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As organizations grow and change, those in management and leadership roles also need to grow – in their skills and capabilities – and change how they approach their roles. For example, the CEO of a start-up needs to spend his or her time very differently from that of a $1 billion enterprise. We will discuss tools and techniques for making these changes in Chapter 9. In this chapter, we focus on the very specific challenges facing the founder or the entrepreneur as his or her business grows.

Unlike the CEOs of large, Fortune 500– type organizations, who are typically promoted through the ranks over a period of many years, the CEO of an entrepreneurial company is typically someone who either was the founder of a company, was part of a founding group, or is the spouse or child of the founder. Examples are legion and include not only those cited above but also some other very familiar names such as Mark Zuckerberg (Facebook), Larry Ellison (Oracle), Jack Ma (Alibaba, China), Anita Roddick (The Body Shop), Martha Stewart (Martha Stewart), as well as some currently less familiar but equally significant names, including Ren Zhengfei (Huawei), Li Ning (Li-Ning, China), Isaac Larian (MGA Entertainment), and Yerkin Tatishev (Kusto Holdings, Singapore). To understand transitions that founders/entrepreneurs must make as their companies grow, it is useful to first consider who they are as people and how they got to be CEOs.

Characteristics of Entrepreneurs

Although there are no precise demographic and psychological profiles available, our experience has shown that CEOs of entrepreneurial companies tend to have certain things in common. About 90 % of these people have one of three types of background: (1) a marketing background, (2) a background in some technical area, such as engineering or computers, or (3) a background in a particular industry. For example, an individual may have sold computer-related devices for a large company before deciding to start his or her own company focused on developing and producing similar products. Alternatively, a person may have been an engineer or other technical specialist and become skilled at product development before deciding to establish a new business. Finally, someone may have worked in a particular industry such as travel, executive search, construction, real estate, garment manufacturing, or a variety of technology areas including software development, computer chips, or telecommunications.

Most CEOs of entrepreneurial companies are enthusiastic about markets and products but are not very interested in management or the “nuts and bolts” of day-to-day operations. Many of them find accounting boring. They have no more interest in their own accounting system than the typical homeowner has in the household's plumbing: They want it to work, but they do not care to understand how it works. Many tend to look at financial statements only to determine “the bottom line.”

Entrepreneurs are typically above average in intelligence, willing to take risks, uncomfortable in environments in which they are told what to do, want things done quickly, and are fond of seeing things done their way. Most, but not all, do not have good listening skills and many seem to have ADD (attention deficit disorder). They are like butterflies flitting from one thing to the next, or like Tennessee Williams's proverbial “cat on a hot tin roof.”6 Anyone who has spent serious time with many entrepreneurs will recognize the behavior that includes an inability to focus on one thing for very long, an ingrained impatience, and an expectation of virtually instant results. One colleague estimates that 90 % of entrepreneurs have the ADD syndrome.

Most of these CEOs have made open-ended commitments to their business, which means that business does not merely consume a great deal of their life; in most instances, their business is their life. The pejorative term workaholic, however, would be a misleading description of such people; rather, they view the business as a very complex, infinitely interesting game. It is a source of profound personal pleasure.

Entrepreneurs are accustomed to being the dominant person in business situations. Above all, entrepreneurs possess a strong desire to be independent of others' ability to control their behavior. They like to feel in control. The typical CEO of an entrepreneurial company either consciously or unconsciously values control both as an end in itself and as a means to other ends. This personal preference has most likely been reinforced in a variety of ways for a relatively long time.

The Impact of the Need for Control on Continued Successful Growth

In the early stages of organizational growth, the typical attributes of an entrepreneurial CEO are beneficial and necessary for the company. Fledgling enterprises need strong direction and open-ended commitment to make everything work properly. At this time, a compulsive CEO who knows about everything that is going on and who pays attention to the smallest detail will have a tremendous positive impact on operations.

As the organization increases in size, however, an entrepreneurial CEO's typical way of doing things (and personality) can begin to adversely affect success. Specifically, everyone in the company (including the CEO) may have become used to the idea that almost every issue – whether major or not – will be brought to the CEO's attention for decision or final approval. In other words, the CEO may have become an unwitting bottleneck in the organization. More insidiously, if the CEO has not been extremely careful, an entire organization inadvertently may have been built on people weaker than the CEO. Even though the business has grown in size and added many managers and professional specialists, the CEO may remain the most skilled person in the company in most, if not all, areas. This means that the CEO has not been able to increase the company's capabilities beyond his or her own admittedly considerable personal skills. Such a situation puts limits on the organization's capacity to grow and develop.

The CEO's desire for personal control over everything done in the organization, which was a considerable strength during the start-up stage, thus becomes a limitation or bind on the company during later stages of growth. The CEO's need to control everything can lead to an unintended dysfunctional consequence of slowing an organization down to a bureaucratic pace.

Also, some CEOs consciously want to retain control at all costs and therefore do not want to hire people who are better than they are at any particular task. Others are afraid that if they hire someone to perform a task that they cannot do themselves, they will become too dependent on that person. For example, the CEO of one service firm with $5 million in annual revenues was doing most of the company's computer programming work himself. When asked why he was spending his time in this way, he replied, “If I had someone else do it, I would be vulnerable if he left me.”

Some CEOs are able to recognize their own limitations relative to their companies' changing needs. As one founder and CEO of an entrepreneurial company aptly stated, “I'm an entrepreneur. I'm very good at controlling things – making a decision and seeing it accomplished by sheer willpower alone, if necessary. But our company has grown beyond that style. I'm not uncomfortable with the company, but I'm not as effective.” Such CEOs realize that, for the good of the enterprise, they need to make the transition from a manager who is used to controlling everything and being the center of all that happens to someone who is still important but is not an omnipresent, omnipotent figure.

Even when the need for it is recognized, however, this type of change can be stressful. For some CEOs, whose identities are closely bound up with their companies, it represents a threat – a potential loss of perceived potency. Many CEOs are simply not able to give up control to any significant degree and end up strangling their organizations.

Some CEOs go through the motions of giving up some degree of control because intellectually they know that this is essential; but emotionally they cannot really bring themselves to do it. For example, one entrepreneur built an organization that achieved a billion dollars in revenues in less than one decade. Recognizing that the size of the enterprise now made it impossible for him to manage in the old way, he brought in two heavyweights – experienced professional managers whom he had to pay high salaries to attract. One was a marketing manager, and the other was a finance-oriented manager who would be responsible for day-to-day operations. The entrepreneur himself moved up to chairperson. Unfortunately, he then proceeded to turn the professional managers into managerial eunuchs. When the organization began to do poorly, he announced that he had experimented with professional managers but, reluctantly, he had to reassume personal control himself. Similarly, this was the root cause of Steve Jobs' battles with John Sculley during his first term at Apple (which ended in 1985). Steve Jobs was, in common parlance, a control freak.

The Tendency to Stick to a Success Formula

Another barrier to continued successful growth relates to the understandable human tendency to repeat what has worked in the past. If a success formula has worked in the past, it is reinforced by success, and tends to be repeated – even after the conditions that enabled it to be successful have changed. For the founder and CEO, many factors reinforce the set of behaviors that has been successful, including conventional wisdom that says, “If it ain't broke, don't fix it.” The problem is that organizational success leads to changes in the key underlying determinant of future success – that is, size. Size matters in business as well as in other areas of life. The greater the size of an organization, the greater its complexity. This, in turn, means that managing and leading the business will also be more complex. Like a rubber band that is stretched to its ultimate breaking point, an organization will inevitably grow to a size where the success formula that created its success (including the way that the CEO has managed and led the business and its development) will no longer function as well and will require change.

The Core Dilemma Facing the CEO or Founder

All of the critical characteristics of a founder or CEO of an entrepreneurial company combine to create what can be characterized as the core dilemma that must be resolved if an organization is going to continue to grow successfully over time: The mindset, skills, and capabilities of entrepreneurial leadership that led to initial success are no longer sufficient or appropriate for future success once an organization reaches a certain critical size. Specifically, at some point, the significant or possibly total focus on markets and products, and the lack of interest in and subsequent neglect of management of the nuts and bolts of day-to-day operations will turn strength into a limitation. Similarly, the willingness and desire to personally “do whatever is necessary” (and, in turn, control everything) will also turn from strength to a limitation. Taken together, this means that the entrepreneurial success formula must inevitably change, if success is to continue.

Aligning the Entrepreneur's Mindset to Support Continued Successful Growth

There are three key ideas that must be embraced by company leaders as their organizations grow. First, a key notion that must be embraced is that past success is not a guarantee of future success. This means that both the mode of operation and the way that a company is operated must inevitably change. This also typically means that the founder or CEO and his or her team will need to develop new skills and change the way that they execute their roles.

The second key idea that must be embraced is that infrastructure matters. When a company is founded and begins to grow, the most important questions are: “Do we have market?” “Do we have a product or service that is desired by the market?” and “Can we make a profit providing that product or service to the market?” If these questions are answered in the affirmative, the company will be successful and grow – at least for a while. At a certain point in this growth, however, significant attention needs to be devoted to developing the infrastructure required to continue to grow and operate successfully. As used here, “infrastructure” relates to the resources, systems, processes, structure, and organizational culture required to support effective and efficient day-to-day operations and continued growth. Just as a city or nation requires an infrastructure to facilitate growth, so does an economic organization like a company require an infrastructure.

The problem with focusing upon and developing organizational infrastructure is twofold. Although it is not typically an objective that excites or energizes an entrepreneurial leader, infrastructure is as critical to a business as to a house. In a house, when you turn on the lights or the water tap, you want it to work flawlessly, but you might not really care about whether or not you have certain types of wiring or copper pipes. You might well be much more concerned about the decorations and furnishings of the house. You know that wiring and pipes are important, but the details are not inherently interesting. With organizational infrastructure, the entrepreneur might know that it is important, but not find it inherently interesting.

The third key notion that must be changed or managed is that developing infrastructure (systems, processes, etc.) means creating bureaucracy. Infrastructure implies process and systems; and processes and systems (to many entrepreneurs) imply bureaucracy. Since bureaucracy is the mortal enemy of innovation and entrepreneurship, an entrepreneurial leader might recoil at the thought of embracing what seems to be tantamount to bureaucracy – just as he or she might not want to embrace a poisonous snake! Another challenge for the entrepreneurial leader, then, is to understand that not only is infrastructure important, but that it does not necessarily mean creating bureaucracy.

The construct we use as the basis for the vision of the required transformation is making the transition from an early stage entrepreneurship to an entrepreneurially oriented, professionally managed organization. This means that the organization must develop the processes, systems, and capabilities to manage the large, more complex enterprise it has (or will soon) become. Many entrepreneurs also equate professional management with bureaucracy, and reject that as an aspiration. For example, Steve Jobs once referred to professional managers as “bozos,” and once said: “Why would anyone respect professional managers? They can't do anything.” This is a misunderstanding of the role and function of professional management. It also explains why Jobs was once fired by his own firm. When Jobs returned to Apple, he changed his perspective and approach and hired Tim Cook, a quintessential professional manager, who became the company's CEO in 2011.7

Alternatives for the CEO as the Organization Grows

Faced with the difficulties described above, what can a founder or entrepreneurial CEO do?

Four basic alternatives are available to the CEO who recognizes that the organization can no longer be run in the old way. As described below, they are: (1) do nothing and hope for the best, (2) sell the business and start over, (3) move up to chairperson and bring in a professional manager to run the organization, or (4) make a systematic effort to change personal behavior to fit the needs of the company at its new stage of development. Let us look more closely at each of these alternatives.

Business as Usual . First, the CEO can do nothing – or, rather, do “business as usual” – and hope for the best. This could be called the “ostrich strategy.” The strongest argument for this course of action is that the company has been successful with its current style to date, and “If it's not broken, don't fix it.” Unfortunately, corporate graveyards are littered with companies that had promising starts but, because of this strategy, did not continue to develop.

Sell the Business and Start Over Again . A second strategy is for the entrepreneurial CEO to sell the company when it gets too big to continue with an entrepreneurial style, and then set about building a new company. A variation on this theme is merging with another company to bring in new senior managers. This was the strategy of Steve Jobs, who began to develop a new company, “Next,” after leaving Apple. This means the founder must become a serial entrepreneur. Some founders are capable of doing this, while for others their business was a one-idea opportunity that cannot be repeated.

Bring in a Professional Manager . The third strategy is for the CEO to become chairperson and bring in a professional manager to run the business. When a founder has sufficient self-insight to realize that he or she is really an entrepreneur or “creative person” and not really an executive, this can be an attractive option. The founder can become the Chief Creative Officer (or whatever other title seems appropriate) and turn over operation to others more capable of running an organization. A great example of this is Mark Zuckerberg, founder of Facebook. As Zuckerberg has stated, “I'm not an operator.”8 Some of our clients have also pursued this alternative – including a package delivery business, where the founder realized he was “not CEO material” and hired a CEO to whom he reported (as COO) on an operational level. The founder was, of course, the owner of the company and had to approve the CEO's recommended strategic plan and capital expenditure budgets. He was also disciplined enough not to throw his weight around and overrule the CEO's managerial decisions and actions, even when long-term employees came complaining about something. As a result, he did not undermine his CEO.

A variation on this theme is for the entrepreneur to turn over the CEO position to another individual in the business who is better suited to handle the CEO position. This was done reasonably successfully by Howard Schultz at Starbucks who turned the business over to Orin Smith. However, after Smith retired from Starbucks, the next successor, Jim Donald, came from outside the organization and was later fired, with Schultz returning to the position of CEO. Schultz later stated that Starbucks would never again hire someone in that position from outside the organization who did not deeply understand the company's distinctive culture.

Change Behavior, Skills, and Role . Finally, a CEO may choose to make the personal and managerial style changes necessary to be able to take the organization to its next growth stage successfully. This can also involve a redefinition of the CEO's role. We will provide more detail on the specifics of leadership transitions in the context of leadership development – the subject of Chapter 9.

As described earlier in this chapter, a critical ingredient in the success of such an attempt is the CEO's willingness to live with less control over the organization and its activities. Our experience in coaching CEOs through this transition is that it is possible, but it is not easy.

Cultural factors can play a role in a CEO's willingness to give up a degree of control. In many Asian counties, founders and CEOs (both men and women) are expected to be “strong” individuals, as they typically are. The cultural expectation can lead to a situation where the CEO makes all of the major (and probably many, if not most, of the minor) decisions. This can result in the CEO being the only strong individual in the company, surrounded by “helpers” or people capable of executing tasks and decisions, but not making them. This makes the company totally dependent on the CEO and results in a self-fulfilling situation where the CEO does not expect others to be capable of making decisions and therefore makes them himself or herself. Similar expectations and behavior are also found in various Latin American countries, including Mexico.

Such a situation does not exist only in Asian and Latin American countries; there are many examples of this behavior in the United States and Europe as well. For example, in one medium-sized bank in which we worked as consultants, the founder was an exceptionally strong and dominating individual, and had “trained” other managers not to challenge him. They simply waited for him to make decisions, which they executed. After his retirement, when the next president took over, he had different expectations, and wanted a true managerial team. It took about two years to change this “obedience culture” in which people simply followed orders.

Still another factor that might limit a CEO's willingness to reduce the degree of control exercised over operations is personal experience. Some CEOs have tried to reduce their level of control, but the results have been disappointing. Other CEOs have not tried to do it themselves, but have observed others try with unsuccessful results. These are powerful barriers to changing leadership practices. For example, one CEO, who headed a residential real-estate development company we worked with for many years, had observed only negative results in decentralization of operations. He was therefore very reluctant to follow the same organizational strategy in his firm. He ultimately became convinced that a variation on this was a necessity for his company to facilitate further growth, which, in turn led to positive results.

The CEO's Existential Dilemma: What Do I Do Now?

The CEO who elects to stay with the company and delegate authority to managers now faces another problem. As more than one CEO has asked us, “What do I do now? What is my role?” It is likely to be more than a little discomforting for a person who has been hyperactive and involved in virtually all phases of an organization's activities to find that all tangible roles have been delegated and the only thing left is to be responsible for intangibles. These intangibles include ultimate responsibility for the company's vision, organizational development, and culture management.

The entrepreneurial CEO has become accustomed to being the most versatile person in the orchestra: the individual who could play violin, bass, trombone, drums, or harp. He or she could even be a one-person band. Now, however, the CEO's job is more like that of an orchestra leader. The CEO may not be at all sure that he or she likes or values this new and unfamiliar role. It does not seem to be productive in a concrete way.

In fact, this new or redefined role is indispensable. The CEO needs to focus on ensuring that the company has a clear and well-communicated vision. People need to know where the company is going and, in this sense, the CEO is the person who is responsible for charting and then working with his or her team of senior executives to keep the organization on course. The CEO is responsible for championing a holistic view of the development of the entity to ensure that there is a focus on creating strengths, overcoming limitations, and identifying areas for improvement. This function is known as “strategic organizational development.” Again the CEO is not responsible for the specific organizational development initiatives; he or she is responsible for orchestrating the process. Finally, the CEO needs to focus on ensuring that there is a clear definition of the corporate culture, as well as a method for managing it. In all of these areas, the CEO is responsible for articulating the “what” (is done), but not the “how” (it is being done).

A CEO may not be equipped to handle this new role because he or she does not adequately understand this new role or have the skills required to effectively perform it, or both. Moreover, many CEOs cannot admit weakness by letting anyone guess that they know neither what to do next nor how to do it. Some try to bluff their way through by acting in an executive manner and issuing peremptory edicts. Others try to cope by becoming hyperactive, burying themselves in their work. Often, however, this is merely make-work or busy work, an attempt to fool themselves into believing that they are still doing something valuable. A CEO who does not know what to do next but is afraid to admit it and seek help is setting the stage for future organizational crises.

At this stage of the company's development, the CEO's role involves becoming a strategic leader. The focus needs to be on the future direction of the enterprise and its long-term objectives, versus doing work or managing day-to-day operations. There needs to be a focus on managing the organization's culture and on serving as a role model for others. Each of these aspects of the CEO's new role requires the ability to think abstractly or conceptually about the business rather than merely in terms of concrete products.