All things occur in cycles, ebbing and flowing as time goes by. In the west, we often think of things progressing in a linear way, but nature teaches us that this is not the case. This cyclical motion affects every area of our lives. Our relationships, our family life and our careers all follow cycles, and so do the lives of the institutions, companies and organizations to which we belong. Even countries and empires rise and fall in cycles.
Many years ago, I was introduced to the idea of the ‘Sigmoid curve’ and I have found it very useful in managing business. The Sigmoid curve is a mathematical concept which has been widely used to model the development stages of companies. The curve is basically a stretched out S shape lying on its side, and can be thought of as having five sections, each of which corresponds to a phase of growth.
The Business Development Curve
When we look at the rise and fall of businesses, they generally experience five development stages in the Development Curve:
- Stage 1 – Startup
- Stage 2 – Survival
- Stage 3 – Growth
- Stage 4 – Maturity
- Stage 5 – Decline
The advantage using the Business Development Curve for entrepreneurs, business owners and managers, is that such an understanding can aid in assessing current challenges; for example, you want to start your business, and you want to know where you are on the Curve, and want anticipate what should happen next. When it comes to existing companies which are larger and more complex, it helps in anticipating the key requirements, to formally systemise the business processes, or when to expand the business with the next level line managers to support the current and future business growth.
To explain this let’s refer to the blue line in the graph below.
It’s important to understand the characteristics of each development stage and the time it takes to reach or to pass through each stage varies by business.
Stage 1 – Startup
The startup stage is characterised by two distinct phases, a pre and post startup phase. The pre startup phase refers to all the efforts and time which goes into the conversion of the business idea into a sustainable business model, the market research, business planning and preparation.
Once funding or investment is obtained the new enterprise is setup to launch to become a fully operational unit. In most cases the new enterprise will not get any large capital support from lenders or investors and the entrepreneur do not have an alternative but to bootstrap the new enterprise. Time equals cost, and capital is required to launch the business hence the reason for the curve’s downward slope. This also means that the longer the business takes to startup the more money is wasted which depletes the capital required to start and survive long enough to become successful.
Stage 2 – Survival
The survival stage is characterised by the physical existence of the business i.e. office, facility or online business and the frantic marketing efforts in the search of customers to generate income to create sufficient turnover with a stable customer base, secondly to buy or produce the required products and lastly to deliver the product as required by the customer.
The Survival phase is in most cases the most challenging of all phases, and will break or make the business.
Stage 3 – Business Success
This stage is characterised by two phases namely the Early Growth and Success Phase, where the early growth phase refers to a business that has demonstrated that it is a working entity, it has adequate customers and satisfy them sufficiently with its products or services to keep on its way to break-even and beyond.
The success phase refers to a company that has attained economic wealth, has sufficient size and product/market penetration to ensure economic success and earns an average or above average profit and the company can stay at this stage indefinitely provided environmental changes does not destroy its market niche or that ineffective management reduces its competitiveness.
Stage 4 – Growth
This stage is characterised by a real first wave of growth, where the owner commits its resources for growth. The owner takes the cash and establishes borrowing power of the company and risks all of it in financing the growth of the company. Among the important responsibilities are to ensure the business stays profitable, to systemise the business processes, develop existing managerial levels to satisfy current business needs, increase organisational competence and to employ and develop managers for the future growth of the business.
Stage 5 – Maturity
At this stage the greatest concern of a company is first to consolidate and control the financial gains brought on by rapid growth and second to retain the advantages of small size company including flexibility of response and the entrepreneurial spirit. The company must expand and develop various management levels fast enough to eliminate the inefficiency that growth can produce and professionalise the company by optimising systems and competence. At this point, a different strategy is required to ensure a second wave of growth, to develop innovative products, search for new markets, intensify marketing and sales to increase market position, optimise operations and with its supply chain to sustain its competitive advantage.
Stage 6 – Decline
If businesses did not take proactive steps during the Maturity Phase the move into the declining phase and tend to experience a shrinking market. There is usually no product innovation, costs are cut to preserve profits, and the profits that remain are usually thin, and if nothing gets done it will generate losses which could not be recovered, and this will go on until the business is liquidated.
Rise and Fall - Business Curve
It is estimated that the failure rate of small, medium and micro enterprises is about 70% during the first two years of their existence and a further 20 % failure between the second and fifth year, which leave us with a mere 10 % successes rate. Why does most businesses fail and some don’t even get off the ground.
The main reasons according to our experience and other sources are:
- Expanding too soon– most business owners have a false assessment of the early growth phase, and fall in the trap of over trading or expanding much too soon, into the new office, factory, warehouse, geographical location. Some of the most tragic expansions are where a business that has yet to get their business model right in the location they originally founded, all of a sudden expands their business into another geographic location that stretches logistic capabilities and dramatically increases overhead expenditure.
- Heavy reliance on debt funding– as soon as a loan is drawn to start a business (a loan which is most likely secured against the family home), you are on the ‘debt clock‘. Debt payments are now cemented in time and you need your business to get to the Break-Even Point (BEP) as fast as possible. Not achieving your BEP or, not achieving your ‘critical mass’ (some people prefer to use the term ‘scale’) in time, may mean further borrowings to keep your startup afloat.
- Poor strategic management– a person who was great at their trade craft (say, plumbers, builders, accountants, chefs etc.) make a move to their own business. While they are great (if not fantastic) at their particular trade, they are not groomed nor educated for business. Business is its own wild animal. One wrong move and it can eat you alive.
- No business plan– Most failed business owners stop planning at the concept stage. Planning your business forces you to seriously think about all areas of your business and not just the fluffy parts of your business like “sales” or “ profit“ instead of focussing on the meticulous details like: operations, employee ramp-up, funding, and forecast financials and logistics are needed to be considered. I mean, at the rate at which small to medium business fail, it’s only going to make you or break you But you only need to do this if you want to give yourself a fighting chance. If not, leave your business concept on the back of your cigarette box you used at the local bar.
So lets look at the Rise & Fall Business Curve below.
Dotted Red Line – Failure Prior to Startup
The red dotted line on the left hand side of the graph represents businesses which actually failed before they even started. The reason for that could be that the person who wanted to start their own business, never understood what is required from an entrepreneur or had no real intentions to get a business of the ground.
Solid Red Line – 70% of Businesses fail in the first 2 years
The second red line represent businesses that went through the pre startup phase and launched their business but as soon as it moved into the survival stage it appears that the this business owner did not know or could not obtain an adequate number of customers, generating sufficient cash and profits to breakeven and ran out of funds to keep the business floating or the stress levels were too high on the owner and his family and decided to call it quits.
Solid Orange Line – 20% of Businesses fail between 2-5 years
The orange line represents businesses that went through a extended survival stage and into an early growth stage but could not manage to break-even fast enough which had a negative effect on the cashflow and eventually depleted all cash which made it impossible to carry on with business or the owner misjudge the impact of the external environment on the business.
Solid Blue Line – 10% of Businesses are Successful
The blue line represents businesses that went through the startup and survival and early growth stages successfully. They have transition into a successful company that has attained true economic health that has sufficient size and market share to be sustainable. Most of these business tend to follow the growth path and develop into matured companies.
The Learning Tree Approach
The Learning Tree focus its solutions on improving business performance to assist companies to progress faster through the various development stages. High Performance relates to two factors effectiveness and efficiency, where effectiveness relates to the degree to which business objectives are achieved and the extent to which targeted problems are solved. Efficiency signifies a level of performance that describes a process that uses the lowest amount of inputs to create the greatest amount of outputs. It minimizes the waste of resources such as physical materials, energy and time, while successfully achieving the desired output.
We provide 3 programs as solutions to our approach:
- Business Startup
- Business Growth
- Business Expansion