Organizational Phase Change

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As certified CEO Advantage advisors, we generally consider middle market organizations (50-2,500 employees) to be in our sweet spot.  As an organization matures, “midmarket” is an inflection point where entrepreneurial companies must become “professionally managed” entrepreneurial companies (a favorite Verne Harnish term).  The entrepreneurial edge is still vital, but the company will suffer without professional management.

Years ago, Peter Drucker nailed this transition, which he dubbed a “change of phase”.  In People and Performance, Peter Drucker writes:

“The change from a business which the ‘boss’ can run with ‘helpers’ to a business enterprise that requires management is what the physicists call a ‘change of phase’ such as the change from fluid to solid.  It is a leap from one state of matter, from one fundamental structure, to another…The English biologist D’Arcy Thompson showed that animals supported by a hard skin can reach only a certain size and complexity.  Beyond this, a land animal has to have a skeleton.  Yet the skeleton has not genetically evolved out of the hard skin of the insect; it is a
different organ with different antecedents.  Similarly, management becomes necessary when a business reaches a certain size and complexity.  But management, while it replaces the ‘hard-skin’ structure of the owner, is not its successor.  It is, rather, its replacement.  When does a business reach the stage at which it has to shift from ‘hard skin’ to ‘skeleton’?  The line lies somewhere between 300 and 1,000 employees in size.  More important, perhaps, is the increase in complexity of the business; when a variety of tasks have all to be performed in cooperation, synchronization, and communication, a business needs managers and a management.”

In today’s environment, with global supply chains and competition, instant communication, more complex compliance requirements, and knowledge workers increasing relative to administrators and technicians, companies hit the complexity inflection point with fewer employees than in the past.  Rather than 300 employees, the line is probably crossed at 100, if not 50, employees.

This inflection point is an exciting place to be as companies grapple with the changes that accompany growth, but it can be a particularly challenging time for the owner/entrepreneur.  Owners should only manage to the extent that they’re able to do so effectively.  Where necessary, they must be willing to concede control to capable managers and a management team.

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