Comments for Mobilizing the right resources: Who and how much?

Key Insights :

This text aims to understand how small growing ventures delegate business-related functions such as marketing, planning, production, financial planning, accounting, shipping, etc. It divides the life a small enterprise into three phases according to their yearly sales: early stages (sales under 300k (service industry) and 1 million (manufacturing industry)), growth (sales between 300k and 3 million (service industry) and between 1 and 10 million (manufacturing industry)) and maturity (sales over 3 million (service industry) and 10 million (manufacturing industry)). The first stage is characterized by no real separation of different function. The start-up team performs everything except for accounting that is sometimes outsourced. In the second phase, the start-up team starts to delegate the production-related functions such as production management, computer system, purchasing and warehousing-shipping). They keep all the strategic like the development of new products or marketing. Finally, in the last stage, the start-up team delegate every function except from the strategic planning.

Implications :

This study has important implications for professionals who provide HRD services to growing companies. First, the results highlight those functions where the need for training and development appears sooner rather than later. Of course, training is not the only possible solution in this situation. An alternative is to hire people with the necessary skills and talents. Second, the study shows that some functions tend to be delegated in groups at about the same time. More specifically, once a company has left the initial stage where none of the functions (except accounting) are delegated, the start-up team tends to delegate several internal functions related to production.

At the beginning of the development of a new business, they are generally so small that differentiation is not likely to involve formal bureaucratic procedures (such as the creation of separate departments or profit centers) but involves much simpler ways of “relieving” the start-up team of the burden of having to perform all the company’s functions by themselves.

Models generally fall into two groups: growth model stages and organizational development models. These models involve a progression through a number of stages from beginning to maturity and, in some cases, decrease.

At one stage, some of the first members or employees of the founding team will find themselves managing people for the first time after having been mainly technical or functional specialists. Based on the results of the evaluation, a structured series of leadership development and team-building exercises could be implemented to address any identified gaps. At later stages, there is a need for marketing and sales training.

In addition, as the organization grows, and new people are added to perform some of the functions, a new set of problems and needs for HRD activities arises. These include developing an optimal combination of knowledge and skills between management and employees; creating flexible organizational systems that allow new employees to be easily assimilated and quickly adapted to a rapidly changing environment; and sowing the seeds of an organizational culture that will become a major asset for the organization at later stages of development.

Limitations :

For an optimal combination of knowledge and skills between managers and employees, a company needs to have a human resources team to always measure the trade-off between, for example, hiring new managers or training current employees. As we know, startups have not a lot of workers and those that are already working have a lot to do. It is not probably to give them this extra responsibility, because that will lead to over-work. For that reason and also because it is unlikely for a startup to have a human resources team, it is not very to implement this measure.
HR makes sure the team is aligned with the company’s goals. At a startup, if someone isn’t pulling their weight everyone immediately notices. It took five years at Work Market to hire their first HR employee.

In this article, we can also remark that with the increasing of the company size, the tendency is to outsource more functions. They delegate more and more, especially production, accounting and HR. This can lead to a loss of the core essence, values and culture of the company, once there are lot of employees entering with no relation with the company. And, as we know, employees are more efficient and committed to the company when they have a relation with it.
Company culture is also important to employees because workers are more likely to enjoy their time in the workplace when they fit in with the company culture and stay in the company for more years.
And we can see, for example, consulting companies, firms in which is very hard to apply their cultures, employees are always entering and leaving the company, there is a big rotation.

Further References :

Cooney, T (2012) Entrepreneurship Skills for Growth-Orientated Businesses​ : http://www.oecd.org/cfe/leed/cooney_entrepreneurship_skills_HGF.pdf​

Ted talk : HR lessons from the world of Silicon Valley start-ups by Patty McCord (june 2015) : https://www.ted.com/talks/patty_mccord_hr_lessons_from_the_world_of_silicon_valley_start_ups​

Hull, J (2016) How Your Leadership Has to Change as Your Startup Scales, Harvard Business Review : https://hbr.org/2016/05/how-your-leadership-has-to-change-as-your-startup-scales​

Key insights:
The article aims to analyse the influence of an acquisition on the behaviour of key
inventors. From patent data about 43 German companies in mechanical engineering,
electrical or chemical industry, 61 key inventors are identified. The key inventors represent
the talents of researchers and developers which determine the value of an acquired company.
In fact, key inventors contribute to the inventive performance of their R&D department and
account for many of their company’s patents. The findings expose an influence on the
behaviour of key inventors in terms of fluctuation and performance modification after the
acquisition. Fluctuation refers to employees leaving the firm. Indeed, one-third of the key
inventors left their company. Half of those key inventors who remained in their company
changed their position, they significantly reduce their inventive performance after the
acquisition. Moreover, different factors are identified as influencing their behaviour like the
size of acquired company, the cultural differences between R&D departments and the
complementarity of technological companies.

Managerial implications:
First of all, the article proposes a classification of the
inventors depending on the quality of their patent and their patent activity. The patent activity
means identify all the patent where the person is named as an inventor, and the quality of a
patent is recognized thanks to several indicators like its sharing ratio or its number of sharing.
The key inventors are described as provider of high-quality patents and with high patent
activity and they are the key for a company to stay active and competitive on the market.
As mention earlier, several factors can influence the fluctuations and the performance
modifications of key inventors. A large cultural difference between R&D department of both
firms can explain a high fluctuation while a low fluctuation can be explained by a high degree
of proximity between technological position of both firms. The performance can be impacted
by the size of the acquired company. If it is a smaller firm, it has positive effect on the
performance of the key investors, and the opposite happens with bigger firm.
Therefore, there are 2 ways to integrate them into your firm:
1. The first way is by acquiring the firm where is the key inventor. Unfortunately, it is not
enough to integrate them, it is also essential to keep them within you. So, we have
identified some relevant steps to follow that help managers to succeed:
• Identify key innovators prior, in order to be worth doing this acquisition.
• Keep them motivate after the acquisition. It can be done by taking care about the four
factors which determines the behaviour of a key inventors before, or by integrating
them into the acquisition process, which is easier in a smaller firm.
• Be also sur that the acquisition is not too expensive for the owner company. If it is
necessary to further restructure the activities, it can have negative effect on the
performance of the key inventors, and also for all the employees.
2. An alternative to acquiring a new company is to capture the key innovators through
headhunting. This solution can provide more advantages to the company since it is
quicker, cheaper and less complicated.
• Use of number of patents and reference value to identify key investor candidate in a
particular company, industry or field research.

Limitations:
When interpreting the managerial implications, some limitations must be
mentioned. Regarding the first managerial implication, it is essential to highlight that when a
firm is making a technology acquisition, it is purchasing the talent as much as the technology
itself. When a company acquires 100% of the shares of a startup, this can lead that the
owners, usually the key inventors, leave the company and start a new one, and then the loss
of technological knowledge might be enormous, as well as hard and expensive to regain.
While when the company invests only, for example 20%, in the startup, is stimulating them
to continue working and innovating. Further, concerning the second managerial implication,
the company must consider the possibility that the performance of the key inventor won’t be
equal as in the former company. Besides, in this scenario, the key inventor has the decision
power if he wants to accept the job offering or not.

Further references:
• Upton, K. (2018, June). Investor Relations Role in Merger and Acquisition Activity. Quarterly
Journal of Finance. DOI: 10.1142/S2010139218500064
• Georgiades, G., Georgiades, S. (2014, January). The Impact of an Acquisition on the
Employees of the Acquired Company. Journal of Business and Economics.

Workshop 5 : executive summary
“THE THRONE VS. THE KINGDOM: FOUNDER CONTROL AND VALUE CREATION IN STARTUPS”

Through this article we discuss the “control dilemma” that is to say the choice for a founder of a firm to keep control or to delegate to make grown his start-up.
Indeed, the founder has to find a tradeoff between attracting the resources required to build company value and being able to retain control of decision making. This dilemma highlights how founders, despite their best intentions, can make decisions that limit the value of the companies they created, or else can risk losing control of their companies.

For the key insights, we develop hypothesis about this tradeoff between value and control. The first hypothesis is the following: “The analyses show that, ceteris paribus, startups in which the founder is still in control of the board of directors and/or the CEO position are significantly less valuable than those in which the founder has given up a level of control”. This is particularly observable in the more than three-year-old companies. Furthermore, the second key insight concerns the ressources acquirement of the company. We can see that by raising capital from capitalist ventures, founders will retain less control. Otherwise, founders who raise capital from business angels keep more influence in their company. Finally, the third insight is about value creation. It shows that founders who want to keep control of the direction by refusing co founders have more difficulties to attract investors. Moreover, it blocks the value creation as the growth of the company is decreasing drastically.

Concerning the first implication, managers can hire experienced executives, build a team of employee, find people ready to finance and give them seats in the board of directors, but mainly they have to enhance business and finance skills in this board. Indeed, founders have technical knowledge and creativity which are fundamental for the launch, but they may sometimes miss business skills.
Furthermore, as seen in the second implication, one solution for the managers could be to develop a Work Breakdown Structure to divide each task in subtasks so that the project is more easily understandable and the founder can keep a close look at the project’s progress without controlling it entirely.

This article highlights also some limits. First, founders and investors can have divergent interests. One might think that the first motivation of everyone is the profit. Although managers have to maximize the company’s capital and and increase its pace of growth, entrepreneurs might have broader interests such as a wish for personal fulfillment, a desire to improve the quality of life of some, or a personal motivation. Another limit will be that a process of decentralization or delegation can lead to Agency Cost. This cost is the sum of control expenses by the principal, the expenditures by the liaison agent and the residual loss. Intangible soft skills must also to be take into account. Indeed, the founder has acquired non-pecuniary aspects and communication skills that aren’t easy to duplicate and to pass on the successors. The last limit is the subjectivity of the entrepreneurs. Many entrepreneurs are overconfident about their prospects and naive about the problems they will face. Founders’ attachment, overconfidence, and naivete may be necessary to get new ventures up and running, but it can later lead to problems. Many founders believe that if they’ve successfully led the development of the organization’s first new offering, that’s ample proof of their management prowess. They think investors should have no cause for complaint and should continue to back their leadership. After all, concerning the further references we learn that entrepreneurs face a new dilemma : starting a business whose main goal is to make money and another factor which motivates them : the drive to create and lead an organization. The surprising thing is that trying to maximize one imperils achievement of the other. [2]

Sources:

[1] Feng, L., Suraj, S., “Corporate governance when founders are directors” in Journal of Financial Economics, Volume 102, Issue 2 (2011), pp. 454-469.
https://ac.els-cdn.com/S0304405X11001462/1-s2.0-S0304405X11001462-main.pdf?_tid=03ecaa3e-8e00-4f70-8ba4-46447c047bdc&acdnat=1543828357_038f4db0ede7ba244aa11723247d44b3 consulted the 29.11.2018.

[2] Wasserman, N., “The Founder’s Dilemma” in Harvard Business Review (2008).
Online: https://hbr.org/2008/02/the-founders-dilemma consulted the 28.11.2018.

[3] Investopedia “What is the role of agency theory in corporate governance ?” (2015)
Online: https://www.investopedia.com/ask/answers/031815/what-role-agency-theory-corporate-governance.asp consulted the 30.11.2018

[4] Wikiquote “Agency Theory” (2016)
Online: https://en.wikiquote.org/wiki/Agency_theory consulted the 30.11.2018

[5] Beattie, A. “Steve Jobs and the Apple story” (Aug 2018)
Online: https://www.investopedia.com/articles/fundamental-analysis/12/steve-jobs-apple-story.asp consulted the 30.11.2018