July 26, 2021

The Four Stages of Business Growth

How does an organisation market effectively given its current growth stage? What efforts and metrics are important at each phase of its journey...

How does an organisation market effectively given its current growth stage? What efforts and metrics are important at each phase of its journey and which aren’t? These are the questions I've been pondering over the past few weeks after working through the report release by WARC entitled “rethinking brand for the rise of digital commerce”.

As more people turn to entrepreneurship in the wake of COVID-19. There’s been a great deal of contradicting marketing advice attempting to help these folks to grow their business. This is especially concerning since the stakes are so high. A wrong move could jeopardize the livelihoods of numerous families. Additionally, successful startups could run themselves into the ground if they don’t adapt appropriately to the challenges of the scale-up phase. The same is true for moving from scale-up to maturity. 

As with most things - there’s no ONE right answer. Hence we can only glean information that helps us become better at solving our business problems given the stage of its journey. We can look at other business stories and case studies for direction but we cannot use these data points as absolute rules. As conditions change around us so do our marketing strategies. It is also important to remember, that although strategy endeavours to inform future decisions, its only real hope is in improving the odds of success. In an increasingly complex world, it’s nearly impossible to predict outcomes. That being said, the answer is not to do nothing. All the analysis done and research performed is to improve the probability of a favourable outcome while reducing the odds of a negative one.

With that quick caveat out of the way, Let's dive into the business growth stages and how you can think about creating a marketing strategy to maximise returns throughout the journey.

The 4 stages we refer to are:

  1. Startup
  2. Scale Up
  3. Maturity
  4. Renewal or Decline

Startup

For the startup phase, there are 3 key factors we need to focus on

  • Product-Market Fit
  • Sales (Harvesting current demand)
  • Brand building (Generating Future demand)

Big challenges and questions that management has to deal with during this phase include (Churchill & Lewis, 1983):

  • Can we become a viable business?
  • Can we get enough customers?
  • Can we effectively deliver our services and produce products?
  • Can we expand from one key customer or pilot production process to a much broader sales base?
  • Do we have enough money to cover the cash demands of this start-up phase?

Although there are different phases even within the startup realm, we'll treat it as one for simplicity sake. At this stage, you should be focused on vetting your offer. Proving that you have enough demand for your product is crucial in both raising funds and in surviving the first couple of years. What you need is a revenue stream that can potentially scale with your customer base while still delivering you a healthy (and hopefully improving) margin - what we’re looking for is to satisfy an existing need in the market, and quickly capture that demand. This is the essence of product-market fit.

Think about precisely what this means. A highly efficient sales process means that you have fewer people making more calls, getting through to more prospects and closing more deals - which is a good thing. The significance of product-market fit here is vital. If you are not delivering a product or service that customers want, need, or can use - your business will be dead in the water before it even manages to raise its first round. The purpose of this stage is to prove that your company has a viable business model and can make money. Although we're focused on creating an efficient machine this doesn't mean that we should cut corners in the quality or craftsmanship of our offering (although a focus on quality has been linked to building brand value).

At this stage, the common analogy used is that of a runway The cash reserves you have is the runway available while any profit you make extends that runway. If your business cannot take off before it hits the end of the runway, that’s it. That's why this phase is so crucial. If you've established a product-market fit, then you start with some level of demand. Your job in this early stage is to harvest that demand and get enough sales to keep you afloat. If the product-market fit is poor (meaning the product does not effectively satisfy customer needs), my theory is that you’re going to have a harder time convincing people to buy. 

You should be focusing your marketing spend on improving your product and generating enough sales to fuel your growth until you have a high volume of quality leads coming in. An important point here is that this is also when you should be testing out different marketing channels to see what works and what doesn't. Don’t worry too much about being “perfect” in this stage - as long as your channels are getting some sort of return that’s valuable. Low cost, high-value channels are going to be most useful here. Yes, TV ads are effective at reaching large audiences, but if you can't afford that, make the most out of what you have. Channels like social media and "word of mouth" shine here since they're so low cost.

At the same time, you also need to be looking toward the future. At some point, you'll reach a time where the demand ceiling has been reached. When that happens growth will suddenly slow as everyone in the current market, who has needed your offer now has it. To prevent this from happening you'll need to endeavour to create demand while you're harvesting it. To put it plainly, while focussing on sales in the startup phase, you also need to be building your brand in the background. Now, the caveat to this is the amount of capital available. A bootstrapped startup will likely have a harder time committing resources to this kind of investment. However, as Prof. Sharp and numerous other colleagues have proven, has pointed out, building memory structures effectively is essential for future growth.

However, if you've already exhausted demand in your market, you could look at geographic expansion as an effective way to give yourself more runway while building your brand. Granted, that you will have to measure up the potential financial reward to the costs required to set this up.

Scale Up

For the scale-up phase, we need to focus on 3 key factors:

  1. Expanding Distribution
  2. Product Optimisation
  3. Brand building (Generating Future demand)

Major challenges to solve include (Churchill & Lewis, 1983):

  • Can we onboard the needed talent required for growth? 
  • Can the core team delegate responsibility to those new members to improve the managerial effectiveness of an increasingly complex enterprise?
  • Will there be enough cash to satisfy the great demands growth brings and a cash flow that is not eroded by inadequate expense controls or ill-advised investments?

We need to look at the scale-up phase as an opportunity to expand the distribution network while at the same time supporting that growth the appropriate changes in production and customer support, improving product quality, and continued investment in brand building.

What we are trying to do is ensure that we can scale our business without losing any of the value that makes us so attractive to our customers. This also means that we want to reduce any friction points in the sales process, which could easily outweigh any change in price that would result from a switch to a more efficient process. To do this, we need to keep refining our product offering until it is at the point where it can be manufactured cost-effectively. This will likely involve improving your marketing channels as well as your other processes.

Now while some might recommend you pay attention to your defection/churn rate at this stage, we strongly advise against that. The truth is that you have a better chance of success by focusing on customer acquisition than focusing on defection rates. Unless customers are leaving for reasons outside the company's control (moving to a new area where distribution isn't available), defection rates are more or less even among competitors. It's more a function of market share. Small brands are gonna have a higher defection rate than larger ones (Sharp, 2010). However, what you could do is monitor defection rates in relation to your competitors. If it's abnormally higher than the industry average or you find out that the majority of customers are leaving for reasons in your control (product quality or customer experience), then there might be something else going on.

Additionally, at this point, it's usually essential to start looking more seriously at promotional activities. While a business can grow to the scale-up phase without the use of promotion, it's nearly impossible to maintain the market share won without it. At the same time, however, your focus will shift more and more towards brand building and away from short term sales activation. More than likely your product has caught up with the initial demand and now you are at the mercy of the market. Remember though, these two work best when used jointly. Resist the urge to completely silo brand building activities and sales activation.

As we're growing at this scale-up phase it's important not to let your foot off the brand-building pedal. We need to be building future demand if we want to keep up our growth rate. A failure to do so will not result in an immediate drop in sales and sirens going off. But after about 12 months you'll start noticing the obvious decrease in demand and by effect; sales. 

Practically, this could mean investing in developing new products, expanding to new markets, or adjusting pricing structure. As with most things - it depends.

Maturity

Now that you've achieved a more consistent growth rate, you're competitors have most likely caught up with you, and you've lost any initial competitive advantages. This is more or less an even playing field. You now have the advantages of size, financial resources, and managerial talent.

At the mature phase of business, you need to pay attention to these 3 factors:

  1. Efficiency
  2. Building Fame (mental & physical availability)
  3. Innovation

Once the company is mature, top management is more concerned with questions like:

  • Can we fend off the new entrants who are more nimble and adapting to the changing market?
  • Can we adapt fast enough to market changes and prevent decline?

The initial growth of your business gave birth to a brand new market and you were perhaps the king of it. Now your position has changed dramatically. You now have competitors who are offering similar services or products, but better value for money or more efficient delivery times. Additionally, your customers are also beginning to ask for more innovative features on top of what you've already provided them with - which is a natural part of the growth process.

On one hand, you need to be optimising your systems and processes to reduce the inefficiencies often brought about during the scale-up phase. On the other hand, though, you need to be looking at ways to boost your growth. This is where we can begin to incorporate elements of product innovation.

If you're lucky enough to be in a market that's growing, this will allow for more sustainable growth than at either the scale-up or startup phases. Innovation is a key focus during the maturity phase as a way of outmuscling competitors. While your goal here is to defend your market share, that doesn't mean completely forgetting about growth. This means that while you want to optimise for efficiency and deliver more value, you also need to re-invest some of it towards processes that lead towards growth in the future (such as building mental and physical availability.).

This brings us to the concept of fame. Brand growth is primarily driven by physical and mental availability (Sharp, 2010). Think about how Coca Cola is available for purchase in nearly every store in every corner of the globe (physically available) and nearly every person can recognise a Coca Cola product on the shelf or remember how it looks (mentally available). This means that to grow, our goal during this stage is to continue reinforcing the brand's fame both physically and mentally. Now you’ve probably been doing this to an extent in both the previous stages, but in the mature phase, you need to continue investing more resources into it. As the profit grows, ideally, so too does your marketing spend. It also means investing in product markets that have a high potential for growth to both reinforce your current position as well as lay foundations for future growth.

At this point, there are a ton of options because of the considerable resources available. The Ansoff matrix could provide some idea of the options available based on selling new or old products to new or old markets. However, strategic alignment is critical here to continue moving forward. A valuable tool in your handbook will be applying constraints to your strategic decision making. The abundance of options is not always conducive to business growth which is why it’s often worthwhile to apply artificial barriers to what can be done.

In a marketing paradigm, effective management is a process through which organizations and people become more competitive and profitable. It is not an event or a summary of an event. The analysis of success must be integrated into the entire decision-making process for a continuous improvement to be realized. Management action is always dependent on the analysis of historical data to determine what has been done and the consequences of that action, along with continual monitoring to adjust and improve actions. 

The marketing program needs to be constantly monitored to provide information concerning its efficiency and effectiveness for deciding what new activities need to be implemented on how new markets can be developed.

Decline or Renewal

The final stage of business growth is the dichotomy of decline or renewal. A recent study by McKinsey found that the average lifespan of companies listed in the S&P 500 was 61 years in 1958. Today, it is less than 18 years. With those odds, it's becoming increasingly difficult for major companies to remain ahead of competitors. 

With that being said, there are 3 crucial factors to address to prevent the decline of a mature business:

  1. Costs
  2. Value Proposition
  3. Culture, Resources & Capabilities

The mature business is at the pinnacle of its growth curve and as a result, their costs are higher than they were in the scale-up phase - which needs to be addressed to prevent decline. Looking at some of the cost elements, you can examine whether they have become redundant or if they are just more costly now than what's required for today's business: Marketing programs, Customer Support, Human Resources and others. A critical mistake at this phase is significant cuts to marketing spend. Although marketers have observed that negative ESOV (excess share of voice) has less effect in higher market share companies, it should be noted that the brand needs more ad spend to maintain its size (Binet & Field, 2018). The key distinction here is that during the maturity phase it all comes down to how much capital you have available - which will determine how much can be spent on operations and marketing.

A mature business cannot afford to be complacent in this phase because of the growing competition that's out there. Your value proposition (how your product or service performs relative to customer's expectations) now needs to be constantly reviewed and improved for you to remain competitive and profitable. A major disadvantage of a business in this phase is the reputation you've built up until this point. Yes, you read that correctly, you're brand could be your downfall if you're not careful. At high levels of brand awareness, businesses become increasingly susceptible to negative exposure (WARC, 2021). Once "everyone" knows your brand as one that provides exceptional service, just a couple of slipups could cause a snowball effect resulting in a drop in your share of market. At this point there are hundreds of competitors, old and new, looking to steal your customers. That's great news for your clients since they have an abundance of choices, but it'll be a challenge for you to keep them satisfied.

To remain competitive, a business in this phase needs to constantly improve its value proposition as well as its marketing efforts - for which it may now need to take an innovative approach. Alternatively, it needs to build on the brand equity it has built up so far by introducing new key features or a new kind of service that improves existing ones. Brand building at this stage requires you to reinforce brand associations in the minds of customers, as well as trying to build new memory links and Category Entry Points (CEPs). This battle for mental and physical availability takes on a new dimension in this phase.

Finally, to prevent decline, you need to continue to develop and embrace your business culture, resources and capabilities. Here you need to enhance your management information system, strategic planning and other core functions - along with the necessary skills needed to run your business. The successful business needs a visionary leader who can identify new markets as well as new opportunities. The biggest disadvantage is that if the company's performance starts falling too far behind its competitors, it's very challenging to turn around.

Literature on the topic

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