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8/8/2019 7 Habits of Ceo VG
1/16
The Seven Habits of Highly
Effective Entrepreneurial
Organizations
Murthy Mathiprakasam
Originally submitted to Professor Robert Sutton,
Management Science and Engineering, Stanford University
Revised
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2/16
INTRODUCTION
A significant amount of work has been done in both academia as well as
the venture capital industries in studying what leads entrepreneurial ventures to
succeed and fail. Typically these perspectives approach the subject from the
perspective of product development or sales execution; that is, to understand the
necessary characteristics of products, markets, and company functions to
achieve success. However, there is an entirely different perspective, arguably
somewhat more important, which is the human element of how entrepreneurial
organizations behave and execute as teams. In this paper, I propose seven
organizational components, which are essential to building a successful high
growth entrepreneurial company and whose lack can severely impair the ability of
a company to grow and succeed in the marketplace.
HABIT 1: HAVE A STRONG LEADER FOR A CEO
Leadership and management have received widespread attention in
organizational behavior research given the obvious their impact in mobilizing
teams to achieve collective objectives. However, strong leadership becomes
even more critical in an entrepreneurial setting where uncertainty about tasks and
goals may be incredibly high. Leading in this highly uncertain environment
requires four fundamental components:
1.1 Fairness and Honesty
Entrepreneurial organizations are distinct from larger organizations in the
sensitivity to organizational politics. Whereas in larger organizations the effects
of politics can often be mitigated by structured process; in a growing organization
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with limited structure, politics, favoritism, and dishonesty can be fatal. Thus it is
imperative in an entrepreneurial organization to obtain leadership from a CEO
who is open, fair, and honest.
Henry Mintzberg refers to this notion in the article The Managers Job:
Folklore and Fact when he talks about the managers role as a leader and
resource allocator in reconciling their individual needs with the goals of the
organizationand deciding who will get what. Shannoni, a Silicon Valley angel
investor, defines leadership as doing the right thing. Jacki, a venture capitalist
at Vanguard Ventures, says a CEO must be fairbe up front about everything.
Keni, a former CEO and Chairman of a Global 1000 Silicon Valley software
company says, its not about what you say, its always about what you do. We
had a sunshine policy where everyone knew everything. It was our way of
letting our employees know we respected their competence and intellect, and
saw them as partners in our entrepreneurial venture.
1.2 Setting a positive example
Given the small size of entrepreneurial firms and the resulting high visibility of
management, it is crucial that leaders set a positive example of the values of firm
for associates to follow. Jim Collins, in his article Level 5 Leadership, refers to
the First Who principle in which leaders attended to people first. Daniel
Denison, in his Denison model for organizational culture, suggests a need for
core values which create a sense of identity and a clear set of expectations.
Jack also referred to this element of leadership by suggesting that a CEO takes
responsibility for their actions and is willing to point the finger at themselves.
They must be willing to admit they are vulnerable and says oops, I screwed up.
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The best example of this is David Neeleman, CEO of JetBlue, who flies on his
companys flights once a week and serves airline customers along with his flight
attendant staff. He says, I know that a fish stinks from the headand that we
can succeed only if I set a good example.
1.3 Being a confident decision maker
The uncertainty of entrepreneurial ventures also requires a particular strength
in leadership from the CEO. Leaders must possess the experience and
confidence to make critical strategic decisions for the firm when very limited data
or process may exist. Mintzerg refers to the leader as an entrepreneur who is
seeking to improve the unit, to adapt it to changing conditions. Bradi, a principal
from Hummer Winblad Venture Partners, mentions that a CEO must take input
from all sources, make a decision, and not stall. A good leader knows which
decisions are theirs to make.
1.4 Having Vision
A CEO of an entrepreneurial organization must necessarily be more than a
general manager. The uncertainty of an entrepreneurial venture requires
leadership to not only manage the existing operations of the firm, but to also have
the creativity, vision, and drive to seek opportunities for growth and continuous
improvement. This vision, of course, must be tempered by a sense for realistic
constraints and expectations. However, by combining a creative vision with a
realistic sense for executing on that vision, leaders can effectively recruit
associates to participate in the pursuit of risky ventures. Denison refers to this
characteristic in his model as part of the Mission trait in which there is a shared
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view of a desired future state [that] captures the hearts and mindswhile
providing guidance and direction. Jack also talks about the role of a CEO as
having vision to see where to gothe truest test of a CEO is asking would
people follow him or her?
HABIT 2: RECRUIT THE RIGHT TEAM
Although, a strong CEO is a necessary condition for entrepreneurial
success, it is by no means a sufficient one. As Shannon says, Entrepreneurship
is a team sport. The CEO needs to be supported by quality people on all sides:
the board, the management team, as well as the staff in the organization.
Professor Tom Byers, Academic Director of the Stanford Technology Ventures
Program, mentions that a CEO must know what they lack and Brad says one of
the primary roles of the CEO is to create the surround sound of a quality
management team. According to Jack, a strong and active board of directors is
also necessary because if the board is braindead, it will be very tough to
succeed and mistakes may escalate to the point of total malfunction.
Careful recruitment of employees who bring specific capabilities to the
organizational is equally critical. Often times, companies assume that a
collection of smart and talented people with limited purpose or leadership will
automatically and inevitably lead the company to success. But as Malcolm
Gladwell points out in The Talent Myth, the talent myth assumes that people
make organizations smart. More often that not, its the other way around.
Richardi, an 36-year-old MBA who has worked into two startups, mentions, we
pumped up the middle level of the company with a lot of inexperienced 28-30
year old MBAs who were all wannabe directors. We ended up talking about a lot
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of ideas, but never actually doing anything. Ken says, as a small company, you
hire people who have a demonstrated record of skills and experience. You dont
hire people for potential or sheer brilliance. You hire what you need. Middle
management in particular should only be brought in when the company achieves
a scale that absolutely requires the extra layers of hierarchy. Ken also
comments, You dont really need middle management until you have achieved
at least 100 or more employees. Until then, the executive team should be able to
provide a sufficient amount of holistic attention.
The two most dangerous types of people that an entrepreneurial venture
can bring into an organization are those who are vengeful and those who are
egotistical. Given the absolute necessity for strong coordination and
collaboration amongst all team members in a new venture, even one or two
people who value personal interests at the expense of the interests of the whole
can impair the ability of the organization to grow. Jack mentions, You dont want
to import a virus a little Hitler who walks around thinking, wait till I get my
chance, Im going to make these people pay. Egoists are just as harmful since
they make take actions that boost their own interests at the cost of doing what is
right for the organization. Jacklyni, a Principal at Silicon Valley strategy
consulting firm that consults for startups, recalls the leadership her friend, the ex-
CEO of Epiphany had in stepping down from the helm of the company. She
recalls, He knew when it was the time to step down and let a more experienced
CEO take over. The fact that the management team was not egotistical about it
is what led Epiphany to continue to grow. Stevei, ex-VP Marketing of a failed
PLM software startup, recalls from his own experience, We made the mistake of
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having both a CEO and a President. The ego issues alone impaired our ability to
get anything done.
A final capability to consider when recruiting team members is having
people whose role is to keep the growing organization in check. Often times, the
primary stakeholders in an entrepreneurial organization by necessity have to
think irrationally in order to generate the explosive growth necessary for a
startup. However, having control mechanisms to ensure that the irrationality
remains bounded is important as well. Steve mentions, the founders and board
have to be obscenely optimistic; otherwise theyd never sign up. So, you need a
few people on the team who provide a reality check. Jack comments, a good
CEO needs a good CFO who can keep the books clean and keep the CEO
clean.
HABIT 3: INVEST IN HUMAN RESOURCES
Simply hiring the right team up front is not sufficient; developing and
rewarding them continuously is also critical for entrepreneurial success.
Development and rewarding of employees serve the entrepreneurial organization
in many ways. An entrepreneurial organization cannot be expected to grow very
fast if the skill sets and capabilities of its human capital are not actively grown as
well. Furthermore, the cost of employee turnover is significant higher in smaller
organizations that depend more heavily on the contribution of each and every
individual. Therefore, it is particularly wise for the entrepreneurial organization to
incent employees to remain with the organization for as long as possible.
Daniel Denison refers to this in his model as both capability development
as well as empowerment. Denison defines capability development as investing
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in the development of employees skills in order to stay competitive and meet
ongoing business needs while looking at empowerment as giving employees
the authority, initiative, and ability to manage their own work. Given the lack of
precedent and process in new companies, it is absolutely essential to give
employees an environment in which they can maximally impact the organization
through their work. David Neeleman of JetBlue comments, We spend extra
money on training to give our crew members the tools they need to succeed.
Jack also mentions, your people should be empowered. If people are not self-
actualized, what is the point of hiring them?
Encouraging and rewarding employees is also a very important element of
human resource investment. Encouragement and rewards when used
appropriately can build a sense of community and commitment amongst
employees of the firm. David Neeleman says, its important to let people know
what a great job they are doing and what a huge impact they are having on the
company. At the same time, it is important to be cautious in inappropriately
associating rewards with behavior that may not be conducive to the firms growth.
As Alfie Kohn mentions in Why Incentive Plans Cannot Work, improper reward
systems can end up working exactly like punishment systems by manipulating
peoples interests. Employees may view colleagues as competitors for a fixed
bonus pool for example or may strive for short-term objectives that impair the
firms long-term capabilities in some way. Kohn quotes a late Cornell University
professor, John Condry, as saying, rewards are the enemies of exploration.
However, by rewarding exceptional performance without implication for particular
objectives, an entrepreneurial organization can recognize employees and
increase commitment to the firm. Professor Byers recalls from his own startup
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experience, its important to show recognition to your employees for their hard
work. One Christmas, we decided to give all our employees an extra 500 shares
of stock. Our board thought we were crazy. But what is nothing more than a few
thousand shares to us was a way we could communicate that we appreciated all
the hard work our staff had given us.
HABIT 4: ENCOURAGE IDENTIFICATION OF PROBLEMS AND TAKE
CORRECTIVE ACTION IMMEDIATELY
Unlike large organizations where mistakes can be absorbed or remedied
in a gradual fashion, entrepreneurial ventures cannot sustain errors that are not
immediately surfaced and dealt with. There are a number of reasons why
entrepreneurial organizations often fail to identify problems and these reasons
are related to the research done on Groupthink. Groupthink, as defined by Irving
Janis, is the desperate drive for consensus at any cost that suppresses dissent.
Janis describes Groupthink as arising in situations where groups rationalize the
correctness and invulnerability of their state and decision making in an effort to
establish a sense of unanimity and peace. However, this suppression of dissent
can lead entrepreneurial ventures to miss critical errors in the organization that
may lead the group as a whole to failure.
Shannon believes that organizations should go as far as incenting and
positively reinforcing the identification of errors. She says, We need to tell
people that its okay to say its not okay. We rewarded people with a gift when
they talked about problems in the organization. When errors are surfaced, its
also important to take corrective action immediately. Jack commented, If you
make a mistake, fix it quick. Dont wait until the problem festers and it becomes a
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really serious problem. Carol Bartz, CEO of Autodesk, believes in a philosophy
she calls fail forward fast, in which problems are identified and dealt with as
rapidly as possible. She says, I tell my staff, dont be afraid to make a change.
I encourage my employees to think different constantly. Without this constant
monitoring, surfacing, and active commitment to rapidly deploying
countermeasures, an entrepreneurial organization can be destroyed by an
undetected problem, much like a undetected disease can destroy an organism.
HABIT 5: SHOW INTEREST IN TEAM MEMBERS, SO THAT TEAM
MEMBERS WILL SHOW INTEREST IN THE ORGANIZATION
Too often, managers rely upon simple techniques like money and fear to
motivate and influence employees. However, one of the most powerful influence
techniques documented by Dr. Robert Cialdini is the rule of reciprocity. The rule
of reciprocity simply suggests that people are more likely to commit to giving us
things when we have initially given them something up front. While this may
appear deceiving at first, it is nothing but a formalization of the so-called Golden
Rule: do unto others as you would have them do unto you. In this context, it is
important for entrepreneurial organizations that are so dependent on the high
performance of their employees to show sincere interest in their well-beings, both
inside and outside of work.
Shannon recalls from one of her former companies, We genuinely cared
about each other. One time, I took all the kids of our employees to the Toys R
Us in Redwood City and spent $687 on toys just to show our staff that we
genuinely cared. We would always issue 10 shares of stock to any employee
who had a new baby. The degree to which you acknowledge peoples lives, the
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better they can be integrated in what you are trying to accomplish. David
Neeleman contributes a portion of his salary to an employee emergency fund,
which supports employees during times of duress, like when an employee loses
a family member. He says, if you take care of your crew members, they will take
care of your customers. Carol Bartz perhaps put it most succinctly and most
bluntly when she says, We give a shit about the people who work for us.we
showed interested in others lives. By caring for the personal and professional
needs of employees, an organization sets up a positive psychological motivation
for employees to care for the organization as well.
HABIT 6: INCREASE THE VELOCITY OF CUSTOMER UNDERSTANDING
High tech entrepreneurial firms are often characterized by a high degree of
research and development activity. This is often necessary since the basis for
competitive advantage in most high tech firms is in fact the technological prowess
of the companys products. However, the creative and innovative elements of an
entrepreneurial firm must be guided and bounded by outside customer input, and
to the extent that this input is injected into the organization more rapidly and
efficiently, the organization is in a better position to succeed.
Daniel Denison addresses this idea in his framework under the topic of
customer focus, which he defines as the degree to which an organization is
driven by a concern to satisfy the customer. Jacklyn mentions that in her
experience the most important balancing act for startups is the balance of
engineering and marketing/sales. Richard also comments, Startups too often
are trying to change the world. They should focus on filling a real market need.
Focus on selling first and adding processes later. Steve summarizes the point
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very simply, Failed companies are often technology-driven and try to sell the
world on how cool their widget is. To succeed, a company must have a flat
hierarchy and be organized around the customer. The goal should be to
increase the velocity of customer understanding throughout the organization as
much as possible.
HABIT 7: CREATE AN STRONG CULTURE
Tying all of the habits together is the seventh habit, which should be a
guiding principle for everything that the organization does. A strong culture which
promotes creates social controls, organizational norms, and inspires innovation is
absolutely mandatory for a growing entrepreneurial organization. David
Neeleman says, the only thing that keeps me up at night is the possible dilution
of our culture. In the absence of a culture that supports the foundation of
corporate growth, the organization will not be able to mobilize as a team and
succeed in the marketplace effectively.
Charles OReilly in his article, Corporations, Culture, and Commitment:
Motivations and Social Control in Organizations talks about the three
fundamental purposes of culture. The first is to establish control over processes
in the organization. Some companies by the nature of their products require high
levels of control in order to be successful. Brad mentions as an example,
hardware companies are almost always in need of significant process in their
culture since yield is a larger concern than within software companies. The
second purpose is to develop company-wide norms that set the social rules for
conductance both during good times as well as the bad. Jeff Hawkins, the
founder of Palm Computing says, if you have the right culture, you can get
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through the tough times. But you have to layout the policies up front so nothing
festers later on. And the third purpose of culture is to inspire the innovation and
creativity that is essential to entrepreneurial growth. Professor Byers comments,
Innovation is a function of teamwork and creativity. Sometimes this requires a
heavy hand from the CEO; sometimes it can be done organically. But either way,
everyones core values must be discussed in order for the organization to be
effective. Thus, having an effective organizational culture lays the foundation for
the entrepreneurial venture to execute its growth strategy and function as a
cohesive team through the struggles that the company faces. As a senior
manager, this issue is of particular importance, since as Jack mentions, The
culture of an organization reflects on the idiot at the top.
SUMMARY
In summary, it is clear from both documented and empirical research that
these seven organizational behavior habits form the basis for some of the critical
success factors of an entrepreneurial organization. By having a strong leader at
the helm, hiring the appropriate team to surround the leader, investing and
rewarding that team, encouraging the identification of problems and
understanding of the customer, and building a strong corporate culture; an
entrepreneurial organization can lay the organizational foundations for ensuring
its growth and success in the marketplace.
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BIBLIOGRAPHY
Cialdini, Robert. Influence: The Psychology of Persuasion. 1993 Quill Williamand Morrow.
Collins, Jim. Level 5 Leadership 2001 Harvard Business Review
Gladwell, Malcolm. The Talent Myth 2002 Gladwell.Com
Janis, Irving. Groupthink. 1971. Psychology Today
Kohn, Alfie. Why Incentive Plans Cannot Work. 1993 Harvard BusinessReview
Mintzberg, Henry. The Managers Job: Folklore and Fact 1990 HarvardBusiness Review
OReilly, Charles. Corporations, Culture, and Commitment: Motivations and
Social Control in Organizations 2001 Readings in the Management ofOrganizations: An Integrated Perspective.
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SPECIAL THANKS
Jack Venture Capitalist at Vanguard Ventures
Jacklyn -- Principal at Silicon Valley strategy consulting firm
Ken -- former CEO and Chairman of a Global 1000 Silicon Valley software
company, currently a Venture Capitalist in Silicon Valley
Brad Principal investor at Hummer Winblad Venture Partners
Richard Former Director of Consulting and Director of Account Managementat two Boston area startups
Shannon former CEO of a networking equipment company and currently aSilicon Valley angel investor
Steve ex-VP Marketing of a PLM software startup in Mountain View, CA
Professor Tom Byers Academic Director of the Stanford Technology VenturesProgram
Stanford Technology Ventures Program for access to video archives of CarolBartz, Jeff Hawkins, and David Neeleman
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AUTHOR BACKGROUND
Murthy Mathiprakasam
Education
Currently candidate for Master of Science in Management Science and
Engineering at Stanford University, expected graduation June 2004
Bachelor of Science in Computer Science from Massachusetts Institute ofTechnology, June 2000
Bachelor of Science in Management Science from Massachusetts Institute ofTechnology, June 2000
Work Experience
Supply Chain Consultant at Optiant, enterprise software startup in Boston,
working with high tech manufacturers
Research Analyst at Fletcher Spaght, boutique BCG spinout strategy and marketresearch consulting firm in Boston, working with high tech startups and venturecapitalists
i Names have been disguised for privacy and confidentiality