Growing Pains. Flamholtz Eric G.

changes in the composition of the top listed companies by “market cap” (market capitalization, the standard measure of a public company's value).2 Only three companies were in the top 10 on both dates: Microsoft, Intel, and Cisco. Several companies that were listed as among the top 10 in 2000 were no longer on the list in 2015, including Dell, Sun Microsystems (purchased by Oracle), JDS Uniphase, and Yahoo!.

      Organizational Success, Decline, and Failure

      Why are some companies able to continue to manage growth successfully over the longer term (at least 10 years) while others are not? Why are some company founders and leaders like Howard Schultz at Starbucks and Richard Branson of Virgin Group able to continue to grow with their companies, while other founders and leaders such as Donald Burr, who founded People Express (and who had an MBA from Harvard!) or Adam Osborne, who founded Osborne Computer, fail to make the required transitions as their businesses increase in size and complexity? What do successful companies and their leaders do differently compared with those that are less successful or even those that have failed? Is it simply chance or something that can be learned and managed?

      Through rigorous research and analysis of organizations and their leaders over the past four decades,3 we have answered these questions and have developed practical tools that can help leaders of companies at all sizes increase their probability of long-term success. Why, for example, did Starbucks Coffee (originally founded as a local roaster with stores in 1971 and later reconceived in 1986–1987 as a “specialty retail/café” hybrid) become a global brand and industry leader,4 while Diedrich Coffee (which was similarly founded in 1972 and later redefined like Starbucks as a cafe in 1983) has been broken into pieces (company stores and franchised stores) and sold to competitors including Starbucks?5 How did Starbucks become the global leader in its space even though other companies like Coffee Bean and Tea Leaf (founded 1963) and Peet's (founded 1966) existed before Starbucks was ever purchased and refocused? As we will see in the next chapter, Starbucks' success is not an accident, nor is it unique. The keys to Starbucks' success were some critical transitions made both by its founder and CEO, Howard Schultz, and by the organization itself. Starbucks developed and followed a plan, not just a classic strategic plan but one that focused upon organizational development as well.

      We shall describe this in some detail and distill the lessons for other company founders and their organizations.

      Lessons like these are not only important for the founders of entrepreneurial companies like Howard Schultz, Steve Jobs (Apple Computer), or John Paul DeJoria (Paul Mitchell hair products and Patron Spirits Company), they are important for venture capital and private equity investors, boards of directors, banks that lend to such companies, managers of such companies, and students of management who aspire to either start their own business or work in a company going through such transitions over time. They are also of importance to society as a whole. Companies create jobs. Successful companies create more and more jobs, while failing companies destroy jobs. For example, successful companies such as Starbucks, Google, and Apple are job-creating machines! However, when companies like Borders (retailer of books), Woolworths (specialty department store), People Express (airline) and Osborne Computer (computer manufacturer) fail, they destroy jobs and people's livelihood, and negatively impact lives.

      Government programs to stimulate companies' growth have been established in countries such as Canada and Poland for just this reason. Canada created the Build in Canada Innovation Program (BCIP) to kick-start businesses and get their innovative products from the lab to the marketplace. The government of Poland has created the Polish Agency for Enterprise Development. It is a tragedy when a company fails after a promising entrepreneurial start because the entrepreneurs do not understand how to build the organization.

      Building Sustainably Successful Organizations^®

      The purpose of our research and really, what we might describe as our life's work, is to help entrepreneurs and others understand what must be done to build sustainably successful organizations^®. We have been helping organizational leaders plan for and implement the transitions required to promote long-term success for almost 40 years. This book will summarize our methods, tools, and insights in a practical and systematic way.

Two Types of Transitions Required for Sustainable Success

      Our research and experience have shown that there are two different but related types of transitions that must be made at different stages of growth in order for an organization to continue to flourish and grow successfully.

      One type of transition concerns the founder or ultimate leader of an organization – which is typically the chief executive officer or CEO. This person must make a variety of personal and professional changes or transitions as their company grows. These include understanding and embracing the changes in the CEO role that need to occur to effectively manage an increasingly larger and more complex organization, developing new skills, adopting a new mindset (that supports, among other things, having increasingly less direct control over results), and changing one's managerial style. For simplicity, we term these the “personal transitions.”

      The second type of transition relates to the organization's strategic and “architectural design.” These organizational development transitions can include changes in the organization's systems, processes, or structure, as well as changes to what the company actually does (who its target customers are and what it offers them).

      If these two types of transitions are not made effectively, they will have a significant impact on organizational effectiveness, efficiency, and success. In fact, the inability to make effective and appropriate personal and organizational transitions is a key underlying reason why organizations experience problems and, in some cases, fail. This chapter will focus on both types of transitions.

      The Personal Transitions Facing Founders and CEOs

      As organizations grow and change, those in management and leadership roles also need to grow – in their skills and capabilities – and change how they approach their roles. For example, the CEO of a start-up needs to spend his or her time very differently from that of a $1 billion enterprise. We will discuss tools and techniques for making these changes in Chapter 9. In this chapter, we focus on the very specific challenges facing the founder or the entrepreneur as his or her business grows.

      Unlike the CEOs of large, Fortune 500– type organizations, who are typically promoted through the ranks over a period of many years, the CEO of an entrepreneurial company is typically someone who either was the founder of a company, was part of a founding group, or is the spouse or child of the founder. Examples are legion and include not only those cited above but also some other very familiar names such as Mark Zuckerberg (Facebook), Larry Ellison (Oracle), Jack Ma (Alibaba, China), Anita Roddick (The Body Shop), Martha Stewart (Martha Stewart), as well as some currently less familiar but equally significant names, including Ren Zhengfei (Huawei), Li Ning (Li-Ning, China), Isaac Larian (MGA Entertainment), and Yerkin Tatishev (Kusto Holdings, Singapore). To understand transitions that founders/entrepreneurs must make as their companies grow, it is useful to first consider who they are as people and how they got to be CEOs.

Characteristics of Entrepreneurs

      Although there are no precise demographic and psychological profiles available, our experience has shown that CEOs of entrepreneurial companies tend to have certain things in common. About 90 % of these people have one of three types of background: (1) a marketing background, (2) a background in some technical area, such as engineering or computers, or (3) a background in a particular industry. For example, an individual may have sold computer-related devices for a large company before deciding to start his or her own company focused on developing and producing similar products. Alternatively, a person may have been an engineer or other technical specialist and become skilled at product development before deciding to establish a new business. Finally, someone may have worked in a particular industry such as travel, executive search, construction, real estate, garment manufacturing, or a variety of technology areas including software development, computer chips, or telecommunications.

      Most

2

Dean Starkman and Russ Mitchell, “Nasdaq: Déjà vu 15 Years Later,” Los Angeles Times, March 3, 2015, B4.

3

We have published many articles presenting our models, testing them empirically. We have also published case application articles showing how our frameworks and tools have actually been used.

4

Starbucks was originally founded by a three-man group in Seattle as a “local roaster,” not a café. Howard Schultz who had worked at Starbucks left to found Il Giornale Coffee in 1986, and then purchased Starbucks and rebranded his company as Starbucks in 1987.

5

Diedrich Coffee was founded in 1983 by Martin Diedrich. It was an outgrowth of an earlier family business begun as a coffee plantation and then a local roasting store that opened in 1972. Diedrich Coffee went public in 1996. In September 2006, Diedrich Coffee announced its plans to close its company-owned retail stores, 40 of which were sold to Starbucks and reopened under that brand. Diedrich's franchisee-owned stores remained unchanged. The company continued as a roaster and wholesaler of coffee beans, with a few independently owned and operated Diedrich stores that remained open in California and Texas. On November 3, 2009, Peet's announced that it was buying Diedrich, but its offer was exceeded by Green Mountain Roasters, Inc., which currently owns the company.