When a venture starts up with just a few people, its founder knows everything going on in every corner of the enterprise. In these early days, founders personally control their firm's resources and coordinates its actions. They control financial decisions, set priorities, assemble and oversee teams, align groups' activities, and make sure everybody's tasks add up to intended results.

"Technology venture leaders, once you get above about a dozen employees, organizational processes matter as much as people and technology/products. [Meyer] equips you to design an organization that solves today's problems, gets you through the next inflection point, and is scalable and sustainable -- the foundation for growth and value creation."

Charlie Shalvoy, seasoned tech venture CEO

However, once the company grows -- to around 50 people, perhaps US$25 to $250 million -- that founder can no longer know everything going on, and make every coordinating decision. (The greater the complexity -- diversity of functions, disciplines, channels, and geographic dispersion -- the sooner this transition-point arises.)

At that point, the founder is working long hours, and there's still not enough of them to make all the decisions that need to be made -- at least not thoughtfully. Things bog down.

Worse, they may be making decisions that subordinates are better equipped to make. As a result of micro-management, mistakes are made and strong leaders at the next level are driven away.

Meanwhile, a CEO immersed in operational management doesn't have enough time to focus on strategic decisions and external relationships, where they're most needed.

When this occurs, the founder who created the company ironically becomes the constraint to its continued growth (or even its survival).

Typical (Unfortunate) Solution

"A venture's founder doesn't have to become the constraint to growth. Dean Meyer's organizational principles free the founder for strategic thinking while reinforcing an entrepreneurial culture."

Max Henry serial entrepreneur and coach to venture CEOs

In some cases, the need for change is recognized by an insightful CEO.

In other cases, it's demanded by members of the Board, bankers, or involved investors. Too often, and sadly, the investors who funded the firm step in and push the founder aside, replacing them with a "professional manager" -- an experienced CEO -- to lead the firm through its next growth phase.

The consequences are often severe. The people who know the industry and the firm's concept, and who have the vision and passion to make the company great -- the founder and senior leaders who made the venture successful to that point -- are marginalized or chased away.

And in many cases, the new CEO installs traditional big-company processes and controls. The entrepreneurial spirit that infused the company morphs into a bureaucracy.

Bureaucracy: waste time and resources on routines that add little value, and establish rules and policies that erode staff's creativity and agility, and that get in the way of getting the job done.

As a result, the company often fails to grow, or fails altogether.

Situation Analysis

Let's analyze what's really going on....

At this transition point, the firm has sorted out its mission, vision, and strategies; and it has viable products. Its challenge is not rooted in its business strategy. The constraints are organizational. The "machine" doesn't have the capability to handle anything more.

"Never tell people how to do things. Tell them what to do, and they will surprise you with their ingenuity."

George S. Patton, Jr.

To grow, the company needs a strong leadership team that's empowered to manage their respective parts of the organization, exercise their creativity, and work directly with one another without the need for day-to-day involvement of the CEO.

However, empowerment cannot mean chaos. Everyone must be aligned with strategies; resources must be controlled; and activities must be coordinated.

The Essence of the Challenge

Up to this point, the CEO has been the coordinating mechanism for the organization. Obviously, that's not scalable. Complexity has grown to the point where one individual can no longer personally manage everything.

(By the way, it's insufficient to simply make the executive office a two-person job (e.g., separating CEO and COO). Just adding another capable manager into the mix only postpones the time when the executive office becomes the limiting factor.)

The essence of the challenge is this: The company must move its coordinating mechanisms out of CEO's head, and into mature organizational processes that control resources and coordinate everybody's activities.

Of course, a "professional" CEO must not fall into the same trap. Even if that person has more bandwidth for business and operational effectiveness, at some point the business will grow to exceed even the most capable leader's capacities.

"To handle the rapid growth we see ahead of us, we have to 'grow up' from a venture to a mature company, but without losing our entrepreneurial spirit. [Meyer] brought together all the principles that we needed. He caused us to ask tough questions about how we do business, and have conversations we'd avoided. And he helped our leaders to develop a clear, shared vision of the company we're out to create."

Leo De La Fuente, COO, Berkey

That's why the next CEO inevitably installs coordination processes and controls, such as budgeting, financial authorities, roles and responsibilities, and metrics. But those processes, based on that executive's past experiences, are often bureaucratic and disempowering -- the opposite of the entrepreneurial culture that made the firm successful in the first place.

But those mature organizational processes must not undermine the entrepreneurial character and values that made the company successful in the first place.

The Solution: Three Legs of the Stool

To break through the bottleneck, like three legs of a stool, three things are needed:

"Intellectuals solve problems; geniuses prevent them."

Albert Einstein

Leg 1: The founding CEO must learn to manage through others, and to focus their personal attention on strategic challenges (or step aside).

Leg 2: Senior leaders at the next level must evolve from functional experts focused on tasks to business leaders focused on results (outcomes).

Leg 3: Organizational processes that coordinate and control the various groups within the organization must be installed.

Leg 1 is well understood. Some founders are able to grow into great organizational leaders. For those who do not (or don't wish to), the only alternative is to bring in a new CEO.

Leg 2 is also well understood. Board members and investors may offer mentoring, and coach executives on strategic decisions. Some firms take advantage of leadership-development programs such as Executive MBAs, or executive coaches. And in some cases, seasoned executives are hired into senior leadership positions.

Leg 3 is where organizational strategy is needed.

Leg 3: Coordination and Control Without Bureaucracy

The challenge is to install business discipline without destroying the entrepreneurial culture on which the company was built.

The key to this connundrum -- discipline plus entrepreneurship -- can be found in the Market Organization: Manage every department, and every group within a department, as a business within a business whose mission is to produce products and services for customers both within the company and externally.

Just like in the economy as a whole, there's an internal value chain for each of a company's external products and services.

For example, a product manager is held accountable for the profitability of a product line. As the "prime contractor," they "buy" services from peers throughout the company.

Note: The word "buy" is used here to emphasize the concept of internal value chains, whether or not money changes hands. Transfer prices and accounting chargebacks are not needed to make this concept work.

That product manager may buy market research from Marketing to hone the concept of a new product. Then, they may buy designs from Engineering, and help with business planning from Finance.

Once the product is ready to go, a product manager buys production from Manufacturing, which in turn may buy modifications to plant infrastructure from Engineering and help with sourcing from Procurement.

With inventory in hand, the product manager may buy warehousing and distribution from Logistics, branding and promotions from Marketing, and selling from the sales force.

In parallel, like everybody else, product managers buy support services from IT, HR, Finance, Procurement, Legal, etc.

A Market Organization has an organization chart. But the way things get done is not by working up and down the hierarchy. Rather, the organization operates as a network of empowered entrepreneurs.

This way, there's no need to fear unproductive bureaucracy or loss of creativity. The Market Organization encourages customer focus, entrepreneurship, individual accountability, teamwork, and innovation at every level of management.

Financial Governance

In a Market Organization, managers throughout an organization are empowered to run their departments as they see fit without any loss of coordination or control.

Financial controls are comprehensive. They're just a little different than in bureaucratic organizations.

Groups are funded to produce their function's products and services. Their budget is not provided to cover their spending; it's to pay for their products and services. In other words, budgets are really prepaid revenues.

The term "investment-based budgeting" means a budget that forecasts the costs of deliverables, as well as the traditional view of spending. Line items in the budget include ongoing operations, local innovation within lines of business, and specific strategic initiatives decided at the enterprise level.

This is the way CEOs understand their true costs, of both ongoing business operations and of strategic initiatives.

And this is the way they control priorities -- by deciding what deliverables to fund, not by controlling what managers spend.

With internal "revenues" constrained, spending is controlled because every group must break even. That's a performance metric.

The only exceptions to the break-even requirement are product managers who sell the company's products and services to external customers. They are managed to traditional targets like profits, margins, market share, and customer loyalty.

By controlling each group's revenues, the CEO has the same tight control over resources as they would have by personally making every spending decision.

Strategic Alignment

Beyond financial controls, everybody in the company is aligned with enterprise strategies (without the CEO telling them what to do, and what not to do).

The CEO and the Board decide which operational processes and strategic initiatives to fund. This aligns resources with strategies.

They fund entire operational processes and initiatives are funded -- the prime contractor (who's fully accountable for the entire result) and all needed subcontractors (other groups throughout the enterprise who contribute to the team). That way, internal alignment of priorities occurs naturally.

Meanwhile, since managers must not spend more than their internal revenues permit, anything that's not funded doesn't happen. Groups provide (and incur costs to produce) only what their customers buy, and low-value products just don't sell. All efforts are focused on the things which the CEO and Board decide to fund.

"Even in the smallest companies, organizational processes matter! In fact, [Meyer's] concepts are best implemented at that early stage of growth. They clarify who's accountable for what, and (perhaps more importantly) whose job it is to think about all the things we're not yet thinking about. And they build an organization that scales while maintaining entrepreneurship at every level."

August J. Ceradini, Jr., President/Partner (Former), Circle Line & World Yacht; and Chairman Emeritus, Culinary Institute of America

Teamwork

Cross-boundary teamwork occurs dynamically as managers buy (internally) whatever they need to deliver the products and service they've agreed to sell.

As they buy help from other groups, teams form laterally, without the need for the top executive to plan everything. And with internal customer-supplier relationships, individual accountabilities within teams are clear. The quality of teamwork improves.

Innovation

Tight controls need not stifle innovation.

Metrics focus on results (rather than how people deliver those results), giving managers room to experiment, to evaluate what worked and what didn't, and to invest in innovation within their internal businesses.

More innovation occurs because internal entrepreneurs include in their pricing (the budget required to deliver their products and services) the indirect costs of necessary sustenance activities such as professional development, process improvements, and technology innovation.

In addition, strategic innovation initiatives are explicitly funded by executives and the Board.

Benefits

In the "real world," market economics inspires entrepreneurship while optimally allocating scarce resources and coordinating unthinkably complex supply chains. It can do the same within organizations.

In a Market Organization, managers are entrepreneurs who strive to earn their internal customers' business by offering the right products and services, excellent value, and a customer-focused culture. To do so, they manage their costs, deliver on promises, innovate, and team with peers and vendors to optimize their value propositions.

Empowering entrepreneurial leaders at every level inspires employee engagement, and taps everyone's creativity. It also develops the business acumen of the company's manager, as they learn to run their internal lines of business. Rather than the typical (and costly) high turnover in this transition, the Market Organization grows next generation of enterprise leaders organically.

As to the financials, cost savings occur naturally at two levels:

• Managers eliminate indirect costs that aren't essential to the delivery of their groups' products and services because they must offer their internal customers competitive rates (unit costs).

• Internal customers stop buying low-value support services which they don't need (even if they are a good deal).

  For example, it may be the job of the IT department to deliver all kinds of great technologies; but that doesn't mean it should be funded to do so. Not every application enhancement is worthwhile, and not every service needs to be delivered at the highest level of availability.

  If other departments choose not to buy some IT projects and services because they deem them not worthwhile, then IT internal revenues (and hence spending) are reduced without material loss of productivity in the business.

Individual performance improves when managers focus on results, not tasks.

Company performance improves when all departments are aligned with strategies.

"Market economics is the most powerful mechanism of social coordination known to mankind."

Dr. Charles "Ed" Lindblom professor emeritus of political science and economics Yale University

Shareholder value is further enhanced through better resource-allocation decisions, since all funding is linked to deliverables.

• For existing product lines, executives have the information they need to judge product-line profitability and the availability of funds for growth initiatives such as new marketing programs, product-line innovation, and internal process improvements.

• For new enterprise strategies, executives have a realistic view of the total cost of proposed strategies -- not just the obvious direct costs, but their impacts enterprisewide.

Furthermore, investor confidence is built through financial transparency before the fact, not just after results are reported. Budgets clearly define what is to be expected of each group in the organization -- clear deliverables and costs.

How the Market Organization is Implemented

The Market Organization, with its various organizational processes, is implemented through a series of systemic changes.

There are five organizational systems that comprise the ecosystem in which people work:

• Structure: the definition of internal lines of business (the organization chart) and cross-boundary workflows

• The "internal economy": resource-governance processes, including budgeting, internal service catalogs with rates, dynamic priority setting (demand management), and financial metrics

• Culture: accepted patterns of behavior, in themes such as integrity and accountability, customer focus, entrepreneurship, and risk

• Methods and tools: how we do our jobs

• Metrics and rewards: dashboards, performance metrics, and performance management

These five systems are the "programming language" of organizations, and the place that systemic controls and coordinating mechanisms are implemented.

Organizational strategy defines a sequence of changes across those five systems.

Within each organizational system, there are design principles and frameworks, as well as participative change processes, that equip leaders to build a very high-performing Market Organization. Organizational design is an engineering process, and there's a proven leadership toolkit to develop your organizational strategy and implement the Market Organization.

The Pot of Gold

When a growing company faces the inevitable transition from founder-led start-up to a well-managed organization, it takes more than the right talent, whether that's developed internally or brought in from outside.

And it takes more than mentoring, whether provided by the Board or a professional coach.

Growing organizations need to install organizational processes to coordinate and control their resources and actions. The Market Organization is the ideal choice.

Implementing a Market Organization takes time, discipline, and investment. But it's worth it....

The bottleneck at the top is eliminated.

Mature processes ensure coordination and control without bureaucracy, and hopefully without losing the creative, motivated founder and leadership team, and its innovative entrepreneurial culture.

The organization is high-performing and infinitely scalable. It's capable of unlimited growth -- indeed, it can drive that growth.

Meanwhile, once they're no longer overwhelmed with operational issues, the CEO and Board can rise to a more strategic role. Instead of being cogs in the machine, they become drivers of the machine.

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