Transitioning from an entrepreneurship to a professionally managed firm

Surviving the major stages of organizational growth

Editor’s note: This is the third installment of four in an ongoing series surrounding what it takes to move from a relatively small micro-business to a more robust, larger organization. Each article explores a different aspect of that journey.

In the previous issues, I discussed the initial phases of transitioning from a business in its infancy to becoming a sustainable business. I discussed the challenges and the growing pains that are experienced by many companies in that part of the growth curve and understanding the six key organizational development tasks to navigate.

In this issue, we will identify and help you better understand the four major stages and the typical characteristics of those stages that an organization must pass through on its way to greatness.

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Those stages and characteristics are:

Description              Developmental Needs            Typical Revenue Size

  1. New venture          Niche and markets                Less than $2 million
  2. Expanding        Resources and operations             $2-$10 million
  3. Developing          Process management               $10-$100 million
  4. Integrating          Organizational culture          More than $100 million

Stage one: In the first stage, revenue ranges from a pure startup to revenues approaching $2 million. As we have covered in detail previously, the essential thing that the owner must be concerned with is developing a focused approach to building the business and securing customers. This happens by identifying, defining, and developing appropriate niches and the carriers and markets to serve them.

Stage two: In the second stage, the firm has expanded beyond the $2 million range and may hit $10 million. At this stage of development, it is not unusual for the firm to experience a period or periods of rapid expansion. This expansion obviously will involve top-line sales revenues but will likely affect any number of employees and multiple locations.

Stage 2, therefore, provides the management of the firm or organization with a new set of challenges surrounding development. How often have people talked to us about their resources being stretched almost to the breaking point when increased sales require ever-increasing people resources, cash flow, office equipment, supplies or office space. 

Simultaneously, just trying “to get the work out the door” is restricting the owner’s attention to recruiting new staff, managing the ongoing training of staff and paying adequate attention to customers and clients other than the renewal period. Since the problems of this period tend to be more associated with growth than survival, this is when people will be pulling their hair out.

It may play out as follows:

  • Supplies run out unexpectedly
  • Some invoices get paid multiple times while others don’t get paid at all for months on end
  • The quality of customer care and responsiveness for existing customers is decreasing with nobody inside catching on to it
  • Fighting fires and dealing with the crisis of the hour or day becomes the norm
  • Staff turnover begins to spike at the worst possible time due to the stress or burnout
  • The impact of poorly designed and executed recruitment processes and lousy hiring decisions come home to roost
  • Errors in handling paperwork (in a paper-based system) lead to missing files, letters, backup documentation, or requests for changes that lead to blaming, confusion, wasted time, and embarrassment
  • Errors in scheduling discipline or too many promises made by too many people may mean the staff will need to be in two places at once or crisscrossing all over the state or country on the same day

Ultimately, it can become so devastating that the organization collapses and goes out of business. Usually, this is because the founder or owner did not deal effectively with the issues and managerial challenges that occurred as the organization grew. Having an effective operational system infrastructure that is scalable as the organization grows may be more critical than many people realize. Often owners are not as concerned with what has been dubbed by some as “organizational plumbing” as maybe they should be.

Stage three: At Stage 3, the owners, and any partners and managers, realize that there is more to becoming even more successful in the future than strictly throwing money into people, equipment, and space. It will be critical that a transition to a different type of organization occur. The movement from an entrepreneurial management style known for its informality to a much more professional leadership style must occur.

It is time to have well-defined strategic plans and operational goals and plans. Regularly scheduled meetings are needed to ensure that everyone stays on the same page and doesn’t feel left out during the quickly changing pace of business. Everyone should have a position description and a well-articulated scope of responsibility used as day-to-day management tools. If not yet in place, it is time for a performance appraisal process to be part of the overall management control system. The people who manage the firm also must change their role and skill sets, approaches to their position, and competencies to keep up with business developments. They probably started as a hands-on manager or a super-worker. They may have maintained that posture through the first two phases. It is unlikely that this same style will serve them well in the future.

Increasingly, what will be needed are the skills associated with formalized planning and administration and overall motivation, including reward and recognition systems and leadership competencies. One tendency to avoid using attention to detail is to under-invest in the management infrastructure until it is almost excruciating.

Stage four: During Stage 4, the main focus is integrating. Once the organization has somewhat mastered the issues discussed in the prior stages, the crucial work of organizational development begins- the care and feeding of the corporate culture. The culture impacts the day-to-day running of the business. It can also have a considerable effect on the level of profitability.

Since day one, the organization has hired multiple people. They may have come in waves (almost referred to as the class of ‘XX) as the business surged through various levels. In many cases, the staff hired early on probably was hired using a much less formal environment and process. Often, one only needed to demonstrate the basic skills to be hired. Culture, whatever existed, was transmitted via word of mouth and observations surrounding, “That’s how we do things around here.” During the second bout of growth and hiring, the employees who were hired early on in the firm’s history become the carriers and keepers of the culture.

As this process becomes replicated, maintaining the culture gets harder and harder for two reasons. First, the sheer number of people hired can overwhelm the number of early hires. The second challenge comes from expanding via branch offices and locations. It is almost impossible to establish and maintain the desired culture while only relying on casual means. It is time to bite the bullet and establish a formal approach to groom the culture. So how do we characterize the differences between an entrepreneurial style and a professional management style?

In simple terms, many entrepreneurs tend to be relatively informal in their operations, lack processes, and systems, and have a freewheeling nature. They are much more likely to decide based on a gut feeling. An organization with professional management tends to be more formal, has well-developed processes and systems, and exerts internal discipline to achieve its business and profitability targets.

In his book, Making the Transition from an Entrepreneurship to a Professionally Managed Firm Eric G. Flamholtz articulated nine discreet result areas that differ between the entrepreneurial and professional management styles: profit; planning; organization; control; management and development; budgeting; innovation; leadership; and culture. The differences are striking, and understanding the methods behind each form of management leads to an enhanced sense of purpose for an organization during this change.

In the next installment, we will discuss developmental items and tactics, explain and assess the organizational growing pains, and plan the transitions that the leader must successfully execute. Watch for the next installment.

Doug Brown is the CEO and chairman of Paradigm Associates LLC, headquartered in Cranford, N.J. with locations throughout the United States. Paradigm Associates specializes in strategic and executive leadership development for professionals. Visit www.ParadigmAssociates.US or call (908) 276-4547 for more information.