But a new challenge has arisen. The relative advances in administrative management, plus the forces operating in the world economy frequently summarized as the “new competitive landscape” (Bettis and Hitt, 1995) have raised the return to entrepreneurial management. Having discussed administrative management above, we briefly review the forces contributing to the new competitive landscape.Globalization, and in particular the decline of trade barriers among nations, has made economies of scale and scope easier to achieve by firms located anywhere while at the same time effectively inviting
competitors from all nations. The advance oftechnologyhas had several effects. One is to raise the pace of competition. Through information technology and e-commerce, pricing power has been eroded. The rapid pace of technological development has shifted the task from management of existing resources to managing knowledge and intangible assets.
And the advances in finance and the deregulation of financial markets have made capital more abundant and available than it once was. Therefore, good ideas are increasingly likely to be funded.
One reason for the heightened pressure of competition is the new modularity of design rules (Clark and Baldwin, 1997). Modularity in design makes possible the independent design of components of a system-based product underneath an overall architecture.
Therefore any component of a system-based product can, in principle, be redesigned for improvement without requiring a redesign of the total product. As a result, competition becomes possible in components, spurring more and more innovation among independent suppliers. At the same time, the systems nature of many technology products creates a premium on design skills by allowing startups to reduce their investment in marketing and (perhaps) management and manufacturing that has historically been required by new companies (Chandler, 1990). Startups in general do better when they can deal with a few customers rather than a mass market (Bruderl, Preisendorfer, and Ziegler, 1992). Systems products and design rules create opportunity for design companies and startups rather than large-scale full line competitors.
A third area of change, less widely noted, is that, at least in the developed world, basic human needs have broadly speaking been met. Food, energy, transport, and clothing (several of the products of Chandler's four companies) are now available in good quality at reasonable prices throughout much of the world. The era of mass customization has begun. The new challenge is ever further refinement of satisfaction of customers by identification of new and advanced needs. For instance, one estimate suggests that there are at least 62 distinct market segments of citizens in the United States, and that finer and finer segmentation is inevitable (Labich, 1994). “Economic advancement may become not so much a matter of producing more with fewer resources, but rather a matter of better matching economic output to a progressively heterogeneous demand” (Fornell, 1995). In this environment the task of creating new products and services becomes much harder, because firms must discover new ways of meeting old needs, as well as create new needs. These require building tomorrow's business today; in short, they require entrepreneurial management.
The alternative explanation for the heightened interest by scholars in entrepreneurial management is rather more prosaic. There has always been competition between firms – even if the nature of that competition has changed in character in recent years. So competition is not new. Instead it is scholars and scholarship.
Scholars and scholarship
It is quite rational for Management scholars to focus their attention on understanding those managerial processes where added value per unit of input is greatest. It seems plausible to argue that large enterprises – the prime subject of Administrative
Management – are the obvious initial focus of attention for Management scholars. Such firms are major influences in key marketplaces and significant providers of jobs and wealth.
To scholars, not only do large firms seem “relevant,” but they also have several other key advantages. They are “credible,” “accessible,” and “easy.” They are credible since they constitute the commanding heights, the “household names” in the economy. Scholars can then bask in the reflected glory of working with/advising such global names.
Such firms are accessible to scholars, often because the firms wish to recruit graduates and so wish to have strong links with academia. Furthermore, their managers are often alumni of top universities, so facilitating access and, of course, the managers themselves will recognize that the research conducted could benefit their own organization. Finally, data and information on these firms is much more likely to be in the public domain, making the scholar's work easier. The final benefit is that, because global enterprises have market power, they are capable of developing and implementing some form of strategy. Performance is more easily related to managerial actions and the stochastic component of performance is likely to be relatively small. Given the greater availability of information, the scholar's task of linking action and performance, over time, is easier the larger is the firm.
For all these reasons it is quite rational for the large global enterprise to be the natural focus of attention of students and scholars of management. But we have argued above that matters have begun to change, primarily because the returns to further investment in Administrative Management have declined. Instead there is now a recognition that the really important and challenging questions are those relating to rapidly growing, but generally smaller, entrepreneurial businesses.
Even the reader prepared to accept the concept that entrepreneurial firms are a legitimate subject for study might argue, with some justification, that the Administrative
Management toolkit has been developed with care and skill. Surely, although the
entrepreneurial firm may differ somewhat from the global firm, the basic issues of good management are common to both? Why throw the baby out with the bath water? Instead, why not modify the lessons of Administrative Management learned from the study of global giants, and apply them to entrepreneurial enterprises?
We reject this argument for the same reasons as those given by Edith Penrose (1959). She famously wrote that a small firm was no more a scaled-down version of a large firm than a caterpillar was a scaled-down version of a butterfly. As the Penrose analogy implies, the two look different, behave differently and, from our current perspective, respond differently to stimuli. In the context of enterprises the analogy implies that if we take out our large firm Administrative Management toolkit and apply it to the entrepreneurial firm there is a major risk of it being inappropriate.
Evidence on the entrepreneurial firm
To demonstrate the inherent dangers of “applying the lessons” of Administrative
Management to the entrepreneurial firm, this section will review key results from a study by David Storey of rapidly growing middle-sized UK companies.
The study identifies all 7,203 independent UK companies with annual sales of between
±5m and ±100m with at least four years of financial records. It then ranks the companies in terms of their sales growth rates over four years and takes as Entrepreneurial those that achieved annual sales growth rates of at least 30 percent per annum over a four-year period. This was 708 companies – or 9.8 percent of the stock. For this reason the Entrepreneurial companies are known as The Ten Percenters. Samples of these Ten Percenters are then analyzed. First, 156 were contacted by telephone in 1996. A second sample of 46 were the subject of face-to-face interviews in 1997. Finally, two years later in 1999, the performance of the 46 was again documented.
To describe the findings the analogy of boats travelling down a river is used. The
research examines the characteristics of those boats which travel quickest down the river – those that grow fastest. It is assumed there are only two ways in which the boat can travel. The first way is for the crew to be strong and coordinated. In this case the valid analogy is with Administrative Management. The firm exhibits the “textbook”
characteristics of tight financial control, modern labor practices, sophisticated distribution and production methods, and the like.
The alternative strategy for moving the boat quickly down the river is for the captain of the boat to identify a fast-moving current. The analogy here is with the marketplace, with the firm being “sucked along” by the demand for its products or services. In some
instances the captain is skillful enough to move the boat out of a slow-flowing stream into a fast-moving stream; in other instances the boat is swept along by the force of the current without the captain having to move streams.
In principle therefore, the research seeks to examine which are the more consistent
influences on the speed at which the boat travels. Is it the skill of the captain in being able to organize and coordinate the crew, or is it the skill of the captain in being able enough, or fortunate enough, to ensure that the boat is in a fast-moving stream?
Key findings
The central finding of the research is that the coordination of the crew appears to be significantly less influential in influencing the speed with which the boat travels, than does the location of the boat within the current. Evidence for this statement is provided below:
1 When asked about the extent to which they perform better than their
competitors, the Ten Percenters were most likely to emphasize a superiority in the areas of “customer service,” “understanding customer needs,” and quality of product or services. Even within the Ten Percenter group those exhibiting spectacular sales growth were much more likely, even than the norm, to view their comparative advantage as in these areas. In contrast, Ten Percenters were much less likely to view their comparative advantage in “physical distribution,”
“lower selling prices,” or “credit availability and terms.” In terms of
Administrative/ Entrepreneurial Management issues the Ten Percenters were
much more likely to point to their Entrepreneurial Management, rather than their Administrative Management, expertise as the source of their comparative
advantage.
2 Almost without exception, Ten Percenters were in markets which were rapidly expanding. Almost none achieved rapid sales growth by a substantial increase in market share. Where they had previously been in slow-growing or contracting markets the entrepreneurial firm had shifted.
3 The new markets in which Ten Percenters were found were generally “niches.”
The markets existed for a variety of reasons, including outsourcing, legislation, special local circumstances, as well as new technologies and changing tastes and social circumstances.
4 However, given their clever market positioning, the key struggle for the firms' leaders is to maintain the entrepreneurial and often freewheeling style of
management that the owner(s) feel underlies their prior growth, with the
requirement to become more formalized as the business develops. In many cases the business founders recognize the need for formality but fear that traveling down this route will douse the fires of entrepreneurship.
The picture that emerges of Administrative Management amongst Ten Percenters is that some are formalized; yet many others are not. Since, by definition, all Ten Percenters are highly successful, Administrative Management skills are neither a necessary nor
sufficient condition for success. Three different Ten Percenters illustrate this diversity when asked about their objectives and accountabilities.
“The objectives and accountabilities of senior managers are ongoing. Any redefinitions happen frequently at informal meetings, normally in the local Indian restaurant on a Friday night.”
“The objectives and accountabilities of senior managers are not written down. This is an entrepreneurial company and I wouldn't have ever recruited anyone who didn't know that their responsibility was to drive the company forward.”
Another Ten Percenter, when asked about defining objectives and accountabilities, said:
“That's an interesting question … I suppose not at all; it's an ongoing process. In a company like ours it doesn't work like that but it goes on all the time, but I suppose we don't do it formally, because everything is moving so fast. If we came to a standstill I suppose we might formalize it then.”
5 Management and performance. Given the face-to-face interviews which took place in 1997 a “management score” for each of the 46 participants was derived based upon 11 Administrative Management criteria including the use of
nonexecutive directors, the tightness of financial control, the scale of staff training, the specification of job descriptions, etc.
In 1999 the performance of these 46 firms was examined. Twenty-nine percent continued to be rapidly growing, 46 percent had slowed their growth but survived, and 25 percent had departed. The average Administrative Management score for the three groups of firms was broadly the same. This suggests that it is difficult to link Administrative Management scores to subsequent performance.
Further evidence
In short, it appears that Administrative Management and Entrepreneurial Management, historically complements, are now substitutes. This substitution effect can be used to explain a number of empirical regularities observed in studies of established firms, of which we selectively highlight three. At the product level,Prusa and Schmitz (1994) show that, in software, sales of a company's first product are almost always larger than any subsequent product. At the industry level,Christensen (1997)demonstrates that established disk drive manufacturers always failed to lead the industry into the next generation of products (from 8 inch to 5.25 inch to 3.5 inch). Across industries,Cooper and Smith (1992)considered the response of 27 established industry leaders in the second third of the twentieth century to innovative technologies. Only 7 of the 27 succeeded in maintaining leadership into the next wave of technology.
Each of these studies has clear strengths and weaknesses. Taken as a whole, however, the results strongly suggest that established firms, grounded in Administrative Management, cannot successfully compete when Entrepreneurial Management is required, and that younger firms need to retain Entrepreneurial Management against the efforts to develop Administrative Management.
Implications for the entrepreneurial firm
At core, the above findings for entrepreneurial firms do not imply that “management doesn't matter,” but rather that what is good management in an Administrative context may not be good management in an Entrepreneurial context.
Does this matter? We think so, and offer three examples. The first is the decisions of venture capital firms on whether or not to invest in fledgling businesses. Certainly in the UK the dominant player in the marketplace, 3I, emphasizes that its choice of investment is strongly influenced by what it believes to be the “quality” of the management.
However, the bulk of 3I's funds are directed toward management buyouts and leveraged buyouts where the qualities sought from a team to continue the development of an existing, well-established, and comparatively large business are much closer to those of Administrative Management. In contrast, the skills of developing the new startup and directing its early growth are likely to demand Entrepreneurial Management talent. Since the bulk of their portfolio is directed towards the MBO market, 31 corporate philosophy is likely to place greater emphasis in its selection upon Administrative, rather than
Entrepreneurial, Management. This means that fledgling firms with growth potential find it difficult to access funds.
The second implication is for what is taught in business schools. The implicit assumption is that graduates from business schools are likely to find employment as managers in large or middle-sized companies. In that case it was appropriate for them to be educated in Administrative Management since the key issue was “control.” The major strategic issue was to ensure that,withinthe company, decisions made were implemented. This contrasts starkly with the issues facing a smaller firm, primarily those of a lack of legitimacy and market power.
The skills required to overcome lack of legitimacy, market power, and other uncertainties outside the firm are rarely taught in business schools. Indeed there is even a debate about whether they can be taught. For example, we observe the fundamental importance of
“niches” in explaining the exceptional performance of entrepreneurial firms. We see that such firms are nearly always “leader driven” and that the leader is an individual who sees it to be their task to have the big picture. Yet, while every business school has courses on financial control and pricing, on HRM, on productions management, there remain
virtually none on “Big Pictures,” on “Niches,” on “Moving the Boat,” or on “Maintaining the Entrepreneurial Fires while growing the business.” The third key implication is for the research community. It is the key research finding that those making the key
decisions in entrepreneurial firms are, in practice, struggling to avoid the suffocating and controlling influences of Administrative Management. They want to avoid meetings, formality, procedures, plans and policies. Indeed many of them established their businesses to get away from such practices. Clearly, most recognize that increasing formality is inevitably associated with larger size, but the key issue for them is to ensure that the tail does not wag the dog. For them the business has experienced rapid growth because of its Entre-preneurialism, and not because of its expertise in Administrative Management.
A central research issue is therefore how this trade-off between Entrepreneurial and Administrative Management is delivered in practice and how it changes as the business grows. The problem is that, by the standards of Administrative Management,
entrepreneurial firms look to be (often very) badly managed. However, we have argued that Administrative Management expertise is not an appropriate criterion on which to assess the management skills of entrepreneurial firms. Alternatively expressed, the Administrative Management toolkit does not currently contain the appropriate equipment for this analysis. It needs the explicit inclusion of the mindset of the Entrepreneur and Entrepreneurial Management.