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STANFORD GRADUATE SCHOOL OF BUSINESS  — Young companies that adopt structured systems to run their operations in their early years grow three times faster than competitors and have a lower rate of CEO turnover, according to an award-winning research paper.

“Some entrepreneurs mistakenly view management systems as significant inhibitors to creativity and growth” say the scholars, and delay adopting systems such as information-based routines that can maintain or alter patterns of organizational activities. “Failure by managers to recognize the value of systems when they achieve rapid growth in their early years will increase the likelihood that part of that growth and scaling will not be  sustainable.” 

Antonio Davila, professor of entrepreneurship at University of Navarra in Barcelona; George Foster, The Konosuke Matsushita Professor of Management; and Ning Jia, PhD ’07, and associate professor of accounting at Tsinghua University in Beijing coauthored the paper after studying 78 California companies, many of them venture capital-backed.

The work, “Building Sustainable High-Growth Startup Companies: Management Systems as an Accelerator,” is the co-winner of the 2011 Accenture Award presented by the California Management Review, recognizing a paper that “has made the most important contribution to improving the practice of management.”

At their inception, many young companies can be run successfully by a founder/CEO who wears multiple hats and oversees all aspects of the operation. “As the company grows, however, this management style can be deadly,” say the researchers. The manager of one company in the study sample told the researchers: “We had management by personality, and it became evident that that wouldn’t scale. We figure our personalities can go through one floor and two walls. After that, management by personality doesn’t work anymore.’”

For most companies, the change needs to be made when the firm includes somewhere between 50 and 100 employees. They found that firms with “professional investors,” such as venture capitalists, tend to be more successful because the investors force the transition to a more formal management style.

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Also on Stanford Knowledgebase:

  1. Formal Management Systems Help Startups Succeed
  2. Founders of Startups May Develop Itchy Feet
  3. When (Organizational) Change Hurts: Startups Need to “Think Employees” from the Get-Go

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