Archive: Management

Managerial Versus Entrepreneurial Decision Making

The following text is from a McGraw-Hill Book on Entrepreneurship published in 2005

The difference between the entrepreneurial and the managerial styles can be viewed from five key business dimensions—strategic orientation, commitment to opportunity, commitment of resources, control of resources, and management structure. Managerial styles are called the administrative domain.

 

Strategic Orientation
The entrepreneur’s strategic orientation depends on his or her perception of the opportunity. This orientation is most important when other opportunities have diminishing returns accompanied by rapid changes in technology, consumer economies, social values, or political rules. When the use of planning systems as well as measuring performance to control current resources is the strategic orientation, the administrative (managerial) domain is operant, as is the case with many large multinational organizations.

 

Commitment to Opportunity
In terms of the commitment to opportunity, the second key business dimension, the two domains vary greatly with respect to the length of this commitment. The entrepreneurial domain is pressured by the need for action, short decision windows, a willingness to assume risk, and few decision constituencies and has a short time span in terms of opportunity commitment. This administrative (managerial) domain is not only slow to act on an opportunity, but once action is taken, the commitment is usually for a long time span, too long in some instances. There are often no mechanisms set up in companies to stop and reevaluate an initial resource commitment once it is made—a major problem in the administrative (managerial) domain.

 

Commitment of Resources
An entrepreneur is used to having resources committed at periodic intervals that are often based on certain tasks or objectives being reached. These resources, often acquired from others, are usually difficult to obtain, forcing the entrepreneur to maximize any resources used. This multistage commitment allows the resource providers (such as venture capitalists or private investors) to have as small an exposure as possible at each stage of business development and to constantly monitor the track record being established. Even though the funding may also be implemented in stages in the administrative domain, the commitment of the recourses is for the total amount needed. Administratively oriented individuals respond to the source of the rewards offered and receive personal rewards by effectively administering the resources under their control.

 

Control of Resources
Control of the resources follows a similar pattern. Since the administrator (manager) is rewarded by effective resource administration, there is often a drive to own or accumulate as many resources as possible. The pressures of power, status, and financial rewards cause the administrator (manager) to avoid rental or other periodic use of the resource. The opposite is true for the entrepreneur who—under the pressure of limited resources, the risk of obsolescence, a need for flexibility, and the risks involved—strives to rent, or otherwise achieve periodic use of, the recourses on an as-needed basis.

 

Management Structure
The final business dimension, management structure, also differs significantly between the two domains. In the administrative domain, the organizational structure is formalized and hierarchical in nature, reflecting the need for clearly defined lines of authority and responsibility. The entrepreneur, true to his or her desire for independence employs a flat organizational structure with informal networks throughout.

 

Source: Hisrich, PhD, Robert D., Michael P. Peters, PhD and Dean A. Shepherd, PhD. Entrepreneurship. 6 ed. New York: McGraw-Hill Irwin, 2005.

What makes good leadership?

A lot is being said and has been written about how strategies and market mechanics determine the success or failure of ventures and large companies. But any entrepreneur will confirm that it usually is execution which decides the fate of the company, especially in venture companies. Thus, leadership capabilities may be the most important skill set of venture management.

Leadership, management, and the principles which guide how employees are motivated and directed in their tasks are usually treated either as a self help topic in management books or as the HR side of company organization.

It might be time to focus on leadership and HR capabilities in the strategic dimension they have for the company. This means to recognize that the best company strategy can be killed by the wrong leadership methods. Good leadership is not only an important requirement for management. It is the necessary condition for company success!

In the region of North Germany where part of my family comes from we say that a fish always stinks from the head, which in my opinion puts in a nutshell the essence of leadership. If your venture team is not motivated or doesn’t excel, start at the head.

Ted Levitt once said that

organizations exist to enable ordinary people to achieve extraordinary things,

which I believe is only a way to say that things happen only if people do them. The success of a company is only achieved if the employees and the managers of that company willingly take the necessary actions to enable that success.

That is certainly first and foremost a question of deciding which of the actions that are available in a given situation is chosen, but it is equally importantly a question of ensuring that every employee executes that strategy in the way that best ensures success, including feedback and adaptation of the strategy when problems arise.

Achieving this, however, is a question of leadership.

Since all dictatorships eventually fail, leadership cannot be reduced to the ability to bark orders. All great historic figures acclaimed for their leadership, from Julius Cesar to Napoleon, from Spartacus to Martin Luther King, are all admired for their ability to inspire, to motivate, and to convey a sense of purpose to a large number of people, i.e. to the organization that they led.

Inspiration however, is nothing without credibility. Credibility, in turn, is only achieved through authenticity. Authenticity is only achieved through honesty. Applied to the world of the 21st century and the context of leadership in business organizations, this means that a truly successful leader needs to combine the ability to inspire others with a set of skills and principles that are tenets of credibility as a leader:

1. An inspiring sense of purpose.

2. A clear set of unflinching values. Shifty leaders command no respect.

3. Honesty at all costs.

4. The ability to communicate necessities and convey a sense of urgency to a team.

5. The ability to define the organization as a community serving a common goal.

6. The ability to honestly admit own mistakes and address the weaknesses of the organization.

7. Relentless commitment to the company goal, including the necessary ability to “punish underperformance”, without humiliating anyone in the organization.

8. The ability to lead by example, including in personal matters such as health or respect for others.

9. The discipline to pursue a strategy and tactics that belong to that strategy and to adapt these whenever necessary, not only “acting from the gut”.

10. The intelligence to always overestimate competition and underestimate your own position.

Most of these traits require a certain level of self-assurance, respect for others, and clear view of your own shortcomings that is incompatible with most managerial egos. But while there are enough cases of at least temporarily successful egomaniacs, in the long run only those entrepreneurs intelligent enough to value, respect, and reward their performing team members, and self-critical enough to recognize their own mistakes become truly great.

It’s a People’s Business – HR is Key

After 15 years of entrepreneurship the realization I come back to more and more, and in these hyped times even more strongly, is that finding the right people is the one determining factor that will decide whether you will have success or not.

On the one hand that seems like a trivial statement and on the other implementing that realization is a continuous challenge. It starts of course, with a founding team – where anyone who has started up a company knows that what seems to be a perfect team at the phase of imagining the product/the service or wrapping up the prototype, may turn out in effect in the next 6 months not to be the right set of talents and personalities. However, the HR topic becomes even more relevant when you’re hiring your first 20 employees- often finding the right person can be very crucial, even in seemingly less decisive functions such as finance or organization, or even some parts of marketing.

In that critical phase where the company is not yet known, and it is hard to find people who are at all willing to work for the company, management often makes a compromise. In essence you may have no choice, but that compromise can be more costly than not hiring a person at all – and it is always much harder and much less fair to get rid of a person who is in the wrong position, perhaps without fault, than to make the necessary effort to take the right decision in the beginning.

I at least have made this mistake over and over again and I still do not feel much smarter. At the same time, having to go through the process of selection and de-selection of the right team can be very critical for the company culture as well, because issues of fairness and the relationship between the HR consequences and your own management mistakes becomes a predominant topic, especially if you have to let people go. This is all the more relevant because in the initial phases of a company, management is bound to make many mistakes, so the issue of fairness becomes even more dominant.

For employees to understand that the fact that management makes mistakes (and will as shareholding/entrepreneurial management, very probably not be ousted), and at the same time accept that co-workers who were hired on a risky job in a company with an uncertain future, are fired, makes it even more apparently unfair.

There are only 2 ways of avoiding that:

1) be as intransigent (if not more intransigent) with lacking performance on the entrepreneurial or the management’s part (start there). As we say in German “A stairway is always swept from the top”.

2) Secondly, make objectives clear, understandable, quantifiable, but also adjustable and communicate continuously around these objectives, so that the standard of performance is understandable for every employee. This also means that objectives have to relate to the company mission and to the overall goal in a way that every employee understands, shares, commits to and identifies with.

Hiring the right people and finding the right balance between clear objectives, clear leadership, strong enthusiasm and group identification is probably the hardest challenge in setting up a company – this is where companies fail, all other mistakes can often be corrected or adjusted, if need be with fresh capital, but once a company’s corporate culture or the mix of talents and resources is poisoned it’s very hard for a company to overcome that stage, and to then regain enthusiasm, regain momentum and catch up with a market that has probably moved on.

To put it simply, at the end of the day, every company is just a group of people trying to achieve something, set up their own rules and gain success. For that and for the entrepreneur endeavoring to achieve success there is no easy way out, there is no toolbox and there are no simple solutions. It is probably the area where he or she most needs to continuously revise (on a daily basis) what he or she is doing, by which principles and with which success. It is the prime area of self-improvement for an entrepreneur, alongside self-management.

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