WHY ENTREPRENEURS DON'T SCALE (UP)

One of the things I like about Romania is that people have an enormous appetite for starting their own business. I am reluctant to call all of them entrepreneurs - entrepreneurs have a dream and a game plan and are intrinsically motivated to realize that dream, while most Romanian business men seem to be mainly motivated by money.

Bucharest (2007) – In an earlier article, I referred to a phenomenon I called "The Romanian business model: Poor companies, rich owners". Romanian owners don't seem to be particularly interested in maximizing their company profits, as a Western company would be. They are mainly interested in increasing their personal wealth. As a result, Romania has very few "national champions" to show for, let alone companies with the potential to become regional players. However, the hay days of this model are coming to an end, as the fiscal nets are tightening, corruption is becoming an increasingly dangerous game and competition levels are growing, leaving entrepreneurs with basically 2 choices: continue to do business the way they have always done by skimming excess cash flow from the company until the company most probably goes bankrupt. Or to fundamentally change the way they conduct their business by investing in upgrading the company, hiring well-paid staff and implementing a clear and coherent business strategy in order to create a sustainable competitive advantage.

In all honesty, most company owners will not be able to make this turn, as it goes against everything that made them into what they are right now. This is definitely a major obstacle to further growth for any company. However, even if an entrepreneur has made this turn, there are still a few other pitfalls that may prevent him from scaling up. The qualities that served him well in launching a business often bring him down as he grows. The reason entrepreneurs "fail to scale", that is, adapt their leadership capabilities to their growing business' needs, is not so much one of leadership personality as of approach. A leader who scales is able to let go of habits and skills that have outlived their usefulness and adapt to new challenges along the way.

Business school courses can't really teach students to deal with people objectively, to think strategically, to create loyalty within a diverse workforce, and to impress customers and investors. These capabilities derive from experience that the new CEO may not yet have. No wonder so many entrepreneurs fail to become leaders as their businesses increase in complexity. This is especially true in Romania, where CEO's are often very young and have never experienced a downward business cycle. Without these skills, most new CEOs fall back on what has worked well for them before - even though these old approaches often don't fit the current problem.

This is also very true for entrepreneurs. I've observed that the habits and skills that make entrepreneurs successful can undermine their ability to lead larger organizations. In an article in Harvard Business Review, John Hamm identifies four tendencies that work for leaders of business units or small companies but become Achilles' heels for those same individuals when they try to manage larger organizations with diverse needs, departments, priorities, and stakeholders.

The first tendency is loyalty to comrades, who were there at the start of the enterprise. As an entrepreneur, you need to lead like you're in charge of a combat unit on the wrong side of enemy lines, where it's all for one and one for all. But blind loyalty can become a liability in managing a large, complex organization. Excessively loyal CEOs may be the best friends you could ever have, but they are the growing organization's worst enemies. That fault is understandable enough; after all, team allegiance significantly contributes to company success. But when leaders fail to see and respond to a team member's weaknesses, they place the company at risk. Such stubborn loyalty, at the expense of an organization's success, is surprisingly common. But leaders who scale, while not lacking in sympathy toward individuals, understand that the organization's success depends on every team member's strengths. These leaders understand that their first allegiance must be to a broad community of employees, customers, and investors, and to the fundamentals of the business- not to any single friend.

The second tendency, task orientation - or focusing on the job at hand - is critical in driving toward, say, a big product launch, but excessive attention to detail can cause a large organization to lose its way. Executives who focus on the job at hand - particularly those who have done well in operations, product development, sales or finance - are the weight lifters of the business world. They execute brilliantly with demanding short-term assignments, but long-term strategy is often beyond them. As their companies grow, they often fail to establish strategic priorities. Leaders able to scale, by contrast, understand the importance of a stream-lined strategy. They learn to extract three or four high-level goals from a longer list and focus their teams accordingly. And in the face of a new threat or opportunity, they release people from promises that were made at a different point in the development process, allowing them to delay or cancel goals they had committed to when they made sense.

The third tendency, single-mindedness, is an important attribute in a visionary who wants to unleash a revolutionary product or service on the world. Yet this quality can harden into tunnel vision if the leader can't become more expansive as the company grows. In start-ups, focus on the quality and differentiation of a new product or service is an important asset. But a leader's devotion to a single issue can also damage a growing organization. A leader who doesn't communicate with and listen to employees with distinct opinions can end up losing their loyalty. On the other hand, executives who scale learn to listen to others and take their opinions into account. They grow with their companies because they realize that their passion is not the only one that matters, and they intentionally broaden their perspective to encompass a range of endeavors.

The fourth tendency, working in isolation, may work for the brilliant scientist focused on an ingenious idea. But it's disastrous for a leader whose expanding organization must rely on the kindness of customers, investors, analysts, reporters, and other strangers. A new idea demands protection. But after the birth of the product or the idea, the internal focus must shift in order to meet market demands for the finished product. Introverted entrepreneurs are often brilliant, but leaders who endure know that success requires some smooth talking and that they have to present their company to the world.

Leaders who scale overcome these tendencies through self-discipline, listening to and seeking input from others, and being willing to shift their outlook. They deal honestly with problems and quickly weed out non performers. They see past distractions and establish strategic priorities. They make concerted, sometimes uncomfortable efforts to do what doesn't come naturally to them for the team's sake. And they learn to work with and communicate to diverse employees, customers, and other stakeholders. Most important, they make the company's continuing health and welfare their top concern.

Clearly, addressing the problems of loyalty to comrades, task orientation, single-mindedness, and working in isolation during a company's formative stages will allow the founder to flourish over the long haul. On rare occasions, people rise to the scaling challenge without any special effort. More often, those who scale do so with outside help, the feedback of an involved board member, a coach, a mentor, or a facilitator. But entrepreneurs who grow into leaders almost always scale because they are open to learning. They want to gain new experiences and to improve their leadership skills. In fact, leaders who scale do so regardless of background, skill, and talent. Romanian entrepreneurs have to take deliberate steps to confront their shortcomings and become the leaders their organizations need them to be. Only then Romania will have its own national champions.

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Autor:

Peter Jansen, Managing Partner of the "Bucharest Consulting Group".

Bucharest Consulting Group offers consultancy services in the field of strategy and general management to local and international medium-sized and large companies in Romania.

For more information contact:

Peter Jansen at