The Seven Habits of Highly Effective Entrepreneurial Organizations

FOREWORD

            I originally researched this topic in 2004 while attending graduate school at Stanford University in Professor Robert Sutton’s Organizational Behavior class.  His general philosophy of evidence-based management and my interest in high technology startups led to the question:  “are there repeatable and observable principles or habits that entrepreneurial organizations should adopt with respect to organizing people that increase the probability of the organization’s success and encourage the sort of creativity necessary for innovation?” 

            In the original version of this paper, I focused on primary research of executives and venture capitalists, as well as, secondary research in organization theory.  In this revised edition, I have added some personal anecdotes as well to further strengthen the points.  The Seven Habits, however, have not changed, as I would hypothesize that these are indeed the seven most fundamental principles of organizing for entrepreneurial success.

THE SEVEN HABITS SUMMARIZED

• HABIT 1:  HAVE A STRONG LEADER FOR A CEO
  
• HABIT 2:  RECRUIT THE RIGHT TEAM
  
• HABIT 3:  INVEST IN HUMAN RESOURCES
  
• HABIT 4:  FOSTER TRUST, ENCOURAGE IDENTIFICATION OF PROBLEMS, AND TAKE CORRECTIVE ACTION IMMEDIATELY
• HABIT 5:  SHOW INTEREST IN TEAM MEMBERS, SO THAT TEAM MEMBERS WILL SHOW INTEREST IN THE ORGANIZATION
  
• HABIT 6:  INCREASE THE VELOCITY OF CUSTOMER UNDERSTANDING
  
• HABIT 7:  CREATE AN STRONG CULTURE
  

 HABIT 1:  HAVE A STRONG LEADER FOR A CEO

            Leadership and management have received widespread attention in organizational 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  Exercising Fairness, Honesty, and Integrity

Henry Mintzberg refers to this quality in “The Manager’s Job:  Folklore and Fact” when he talks about the manager’s role in “reconciling their individual needs with the goals of the organization…and deciding who will get what.” 

I remember observing a manager once who was hiring a team very rapidly with the need to meet increasing work demands.  In doing so, however, she ended up hiring a couple of people who she really personally liked and a couple others whom she did not.  Although everyone doing work should have been treated equally, she endowed her favorites with better raises, faster promotions, etc.  The behavior was so apparantly that both the favorites and non-favorites acknowledged it.  The consequence of this was that those who were not subjectively favored were left demoralized, despite no shortage on their work performance.  Most of them ended up quitting the team.

Being fair is not about getting to choose who will win and who will lose.  Being fair is about setting an objective and transparent standard for success and evaluating performance only against that standard.  Jack, a venture capitalist at Vanguard Ventures, says a CEO must “be fair…be up front about everything.”  Daniel Denison, in his model for organizational culture, suggests a need for core values “which create a sense of identity and a clear set of expectations.”  Ken, a former CEO and Chairman of a Global 1000 Silicon Valley software company says, “its not about what you say, it’s 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 with humility and modesty

Jim Collins, in his article “Level 5 Leadership,” refers to the First Who principle where he states that leaders “attended to people first.”  David Neeleman, CEO of JetBlue, has a habit of flying on his company’s flights once a week and serving airline customers along with his flight attendant staff.  He says, “I know that a fish stinks from the head…and that we can succeed only if I set a good example.”

In one of my previous jobs, a bunch of us flew out to an industry trade show to show off our product and generate some leads.  Our CEO and VP Marketing came along on the trip to do interviews with the press.  At the end of the conference when it was time to pack up, the CEO and VP smoothly slid off to a side so as to avoid having to help.  So while the rest of the team was on our hands and knees unscrewing bolts and getting papers put away, our management sat and watched us while they checked their voice mail. 

This kind of behavior can skew an employee’s perception of the organization and its fundamental mission.  Is everyone really committed to the goals of the organization or are some people expected to be more committed than others?  Jack 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.’”  

1.3  Being a confident decision maker who leads completely

Mintzerg refers to the leader as an entrepreneur who is seeking “to improve the unit, to adapt it to changing conditions.”  Every organization has decisions it must make, hopefully assigned to specific and accountable managers.  There is a temptation, particularly in conflict-averse cultures, to try to seek consensus before committing to a decision. This is unfortunately impractical in an entrepreneurial organization where speed is a competitive advantage.  On the flip side, excessive direction without appropriate information or buy-in can obviously lead to failure too.  Meg Whitman used to call this delicate balance, “leading completely.”  That is, instead of viewing the decision-making point solely from the standpoints of consensus, conflict, speed, or accuracy; approach the decision-making point from an integrated standpoint and facilitate the process with balanced judgment.  Raj, a principal from Hummer Winblad Venture Partners, summarizes this best when 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

Denison refers to this characteristic in his model as part of the Mission trait in which there is a “shared view of a desired future state… [that] captures the hearts and minds…while providing guidance and direction.”  I remember a manager once who led a large team of business analysts.  When other managers in the organization asked her what her team did, she would say something like, “we’re the business analyst team for the company.”  She basically identified the mission of the team with who the team was instead of what the team did.  By focusing on who they were, the team didn’t feel motivated to work since they fulfilled the team mission by just showing up.  Furthermore, no one else in the company really cared since they couldn’t identify with mission at all.  A compelling vision states an intention or an end state that motivates customers to volunteer their resources and motivates employees to volunteer their time.  Without that motivated followership, a leader is completely alone.  Jack summarizes this well with the role of a CEO as “having vision to see where to go…the truest test of a CEO is asking would people follow him or her?

HABIT 2:  RECRUIT THE RIGHT TEAM

            As Shannon says, “Entrepreneurship is a team sport.”  A good CEO is not enough for an entrepreneurial venture to succeed.  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 Raj 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, it’s the other way around.”  Richard, 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 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 don’t 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 don’t 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 team can impair the ability of the organization to grow.  Jack mentions, “You don’t want to import a virus – a little Hitler – who walks around thinking, ‘wait till I get my chance, I’m going to make these people pay.’”  Egoists are just as harmful since they make take actions which boost their own interests at the cost of doing what is right for the organization.  Jacklyn, a Principal at Silicon Valley strategy consulting firm that consults for startups, recalls the leadership her friend, the ex-CEO of Epiphany had in stepped 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.”  Steve, ex-VP Marketing of a failed PLM software startup, recalls from his own experience, “We made the mistake of 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 must think creatively and nontraditionally in order to generate innovation.  However, having control mechanisms to balance and bound this creativity ensures that the organization does not falter from its mission.  Steve mentions, “the founders and board have to be obscenely optimistic; otherwise they’d 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 their capabilities and rewarding their accomplishments continuously is also critical for entrepreneurial success.  Daniel Denison refers to this in his model as both capability development as well as empowerment.  Denison defines capability development as “investing in the development of employee’s 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 for achievement 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 inadvertently incentivizing the wrong behavior.  As Alfie Kohn mentions in “Why Incentive Plans Cannot Work,” improper reward systems can end up working exactly like punishment systems by manipulating people’s interests.  Employees may view colleagues as competitors for a fixed bonus pool for example or may strive for short term objectives that impair the firm’s 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 experience, “its important to recognize 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:  FOSTER TRUST, 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.  Sometimes this rationalization is quite intentional as a consequence of a lack of trust.  The less trust and more strain there is between members of the organization, the less each group is inclined to seek or respect differing opinions than that of their own.  This suppression of dissent, whether conscious or unconscious, 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 it’s okay to say it’s 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.  Don’t wait until the problem festers and it becomes a really serious problem.”  Carol Bartz, former CEO of Autodesk and current CEO of Yahoo, 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, ‘don’t 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 an 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 people’s lives, the 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.”  

At one of my past jobs, I had a chance to present some of my work for a VP and his staff of directors.  After the meeting began, the VP graciously asked me to be patient for 15 minutes before starting my presentation.  This VP had a tradition that at the beginning of every staff meeting, every Director around the table had to provide a 3-4 minute update on their weekend, their family, and their personal lives.  The VP wanted to communicate that he didn’t just care about getting down to business; he cared about his reports as people first. 

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 company’s products.  However, the creativity and innovation elements of an entrepreneurial firm must also be guided and bounded by outside customer input, and to the extent that this input is injected into the organization more rapidly, the organization is in a better position to succeed.

I remember seeing an organization where the executive team clearly identified themselves as the strategists of the firm.  They spent most of their time at headquarters in closed door meetings talking about positioning, pricing, packaging, and a whole host of other issues that were arguably irrelevant since they still had no revenue.  Meanwhile sales managers and consultants who were constantly on the road were never queried for what they were learning from the market.  In the end, the exec team kept pushing strategies that were inconsistent with what the market needed so nearly the entire customer-facing team ended up quitting the company.

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 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 creates social controls, promotes 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 which supports the foundation of corporate growth, the organization will not be able to mobilize as a team and succeed in the marketplace effectively.

Charles O’Reilly 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.  Raj mentions, “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 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 which 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, everyone’s 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 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 company can lay the organizational foundations for ensuring its growth and success in the marketplace. 

BIBLIOGRAPHY

Cialdini, Robert.  “Influence:  The Psychology of Persuasion.”  1993 Quill William and 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 Business Review

Mintzberg, Henry.  “The Manager’s Job:  Folklore and Fact”  1990 Harvard Business Review

O’Reilly, Charles.  “Corporations, Culture, and Commitment: Motivations and Social Control in Organizations”  2001 Readings in the Management of Organizations:  An Integrated Perspective.