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.
Identifying Business Processes
One of the most eye-opening experiences an entrepreneur can have is identifying all the processes (activities, tasks, etc,) that occur in the business. Even more revealing of how the business works is a process map or flow chart that traces how information flows through the business. The reason for this is that designing the way the business will work is often not the entrepreneur’s area of expertise. Entrepreneurs are usually good at generating business ideas, testing concepts, and gathering resources to give the new business traction. Designing the operations and organization of the business is not always within their competence. Nevertheless, considering how the business will operate is crucial to figuring out how many people to hire, how much equipment to purchase, and what kind of facility will be needed.
To create a map of the business processes, take an imaginary tour of the business during a single day, listing all the tasks, people, equipment, supplies, and space required to run the business. For example, if customers entered the door of this business, what would they see? Who does the work in this business? Where do they work? What do they need to do the work? What information is being generated? Where does that information go?
The information gathered during that “fantasy tour” will also be useful when figuring expenses for financial projections later on and when determining what kind of personnel need to be hired to perform those tasks.
Another benefit of understanding how the business works is that such familiarity makes it easier to determine whether to employ a traditional organizational structure or a virtual organizational structure.
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