Every entrepreneur, at some point in his career, faces the dilemma of when to make the transition from an entrepreneurial company to a professionally managed one.
Even though many entrepreneurs realise the need to put in place much needed structures in order to be able to manage the business, the fear of losing control over what has become an extension of oneself causes many entrepreneurs to postpone the inevitable.
So much so that at some point it becomes too late and, in the absence of proper management in place, the company spirals downwards very quickly.
The challenge though is to know when to make that transition so that the entrepreneurial spirit that made the company a success in the first place does not get subsumed by rigid, bureaucratic management practices that can stifle the growth and spirit of the company.
So, how does one make the transition without losing the entrepreneurial spirit?
The first step is perhaps to understand the importance of management and the contribution it can make to the growth of the business.
Experienced venture capitalists have a simple formula to determine the success of a new venture.
They express this with an equation:
S = [(BM X MS)/EI]^MC
Here S, the venture’s success is equal to the product of the Business Model (BM) and the Market Size (MS) divided by the Entrepreneur’s Inflexibility (EI), and the whole raised to the power of the Management Capabilities of the firm.
As you can see, firstly, regardless of how attractive the business model or the market size may be, the success of the combination of these two factors can be undermined by the entrepreneur’s inflexibility.
For any venture to succeed the entrepreneur must be flexible enough to change his approach and try new things if his initial approach does not work.
Second and more importantly, the success of the venture is hugely dependent on how strong the management capabilities of the entrepreneur and the organisation are.
That’s why, in the equation, all other factors combined are raised to the power of this factor, management capability.
Having understood and accepted the importance of good management the dilemma still remains as to when to introduce management systems and practices in an entrepreneurial organisation.
Dr Ichak Adizes, a renowned business guru, theorist and founder of the Adizes Institute in California, has developed an interesting model called the ten stages of an organisation’s life-cycle.
According to this model, just like any living organism, an organisation typically goes through ten stages in its life-cycle.
These are:
1. Courtship - the stage when the entrepreneur engages with one or more partners or clients to start the business;
2. Infancy - the stage when the organisation begins to come alive and starts to do business;
3. Go-go - this is a stage when the organisation experiences rapid growth and the people engaged feel the power and energy of making things happen. It is also a stage when there is a lot of chaos and ad hoc decision making;
4. Adolescence - when the organisation comes of age, loses its innocence and begins to be more established;
5. Prime - the stage when the organisation is at its fittest and most competitive; profits are strong and the organisation gains full self-confidence;
6. Stability - the stage when the
organisation recognises the need to consolidate its gains but in the process begins to lose some of its edge;
7. Aristocracy - in this stage the organisation is coasting along due to its past successes, but starts to lose market share at the fringes to new competitors, new trends or technologies;
8. Recrimination (Early Bureaucracy) - the entrepreneur begins to have doubts; internal issues and infighting starts to overshadow the original intent and purpose of the organisation;
9. Bureaucracy - In order to solve the problems the organisation turns to bureaucracy by putting in place tight fiscal controls and procedures;
10. Death - the final stage when the organisation is sold-off or closed.
An important thing to note is the distinct possibility that an organisation can reach a premature end during any of the first four stages.
For instance, during courtship the partners who are attempting to set-up the venture may decide not to proceed for whatever reason and the partnership is not consummated in ’marriage’.
It fizzles out as an ’affair’.
Similarly, during infancy, if the organisation is not provided with adequate nourishment such as capital and resources, it is bound to die a premature death.
We call this ’infant mortality’.
Most entrepreneurial companies die prematurely during the go-go stage when the entrepreneur refuses to bring in required management talent to manage the organisation.
This leads to the ’founder-trap’ when the founder does everything himself and due to his limited skills, knowledge and time the organisation is stymied by the founder’s limitations and it never grows to its full potential.
And lastly, during the adolescent stage, the organisation can come apart due to differences among the partners or their failure to amicably resolve issues arising from the rapid growth of the business.
Once an entrepreneur understands the various stages that the organisation typically goes through in its life-cycle, he or she can begin to understand the issues faced at each stage and develop a strategy to address them.
Every stage in the organisation’s life-cycle will present challenges.
The important thing is to recognise where your organisation is in the life-cycle and identify which challenges are normal to that stage of development and which ones are abnormal, and deal with the abnormal ones effectively.
If the entrepreneur has strong management skills then the organisation can get by without an elaborate management structure at least until the ’Go-Go’ stage.
But once it reaches this stage it is imperative that the entrepreneur begins to put in place some form of management structure to take the organisation to its next stage.
For more information on the Organisation Life-cycle model you can visit: http://www.adizes.com/corporate_lifecycle.html
Ram Ramesh can be reached at rr2803@gmail.com.
