What Is Expansion Stage?

September 24, 2009 by

I get asked the question “what is expansion stage?” frequently.

From a high level perspective, if early stage is when a company does its initial product development and customer development, then expansion stage is when the company takes product development and customers development to the next level, puts much more emphasis on company development (that is, methodology development, organizational development, and operational development), and grows the company at the same time.

From a more detailed perspective, expansion stage is the stage in a company’s development that starts when a company can add customer development resources (most of the time this means adding sales and/or marketing resources) and be confident that the additional resources will result in predictable top line revenue gain and long term value (that is, you can get a large enough economic result for each additional unit cost added to customer development activities).

Expansion stage begins when your company fits most of the following:

  • You have a core product vision and “whole product” offering with enough functionality and enough of a competitive differentiation that your target market customers are purchasing/using your “whole product” with a high enough win/conversion rate.
  • You have a set of happy (or at least satisfied) customers (that are willing to be used as references, used for case studies, and/or say good things about your company online and offline) and your customers and target market are generally happy with your product and go to market approach.
  • You have a core Go-To-Market Strategy and are executing it in a way that gets solid economic results (sometimes we call this “sales economics”, “sales and marketing economics”, “distribution economics”, or “funnel economics“). Ideally, the management team has gone down the learning curve far enough that the benefits of growing the resources outweighs the more difficult continuous improvement of a larger set of resources (that you will have as you go through the expansion stage).
  • You have adequate organizational and operational methodologies and people to support additional resources and additional business.

In many ways, the expansion stage of a company is the most difficult phase to manage, as it is the time when a company is going through the greatest set of market, methodology, people, and management changes and needs to do all of these things as it is improving and growing its product development and customer development activities. The net result is that business complexity and organizational size and complexity grow and need more management attention

For example:

  • You may add additional target market segments, increasing the complexity of your go-to-market strategy and perhaps your product and development.
  • You may add additional products to your mix, increasing the complexity of your product and development, and go-to-market methodologies.
  • You will probably saturate your current marketing channels, may add additional marketing channels and sales channels, increasing the complexity of your business.
  • You will probably add a lot of people, making recruiting, onboarding, and ongoing management more difficult (particularly with all of the change going on).
  • You will need more A-caliber management bandwidth to manage more people and more business complexity, which is difficult to find and attract and really difficult for some current managers to accept (they liked being in control of more things in the past and they may be better generalists than specialists).
  • Some of the management team members may not be able to professionally develop at the same pace as the skill requirements of a larger, more complex company, requiring difficult decisions and difficulty hiring the best A-caliber managers to supplement the current team.
  • Most of the management systems that work for early stage companies stop working as you grow your team during the expansion stage and new management systems need to be developed.
  • Your financial infrastructure will probably not scale to the point that you need it to, and you will be increasing the sophistication (and complexity) of your financial methodologies and people.
  • Many founders long for the good old days before you reached the expansion stage, when everything was simpler!

The expansion stage ends when the company is an institutionalized growth stage company, which generally means that the company has a solid market position, solid methodologies, a solid set of people with double/triple redundancy in the key roles, and well developed and robust organizational and operational methodologies.

The expansion stage of a company’s development is when all of the hard work from the early stage, generally product development and customer development, can morph into a great company if the phase is managed well.