How will you manage the growth of your company?
Transitioning: Entrepreneurial Management to Professional Management
When an organization is born, the emphasis is on creating a product and surviving in the ecosystem. Certain features characterize an entrepreneurial management style and structure.
The founders devote their full energies to the technical activities of producing the first product and later marketing it. The work hours are long, and work procedures are typically informal. At this stage there is little need for formal procedures, systems, and structures because the venture is small enough that activity can be monitored through the daily, personal interaction of the entrepreneur, the venture team, consultants, and hired employees.
More importantly, because the venture is young and inexperienced, it has not yet learned the patterns and routines that are required for rapid growth. Since there is little specialization or formalization, coordination, command, and control are from the top. This centralized decision making is where one or a very few number of individuals are responsible for making all the major decisions, and generally, one person can comprehend all the information required for decision making.
In the mid-1950s, in response to Remington Rand and UNIVAC’s leadership of the early days of the computing age, Thomas J. Watson, who was then IBM’s patriarch, was forced to make a decision on restructuring IBM. Thomas J. Watson, Jr., recalls the situation his father faced, “If we had organization charts, there would have been a fascinating number of lines—perhaps thirty—running into T. J. Watson.” In late 1956, after months of planning, they called the top one hundred or so people in the company to a three-day meeting in Williamsburg, Virginia. They came away from that meeting decentralized.
Who has the key to the Coke machine in your venture? We tell entrepreneurs that Michael Dell had two Eureka moments, the first was creating the “direct-from-Dell” business model. The second was learning about delegating business responsibilities.
In the early days of Dell Computer, while working on a complicated business issue, he was interrupted by an employee complaining that he lost a quarter in the Coke machine. Dell wanted to know why the guy was complaining to him. The employee responded, “Because you’ve got the key to the Coke machine!”
Professional Management Structure
According to Bhide, “To assume that all firms are equally endowed with enterprising management seriously misrepresents the realities of growing businesses.” Co-founders Pierre Omidyar and Jeff Skoll of eBay realized they needed help when they started seeing a 70 percent compound monthly growth rate. In his book, The Perfect Store: Inside eBay, Adam Cohen captured Omidyar’s comments, “We were entrepreneurs and that was good up to a certain stage. But we didn’t have the experience to take the company to the next level.”
Professional management structure creates an environment where people set goals, and put into place formal activities that make things happen on time, over and over again. It is where issues of accountability and responsibility for delivering results become very key.
Three key features characterize professional management:
– First, there is the delegation of decision-making responsibility. Like we saw with Dell and the Coke machine, the entrepreneur and the venture team cannot make all of the decisions required to manage a fast-growing firm. The team must begin by delegating responsibility to middle managers, and later to front-line employees. Like we saw with IBM, how the venture team and board members determine how this gets done will eventually determine the venture’s organizational restructuring.
– The second feature is the introduction and use of formal controls and systems to manage the venture. These systems include mechanisms for setting goals and objectives, performance metrics, and methods for monitoring performance against clearly established measures.
– The third key feature is repeatability. To accomplish this, many hired managers develop policies and standard procedures that are used to guide and manage the actions of the employees that will be hired later on.
Making the Transition to Professional Management
We have found that the most distinctive factor in the transition is the change in the decision-making process, moving from intuitive decision making to organizational decision making. In her Inc. article, “Founding CEOs vs. Second CEOs,” Carole Matthews writes that typically the founding CEO has “fingers in every part of the business—a desire for total control,” while the Second CEO has a “desire to establish a management team” and a “track record of building a company from initial funding stages.” The formalization and transition to professional management style and structure involves the installation of rules, procedures, and formal control systems.
The top management has to delegate responsibilities, and communication becomes more formal and less frequent. During this period, goals are shifted from survival to maintaining internal stability and creating growth expansion strategies.
Like we saw with eBay, after a certain point the founders cannot do everything and will have to start hiring professionals. One person can be stretched to lead an emerging growth venture that has revenues of $10 to $25 million per year, and up to fifty employees. After that point, the venture will need to find the right executives or the business will die.
There are five formal steps that are required for a successful transition to professional management:
– The first step is simply recognizing the need for change. This is often extremely difficult because it is a by-product of success, which means that the venture may be growing and the growth rate may be accelerating into escape velocity, but with little or no chance of survival. What happens is that success reinforces beliefs and behavior that may be appropriate for the start-up stage of the venture but that may not fit the needs of a fully scalable, larger, more complex venture.
– The second step is formally developing the human resources. This means hiring “A” people to hire more “A” people and not starting the death spiral we discussed in previous Articles.
– The third step is delegating responsibilities. Entrepreneurs should not wait until someone comes pounding on their door for the key to the Coke machine, nor wait until competitors threaten to smother the flames that are powering rapid growth.
– The fourth step is developing formal controls and a control system that shifts to performance rather than behavior.
– The fifth step is stepping aside once the ball is put into play. This requires a fundamental change in the attitudes and behaviors of the founders and the venture team. Michael Roberts, executive director of entrepreneurial studies at Harvard Business School, knows why the transition to professional management is often so difficult. It requires far more than changes in organizational systems and structures. He says, “It requires a fundamental change in the attitudes and behaviors of the entrepreneur.” Merely creating organizational structures and systems accomplishes little if the entrepreneur is unwilling to step aside, truly delegate, and finally hand over the key to the Coke machine.