual shift from functional to tactical planning is what really distinguishes the second phase. Strategic planning is still not prevalent, but as the desire to grow increases, it must become more prevalent as a necessary precondition of the third phase. In other words, the third phase cannot be accomplished without ambition and forward-thinking.

Third phase: Development and growth

This approach will continue in the next years with a projected expansion to boost market share, sales turnover, and profit. The business’s capital growth will typically be the other primary goal, besides expansion. The entrepreneur and the company both seek to raise their market share and profits in order to increase their personal power and influence.

The risk to the entrepreneur’s personal finances is less significant at this point. A more adventurous approach to the market is made possible by the overall confidence gained from the second phase. It is also a point to identify and explore other marketplaces not touched earlier. Additionally, the business is under much less financial strain as finances for future expansion become accessible. Usually, higher degrees of delegation follow the realisation that management techniques must alter in order to support future growth.

Future expansion cannot happen without this one key component. It is typically accompanied by recruitments or creation of new and additional management and staff talents, providing the chance for improved delegation mechanisms. As the organisation grows, delegate operational decisions increasingly to higher levels of management, with the majority of decisions taken at this level being strategic and tactical.

Fundamental shift

After passing successfully through all the phases, there is the need of fundamental shift in the entrepreneur’s mindset and small business culture that is necessary for the company’s future expansion and development. Essentially, the entrepreneur needs to move into a proactive higher gear that will incorporate strategic planning for the future of the organisation, moving away from only making tactical judgments and day-to-day operational decisions.

In the early phases of the business, the entrepreneur created several management tasks that he needs to give up. This is perhaps one of the hardest decisions they must make. It typically entails transferring some of the accountability and power associated with the startup phase of the business development.

You may like to read other articles here for better understanding business development concepts.