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HOW TO UNDERSTAND THE WAY A BUSINESS WORKS

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There is probably no single best organizational structure for all types of ventures in all situations. Rather, the entrepreneur must find the best fit, given the existing contextual factors (environment, technology, market), design factors (strategy, and models), and structural factors (complexity, formalization).

A misalignment or misfit among these factors could result in an organizational structure that does not suit that particular market the company wishes to serve. For example, if a firm chose a low-cost strategy, but did not implement tight control systems, minimize overhead, and focus on achieving economics of scale, it will be unlikely to succeed.

 

Firms in different industries tend to also differ in different administrative mechanisms and structures. Several studies have found that the design of the organizational structure – how business activities are grouped, divided, and coordinated – is a critical factor in business performance and that a growing entrepreneurial firm must continually modify its structure to meet the demands of growth. These findings reinforce the argument on the importance of conducting thorough industry and market analyses to understand the external conditions that will affect the business.

 

Ambiguity is a significant force in most entrepreneurial ventures. It derives from conflicting constituencies with different goals and need, and from lack of immediate control over resources. As a result, ambiguity often manifests itself in pressures on the new business for legitimacy and commitment. Legitimacy is validation of the business by external constituencies such as suppliers, customers, distributors, and others in the value chain. Commitment is the binding of an individual to the goals of the business. Commitment and legitimacy are interdependent: in particular, legitimacy cannot exist without commitment.

 

The success of an entrepreneurial organization is a function of its ability to secure commitment and legitimacy while operating in an ambiguous context. Suppliers and others in the value chain expect the firm to demonstrate legitimacy through formalized systems and controls, something that entrepreneurial ventures in the earliest stages typically don’t have because the dynamic environment in which they operate predisposes them to develop structures that are flexible and loosely defined with informal and minimal management systems.

 

Information systems technology has facilitated new kinds of structures that enable new businesses to compete more effectively in rapidly changing environments. The move from centralized structures to more decentralized structures is highly compatible with the mindset of the entrepreneur.

 

Because of limited resources and a creative and opportunistic mindset, entrepreneurs are naturals at improvisation – they are the jazz musicians of the business world – and can find ways to work around even the most rigid structure of a traditional bricks-and-mortar business model. Because entrepreneurial organizations reflect a fine balance between structure and chaos, they are innovative and creative. In that environment, entrepreneurs give free rein to new ideas and space to allow them to grow.

 

Entrepreneurs in dynamic environments need to retain internally what the company does best. In other words, focus on its core competencies until the company has established itself in the market. Then begin to look outside core competencies for new opportunities. Entrepreneurs also need to look for ways to keep overhead (non-revenue-producing plant and equipment) to a minimum. Outsourcing will facilitate this

Bernard TaiwoBernard Taiwo
Bernard Taiwo
I am Management strategist, Editor and Publisher.

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