Chapter 12

Creating the Organization

THE TOP MANAGEMENT TEAM

The top management team (TMT) is a key component in the success or failure
of the new venture.
The team is crucial to attracting investors, for investors look for experience and
integrity in management.
As the organizational leader, the entrepreneur selects the members of the TMT
and works to blend their skills and expertise to ensure high productivity.
As the architect of organizational purpose, the entrepreneur is an analyst and
strategist, helping the TMT determine the business’s goals, objectives, and
directions.

Creating the Top Management Team

A team can be defined as “a small number of people with complementary skills
who are committed to a common purpose, set of performance goals, and
approach for which they hold themselves mutually accountable.”
Creating the Top Management Team
A team can be defined as “a small number of people with
complementary skills who are committed to a common purpose, set
of performance goals, and approach for which they hold themselves
mutually accountable.”

The process of TMT formation should begin with an evaluation of the talents,
experience, and personal characteristics required in the new venture’s
operating environment. This evaluation gives the entrepreneur a map of the
ideal team. This map helps guide the process of putting the TMT together
and of answering the three fundamental TMT recruitment questions:
From what sources will TMT members be recruited?
What criteria for selection will be used?
What inducements will be offered to potential members?

Sources of TMT Members. TMT members are recruited both from people
whom the entrepreneur already knows and from “unfamiliars.” Familiars
include family, friends, and current and former business associates.
 Unfamiliars are people not known to the entrepreneur at the start of the
new venture. They are individuals with the potential for top management
who may have had previous start-up experience. Entrepreneurs can find
such people through personal connections, business associates, or
traditional personnel recruitment techniques: employment agencies,
executive search agencies (headhunters), and classified advertising.
 Criteria for Selection. If the TMT is to be highly effective and to
contribute substantially to enterprise performance, it should be composed
of individuals with either of two primary characteristics:
These people should either personally possess resources that are rare,
valuable, hard to duplicate, and not easily substituted, or they should be
able to help the firm acquire and employ other strategic resources with
these qualities.
Good personal chemistry between the TMT candidate and the entrepreneur
can be a factor in selection. It may be reassuring for the entrepreneurs to
feel such a mutual affinity, putting them at ease and creating a comfortable
working situation that nurture’s the founders’ talents and creativity.
 Inducements. The final factor in team composition is the range of
inducements offered to potential members. These take the form of both
material and nonmaterial rewards.
 Material rewards include equity (stock in the company), salary,
perquisites, and benefits. It is vital that most of these rewards be contingent
on performance, even in the early stages of the new venture when
performance and profits may still be in the future.
 Nonmaterial rewards can be equally important. A person may relish
learning about the new venture creation process. People who someday will
be entrepreneurs themselves may agree to participate in a start-up business
as preparation for their own endeavors. Being a TMT member is also a sign
of upward mobility, distinction, prestige, and power—an additional
inducement for many.
Maintaining Top Management Teams :
As the transition to professional management continues, team members must learn to work together
and this takes time, especially if the group is composed of individuals from diverse backgrounds
and cultures.
This section offers an overview of the properties as they relate to new venture TMTs .
Goals. It is essential that the goals of the TMT be the goals of the new venture. Research shows
that agreement within a TMT on what the goals of the firm should be is positively related to firm
performance.
Norms and Values. Norms are the team’s shared standards for behavior, and values are its
desired outcomes. The most important of these norms and values are :
Cohesion: the understanding that when the team gains, each individual member gains
Teamwork: the acknowledgment that collective activities and accomplishments can surpass what
any individual can achieve on his or her own
Fairness: the realization that rewards and recognition are based on the contributions of individuals
to the team’s efforts and its success.
Integrity: the adherence to honesty and the highest standards of ethical behavior within the
framework of the top manager’s fiduciary relationship with the enterprise’s owners and investors
Tolerance for risk: the willingness to be innovative and to accept ambiguous situations.
Tolerance for failure: the willingness to accept that innovation and ambiguity sometimes end in
failure
Long-term commitment: the obligation to promote the interests of the organization, its customers,
employees, investors, and other stakeholders
Commitment to value creation: the recognition that personal wealth will arise from the value of
the new venture as an ongoing, growing, and profitable entity
Roles. In every group, certain people play certain roles.
Contributors are task-oriented initiators, usually individuals with special
knowledge or expertise in the area to which they are contributing.
Collaborators are joiners who align themselves with those making the
contribution of the moment.
Communicators define the particular task, pass information from contributors
to other members of the group, and restate positions held by potentially
conflicting members.
Challengers play the devil’s advocate. They offer constructive criticism and
attempt to portray the downside of the contributor’s recommendations.
Their role is to ensure that no course of action is taken, no decision made,
without considering what can go wrong or whether alternative courses
might be more effective
Board of Director(BOD)
The top management team may be augmented by a board of directors. In fact,
although the board and TMT members may overlap, the board is not the
top management team and should not attempt to micromanage the venture.
There are two types of boards: an advisory board and a fiduciary board.
The primary task of the advisory board is to provide advice and contacts.
It is usually composed of experienced professionals with critical skills
important to the success of the business. For example, if the business is
primarily a retail establishment, merchandising, purchasing, and marketing
experience are important resources. People who have good contacts and are
open-minded, innovative, and good team players are prime candidates for
an advisory board.
A fiduciary board is the legally constituted group whose primary
responsibility is to represent the new venture’s stockholders. It is usually
made up of insiders (the managing founder and senior TMT members) and
outsiders (investors and their representatives, community members, and
other businesspersons).
Members of the board, as trustees of the shareholders’ interests, constitute the
broad policy-setting body of the company. They advise and mentor the
founders and the TMT in the execution of their strategy.
Specifically, the board exercises its power in seven areas:
1. Shareholder Interests. In representing shareholders, the board is
accountable for the new venture’s performance. It must approve the
audited financial statements and all reports to the shareholders. The board
must approve any changes in the venture’s bylaws and get shareholder
approval as well. The board is also responsible for all proposals made to
shareholders and approves the annual report prepared by top management.
2. Financial Management and Control. The board sets and declares all
dividends. It sets all policies regarding the issue, transfer, and registration
of company securities. It approves any financing programs: The TMT
cannot seek financing that changes the status of current shareholders
without board approval. The board, along with the shareholders, also
approves the selection of the outside auditors recommended by top
management.
3. Long-Range Plans. The board advises top management on its long-term
strategy. It does not devise strategies, but it can mold the venture’s future
using the recommendations of the top managers. The board establishes
broad policies regarding the direction and means of growth. It must
approve all acquisitions and mergers, subject to further approval by the
shareholders.
4. Organizational Issues The board elects its chairperson, the firm’s
president, and (based usually on the president’s recommendations) the
other officers and top managers of the company. It writes and approves the
chairperson’s and president’s job descriptions. It establishes their
compensation levels, stock options, and bonuses, and it subsequently
reviews their performance. From recommendations of the president, the
board also approves the appointment, termination, promotion, and
compensation of the other managers who report directly to the president.
5. Operational Controls. The board approves the annual operating and
capital budgets. It reviews forecasts and makes inquiries about variances
from forecasted amounts. It can request information and special reports
from top management, which it may then use to carry out its other
fiduciary duties. If performance falters, the board may recommend a
reorganization, restructuring, or even voluntary bankruptcy to protect the
shareholders.
6. Employee Relations. The board approves the firm’s compensation policies,
pensions, retirement plans, and employee benefit options. It also reviews
the behavior of employees and top managers to ensure that they act in
accordance with the highest ethical, professional, and legal standards.
7. Board Internal Operations. The board is responsible for its own internal
operations. Based on the recommendation of the CEO and president, the
board members approve their own compensation and expense accounts.
They appoint subcommittees to study special issues, such as the protection
of minority shareholder rights. They must attend board meetings at the
request of the chairperson.

Guidelines for Successful Boards

Information and research about top management teams and group processes
can provide guidelines for successfully selecting and employing advisory
and fiduciary boards. These key factors should be part of the creation of the
new venture’s board of directors:
 Keep the board to a manageable size, 12 to 15 members at most.
 Board members should represent different capabilities and resource bases.
For example, the board should have a balance of people with financial
backgrounds, operational and industry experience, and local community
knowledge.
 Because the board’s primary responsibility is to the shareholders, both
majority and minority shareholders should be directly represented.
 People with good communications skills and the ability to voice an
independent opinion are needed. If everyone agrees about everything all
the time, there is not enough diversity on the board.
Benefits and Pitfalls of TMTs
Benefits
Creating a top management team for a new venture offers:
The benefits of team decision making (breadth of knowledge, diversity,
acceptance of decisions, and legitimacy)
The team approach to top management balances skills and attracts vital
human resources to the emerging organization.
It is also a test of the venture’s viability: If no one will join the team, there is
serious room for doubt about the venture’s potential for market acceptance.
A well-developed team will minimize the disruption caused by the loss of any
single member, saving the time and energy needed for later recruitment.
Such a team also demonstrates to external stakeholders that the founder is a
“people person” willing to share authority and responsibility.
Pitfalls
 TMT members may lack start-up experience.
 They may be recruited too quickly, without careful attention to their long-
term commitment.
 The team may be too democratic. Members may feel that they should all
vote on everything instead of deferring to the person with the most
expertise.
 In an effort to recruit, the entrepreneur may exaggerate the level of
decision-making discretion the team will have. The realization of such
exaggeration is bound to disappoint and de-motivate team members when
they learn that the new venture is wholly controlled by the founder and
majority stockholders.
 The TMT may make decisions too rapidly in the mistaken belief that
everything must be settled on Day One.
THE ORGANIZATION’S BOUNDARIES
The previous topic concerning the creation and maintenance of a top management assumed that there was
sufficient justification for building an organization. That is, the entrepreneur needed help, and the best
way to secure this help was to form a TMT. But is it possible to be an entrepreneur without a TMT
and, implicitly, without building an organization? A founder could conceivably rely solely on outside
contracting and a network of independent suppliers and distributors to produce, deliver, and market
the product or service. To understand the choice entrepreneurs face when determining whether to
remain on their own or build an organization, we need to understand the forces that determine the
organization’s boundaries and to consider relationships beyond those boundaries—e.g., in its
networks and alliances.
The Virtual Organization
The virtual organization could be the model for global business organization in the years ahead. It consists
of a network of independent companies—suppliers, customers, and even rivals—linked by
common goals and information technology to share skills, costs, and access to one another’s
markets. This new, evolving corporate model is fluid and flexible, a group of collaborators quickly
united to exploit a specific opportunity.
In the concept’s purest form, each company that links with others to create a virtual corporation
contributes only what it regards as its core competencies. Each firm is organized around its specific
rare, valuable, hard-to-copy, and nonsubstitutable resources. All other resources are provided by other
firms that also possess the four attributes of sustainable competitive advantage. These advantages,
however, remain protected within the other firms.
Technology plays a central role in the development of virtual corporations. Entrepreneurs in different
companies can work together concurrently rather than sequentially on computer networks in real
time. To participate in a virtual corporation, an enterprise must focus on the things it does best and
forge alliances with other companies, each bringing its own special capability. Such an organization
would be a world class competitor, with the speed, power, and leading-edge technology to take
advantage of market opportunities.
The Incubator Organization
A business incubator is an organization that provides resources for new start-
ups. It can be a physical incubator locating all the start-ups in the same
building and providing shared space as well as shared resources like office
equipment and administrative support. A virtual incubator, in contrast, can
be geographically disbursed, sharing valueadded investors, leadership, and
specialized expertise

Traditional Organizational structure

Traditional organizational structures usually have a leader and multiple layers
of subordinates. In a functional organization, occupations are grouped
together. In a divisional structure, each business unit conducts its own
activities, such as sales, marketing and training.
The traditional view of organizational boundaries is based on the strategy-structure
hypothesis: structure follows strategy. This means that the boundaries of the
organization are adjusted periodically to meet the requirements of the firm’s strategy.
This process is a component of the transition from entrepreneurial management to
professional management.
Stage One: Simple Structure
An historical analysis of firm behavior provides the template for this
hypothesis. In the earliest stages of firm creation, an organization’s
boundaries begin and end with the entrepreneur and a few close associates.
The strategy pursued by the top management team of such a new business
is directed to increasing sales volume. This is the first stage of the
organizational structure life cycle.

Stage Two: Departmentalization

As the firm grows larger, entrepreneurs find themselves engaged in more and
more administration (e.g., allocating resources to specific functions) and
fewer and fewer entrepreneurial tasks. This is detrimental to firm
performance. When the volume of the business grows so large that the
entrepreneurs themselves can no longer make all the executive decisions,
they hire managers: production managers, marketing managers, sales
managers, engineering and design managers, and personnel managers.
These managers supervise the activities of their various departments, which
surround the main core of the business. Departmentalization is the
second stage of organizational structure.
Stage Three: Divisional Structure
The volume of a business can grow only so large in a single location. Constraints such as
plant capacity, transportation costs, logistical issues, and the limits of the market
itself mean that if a firm continues to grow, it must expand to other locations. The
next strategy, then, concerns geographic expansion. Initially, firms attempt to manage
both old and new sites from the original location. As the number of sites increases
and the branches and outlets proliferate, however, this becomes impossible. Thus, the
structure of the firm must change to meet the demands of the new strategy. The new
structure calls for grouping the units within particular regions into geographic
divisions.
Stage Four: Multidivisional Structure
Future growth in a single product, like growth in a single location, is a limiting strategy
because of satiated demand for the product and missed opportunities from related
products and markets. As firms continue to grow, they change to a strategy of related
diversification and vertical integration.
This diversification puts new demands on the old divisional structure. Stress and strain
are created, inefficiencies arise, and finally a new structure is developed—the
multidivisional structure, the fourth stage of development. Like the divisional
structure, it groups similar products and activities together so employees can achieve
maximum productivity.
Stage Five: The Conglomerate
The fifth and final structure is created when the strategy changes from related
to unrelated diversification. When firms enter businesses completely unlike
any in which they have previously engaged, the old structure begins to
break down. Executives in the older divisions do not understand the new
businesses and do not share the perspectives of the newer managers. There
is no reason to group these unrelated divisions together because they do not
share markets, products, or technologies. In fact, it is better to keep them
separate so that the performance of each can be measured independently.
From this change in strategy comes the conglomerate, also known as the
holding company.

In summary, the “structure follows strategy” hypothesis says that an

organization’s boundaries arise from the pursuit of different strategies. The
boundaries are fixed for periods of time, but as the changes in strategy put
stress on the organization’s structure, a new structure arises. Each time a
new structure comes into being, the enterprise’s boundaries expand, as do
the activities within those boundaries.
THE ENTREPRENEURIAL WORKPLACE
The new venture is not just a vehicle for the entrepreneur and the top management team
to realize their dreams and ambitions; it is also the place where people work. The
challenge of the entrepreneurial workplace is to enable employees to share the
founders’ excitement, motivation, commitment, and satisfaction. Otherwise, they will
fail to carry out their tasks and responsibilities energetically and effectively. Part of
the entrepreneur’s responsibility is to create an organization where the culture, the
ethics, and the human resource management system are consistent with the goals and
ambitions of the enterprise.

The Entrepreneurial Culture

The culture of the organization is reflected in its philosophies, rules, norms, and
values. It defines “how we do things around here” for both employees and
customers. A strong entrepreneurial culture mirrors the entrepreneurial values of the
founders. Entrepreneurs often start their businesses because they want to do things
“their own way,” and creating an entrepreneurial culture is their opportunity to allow
others to do it “their own way.” Therefore, it is imperative that the entrepreneurs
communicate what they believe is important. This communication can be one-on-
one, or it can be shared in meetings, employee newsletters, or other written formats.
Often the culture is communicated in rituals, rites, and the folklore of the
company.71 Entrepreneurial companies can do things their own way.
The entrepreneurial culture is clearly different from the culture of traditional
large organizations. It is future-oriented and emphasizes new ideas,
creativity, risk-taking, and opportunity identification. People feel
empowered to manage their own jobs and time. Everyone contributes to the
firm’s success, and the common worker is a hero. Communication is
frequently horizontal and bottom up—while the worker serves the
customer, the manager serves the worker.

Entrepreneurial Ethics
An important part of a new venture’s culture is its ethical climate. The ethics
of the organization are never clear enough and are frequently ambiguous
and shifting. Stereotypically, entrepreneurs are seen as having low ethical
standards. Entrepreneurs repeatedly face ethical dilemmas, all involving
the meaning of honesty.
At times the entrepreneur may feel that to be “completely honest” does a
disservice to the new venture and his or her efforts to create it. Yet to be
less than completely honest puts the credibility and reputation of both the
entrepreneur and the new venture in question. These are the dilemmas of
the promoter, the innovator, and the transactor.