Growing Pains. Flamholtz Eric G.

training to one in which there are formal management development programs; from one in which there is no budget to one in which there are budgets, reports, and variances; and, finally, from a situation in which profit simply happens to one in which there is an explicit profit goal to be achieved. In brief, the company must make the transition from an entrepreneurship to what we term “an entrepreneurially oriented, professionally managed organization.”

      As we will see in Chapter 1, this is a time when the very personality traits that initially made the founder-entrepreneur so successful can lead to organizational demise. Most entrepreneurs have either a sales or technical background, or they know a particular industry well. Entrepreneurs typically want things done in their own way. They may be more intelligent or have better intuition than their employees, who come to rely on their bosses' omnipotence. Typical entrepreneurs tend to be “doers” rather than managers, and most have not had formal management training, although they may have read the current management best-sellers. They like to be free of “corporate restraints.” They reject meetings, written plans, detailed organization of time, and budgets as the trappings of bureaucracy. Most insidiously, they think, “We got here without these things, so why do we need them?” Unfortunately, the nature of the organization has changed – and so must its senior management.

      There is no one pattern for a successful transition from an entrepreneurship to a professionally managed enterprise. Whatever path is followed, the key to a successful change is for the entrepreneur to recognize that a new stage in the organization's life cycle has been reached and that the former mode of operation will no longer be effective.

      Making an Organizational Transition

      As an organization grows, it will, in fact, face not just one but several significant transitions and transformations that need to be managed. A key question for senior leaders (whether they are the entrepreneur of a new company or the CEO of a billion-dollar-plus company), then, is, “What should we do to take the organization successfully to the next stage of growth?” To answer this question satisfactorily, it is necessary to understand that there are predictable stages of organizational growth, certain key developmental tasks that must be performed by the organization at each growth stage, and certain critical problems that organizations typically face as they grow. This understanding, in turn, requires a framework within which the determinants of successful organizational development may be placed.

      Part One of this book focuses on identifying these determinants of success, on the identification of the predictable stages of organizational growth (each requiring transitions), and on the personal transitions that entrepreneurs and other leaders need to make to support the transitions from one stage of growth to the next.

       Chapter 1 deals with the personal and organizational transitions that are necessary during the life cycle of a business enterprise. It examines a variety of personal and professional changes or transitions that must be made by the chief executive officer or “CEO” as a company grows. These individual transitions include the changing nature of the CEO's role, changes in managerial style, and the behavioral and attitudinal changes required to support successful organizational transitions. It also examines the strategic and “architectural design” changes required for healthy organizational development as a company grows over time.

       Chapter 2 presents a holistic framework for successful organizational development. It deals with the issue of what makes an organization successful and profitable. Drawing on research and experience from consulting with organizations of all sizes and types over nearly 40 years, it presents a systematic approach to understanding the six critical variables that determine organizational effectiveness. It examines these six critical tasks of organizational development and describes what must be done to accomplish each. Chapter 2 presents a method for self-assessment of the strength of a business in terms of these variables, which we call the Pyramid of Organizational Development. A database is provided for the reader's comparison of their company's “strategic development scores” with that of other businesses.

       Chapters 3 and 4 together identify and examine the seven different stages of organizational growth, from the inception of a new venture through the early maturity of an entrepreneurial organization, and to the ultimate decline and revitalization of a company. Chapter 3 focuses upon the first four stages of growth from a new venture to scale-up, and from scale-up to professionalization of the enterprise as well as consolidation. Taken together, the four stages described in Chapter 3 comprise the period or era from an entrepreneurial start-up through transformation to becoming an entrepreneurially oriented professionally managed enterprise. Chapter 4 examines the remaining three stages – diversification, integration, and decline-revitalization. These chapters also examine the relative emphasis that must be placed on each of the six critical developmental tasks at each stage of the organization's growth.

       Chapter 5 identifies and describes the growing pains that all developing organizations experience. It provides a method for assessing these growing pains and determining their severity. Senior managers need to be able to recognize such growing pains as symptoms of the need to make changes in their organizations. Chapter 5 also presents a method for self-assessment of the “growing pains” being experienced by a business as well as for interpreting the degree of “risk” of problems (including ultimate failure) facing the company. A database is provided for the reader's comparison of their company's growing pains scores with that of other businesses.

      Taken together, the ideas in Chapters 1 through 5 provide a conceptual map of the “tasks” that must be focused upon to build a sustainably successful business. Part One also provides a guide for analyzing and planning the transitions that must be made in moving a company from one developmental stage to the next.

Chapter 1

      Transitions Required to Build Sustainably Successful Organizations^®

      It is well established that approximately 50 % of all new ventures will fail within five years. For every Southwest Airlines that succeeds, there is a People Express that goes bankrupt. For every Facebook, there is a Myspace that was once popular, but that is now an afterthought. For every Starbucks, there is a Diedrich Coffee that failed. For every Dell, there is an Osborne Computer (who very few people even remember – even though it reached $100 million in sales revenue in three years before going bankrupt, and was a leader in personal computers prior to the founding of Dell).

      It is a great achievement to create a successful start-up, given their 50 % failure rate. It is an even greater challenge to create a company that is sustainably successful over “the long run.” As we view it, the long run relates to sustainable success over several decades. At a minimum, it involves success over at least two generations of company leaders. In sports such as baseball, basketball, or football, it is possible to have sustained success with a specific group of players and a single coach; but true “sustainable success over the long run” exists only when leadership has passed from generation to generation with sustained success. One company that has achieved this is General Electric (GE). Founded in 1878, GE continues to be a global leader. Another is Heineken, the Netherlands-based beer company. Heineken was founded in 1864, and also continues to be a world leader in its space. A third is Toyota. Toyota, focused on the production of automobiles, was founded in 1933 as a department of Toyoda Automatic Loom Works, which itself traces its history to 1926. Toyota Motors was created as a spinoff from the parent company as Toyota Motor Company in 1937.

      Sustainable success for a long period is very challenging, but possible, as shown by GE, Heineken, and Toyota. It is difficult even over a relatively shorter period such as 15 years. A comparison of companies listed on the Nasdaq stock exchange from 2000 to 2015 shows