WHY DOES THE PROMOTER TRANSFERS THE MANAGEMENT INTO THE HANDS OF PROFESSIONALS ONCE THE ORGANIZATION GROWS TO A LARGE SIZE

WHAT IS THE OBJECTIVE OF THE PROMOTER FOR HIRING PROFESSIONALS TO RUN THE COMPANY AND HANDOVER THE MANAGEMENT TO RUN THE DAY TO DAY AFFAIRS

For running any organization and growing it over a period of time we need customers, finance, business ideas and management time and different types of skill sets.

For any human being it is practically not possible to have all skill sets and the time to deploy those skill sets continuously with the same intensity and in fact more effectiveness as the time passes and the business that he started grows with time.

So what alternative he has if he has a drive to make his business still keep on growing during his life time and even for generations after that?

The only way to create a perpetually existing and BUILT TO LAST company to create a strong Business Code of Conduct , A Vision for the company and find a professional management who not only has the ability to run and the grow the company in the best possible manner but also find their successors who would continue to do that.

Some of the examples of such companies are Disney, 3M, Johnson & Johnson, Wal Mart, Procter & Gamble, Gillette, Abbott etc.

All these companies started small and the dreams of the promoters to see their company live many more centuries than themselves made them passing the management to professionals with a strict guiding principle.

If we look at the evolution of the business from the start to fully grown stage, we can divide it into five stages.

Stage I: Existence

In this stage the main problems of the business are obtaining customers and delivering the product or service contracted for. Among the key questions are the following:

a)       Can we get enough customers, deliver our products, and provide services well enough to become a viable business?

b)       Can we expand from that one key customer or pilot production process to a much broader sales base?

c)       Do we have enough money to cover the considerable cash demands of this start-up phase?

The organization is a simple one—

         I.            The owner does everything and directly supervises subordinates, who should be of at least average competence. Systems and formal planning are minimal to nonexistent.

        II.            The company’s strategy is simply to remain alive.

      III.            The owner is the business, performs all the important tasks.

      IV.            He is the major supplier of energy, direction, and, with relatives and friends, capital.

Companies in the Existence Stage range from newly started restaurants and retail stores to high-technology manufacturers that have yet to stabilize either production or product quality. Many such companies never gain sufficient customer acceptance or product capability to become viable. In these cases, the owners close the business when the start-up capital runs out and, if they’re lucky, sell the business for its asset value. In some cases, the owners cannot accept the demands the business places in their time, finances, and energy, and they quit. Those companies that remain in business become Stage II enterprises.

Stage II: Survival

In reaching this stage, the business has demonstrated that it is a workable business entity. It has enough customers and satisfies them sufficiently with its products or services to keep them. The key problem thus shifts from mere existence to the relationship between revenues and expenses. The main issues are as follows:

a)       In the short run, can we generate enough cash to break even?

b)       Can we cover the repair or replacement of our capital assets as they wear out?

c)       Can we, at a minimum, generate enough cash flow to stay in business and to finance growth to a size that is sufficiently large, given our industry and market niche, to earn an economic return on our assets and labor?

The organization is still simple.

                        

         I.The company may have a limited number of employees supervised by a sales manager or a general foreman.

        II.Neither of them makes major decisions independently, but instead carries out the rather well-defined orders of the owner.

      III.Systems development is minimal.

      IV.Formal planning is, at best, cash forecasting.

       V.The major goal is still survival, and the owner is still synonymous with the business.

In the Survival Stage, the enterprise may grow in size and profitability and move on to Stage III.

Or it may, as many companies do, remain at the Survival Stage for some time, earning marginal returns on invested time and capital, and eventually go out of business when the owner gives up or retires. The “mom and pop” stores are in this category, as are manufacturing businesses that cannot get their product or process sold as planned. Some of these marginal businesses have developed enough economic viability to ultimately be sold, usually at a slight loss. Or they may fail completely and drop from sight.

Stage III: Success

The decision facing owners at this stage is whether to exploit the company’s accomplishments and expand or keep the company stable and profitable, providing a base for alternative owner activities. Thus, a key issue is whether to use the company as a platform for growth—a sub stage III-G company—or as a means of support for the owners as they completely or partially disengage from the company—making it a sub stage III-D company. Behind the disengagement might be a wish to start up new enterprises, run for political office, or simply to pursue hobbies and other outside interests while maintaining the business more or less in the status quo.

Sub stage III-D. In the Success-Disengagement sub stage,

         I.The company has attained true economic health, has sufficient size and product market penetration to ensure economic success, and earns average or above-average profits.

        II.The company can stay at this stage indefinitely; provided environmental change does not destroy its market niche or ineffective management reduce its competitive abilities.

      III.Organizationally, the company has grown large enough to, in many cases; require functional managers to take over certain duties performed by the owner.

      IV.The managers should be competent but need not be of the highest caliber, since their upward potential is limited by the corporate goals.

       V.Cash is plentiful and the main concern is to avoid a cash drain in prosperous periods to the detriment of the company’s ability to withstand the inevitable rough times.

      VI.In addition, the first professional staff members come on board, usually a controller in the office and perhaps a production scheduler in the plant. Basic financial, marketing, and production systems are in place. Planning in the form of operational budgets supports functional delegation. The owner and, to a lesser extent, the company’s managers, should be monitoring a strategy to, essentially, maintain the status quo.

    VII.As the business matures, it and the owner increasingly move apart, to some extent because of the owner’s activities elsewhere and to some extent because of the presence of other managers. Many companies continue for long periods in the Success-Disengagement sub stage. The product-market niche of some does not permit growth; this is the case for many service businesses in small or medium-sized, slowly growing communities and for franchise holders with limited territories.

   VIII.Other owners actually choose this route; if the company can continue to adapt to environmental changes, it can continue as is, be sold or merged at a profit, or subsequently be stimulated into growth. For franchise holders, this last option would necessitate the purchase of other franchises.

Sub stage III-G. In the Success-Growth sub stage,

         I.The owner consolidates the company and marshals resources for growth. The owner takes the cash and the established borrowing power of the company and risks it all in financing growth.

        II.The second important task is to keep it profitable which requires hiring managers with an eye to the company’s future rather than its current condition.

      III.Systems should also be installed with attention to forthcoming needs.

      IV.Operational planning is, as in sub stage III-D, in the form of budgets, but strategic planning is extensive and deeply involves the owner.

       V.The owner is thus far more active in all phases of the company’s affairs than in the disengagement aspect of this phase.

If it is successful, the III-G company proceeds into Stage IV. Indeed, III-G is often the first attempt at growing before commitment to a growth strategy. If the III-G company is unsuccessful, the causes may be detected in time for the company to shift to III-D. If not, retrenchment to the Survival Stage may be possible prior to bankruptcy or a distress sale.

- Stage IV: Take off

In this stage the key problems are how to grow rapidly and how to finance that growth. The most important questions, then, are in the following areas:

a)Can the owner delegate responsibility to others to improve the managerial effectiveness of a fast growing and increasingly complex enterprise?

b)Further, will the action be true delegation with controls on performance and a willingness to see mistakes made, or will it be abdication, as is so often the case?

c)Will there be enough to satisfy the great demands growth brings (often requiring a willingness on the owner’s part to tolerate a high debt-equity ratio) and a cash flow that is not eroded by inadequate expense controls or ill-advised investments brought about by owner impatience?

d)The organization is decentralized and, at least in part, divisional zed—usually in either sales or production. The key managers must be very competent to handle a growing and complex business environment.

e)The systems, strained by growth, are becoming more refined and extensive.

f)Both operational and strategic planning is being done and involves specific managers.

g)The owner and the business have become reasonably separate, yet the company is still dominated by both the owner’s presence and stock control.

This is a pivotal period in a company’s life and following things may happen

         I.If the owner rises to the challenges of a growing company, both financially and managerially, it can become a big business.

        II.If not, it can usually be sold—at a profit—provided the owner recognizes his or her limitations soon enough.

      III.Too often, those who bring the business to the Success Stage are unsuccessful in Stage IV, either because they try to grow too fast and run out of cash (the owner falls victim to the omnipotence syndrome), or are unable to delegate effectively enough to make the company work (the omniscience syndrome).

      IV.It is, of course, possible for the company to traverse this high-growth stage without the original management.

       V.Often the entrepreneur who founded the company and brought it to the Success Stage is replaced either voluntarily or involuntarily by the company’s investors or creditors.

      VI.If the company fails to make the big time, it may be able to retrench and continue as a successful and substantial company at a state of equilibrium.

  

Stage V: Resource Maturity

The greatest concerns of a company entering this stage are, first, to consolidate and control the financial gains brought on by rapid growth and, second, to retain the advantages of small size, including flexibility of response and the entrepreneurial spirit. The corporation must expand the management force fast enough to eliminate the inefficiencies that growth can produce and professionalize the company by use of such tools as budgets, strategic planning, management by objectives, and standard cost systems—and do this without stifling its entrepreneurial qualities.

A company in Stage V has the staff and financial resources to engage in detailed operational and strategic planning.

         I.The management is decentralized, adequately staffed, and experienced.

        II.And systems are extensive and well developed.

      III.The owner and the business are quite separate, both financially and operationally.

      IV.The company has now arrived.

       V.It has the advantages of size, financial resources, and managerial talent.

      VI.If it can preserve its entrepreneurial spirit, it will be a formidable force in the market.

    VII.Growth environmental change first.

Key Management Factors

Several factors, which change in importance as the business grows and develops, are prominent in determining ultimate success or failure.

1. Financial resources, including cash and borrowing power.

2. Personnel resources, relating to numbers, depth, and quality of people, particularly at the management and staff levels.

3. Systems resources, in terms of the degree of sophistication of both information and planning and control systems.

4. Business resources, including customer relations, market share, supplier relations, manufacturing and distribution processes, technology and reputation, all of which give the company a position in its industry and market.

The four factors that relate to the owner are as follows:

1. Owner’s goals for himself or herself and for the business.

2. Owner’s operational abilities in doing important jobs such as marketing, inventing, producing, and managing distribution.

3. Owner’s managerial ability and willingness to delegate responsibility and to manage the activities of others.

4. Owner’s strategic abilities for looking beyond the present and matching the strengths and weaknesses of the company with his or her goals.