The Five Stages of Small Business Growth (Churchill and Lewis)

The Churchill and Lewis model describes a small business as moving through five stages: Existence, Survival, Success, Take-off, and Resource Maturity. What makes it useful isn't the labels. It's the claim that each stage changes what the owner has to be good at. Early on the owner's job is to do the work and find the cash. Later it's to build managers and systems, and to let go of doing.

Neil C. Churchill and Virginia L. Lewis published it as "The Five Stages of Small-Business Growth" in the May 1983 issue of Harvard Business Review. HBR lists Churchill as a professor of innovation and entrepreneurship who held posts at Carnegie-Mellon, Harvard Business School, Babson, INSEAD and UCLA, and Lewis as a senior research associate at SMU's Caruth Institute. The model is still a common reference point for anyone thinking about how a founder-led company has to change as it grows.

The stage descriptions, factors and quotations below are taken from the original HBR article.

Why the authors built a new model

Churchill and Lewis argued that earlier growth models didn't fit small businesses. They gave three reasons. The older frameworks assumed a company must grow and pass through every stage or die trying. They missed the early stages of a company's origin and growth. And they measured size mostly by annual sales, ignoring things like value added, number of locations, product-line complexity, and the rate of change in products or technology.

Their alternative describes each stage by an index of size, diversity and complexity, plus five management factors:

1. Managerial style
2. Organizational structure
3. Extent of formal systems
4. Major strategic goals
5. The owner's involvement in the business

The authors say the framework came from a combination of experience, a literature search, and empirical research. The article doesn't give a detailed method or sample size.

The five stages

Stage I: Existence

The main problems are getting customers and delivering what was promised. The organization is simple: the owner does everything and directly supervises the staff. Systems and formal planning are minimal to nonexistent, and the strategy is simply to stay alive. In the authors' words, the owner is the business.

Many companies never get past this point. When start-up capital runs out the owner closes the business, and some owners quit because they can't accept the demands on their time, money and energy. Those that stay in business move to Stage II.

Stage II: Survival

The business has proven it's workable: it has enough customers and keeps them. The question changes from "can we exist?" to the relationship between revenue and expenses. Can the company break even in the short run and cover the replacement of worn-out assets? Can it generate enough cash flow to grow to a size that earns an economic return?

The structure is still simple. A sales manager or general foreman may supervise a few employees, but neither makes major decisions independently. Formal planning is, at best, cash forecasting. The authors note that many companies stay in Survival for a long time earning marginal returns, and "mom and pop" stores are their example.

Stage III: Success

At this point the owner faces a choice, and the model splits the stage in two.

• Success-Disengagement (III-D): the company is economically healthy and earns average or above-average profits. It can stay here indefinitely unless its market niche is destroyed or poor management erodes its competitiveness. Functional managers begin taking over duties the owner used to perform, the first professional staff (a controller, perhaps a production scheduler) arrive, and the strategy is essentially to maintain the status quo. The owner and the business gradually move apart.
• Success-Growth (III-G): the owner consolidates the company and puts its cash and borrowing power at risk to finance growth. Two tasks matter most: keep the core business profitable so it doesn't outrun its cash, and hire managers with the company's future in mind rather than its current size. Strategic planning is extensive and involves the owner deeply, so the owner is far more active than in III-D.

This split is the part founders most often skip over. Staying in III-D is a legitimate outcome, not a failure. The authors give reasons it can be the right call: some product-market niches don't permit growth, and some owners simply choose it.

Stage IV: Take-off

The key problems are how to grow rapidly and how to finance it. Two questions dominate. The first is delegation: will the owner genuinely delegate, with controls on performance and a willingness to see mistakes made, or will it be abdication? The second is cash: will there be enough to fund growth, without expense controls slipping or impatient investments eroding cash flow?

The organization is decentralized and at least partly divisionalized, key managers must be very competent, and both operational and strategic planning involve specific managers. The owner and the business have become reasonably separate, though the company is still dominated by the owner's presence and stock control.

The authors call this a pivotal period. They write that too often the people who built the company to the Success stage fail in Stage IV, either because they grow too fast and run out of cash (the omnipotence syndrome) or because they can't delegate effectively enough to make the company work (the omniscience syndrome). They also note that the founder is sometimes replaced, voluntarily or not, by investors or creditors.

Stage V: Resource Maturity

The concerns are to consolidate and control the financial gains from rapid growth, and to keep the advantages of small size, including flexibility and the entrepreneurial spirit. The company needs to expand its management force fast enough to remove growth-related inefficiencies and to professionalize through budgets, strategic planning, management by objectives and standard cost systems, without stifling its entrepreneurial qualities. The owner and the business are, by now, quite separate.

If the company loses that entrepreneurial spirit, the authors say it may enter a sixth stage of sorts: ossification, marked by a lack of innovative decision making and avoidance of risk.

The stages at a glance

The eight factors that change in importance

The second half of the model is a list of eight factors that Churchill and Lewis say change in importance as the business grows. Four belong to the company and four to the owner.

The authors rate each factor at each stage as key, necessary, or of little immediate concern. The pattern across stages is clear from their text:

• Operational ability matters most early, when the owner's talent for selling or producing gives the business life. It shrinks as other people take over those tasks.
• Delegation sits at the bottom early because there's nobody to delegate to, and then becomes essential. The authors say the inability of many founders to let go of doing and begin managing explains the demise of many businesses in III-G and Stage IV.
• Cash is critical at the start, manageable at Success, a main concern again when the company grows, and manageable again as growth slows.
• People, planning and systems rise in importance as the company moves toward rapid growth, and have to be acquired somewhat ahead of the growth stage so they're in place when needed.
• Goal matching matters at two points. In Existence the owner has to reconcile with the heavy demands of the business. At Success the owner must decide whether to commit time and risk accumulated equity to grow, or to enjoy the benefits of success.
• Business resources matter a lot early and decline as the loss of one customer or supplier becomes easier to absorb.

The authors observe that Take-off is where nearly every factor except the owner's ability to do is crucial. They suggest owners ask whether they have the people, the systems, the inclination to delegate decisions, and the cash and borrowing power to risk everything on growth.

One more finding is easy to miss. The authors report that some companies sit at different stages on different factors, for example, a company with abundant cash ready to accelerate while the owner is still trying to supervise everybody. They say a factor is rarely more than one stage ahead of or behind the company as a whole, but that an imbalance can create serious problems.

Where this fits for founder-led companies

Read with a founder's eyes, the model is mostly a story about the owner's role. Stage I and II demand a person who does and decides. Stage IV demands a person who sets direction and builds a team that decides. The same person has to make that switch while the company is moving fast, and some can't. That's the territory covered in founder dependence, founder's syndrome and founder mode vs manager mode.

The practical steps the model points to match the standard playbook for professionalizing a business: hire managers ahead of need, install systems before they're strained, and put a delegation of authority matrix in place so delegation isn't abdication. The authors' contrast between delegation and abdication (controls on performance and a willingness to see mistakes) is a useful test for any handover. For the skills side, see founder CEO skills by stage.

How it compares with Greiner and Adizes

Churchill and Lewis aren't the only people to describe growth in stages. Two other models come up often, and they answer different questions.

Greiner wrote about how an organization's management style has to change as it ages and grows, with each period of calm growth ending in a crisis. Larry Greiner's "Evolution and Revolution as Organizations Grow" is covered in Greiner's growth model. Greiner's crises (leadership, autonomy, control, red tape) are about how the organization is run. Churchill and Lewis keep the owner at the center and break out the earliest stages that Greiner's model treats more briefly.

Adizes frames a company as having a life cycle with a point of decline, and asks what behaviors keep it healthy at each age. The full model is in Adizes's corporate lifecycle. Where Churchill and Lewis end at Resource Maturity with a warning about ossification, Adizes treats aging as a central topic.

None of the three is a forecast. They're checklists for asking what has to change next.

Limits of the model

A fair reading has to include its weaknesses.

It's not as one-way as it looks. A common criticism of stage models is that they imply a fixed march upward. Churchill and Lewis rejected that premise for earlier models, and their own text describes several endpoints: companies that close in Existence, stay in Survival, remain stable in III-D, or drop back from Stage IV to Stage III or even Survival. The Success fork is also a choice, not a deadline. Even so, the picture is still of an ordered sequence, and the model doesn't cover companies that skip stages, as the authors admit with franchises and venture-backed technology companies, which they say can jump through Stage I and last out Stage II.

Stages may not be real. The strongest critique comes from later research. Levie and Lichtenstein examined 104 stages-of-growth models in the management literature and, in their 2010 paper in Entrepreneurship Theory and Practice, reported no consensus on basic constructs and no empirical confirmation of stages theory. They proposed a "dynamic states" alternative instead. That finding applies to the genre, not to Churchill and Lewis alone, but it's a reason to treat any stage model as a thinking tool rather than a law.

It's old, and so is its context. The article was published in 1983, and its examples (dividend taxation, automobile dealers in the late 1970s and early 1980s, venture-backed laser and genetic-engineering firms) belong to that period. A software company that sells subscriptions, a services firm run remotely, or a business that scales through a platform may not match its descriptions of systems and structure.

It's owner-centric by design. That's its value for a founder-led firm, and also its blind spot. It says less about markets, technology shifts or competitors, except where it mentions environmental change threatening a niche.

Stages aren't sharp. The authors themselves found companies sitting at different stages on different factors. Treat the stage label as an approximation, and spend more time on the eight factors than on the box you're in.

How to use it

A simple way to apply the model without overreading it:

1. Place the company on each of the eight factors separately, not just on one overall stage.
2. Look for imbalance, for example cash ready for growth with an owner who still supervises everyone.
3. Decide deliberately between III-D and III-G, including what you'd personally want from the next five years.
4. If you're heading for Take-off, hire people and install systems before they're needed.
5. Test your delegation against the authors' standard: controls, plus acceptance that mistakes will happen.

The model is also a useful companion to stage-based advice elsewhere. Early-stage vs growth-stage covers the venture view, and product life cycle covers a different kind of stage, the life of a product rather than a company. The strategic side of the Success-Growth decision is covered in growth strategy.

Key Facts: Churchill and Lewis model

• Published as "The Five Stages of Small-Business Growth" by Neil C. Churchill and Virginia L. Lewis in the May 1983 issue of Harvard Business Review.
• The five stages are Existence, Survival, Success (split into Success-Disengagement and Success-Growth), Take-off, and Resource Maturity, per the article text.
• Each stage is described by five management factors: managerial style, organizational structure, extent of formal systems, major strategic goals, and the owner's involvement.
• The model tracks eight factors: four about the company (financial, personnel, systems, business resources) and four about the owner (goals, operational, managerial and strategic abilities).
• The authors say founders who can't shift from doing to managing and delegating explain the demise of many businesses in the late Success and Take-off stages.
• Levie and Lichtenstein (2010) reviewed 104 stages-of-growth models and reported no consensus on basic constructs and no empirical confirmation of stages theory.

Related reading

• What Is a Founder-Led Company?
• Founder Dependence
• Professionalizing a Business
• Founder CEO Skills by Stage
• Greiner's Growth Model
• Succession Planning