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Five Phases of Business Development

Guest post by: Dr. John W. Stolk

Article Overview: The Business Development Phases privately held businesses go through. If you were to understand them, the easier you can prevent these common pitfalls.

Five Phases of Business Development

There are Five Phases of Business Development

The first three phases are linear, typically described as the entrepreneurial phases, and are expert centric. The last two phases are circular.

Initiation Phase

This is the phase when the expert entrepreneur decides to start a company to sell their product or service. It is common for this phase to be completely product or service centric. The entrepreneur projects their enthusiasm and fascination on the prospects of success without properly investigating marketing research and/or developing proper business engineering in order to create the correct business structure for the current stage of the enterprise. Typically advice is obtained from CPAs and Attorneys without sharing with them the goals and objectives of the company. Therefore, the owner(s) often obtain generic advice versus custom advice. This could lead to the wrong business formation i.e., C-Corporation versus a DBA. It is also typical to not have any systems or controls in place, nor proper job descriptions. The majority of "companies" get through this phase without applying any fair market cost or values, operating without a real business plan with return on investment objectives. The quantity and quality of the output of the business is totally relying on the individual that happens to execute the task at hand.Commonly the name of the business includes the owner(s) name(s).

On average about sixty percent of companies will survive the Initiation Phase. The average time frame, depending on the industry, is one to three years and the average revenue, depending on the industry, is below one million dollars.

Survival Phase

This phase is described as “when everybody is doing everything” within the company. The owner is still working in their business versus managing their business. There is limited ability to properly analyze the necessary skill sets for a specific job based on true business need, as a result friends and family are hired. Cash flow issues are typical and owners think it is normal to under pay themselves or not pay themselves at all. There is still a lack of mid- and long term planning. Short term planning is essentially "whatever hits the desk today". Another characteristic for this phase is misunderstanding what the real profit centers are. A company that started making and selling widgets does not realize that, in many cases, the selling of product is no longer providing the majority of revenue. Instead it comes from installing these widgets at client's site. This is a common situation where a product centric company does not realize it transitioned into a service company and keeps holding on to the initial business model.

High employee turnover is common. There is very little to no information about the company shared with employees, combined nepotism.

On average about twenty percent of companies will get past the Survival Phase. The average timeframe, depending on the industry, is three to five years and average revenue, depending on the industry, is below two million.

Transition Phase. The last of the linear phases is the most complex and difficult phase. The company needs to transition from an entrepreneurial company, where the owner(s) still micro manage to a company where the owner(s) can be absent for weeks without impact on the company operations. This is where the realization sets in that having employees based on personal relationships (friends and family) is not the right reason for employment. It is time to understand that the promotion of employees based on relationships and years of service versus their ability to perform the job function is not the answer.

The transition phase is when the company depends on the implementation of new processes and procedures, job descriptions and controls to ensure the quantity and quality of the company's output. At this stage, there are employees that earn a higher salary than the owner(s). They are typically “start-up company” minded employees from the first two phases that are unable to follow the transition to improved processes and procedures and will be replaced.

During this phase old and new unhappy customers will start demanding the attention from the owner(s) and the owners will have to deal with commitments and activities outside the Company to grow and prosper the Company. The owner(s) will have to learn to delegate the internal management of the Company to other qualified employees. If the retirement goal of the owner(s) is to sell their business, it is not uncommon during the Transition Phase that the name of the business is changed to a more generic identity.

On average about twenty percent of companies will survive the Transition Phase. The average time frame is three to five year and the average revenue is below ten million in annual revenue depending on the industry.

Summary of the First Three Phases

The first three phases can generically be described as inward focused, reactive, and fairly disorganized. Owners are working in the business not managing the business. There are limited or no consequences for any actions. Everybody does everything and are unable to measure objective results. Favoritism and nepotism are the norm and the if the owner were to die, the Company would not survive. It is expected that Companies that survive the linear phases will go through dramatic growth and decline.

Growth and Stabilization Phases

These two phases are intertwined and are more like two alternating stages of one phase. Companies that make it to the growth and stabilization phases can be described as having an outward focused with a strong corporate culture. They perform yearly planning and are proactive. The set goals and objectives and measure results. Informed decisions are made based upon accurate and complete financial information. Tasks are well defined based upon company needs and fair treatment of employees and customers. The company will survive the owner(s) and in most cases the owner(s) manage.

On average most companies that are able to transition into the Growth and Stabilization Phases will survive long term and be able to grow past ten million in annual revenue.

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Article Tags: business developement, business developement phases, phases



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