"; "; ";
 

The challenges of the growing firm: an introduction to organisational development models

The challenges of the growing firm:
an introduction to organisational development models

Laura Lavia Haidempergher
M & M Bomchil, Buenos Aires
laura.lavia@bomchil.com

The end of the twentieth century witnessed an explosion in entrepreneurial activities in different industries such as food, electronics, publishing, real estate, distribution, services, apparel, etc. Many of the current most important companies with businesses worldwide commenced as entrepreneurships. Microsoft, Starbucks, Nike and Federal Express are well known examples.

Certain fields, such as personal computers, are perhaps the most representative examples of successful entrepreneurial firms, eg, Apple, Compaq and Dell Computers.

It is clear that we are familiar with successful cases, but in general less attention is paid to those entrepreneurial firms experiencing problems and even failure. Cases such as Boston Market, LA Gear or People Express are rarely mentioned.

Handling growth

The difference between the first group of companies and the others is obvious: success. But one key element of success is how companies handle growth.

In other words, the small company has to go through certain stages until it becomes a big corporation, even a public one. The life of the closely held company will depend on the ability of its directors and managers to recognise, solve and overcome the problems and obstacles to be faced by the growing firm in its expansion process.

It can be stated that these issues concern management and belong to the field of organisational theory. As a matter of fact, this science has made important contributions to this area by developing models which determine the different stages of development of the growing company, identifying the key issues and problems to be faced in each of them.

However, advisors in other areas, such as lawyers, must be prepared to assist their clients (managers, partners, shareholders and the company itself) in the myriad conflicts and legal issues implied in the process of change. Thus, the knowledge of certain tools developed by the organisational theory will be an asset for law firms, since they will be useful to better identify the clients’ needs according to the current stage, to anticipate their needs for the next phases of development and to be prepared to satisfy them.

On the other hand, the law firm itself, as an organisation, is subject to evolution, growth and change. In consequence, these tools should be useful internally, to handle the development process of the proper law firm.

The purpose of this article is to provide an introductory glance at this topic, by summarising the main three models in organizational development, in particular in point to the stages in which each of them divides the life of an organization and their main features.

Adizes’ corporate life cycle model

Ichak Adizes considers that companies, as any living entity, experience stages in their development as life cycles. They are born, grow, mature and die. As long as changes take place, certain predictable behavioural patterns appear. Problems or difficulties manifest in each stage, which must be overcome.

When an organisation consumes energy in a successful transition from one stage to another, problems are normal. However, if the efforts to remove obstacles are not effective, the problems are deemed abnormal.

The different stages are defined on the basis of the relationships between flexibility and control, with no link to the age, level of sales, resources, assets, or number of employees of the organisation.

Despite being living entities which are condemned to die, companies do not necessary have to perish. There is a source of youth for the organisations that the author calls prime stage, which appears when a balance between control and flexibility is reached. Once the company has achieved this stage, the leaders’ goal is to maintain the organisation in that position.

In his book ‘Managing Corporate Life Cycles’, Adizes identifies ten stages of corporate life-cycle, as follows:

Courtship

This is the initial or formation stage, where the business model or proposition is defined. Founders focus on ideas and future possibilities, talking about and developing ambitious plans. Courtship ends when infancy appears and the entrepreneurs assume risks.

Infancy

Founders’ focus turns from ideas and possibilities to the generation of concrete results. The need for closing sales leads this stage. Nobody cares about paperwork, order, controls, systems or proceedings. Founders work hard, even seven days a week trying to do everything by themselves.

Go-go

This is a fast-growth stage and sometimes chaotic. Sales are still the main goal. Entrepreneurships start to believe that they cannot make mistakes and discover opportunities everywhere. Arrogance exposes them to big flows. The company is organised around key people rather than determined functions. These people may carry out several tasks, but the founders will make all decisions.

Adolescence

The organisation is still growing but it adopts a new shape while it becomes more established and defined.  Founders hire a Chief Operations Officer but it is hard for them to transfer the ‘kingdom’. Attitude conflicts between the old and the new employees affect the performance of the company. Internal conflicts erode relationships and divert people from rendering services to the clients. A temporary loss of focus is suffered.

Prime

The business or organisation is at its fittest, healthiest and most competitive, popular and profitable. With a renewed vision, companies set up a new balance between control and flexibility, within an innovative and disciplined environment. Clients’ requirements are fulfilled punctually and predictably. New businesses appear inside the organisation; these are decentralised in order to pursue new growth opportunities.

Stability

Companies maintain their strength – still effective, popular and profitable – but they have lost the passion of the first stages. Financial areas increase control in expenses and force short term results, limiting long term projects and innovation.  Focus on marketing and R&D vanishes.

Aristocracy

The organisation is strong by virtue of its market presence and the consolidated accumulated successes, but it is slow and unexciting. A loss of market share is observed. Competitors introduce new technologies and trends but the company remains disconnected from these new developments.

External signs of formality (eg, decoration of the offices) are evident and appear to be very important. The company buys businesses rather than developing new projects. Culture outlines how things have to be made, in place of why people must do them as they actually do.  Leaders believe that the past will conduct them to the future.

Recrimination

At this stage of decadence, a virtual ‘witch hunt’ is carried out, trying to find who did things wrongly, instead of identifying flows and trying to work out the associated problems. Cost reductions are more important than efforts to increase revenues. Officers fight for their privileges and distance themselves from their colleagues in the process.

Bureaucracy

If the company has not perished during the previous stages, it will degenerate into cumbersome bureaucracy. Manual processes and paperwork increase, and rules and policies restrict and limit creativity and innovation. The company neglects its clients as a consequence of an inward-focused administration.

Death

The final stage can arrive after a long period, or strike with violence, and occurs when companies are not able to generate the necessary cash to survive. Closure, sell-off, bankruptcy, sale for asset value or customer-base only is the last step in the life of an organisation.

*****

It is worth mentioning that Adizes outlines that a company could not go through all the identified stages. For example, if the adolescence stage is not overcome successfully, the organisation could fall into premature aging, skipping stages, in particular the prime stage.

Finally, the model foresees the ‘illnesses’ affecting each stage which, if not cured in a timely manner, will impede the company in reaching the next stage, altering the natural evolution and generating an ‘unhealthy organisation’.

The Flamholtz-Randle model

Eric G Flamholtz and Ivonne Randle expose in their book, ‘Growing Pains’, a theory in which the initial process of developing the organisation is divided into four stages: New venture, expansion, professionalisation and Consolidation. These stages characterise the period from inception of a new venture to the attainment of organisation maturity, and include the development of an entrepreneurship through the stage when the firm becomes professionally managed. The foundation of this process is the business concept.

The authors identify certain abilities, competences or issues as important or critical for each stage for a healthy development of the company, and for the organisation to move forward successfully to the next level.

Challenges of the growing firm (graphic)

Upon completion of these four phases, the stages of diversification and integration follow.  Finally, the destiny of the company will be sealed in the next phase, which can be declination or revitalisation.

Flamholtz and Randle’s work is based on empirical research on the evolution and growth of certain companies and the obstacles they faced in this process, focusing on how the organisations dealt with such problems.  Precisely, the name of their book refers to those pains common in children as a consequence of the growing process.

The main aspects of each stage are as follows:

New venture

The main issue is to identify correctly the target market or niche, and the product to commercialise to satisfy the detected need. The main virtue of the company at this stage is the detected market opportunity, which is critical for the future development of the organisation.

Thus, the development of the product or service is fundamental at this stage. If the niche exists, the company must be able to design the appropriate product which has to be produced at satisfactory costs.

Expansion

The development of the product or service is the key at this critical stage.  Resources – comprehensive of financial, technological and human resources – must be available and carefully planned. Long-term planning has to be implemented, together with an analysis of the resources to be developed and formed at present to be used in the future.

Another important issue is the appropriate development of operative and organisational systems (administration, finance, accountancy, inventories, hiring, etc).

Professionalisation

Management systems are the most relevant issue at this stage.  Appropriate management systems and qualified managers are needed to apply and implement them. Systems involved are those related to planning and budgeting (operative, strategic and contingency oriented), managerial development and internal promotion, organisation design and control.

Consolidation

The new challenge will be to consolidate the organisational culture, which reflects the company’s personality and aligns its members with the achievement of common objectives, and in the methods to apply to pursue said goals.

The main elements are values, beliefs and norms ruling the organisation and distinguishing the firm from others.

Diversification

Once an organisation has reached the consolidation stage, it needs to move forward to the diversification phase. New products, new markets or both of them must to be pursued. The company is facing the need of regenerating certain entrepreneurial spirit and broadening its portfolio of businesses.

Provided it is hard to recover such entrepreneurial spirit, authors recommend developing an intrapreneur approach: the internal development of managers with potential to generate, promote and apply innovative policies, aimed to improve and broaden the businesses that the company carries out.

Integration

This stage refers to the integration of the different business units of the company, developing the infrastructure to support such new businesses and markets and generating the necessary evolution of the organisational culture to reflect the patterns of the new company.

Declination or revitalisation

The company resigns to declination or faces the challenge of revitalising itself by refreshing and reforming all the levels of the pyramid, jointly and simultaneously. This is a hard stage, since a change as fundamental as required is difficult to achieve, and its need is not noticed until it is too late to act.

Greiner’s model

Larry Greiner proposed in his paper, ‘Evolution and revolution as organizations grow’, a model based on the premise that an organisation’s history determines its future, rather than the influence of external forces.  Greiner recognises relationships between the age of the company, its size, the growth rate of the industry, and five well defined stages or phases of evolution-revolution, each characterised by a gradual, evolutionary period followed by a shorter, revolutionary period.

These stages are subsequent and each of them is the effect of the previous phase and the cause of the following. Managerial behaviours corresponding to each stage are predefined. In other words, if growth is a goal to attain, managers must make certain decisions and refrain from others to avoid failure.

Solutions conducting to growth during a given phase may not be advisable for the following stages. The key issue is to find the appropriate set of organisational practices or principles for each revolutionary period, which in turn will be the basis for the administration of the next stage of growth or evolution.

It is to be outlined that these new practices eventually sow the seeds of their own declination and lead to another period of revolution.  Organisations experience the irony that a relevant solution for a certain stage becomes a bigger problem in a subsequent phase.

The phases identified by Greiner are as follows:

Creativity

Founders are technically or entrepreneurially oriented. The communication is frequent and informal. The entrepreneurs and collaborators work long hours for modest salaries. They are reactive to feedback from the market.

The crisis associated to this phase is the leadership crisis. As the company grows, new systems are needed – manufacturing, accounting, personnel, etc. The founders usually do not have the expertise to manage this new set of systems, nor can they motivate new employees. The company may bring in management who can manage in this new environment or may flounder as founders try to ‘maintain the old guard’.

Direction

A functional organisation structure is developed, together with accounting systems. The communication becomes formal and impersonal, and the direction is centralised to the new upper management.

The crisis associated to this phase is the autonomy crisis. As the company grows, centralised management is inappropriate. Lower level managers acquire better knowledge of the market but are unable to react quickly. The second revolution comes from a demand for greater autonomy.

Delegation

The plant and field marketing managers assume greater responsibility.  Profit sharing and bonuses are used as incentives. Top managers manage by exception. Management becomes active in acquisitions. The communication from the top is infrequent.

The crisis associated to this phase is the control crisis. Field operations become diversified and inefficiencies creep into the system. Top management loses control over planning, money, technology, and manpower.

Coordination

Decentralised units are merged into product groups. Formal planning procedures are established and reviewed. Staff is hired at headquarters to initiate company-wide programmes. Capital expenditures are reviewed and distributed across the organisation. Return-on-capital becomes the criterion for measuring field operations. Certain technical functions, such as data processing, are centralised. Stock options and profit sharing are used to encourage identity with the firm.

The crisis associated to this phase is the red tape crisis. Lack of confidence gradually undermines the relationships between line and staff, and headquarters and the field. Field managers begin to resent formalised control from staff managers who do not understand the local markets.  Staff personnel resent the ‘uncooperative’ line managers. The organisation has become unwieldy and everyone resents the bureaucratic system that has evolved.

Collaboration

The focus is directed to solving problems through team action. Teams are formed from across functions. Headquarters’ staff is reduced and reassigned to teams which consult with field units. A matrix organisation structure is often developed. Formal systems are simplified and combined.  Conferences of key managers are held frequently. Educational programmes are utilised to train managers. Real-time information systems are used in decision making. Economic rewards are geared to team performance. Experiments in new practices are encouraged.

The crisis associated to this phase is the ‘?’ crisis. Greiner speculates about the solution to this new crisis coming from employees, emotionally and physically exhausted by the intensity of teamwork and the heavy pressure for innovative solutions.

In addition, it is worth mentioning that there are specific management actions that characterise each phase. These actions are also the solutions which ended each preceding revolutionary period, which the author summarises in the following chart:

Category

Phase 1

Phase 2

Phase 3

Phase 4

Phase 5

Management focus

Make & sell 

Efficiency of operations 

Expansion of market 

Consolidation of organisation

Problem solving & innovation

Organisation structure 

Informal

Centralized & functional 

Decentralised & geographical

Line-staff & product groups

Matrix of teams

Top management style 

Individualistic & entrepreneurial 

Directive

Delegative

Watchdog

Participative

Control system 

Market results 

Standards & cost centres 

Reports & profit centres

Plans & investment centres

Mutual goal setting

Management reward emphasis

Ownership 

Salary & merit increases 

Individual bonus

Profit sharing & stock options

Team bonus

Final comments

The theories summarised above are tools to help companies to manage growth and change, and to identify the problems associated to each stage in their development. Not every company or organisation will fit into the patterns proposed by said models, since we are dealing with a factual science. In certain cases, some concepts from a model should be amalgamated with ideas stemming from others to analyse properly the particular situation of a given organisation.

With respect to legal firms, as organisations they are affected by the evolution process, but with special particularities stemming from the nature of the product they offer (professional services).

Thus, the theories briefly presented in this paper could be considered as the starting point to develop a tailor-made tool to be applied to a particular law firm, adapted to the organisation profile and culture, human resources involved (professional profile required, training, expertise, motivation, rewards, etc), target (profile of clients, specialisations, niches, etc) and marketing strategies.

Bibliography

Adizes, Ichak, ‘Managing Corporate Lifecycles’, Prentice Hall Press, USA, 1999.

Flamholtz, Eric; Randle, Ivonne, ‘Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm’, Jossey-Bass Inc, San Francisco, USA, 2000.

Greiner, Larry, Evolution and Revolution as Organizations Grow, Harvard Business Review, May-June 1998, p 55–67, reprint Nbr 98308.

 Bookmark with:  FacebookGoogleTwitterYahoo

e-mango online business solutionsPowered by e-mango