Control of entrepreneurial decision making

ENTREPRENEURS want to retain control and enjoy full decision-making independence in the firm, but the emerging demands of managerial capabilities, financial requirements, and skills relevant to the growth phase often require a shift of control away from the founder.

There are other reasons for the founders to leave the company they have started after it has developed to a growth stage. One of the main reasons is that they lose control over the firm.

An entrepreneur’s ownership of shares determines influence. The larger the ownership share, the greater influence on and control of the company’s decision making. The top management team and its power to control are more likely to be changed and influenced with an increase in the ownership from outside the organisation.

The board of directors also has strong control over a firm’s management, policies, performance and decisions. Board members from outside the organisation often exercise their control and power to monitor the activities of the firm and are more inclined to change the founding entrepreneurs and top management team to improve and increase organisational performance.

Investors from outside the organisation are more likely to control the board of directors, whereas founders who hold the position of CEO want to be at the helm of the affairs. CEOs with marketing or sales experience are less likely to be replaced than are more science- and technology-oriented CEOs.

Other factors that may contribute to the loss of control and influence on a firm’s strategic decision making, ultimately affecting the founder’s departure, include lesser strategic diversification and industry experience. When entrepreneurs start a business, they have expertise in managing one specific product or market. On the path of growth, companies often decide to expand their business beyond the original product and market, resulting in diversification. Entering into new products and markets also requires specific skills, industry experience and expertise that founding entrepreneurs often lack limited industry experience and a firm’s strategic diversification become liabilities for founders and entrepreneurs as they attempt to retain their position on the top management team. When managers and founders have deep industry experience, however, their team participation may result in a conflict because of their emphasis on previous norms and experiences.

Less functional diversity is a critical factor for the replacement of a founding team with new managers. The more the teams are diversified functionally, the more efficient they are in implementing the outgrown developments of the organisation. The functional diversity of the teams can also be counterbalanced by the intrapersonal diversity in individual experience. When organisations lack such individuals and teams, there is a greater need to bring in new managers with more functionally diversified experience, capabilities, skills, and expertise to replace the existing teams and founders

Managerial capacity issues

In order to reduce the effect of a managerial capacity problem, different management techniques are required depending on whether the firms are slow-, normal-, or rapid-growth firms. The firm’s growth ability refers to the extent to which it is capable of adding managerial capacity for the growth administration of the firm. This ability of the firm addresses the managerial capacity problem, which is not limited to the partnerships with other firms or the recruitment of new employees but is a more complex process accomplished through employee development, training, clearly elaborated mission, and vision statements.

Firms pursuing a high-growth strategy manage and incorporate sufficient managerial resources to reduce the effect of a managerial capacity problem. This can be achieved through organisation-wide commitment and growth motivation. A shortage of core competence and skilled workers and managers is one of the major problems faced by entrepreneurs. Continuous requirement and selection of people with optimal fit to the job requirements is another challenge during the growth phase.

The recruitment of managers with broader social networks can enable the firm to fulfil requirements of adverse employee selection and recruitment by referring employees known to such managers. Partnerships and financial incentives aligning the employee’s interests with the firm’s interests can help an organisation mitigate growing pains of these kinds.

Competition and External Environment

Smaller firms usually grow more quickly than larger ones. The factors that affect and restrict firms’ growth are both internal and external. Irrespective of the resources and strategic orientation of a firm, its growth and performance are affected by its business environment.

A hostile business environment has negative consequences on growth of the firm. The competition caused by new products in the market and new competitors can potentially affect the growth of the firm. They also asserted similar effects on growth by integrating the firm’s resources.

Competition is one of the major causes that hinders the growth of a firm, ultimately resulting in the failure of the company. Failure in planning, managing, and allocating resources can create problems for the firm in these areas empirically showed some of the external factors that become restraints on the growth of the firm. These include unfair competition, compliance cost for regulations, barriers to obtaining external financing, location of the business, and tax burden on the firms that entrepreneurs are unable to handle. Corruption is a main source of increasing unfair competition. Compliance cost to regulations and increased tax rates expand the costs for the enterprise while limiting its growth. Loan policies, complex terms and conditions, and collateral requirements discourage firms from obtaining loans from banks, which are the main source of external financing, some of external growth barriers, include scarcity of qualified labour, inappropriate finance, venture capitalist availability, and delays in acquiring capital and intense competition. The importance of competitive advantage can be achieved through the specialised skills of the founders/ owner–managers for solving the critical challenges of the enterprise.

Competitive advantage can be attained through the allocation of resources in pursuit of growth opportunities and through capturing the niche market as part of a firm’s competitive strategy. Entrepreneurs and the top management team should identify the capabilities they require for their business as well as use their core competence to exploit and build competitive advantage, competition and human capital have important roles in the growth of an enterprise. Skills and knowledge specific to the company are competitive advantages of the entrepreneur, which are hard to imitate. Growth rates are affected by such variables as access to resources, adjustment capacity, proximity to customers, and growth motivation. Growth capacity can be affected positively or negatively depending on the changes in the external business environment of the company, for example, a large unexpected order from a big firm, the bankruptcy of a competitor, or other changes in the external environment. Sometimes these changes are beyond the control of management; however, entrepreneurs must proactively and reactively build, evaluate strategies, and make decisions to mitigate the effect of such changes. These decisions can be augmented from the information collected through close proximity with the clients. On the basis of this information, the firm can access and obtain the required resources. Management actions can mitigate the effects of these growing pains…to be continued ◆ Dr Keen Mhlanga is an Investment Advisor with high skills in Finance. He is the Executive Chairman of FinKing Financial Advisory. Send your feedback to keenmhlanga@gmail.com , contact him on 0777597526.