Entrepreneurship And Organizational Change In Growing Firms

Description
Entrepreneurship And Organizational Change In Growing Firms

Entrepreneurship and Organizational Change in Growing Firms
by Ulrich Witt and Hagen Worch
*) §)
Max Planck Institute of Economic, Jena, Germany
*)
Eawag - Swiss Federal Institute of Aquatic Science and Technology, Dübendorf, Switzerland
§)
corresponding author: [email protected]
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I. Introduction
Systematic transformations of firm organizations are frequent and can have many causes. Among
them are, on the one side, deliberately initiated transformations following a strategy change, e.g.,
the implementation of internal diversification strategies (Kazanjian and Drazin 1987) or the
adaptation to new technological competencies (Teece, Pisano and Shuen 1997). On the other side,
organizational change may be driven by developments that are either not under managerial control
like changes of the firms’ environment, or that are unintended side effects of the strategies that have
been chosen. In this paper the focus is on one of the most frequent causes of systematic
organizational change, viz. the transformations triggered by the growth of the firm organization. As
the outcome of the firm’s hiring activities, an expanding staff is always intended and usually seen
as a sign of a successful business. However, the consequences which the expansion has for the
organization are often not, or not fully, anticipated and, in this sense, unintended. Where they result
in irritations, frictions, and losses of organizational coherence and coordination they are even
unwelcome.
Sustained organizational growth over a longer period of time has therefore been identified
quite early as source of a systematically developing adaptation pressure to which firms respond
differently moving down along different developmental paths (Penrose 1959, Greiner 1972, Brown
and Eisenhardt 1997, Aldrich 1999, Rathe and Witt 2001, Siggelkow 2002). Adaptation pressure is
typically building up latently till it takes on critical forms. The critical phases occur when the
organization size arrives at certain thresholds. Efforts are often triggered then to reconfigure the
firm’s resources in one way or other. A first threshold seems to be a size of about 80 firm members.
At this size, Sapienza and Gupta (1994) observed a high frequency of having a first round of IPO;
Gulati and Higgins (2003) found a frequent entering into strategic alliances; Graeber and Eisenhardt
(2004) identified a peak in the probability of being acquired. Earlier literature also described signs
of a first growth crisis occurring at that firm size but, in addition, signs of a second crisis at about
a size of 300 to 400 firm members (Clifford 1973; Albach, Bock and Warnke 1984; 1985, pp.324)
Pointing to rather regular threshold patterns, these findings suggest a systematic, growth-
driven process of organizational development. Some attempts have been made to interpret the
development as a life-cycle process with characteristic, successive stages that firms run through as
time elapses (Greiner 1972; Kazanjian and Drazin 1987; Van de Ven and Poole 1995). It is clear,
though, that for firms there is not only an alternative between following a uniform progression of
stages or exit as the life-cycle metaphor would suggest. Firm organizations can, and in the majority
of cases do, stagnate in their size for long periods of time or even over all their life span.
Furthermore, if they indeed grow so that critical phases emerge, the ways they respond to a growth
crisis are far from following a uniform progression pattern. Accordingly, there seem to be a whole
set of typical developmental paths a firm organization can run through that differ in both the number,
the sequence, and the timing of stages attained.
From a logic point of view, a developmental path originates from the entrepreneurial act of
founding a business venture and hiring staff. While such an act always aims at realizing in a joint
effort an envisioned business opportunity that cannot be realized by ordinary market transactions
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Witt (1998), Shane (2000), Eckardt and Shane (2003), Alvarez and Barney (2005).
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One of the reasons for choosing employment contracts and the organizational form of the firm may
be the inability to pre-specify what exactly the deliverables under the contract are (see Coase 1992).
Another reason may be that the pursuit of the business opportunity requires commitment to multi-
party cooperation that is unlikely to be feasible in arm’s length market transactions (Moran and
Ghoshal 1999).
Following Penrose (1959, p. 32), entrepreneurial services are interpreted here as
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being distinct from “...managerial services which relate to the execution of entrepreneurial ideas and
alone, the way the joint effort is elicited in the firm organization can differ significantly. Of the
many external and internal factors determining the further fate of a firm, a most important internal
one is the entrepreneurial governance regime, i.e. the way of coordinating and motivating the firm
members (Witt 2000, 2007). With its style of leadership, the mix of incentives and controls, and its
impact on the organizational culture that emerges, it determines the degree of coherence and has an
impact on the performance of the newly founded firm.
The question of whether and when, in case of a successful growth of the firm, the initially
chosen entrepreneurial governance regime can turn ineffectual, trigger a growth crisis, and thus
initiate a developmental path on which the firm organization is transformed is the topic of this paper.
It is essential, we will argue, for understanding the relationships between entrepreneurial regimes
of coordinating and motivating on the one hand and the development paths a firm organization can
take. Backing our hypotheses by case study evidence, we will show why and how the growth of the
firm organization can challenge the initial entrepreneurial regime, how this manifests itself in a
crisis, and what organizational transformations, expressed as transitions between alternative
entrepreneurial regimes, typically follow. We will argue that the forces that drive the transitions
emerge in a self-organizing way and therefore often lead to sudden, and surprising changes.

The paper proceeds as follows. Section II outlines the entrepreneurial background of our
approach to governance in firm organizations. Section III presents case study evidence on
organizational crises and transformations. Section IV describes the possible developmental paths
our theory predicts and elaborates the model of the growth-driven transitions between the
entrepreneurial regimes. Section V offers the conclusions.
II. Entrepreneurial Regimes of Coordinating and Motivating Firm Members
Firm organizations are founded and the corresponding resources are acquired on the basis of
employment contracts when entrepreneurial agents envision business opportunities which they
cannot seize by ordinary market transactions alone. However, envisioning business opportunities
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is one thing. Quite another thing is to develop such imaginings into a mental model of how to do the
business. Such a mental model is needed to guide the design of the firm organization to be set up
and to structure the corporate activities considered suitable to seize the business opportunity. For
sake of brevity, these more or less complex mental models will be called entrepreneurial business
conceptions here. Though they may inspire detailed business plans and strategies, entrepreneurial
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proposals and to the supervision of existing operations.” Hence, both entrepreneurial and managerial
services may be provided by one and the same person, and entrepreneurial services may be provided
by both firm owners (residual claimants) and paid managers.
business conceptions are not themselves plans or strategies. They rather are a cognitive framework
that provides the orientation necessary not to get lost in the details and to assess, and account for,
experience.
When, in the pursuit of their business conception, entrepreneurial agents hire staff, the newly
hired employees do not know of the underlying business conception. To take advantage of their
dispersed knowledge and skills, their activities therefore need to be coordinated on the pursuit of
the entrepreneurial business conception. Furthermore, the employees must be motivated to undertake
the physical and mental efforts necessary to use their knowledge and skills for this goal. The way
in which these two task are tackled jointly make up the entrepreneurial governance regime by which
the firm organization is run. Concerning the coordination device there are several options. A
business can be run by giving detailed directives to the employees, who then do not have to know
anything about the entrepreneurial business conception. Alternatively, the employees can be
explained the function assigned to them according to the business conception and be given discretion
as to how best to pursue it. This, of course, requires to communicate the entrepreneurial business
conception to the employees in the first place and to induce them to adopt it as a cognitive frame on
their work.
Concerning the motivational side, the options are constrained by the kind of work motivation
the chosen coordination device evokes. If employees are given directives on each and everything,
this leaves little, if any, room for them to develop task identification and commitment, creativity,
and achievement motivation. Under such a coordination scheme extrinsic work motivation
dominates (William and Yang 1999). This means that doing their work well is not felt intrinsically
rewarding by the employees. Work effort is elicited primarily by extrinsic (mostly material) rewards,
and the effort is reduced where this is possible without reducing the extrinsic rewards. Hence, it is
necessary to make the extrinsic rewards contingent on a tight monitoring of the employees’
performance in carrying out the given directives. Because of principal-agent problems, even this
may, however, not be sufficient to induce the employees to fully perform.
An entrepreneurial governance regime characterized by detailed directives as coordination
device and tight controls combined with only extrinsic rewards as motivational device may be called
a “monitoring regime” (cp. Alchian and Demsetz 1972, Williamson 1979, Holmström and Tirle
1989). It binds the more time and effort of the entrepreneurial agents to exert control on the
employees the larger the number of employees grows. With a growing organization size a creeping
loss of control of the individual employees’ performance is thus inevitable. Even though this may
not be noticed immediately by all employees, some of them may reduce their work effort and
experience no sanctions. While not noted by the entrepreneur, under the conditions of social learning
processes this is likely to be observed by their fellow employees. Given their extrinsic work
motivation they are likely also reduce their effort under these conditions so that in a band wagon
effect the entire firm organization eventually operates on a low work effort level. The process can
only be reversed by the entrepreneur by appointing managers and by delegating the monitoring tasks
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to them, keeping own control only of the managers. By the same logic, a growing monitoring regime
tends to develop into an increasingly more hierarchical structure in which inefficiencies and
administrative costs can increase more than proportionately (“managerial diseconomies of scale”,
Mueller 1972).
An alternative motivational device is possible, if the employees can be induced to adopt the
entrepreneurial business conception, exert own discretion on the functions assigned to them, and
take on outcome responsibility. In this way it is possible to stimulate their task identification and
commitment, creativity, and achievement motivation which, in turn, lead to a high degree of intrinsic
work motivation (Deci and Ryan 1985). Moreover, if the agents perceive themselves and others as
contributing with their work effort to a common goal – as they do if the entrepreneurial business
conception is socially shared in the firm organization – this can enhance intrinsic work motivation
further (Osterloh and Frey 2000). Combined with a balanced ratio of intrinsic and extrinsic rewards,
controls can be less tight, focusing on an outcome assessment at large. However, to induce the
employees to indeed adopt the entrepreneurial business conception – the prerequisite of this
motivational device – is no trivial task. To recognize where the problems lie, a short digression into
the cognitive and motivational underpinnings of human behavior is necessary.
A feature of human “bounded rationality” is the limited, and therefore highly selective,
information processing and memorizing capacity. What pieces of information are selected is
determined by discriminative attention processes which, in turn, hinge on spontaneously produced
cognitive cues and interpretative frames (see, e.g., Anderson 2000, Chap. 3). At any point of time,
only one cognitive frame is in operation. This means that, while in use, such a frame cannot at the
same time be made the object of cognitive reflection. (Different cognitive tasks can, of course, be
pursued on the basis of different frames at different times.) Furthermore, at any point in time, the
prevailing cognitive frame determines what information is interpreted and how. Hence, information
about alternative courses of action not fitting the cognitive frame is simply not considered unless
one is forced to pay attention to it by strong outside stimuli.
As explained above, an entrepreneurial business conception is a cognitive framework that
provides general orientation with respect to the business as conceived to be done by the
entrepreneurial agent. Once in operation as a cognitive frame, a business conception constrains the
interpretation of, and reflection on, alternatives relating to the business so that possible course of
action gain no attention that would be considered, if another cognitive frame were in use. Since all
firm member operate on the basis of an individual cognitive frame, their knowledge, skills, and
efforts would be concerted most effectively, if they all were to share the entrepreneurial business
conception as their own cognitive frame. Their task perception would be framed such that their
attention is directed more to solving problems in the interest of the firm’s goals than to figuring out
alternatives serving other interests. How can this be accomplished?
The formation of individual cognitive frames is a complex, socially contingent process in
which communication with, and observation of, other agents play an important role (Bandura 1986,
Chap. 2). The more frequent the face-to-face communication between agents is, the more likely they
are to develop collectively shared interpretation patterns. (These cognitive commonalities result not
least from the fact that, in intensely communicating groups, the agents’ selective information
processing is occupied with much the same topics.) Accordingly, for the formation of the
interpretative frame the employees bring to bear in pursuing their function, face-to-face
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communication with the entrepreneurial agent who tries to convey her or his business conception
is one important influence, but not the only one. Having formal power over the firm organization,
an entrepreneurial agent may be able to determine the structure and the agenda of formal
communications, but not necessarily the agenda of the informal communication spontaneously
taking place between employees. At that level, an attempt to make the employees adopt the
entrepreneurial business conception as their own interpretative frame may rival with other cognitive
influences.
Observational learning within the firm organization can challenge the entrepreneurial
interests also at the motivational level. Employees tend to pay attention to the motivational attitudes
of others. In particular the motivational attitudes of the most influential firm members can serve the
others as a model of behavior. A model of behavior tends to be imitated and may thus become a
socially shared model and take on a normative character (Bandura 1986, Chap.7). Models of
behavior that emphasize task commitment, cooperative problem solving, fairness, and frankness are
supportive to intrinsic work motivation and keep intra-organizational frictions and individual
frustrations down (Mullen and Goethals 1987, Paulus 1989). From the entrepreneurial point of view,
they would therefore be highly desirable. However, at the informal level at which observational
learning takes place it is difficult to control what model of behavior actually emerges. Moreover,
when a desirable model of behavior indeed prevails this may always be challenged by some firm
members who engage in behavior undermining commitment and cooperation in an opportunistic
fashion. Such an event is likely to attract considerable attention and may make other firm members
aware of action alternatives their cognitive frame had prevented them from considering before
(Levine 1989). If such deviating behavior is observed as being successful it may undermine the
intrinsic work motivation and invite the imitation of opportunistic attitudes.
Hence, in order to make their business conception a shared interpretative frame within the
firm organization, entrepreneurial agents have to win in the informal face-to-face interactions over
rivaling cognitive influences and undesirable models of behavior and persuade their employees to
follow their conception and a desirable model of behavior. This is likely to be an enduring wrestling
for “cognitive leadership” (Witt 1998) in which particular social skills like communicativeness,
persuasiveness, and persistence, as well as fairness, credibility, appreciativeness are important. The
attractiveness of a business conceptions also plays a role. If a business conception is too complex
or obviously unsuited, it will be difficult to make it a shared frame. The same holds if it frustrates
intrinsic motivation, e.g. by overdrawn claims with regard to working abilities, or if it grossly
ignores extrinsic motivational features of the employees like remuneration, qualification
enhancement, and possible career promotions.
An entrepreneurial governance regime characterized by the entrepreneurial business
conception as the socially shared cognitive frame and a strongly intrinsically motivated organization
may be called a cognitive leadership regime – pointing to what it presupposes. Where it could be
implemented in a newly founded firm, it is likely to increasingly challenge the persuasive
entrepreneurial skills when the firm grows. By necessity, the frequency of informal face-to-face
interactions between the entrepreneurial agent and the other firm members on average then declines.
The theory would predict that such a trend increasingly deprives the entrepreneurial agent of her or
his influence on interpretative frames of the employees and their models of behavior and sooner or
later can become critical for the motivational basis of a cognitive leadership regime.
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The former serves to identify factors that may be causal to the investigated
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phenomenon in one case. The latter compares causal factors across cases and tries to distinguish
It is one of the robust features of human behavior that the probability for switching from an
extrinsic motivation to an intrinsic one has in general been found to be significantly smaller than the
opposite switching probability (Deci, Koestner, and Ryan 1999). This asymmetry in changing one’s
motivation is a crucial constraint on the developmental paths a firm organization can take. It implies
among other things that, once the strong intrinsic work motivation existing under a cognitive
leadership regime is crowded out by an extrinsic one, this is unlikely to be reversible. The
implications of this significant asymmetry will be discussed further below.
The specific combinations of coordination and motivation devices that make up the two types
of entrepreneurial governance regimes is summarized in the cross tabulation of Figure 1. The
combinations in the lower left cell and the upper right cell do not allow coherent governance
regimes. Running a business by permanently giving directives to the employees does not stimulate
their task identification, creativity, achievement motivation, and an intrinsic commitment to their
functions. Likewise, granting discretion in pursuing their functions would contradict tight action
controls. Moreover, given the just mentioned asymmetry, the granted discretion would tempt
extrinsically motivated employees to reduce effort rather than to become intrinsically motivated.
Even if these combinations were attempted, they would therefore not result in stable organizational
states.
-------------------------------------
Figure 1 about here
-------------------------------------
What is always possible, of course, are states of the firm organization in which
entrepreneurial agents fail to establish any working governance regime. Be it that they are unable
or negligent of sufficiently enforcing directives and controls, or that they are negligent of, or lose
out to rivaling influences in, wrestling for cognitive leadership. In both cases, the resulting lack of
coordination, commitment, and coherence within the firm tends to generate a state of organizational
disarray accompanied by an inferior performance and declining competitiveness of the firm.
III. Entrepreneurial Regimes and Growth Crises – Evidence from Business History
The question which the discussion of the entrepreneurial governance regimes raises is what happens
in an organization that is run on such a basis in case of a successful growth. Since relevant firm data
are not available and experiments that could be claimed to be representative cannot be made, we
resort here to qualitative evidence from business history on processes of organizational change.
Business history records are particularly well suited to keep track of how coordination and
motivation devices employed by the entrepreneurial agents are affected by, and may change as a
consequence of, the growth of the organization. Analogously to multi-case-study method (see
Eisenhardt 1989) we discuss the development of four firms on the basis of, first, a descriptive
within-case analysis and then a synoptic cross-case analysis. The four firm organizations are
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replicative causal factors from non-replicative ones that should then be attributable in a plausible
way to circumstances of the specific case (Yin 1984; Eisenhardt 1989; Graebner and Eisenhardt
2004).
chosen from different industries, different time periods, and different cultural background:
Southwest Airlines, Siemens & Halske, Andersen, DeLany & Co., and Bouchayer et Viallet (see
Table 1).
Southwest Airlines began its service as a Texas based regional operator in 1971. By the year
2004 it had become the third largest airline in the US market in terms of passenger figures (194,000
passengers per day), in terms of the number of flights operated per day even the largest national
carrier, and had the highest market capitalization in the US airline industry. The business
opportunity that the founders Herbert D. Kelleher and Rollin W. King had seen was to capture
market shares from competitors by providing reliable low-fare air travel to customers (see Ito and
Lee 2003). By reduced fares passenger traffic should be increased to make even the less frequently
flown city connections profitable (Gittell 2003, pp. 7).
-------------------------------------------
Table 1 about here
--------------------------------------------
Arthur E. Andersen and Clarence M. DeLany founded their company in 1913. Arthur
Andersen & Co, as the firm was soon renamed, became one of the largest, internationally renown
accounting firms. The business opportunity which the founders had envisioned was stated in their
opening announcement as “the designing and installing of new systems of financial and cost
accounting and organization, or the modernizing of existing systems” (Arthur Andersen & Co. 1974,
p. 3). The idea was to better satisfy the needs of customers, particularly large corporations, by
assuring a high quality standard of accounting services and to offer the newly developed systems
and standards by employees with the status of partner having their offices distributed over the
country (Squires, Smith, McDougall and Yeack 2003). The idea was indeed appealing to the
emerging large corporations that needed professional accounting services in their neighborhood.
Werner Siemens, Johann Georg Halske and Johann Georg Siemens started their telegraph
manufacturing firm “Siemens & Halske” in 1847 for which they saw a business opportunity in
serving an expanding market with improved technical equipments and the offer to install them.
Werner Siemens, the driving force in the company, had an engineering and science education and
was already strongly engaged in developing and patenting in electrical technology, particular the
telegraph technology, in a military position before he became entrepreneur in that business. After
its founding, due to lacking competitors, the company quickly won large-scale contracts such as
installing submarine cables and international telegraph lines among others to Russia and India and
grew rapidly (see Weiher and Goetzeler 1984, Kocka 1969).
Bouchayer et Viallet was founded in 1870 to pursue a business opportunity in the emerging
heating and ventilation industry and other metal construction. With the eldest son of the founder,
Aimé Bouchayer, taking over as sole entrepreneur in 1898, the company moved into the
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hydroelectricity market and the pressure pipeline industry (see Smith 2001) and started to grow
significantly. During World War I the company profited from the booming demand for war supply
by adding ammunition manufacturing to its portfolio and expanded to a size of more than 3000
employees. However, the size declined again in the post-war period when ammunition
manufacturing was closed.
Concerning the entrepreneurial governance regime the four companies started with on their
developmental path, the first two firms can be associated with a cognitive leadership regime, while
the latter two show characteristics of a monitoring regime. In the case of Southwest Airlines the
business conception which the two founders Kelleher and King pursued focused on some specific
organizational practices. The reason for this is that, in the case of short-haul flights on which
Southwest Airlines had specialized, average productivity is lower than in the case of long-haul
flights. The reason is simply that the ratio between flying time during which the revenues are earned
and time for turnarounds on the ground is simply more unfavorable. Furthermore, Southwest
Airlines basically served point-to-point city connections lacking a hub-and-spoke network that
allows the airlines to realize scale economies (Melconian and Clarke 2001). Given such conditions,
low-fare flight operations were not considered possible in the airline industry. Kelleher and King
had to compensate for these disadvantages by organizational practices that improved turnaround
processes on ground.
The turnaround process on the ground involves twelve distinct functional groups: pilots,
ramp and baggage transfer agents, cargo agents, mechanics, fuelers, aircraft cleaners and caterers,
ticketing and gate agents, flight attendants, and operations agents (Gittell 2003). To speed up the
turnarounds without frustrating customer satisfaction requires very efficient interactions between
all of them. The founders’ business conception tried to accomplish this goal by organizational
practices that were based on a specific model of behavior. It was called “relational coordination” and
emphasized shared goals, shared knowledge, and mutual respect in the relationships both between
the entrepreneurs and their employees and between the functional groups involved on the ground
operations (Gittell 2000, 2003). By creating a shared vision of “relational coordination” to get the
aircrafts back in the air as quickly as possible after landing and by supporting it in intense face-to-
face communication on site, Kelleher and King conveyed their business conception to their
employees (see O’Reilly 1995).
As many of their interview statements reveal they were concerned from the beginning to
back the interpretative frame, to be shared by the employees in their task perception, by promoting
suitable organizational practices and a cooperative model of behavior (see, e.g., Lee 1994). By
careful, interview-based hiring procedures applicants were screened for cooperative attitudes. All
firm members were given continuing training not only on their functional tasks but also on the
company’s organizational approach, and the employees were encouraged to learn about the work
in functional groups other than their own. Supervisors were urged to adopt a coaching and
counseling attitude in managing frontline staff. Mentoring and constructive approaches to conflict
management were implemented (Gittell 2003). Communication between all functions, particularly
on suggestions for improvement, was encouraged and practiced also when improvements were
suggested by the entrepreneurs.
In the case of Andersen and DeLany, the business conception was not to create just another
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The dedication to engage in developing new methods and systems of accounting may
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have to do with the fact that, before founding the firm, Arthur Andersen held an assistant professor
position at Northwestern University. He later became head of the accounting department of the
business school and full professor (see Squires, Smith, McDougall and Yeack 2003, Chap.1).
accounting office preparing periodical audits and certifying financial statements. The specific feature
of their conception rather was to assure the provision of high standard, innovative accounting and
auditing services throughout the country by employees located in major centers. In view of the low
profile of the accounting business at that time, this was quite an ambitious conception. The
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challenge it faced was that the firm could only live up to these high expectations with employees
able and motivated to apply the new tools at a high level of expertise, with a consistent service
quality, and in a coordinated way exactly as they had been designed by the entrepreneurs. The
provisions that Andersen and DeLany took basically tried to accomplish these goals by
implementing their own business conception as a shared vision of the business and the self-
understanding of the accountants and by establishing a proper model of behavior.
First, they considered a more equal background and an academic education conducive to
create a workforce sharing the high standards they wanted to ensure. They therefore upgraded the
hiring requirements and became the first accounting firm formally recruiting college students.
Moreover, coming from rural Illinois, Arthur E. Andersen preferably hired young men who had
graduated from college with the same small-town or farming background and a strong Midwestern
work ethic like himself. The corresponding model of behavior emphasized integrity and honesty
(Squires, Smith, McDougall and Yeack 2003, Chap. 2). Second, intense face-to-face communication
between the entrepreneurs and the employees was given high priority. After entering the firm, the
newly hired accountants participated in an intensive apprenticeship either directly with Arthur E.
Andersen or with one of the senior staff members. The apprenticeship not only served to train the
recruits in the new accounting and auditing methods and in delivering an uncompromised service
quality. The close apprenticeship relation was also a device to induce the young accountants to adopt
a shared interpretative frame and to strengthen their commitment to the shared values of integrity
and honesty.
Fostering in this way the creation of a shared business conception and a shared model of
behavior was also meant to help maintain coherence within a firm that was supposed to operate
through regional branches distributed all over the country. It was considered important for this end
that the firm organization presented itself as one voice to the outside world. Any partner office
should practice the same high standard of professionalism and service quality. In addition to a
coherent presentation and performance of the firm, the one-firm-one-voice policy could also serve
to maintain an attitude of solidarity and cooperation between the regional branches of the firm.
Unlike the previous two cases, the German company Siemens & Halske was a firm
organization in which the two founders from the beginnings pursued their business conception on
the basis of a monitoring governance regime. Their business conception emphasized the
development of new technology in the telegraph sector, combining engineering services and
manufacturing in on hand. According to the partnership agreement, Werner Siemens was supposed
to do contract acquisition on the basis of his inventions and to manage contract execution, while
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Halske was seeing through the development of the necessary processes and the details of the
products at the shop floor in the factory. The business was organized hierarchically in the traditional
form with masters as foremen and craftsmen as workforce. Throughout the 1850s and 1860s the
firm’s products were handcrafted in a production with a low capital intensity.
Halske’s authority as an entrepreneur on the shop floor derived from his extensive
knowledge and skills in mechanics and his paternalistic attitude towards the workers. Werner
Siemens’ relationship to the employees was characterized by respect for the individual person on
the one hand and the expectation of their strict compliance to his and the superiors’ directives on the
other hand (Weiher and Goetzeler 1984, Chap. 1). Kocka (1969, pp. 79 and p. 83) describes Siemens
as an entrepreneur aiming at enforcing discipline and loyalty while at the same time trying to create
an own interest on the part of the employees in improving the firm’s operations. In a letter to his
sons, advising them with retrospect to his own conception on how to lead the firm, he wrote for
instance “… break what is not bending – because a large and complex company as ours will simply
not work without a strict command!” (Heintzenberg 1953, p. 330). In line with this entrepreneurial
monitoring regime, Siemens & Halske introduced in 1854 a system of monetary incentives for the
firm’s employees (Kocka 1969, pp. 84).
In the fourth case discussed here, that of Bouchayer et Viallet in France, Aimé Bouchayer,
(as of 1898 the sole entrepreneur) tried to realize his business conception with an understanding of
leadership based on the view that a patron is the unquestioned master in a firm similar to a patron’s
role in a family in those times. In this paternalistic variant of a monitoring governance regime,
workers were required to strictly comply with the directives given to them and show discipline in
carrying out the tasks assigned to them. On the other side, the patron would feel obliged to account
for the interests of the workers (as he understood them) and to provide some social benefits to
protect them. Bouchayer was used to walk to the shop floor and, as long as the factory was small
enough, had face-to-face contact with his employees so that he knew many of them by name (Smith
2001). However, this was not implying any communication about, or even sharing of, the
entrepreneurial business conception. It may be assumed instead that this attitude was to support
discipline and to strengthen the social model of a dominance-subordination relationship between the
entrepreneur and the employees.
All four companies discussed experienced a significant growth in their operations and, as a
consequence, a growing size of the firm organization. The theoretical reflections in the previous
section suggest that, with a growing organization size, both entrepreneurial governance regimes
sooner or later face problems. These problems differ and have different reasons, but they identically
affect the performance and the further development of the firm. The cognitive leadership regime has
been argued to suffer from the declining frequency of informal face-to-face interactions between
entrepreneurial agents and the other firm members. The influence of the entrepreneurial agents on
interpretative frames of the employees and their models of behavior fades in a process that is often
hardly noticed until a critical threshold is reached at which the coordination and motivation of the
employees runs into troubles. This conjecture can indeed be supported in the case of the two
companies that were founded with a cognitive leadership regime.
Southwest Airlines started an expansion beyond Texas and the neighboring states with the
opening of a connection to Los Angeles in 1982 and later to Baltimore Washington International
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Airport. However, with a rapid opening of new branches in the new destinations and the immense
demand for the low-cost air transport services, the organizational practices at the core of the
entrepreneurial business conception could no longer fully be upheld. As expected, with the growing
number of employees in the new branches, personal face-to-face interactions with the entrepreneurs
became rare. Moreover, the rapid growth of sales, resulting in an understaffing of the ground
operation and an attempt to quickly compensate for it, undermined the company’s careful hiring and
training practices. As a consequence, coordination of the newly hired staff on a shared business
conception and a corresponding model of behavior suffered, and so did organizational coherence
and performance. In the new branches, failure to implement the “relational coordination approach”
resulted in disorientation in the ground operation. Newly hired staff lacked the understanding and
engagement for a smooth coordinating processes across the twelve distinct functional groups.
Significant delays threatened the operational goal of a quick turnaround for the aircrafts on ground,
the very basis of the low-fare services.
Andersen, DeLany & Co. business conception was successful so that the company slowly
grew in the first years. However, the growing number of employees seems to have induced the two
entrepreneurs to develop different assessments of their business conception (see Spacek 1985).
DeLany’s more traditional understanding of how to run an accounting firm set limits to the
expansion. Andersen’s belief in the strength of a professionally trained staff applying sophisticated
accounting methods, strongly guided in their activities by a common vision and shared values of
integrity and honesty, saw no such limits. DeLany resigned after only five years. Andersen managed
to continue the expansion of the business with a basically unchanged cognitive leadership regime
until his death in 1947. Yet, with his decease it abruptly became clear that the organization had
grown to a size where none of the partners were able to step in for Andersen as equally accepted
cognitive leader. All of a sudden the company faced an existential crisis that brought it close to
being broken up.
The problems a monitoring regime faces when the organization grows have been argued
above to be of different nature. The increasing number of employees to be directed and controlled
at some point overcharges the entrepreneur’s capacity. The monitoring crisis can be remedied (at
the cost of bureaucratization) if the monitoring task can successfully be delegated to employees in
a managerial role. If an entrepreneur fails to take this step, the firm is likely to suffer in its
performance, probably to an extent where its existence is threatened. Indeed, the significance of the
crisis can be illustrated by the two firms identified here with a monitoring regime.
After eight years in business, the Berlin branch of Siemens & Halske had grown to a size of
about 100 workers overseen by 5 masters. This was a size at which Halske apparently started to feel
uncomfortable with administering and monitoring the shop floor, not least because of his strong
preference for tinkering with new products and processes (Kocka 1969, p. 75). The two
entrepreneurs addressed the problem by creating a new managerial layer in the workshop, assigning
the most senior of the five masters the head of the workshop with the function of coordinating and
supervising the other masters. Moreover, a chief engineer and executive director, William Meyer,
was hired to relieve Siemens in his work. He was a friend of Siemens and his former officer comrade
in the Prussian army. He formalized the interactions in the growing organization by numerous
bureaucratic procedures designed to better direct and keep control of the business, not least to
accommodate for the international expansion of the firm.In the 1860s the further growth of the firm
12
brought a challenge in the form of organizing the transition from craftsmanship as main production
method to industrial piecework as a preparation for mass production. Halske objected to this
transition and, consequently, withdrew from the company (Weiher and Goetzler 1984, p. 17).
With Werner Siemens’ brothers William and Carl in charge of the branches in London and
in St. Petersburg, the firm became an internationally operating family enterprise that expanded even
more rapidly. Several divisions and subdivisions were created with managers usually recruited in
house. Also an R&D department was created and its direction assigned to a scientist. He was
supposed to substitute Werner Siemens’ own engagement in research and development which, as
he complained in a letter, suffered from “the expansion of our business (that) absorbs ever more of
my personal time for the actual management of the company” (Matschoss 1916, p. 385). The
transformation of the firm into a multi-layered, bureaucratic organization did not go through without
frictions between the department managers who argued about competencies. Formal task
descriptions were introduced to improve coordination. At the lower ranks of the hierarchy, the
monitoring of the subordinates often took on a military tone (Kocka 1969, p. 235). Nonetheless,
despite the managerial diseconomies of scale the company continued to grow rapidly.
The situation was very different in the case of Bouchayer et Viallet. With a workforce of
more than 3000 employed in ammunition manufacturing during WWI, the company had reached its
maximal size. After the war, Bouchayer had to refocus the firm’s activities on the pre-war business
fields. With the experiences collected in mass-production of ammunition, he aimed to enlarge the
scale production of the hydroelectricity and pipeline businesses to retain employment at that level.
However, the attempt failed as Bouchayer was not willing to transform the traditional patron-lead
firm structure by introducing a multi-layer management as it would have been necessary to ensure
coordination and control at a mass production level (Smith 2001, p. 67). As a consequence, the firm
size rapidly declined to the pre-war level and the firm entered into a long struggle for survival. When
resigning for age reasons, Aimé Bouchayer decided to hand over the succession of the company to
his eldest son Jean who, unfortunately showed little entrepreneurial spirit and talent. It was only
after a major crisis in 1953 that external consultants were hired for the first time (ibid., p. 147).
Following the earlier patterns, Jean Bouchayer’s eldest son Robert took over at that time, but
he too continued the paternalistic, family-centered governance regime so that some attempts to
modernize the firm organization failed. He basically remained an isolated patron described by Smith
(2001, pp. 161) as follows: “His inability to recruit and lead an effective managerial team prevent
him from developing … Bouchayer et Viallet. … Robert maintained a cool … relationship with (the
managerial personnel). (They) attested to Robert’s limited capacity to shape the firm’s culture …”
After four generations of failing to implement an efficient management-based monitoring regime,
the company’s performance had eventually reached a level where its competitiveness was
undermined. The decision to liquidate Bouchayer et Viallet was taken in 1971.
The comparison between Siemens & Halske on the one hand and Bouchayer et Viallet on
the other shows that, if properly expanded in time into an ever more differentiated bureaucracy, the
monitoring governance regime does not seem to face endogenous bounds to its growth, despite
obvious managerial diseconomies of scale. In contrast, for an entrepreneurial cognitive leadership
regime there seems to exist such an upper bound, where the entrepreneurial capacity to prevail with
the own business conception and the desired model of behavior in the interactions with the growing
number of firm members is exceeded. The size of the firm organization at which this happens may
13
vary with individual factors, but once the bound has been exceeded, the governance regime runs into
a crisis with direct consequences for organizational coherence, efficiency, motivation and,
ultimately, performance of the firm. The question then is in which way the crisis can be overcome
or, more specifically, what options exist for transforming both the entrepreneurial governance
regime and the organization itself to make further growth possible. The cases discussed provide
some hints as to how to answer this core question in a developmental approach to the theory of the
firm.
Bouchayer et Viallet over several generations of owners failed to implement an extended
managerial hierarchy to efficiently direct and control the business facing the needs of mass
production. The smoldering crisis of the paternalistic monitoring system could have been mastered,
it may be argued, if leeway had been made with the necessary extension of the monitoring hierarchy.
In the case of the growth crisis of Southwest Airlines something similar could be argued to have
been an option, i.e. the introduction of an extended managerial hierarchy based on directions and
controls rather than the attempt to further uphold the “relational coordination” approach. This would,
of course have meant a transition from a cognitive leadership regime to an (extended) monitoring
regime with deep-going effects on self-perception, motivation, and the prevailing social model of
behavior in the organization. Likewise, the sudden revelation of an organizational crisis when Arthur
Andersen’s death left a vacuum in the cognitive leadership regime in the company grown large,
could be imagined to have been followed by a similar transition to a company wide monitoring
regime or by a breaking-up of the entire company into independent regional companies which,
because of their size, could each have maintained a cognitive leadership regime.
However, in both cases, something different happened. To tackle the emerging problems,
Southwest Airlines did restructure by creating new managerial layers. A number of vice president
positions and the position of regional directors were newly created. The latter supervised staffing,
union matters, facility management, and budgeting issues in all cities served by the airline in one
of the following five regions: Heartland (Texas and surrounding states), California, Remaining West,
Midwest, and East. However, Southwest Airlines also launched an attempt to revitalize and adapt
its organizational practices. The aim was to secure a sustained intensive communication and
interaction within and across the functional groups operating on the ground. To this end, the
competencies and responsibilities of the station managers overseeing the ground operations at each
single airport were strengthened to an extent unknown at other airlines. Enlarging the managerial
capacity of the company and, at the same time, nurturing an entrepreneurial spirit in all managerial
layers of the organization was conceived as crucial balancing step to maintain the relational
coordination approach (Gittell 2003).
To assess what kind of governance regime resulted from the restructuring, the relative
entrepreneurial independence of the station managers is important. All of them were selected from
inside the firm organization and therefore had experienced before both the entrepreneurial business
conception and the desirable model of behavior. They were given the competence and time to revive
the careful, hiring procedures by which applicants were screened for the proper attitudes and to
make the hiring decisions. They were expected to engage in a constant, two-way communication
with all their team members and to convey Southwest Airlines’s business conception to the newly
hired ones. Following Kelleher’s social model of mutual respect, station managers were trained to
appreciate the skills, contributions, and suggestions, of their employees and to promote them where
14
The crisis was preprogrammed by a latent controversy among the partners about how
5
to re-structure the growing company. There were considerable tensions built up on this question
between a Chicago fraction and a New York fraction, see Squires, Smith, McDougall and Yeack
2003, p. 41).
See Landry and Nanda (2000). In the 29 years from 1918 when DeLany’s resigned
6
to 1947, Arthur Andersen & Co. had grown to a size of roughly 900 employees. In the following
decades it grew by about 900 employees every five years.
possible. Station managers were given sufficient autonomy in running the business to experiment
with new procedures either proposed by themselves or by their employees. Such reorganizations had
to be reported on a monthly basis to the regional directors, but did not require approval from them
or the headquarters beforehand (see Oliva and Gitell 2002).
Thus, although Southwest Airlines’s responded to the growth crisis by stocking up the
managerial resources, efforts were taken to avoid a transition to a bureaucratic monitoring regime.
Firm members who had already acquired a shared understanding of the company’s “relational
coordination approach” before were appointed to the new managerial positions and they were
endowed with competencies and resources to exert entrepreneurial discretion at their layer of
operations. The entrepreneurial governance regime that resulted may be called “divided cognitive
leadership” (Witt 2000) as it required the managers with entrepreneurial functions to make the
employees at their layer of operations adopt the company’s business conception and model of
behavior in their daily activities.
A divided cognitive leadership regime also emerged in the case of Arthur Anderson & Co.
as might be expected, given the firm’s structure based on partnerships and regional branches
operating independently within the one-voice policy dominated by Arthur Andersen’s cognitive
leadership. However, the transition was not a trivial act. Upon his death in 1947, Arthur Andersen
had held more than 50% of the votes in the company’s board. Any single partner stepping into his
shoes would therefore have been able to determine the company’s fate even against the rest of the
partners or a majority of them. Since it was not clear whether and to what extend the shared business
conception would be modified or even abandoned by such a successor, the partners feared that they
could be forced to implement changes that were in conflict with their conception and model of
behavior. An exit option was blocked by the fact that a partner withdrawing from the company was
contractually bound to pay a high penalty.
Under these conditions, the crisis triggered by Andersen’s decease culminated in a vote by
the partners in 1947 to liquidate the company. However, during the same night a group of partners
5
crafted a plan that implied significant changes in the organizational structure, but would hold the
company together. Suggesting to keep to the one-voice policy while at the same time adopting the
principle of “one partner, one vote” the plan implied that the majority of partners would determine
the firm’s further fate, while in the single branches each of the partners would be compelled to exert
cognitive leadership on the basis of the commonly agreed business conception. The partners
accepted this arrangement the next day and thus created the basis for a divided cognitive leadership
regime that allowed to company to enter a period of an even more rapid growth.
6
15
IV. A Model of Transitions Between Entrepreneurial Regimes
The evidence from the history of selected business firms that has been presented in the previous
section points to crises that a successfully implemented entrepreneurial governance regime is sooner
or later exposed to when, as a result of its success, the firm organization grows. These crises
challenge the existing governance regime and, if the challenge cannot be tackled, result in a
significant reduction of firm growth or even a decline. In the case of a monitoring regime, a creeping
degradation process results from the fact that the entrepreneur’s limited capacity of directing and
controlling implies an on average decreasing monitoring intensity with regard to the individual
employees’ performance as the number of employees continually grows. A band wagon effect
already mentioned in Section II triggers the crisis. The underlying process has some self-organizing
features, characterized by a shift of a critical mass point caused by the continuous growth. This
eventually results in an abrupt breakdown of the level of work effort in the organization as can
already be shown with a simple, bi-modal model. This means that the core feature – the employees’
level of work effort – can only be either high or low.
Let the relative frequency of firm members with a high level of work effort at time t be
denoted by F(t). Furthermore, let q(t) be the likelihood that someone with a high level of work effort
changes her or his attitude at time t to a low level. The likelihood of a converse switch (by someone
with a low level of effort) may be denoted by r(t). Under conditions of intense intra-organizational
communication and social learning, increasing incidents of low work effort that are not sanctioned
are very likely to be observed by the employees. When employees still operating on a high effort
level see a low effort level disseminating in the firm, they are increasingly likely to also switch to
a low level, given their extrinsic work motivation. This amounts to the assumption that q(t) is a more
than proportionately increasing function of F(t),
(1) q(t) = N (F(t)), where N' > 0, N'' > 0.
For simplicity, let us assume a quadratic specification of eq. (1). Assuming further that social
cognitive learning works also in the opposite direction, the probability of switching from a presently
low level of work effort to a high level can be made dependent on the relative share 1-F(t) as in
(2) r (t) = n (1-F(t)), where n' > 0, n'' > 0.
Again a quadratic specification will do here.
If the number of firm members n(t) grows over time as a concomitant of a favorable
performance of the firm, it becomes increasingly difficult for the entrepreneur to monitor the
individual employees’ performance. In the present model this condition can be expressed by a bias
variable b(t) that affects the individual employee’s likelihood of switching between the levels of
effort. b(t) is assumed to vary with n(t) and a parameter 8, 0 < 8 # 1, which reflects the
entrepreneur’s tolerance towards slack: a value of 8 close to 0 indicates a low tolerance, 8 close to
1 a high tolerance. A functional form satisfying these assumptions is
(3) b(t) = 1 - 2 .
(1 - 8 n(t))
16
F/ is a point satisfying eq. (5) which lies on the 45/-line and is not a stable attractor.
7
For all points on the 45/-line the l.h.s. of eq. (5) is equal to the r.h.s. Setting b(t) = -1 and F(t+1) =
F(t) = F in eq. (5) and solving for F yields F=1. Since for b(t) = -1 the only stable attractor F* = 0,
F = 1 must be a separation point.
Note that the first order difference eq. (5) and the corresponding graphs in Figure 2
8
represent mean processes. In the realization of the stochastic switching process based on the
individual probabilities q(t) and r(t) the actual increment ªF(t)/ªt fluctuates around the expected one
given by (5). Consequently, the closer F/ approaches 0, the greater the chance that by a cumulation
of random fluctuations F(t) is pushed beyond F/ and the process then is attracted to F** = 1. For a
detailed discussion cf. Weidlich (2000).
Eq. (3) states that, for appropriate values of 8, b(t) goes from close to -1 to 1 as n(t) grows larger.
This means that the bias becomes the greater the larger n(t).
For a large firm organization, the probability of finding a randomly chosen employee to work
on a high level of effort at time t can be approximated by 1-F(t) and the probability of finding a low
work effort by F(t). Since switches between the work efforts are possible in both directions the
change over time in the relative frequency of employees operating on a low level of work effort can
be written as a first-order difference equation
= 0 for F < 0,
(4) F(t+1) = F(t) + (1-F(t)) q(t) (1+b(t)) - F(t) r(t) (1-b(t)) for F 0 [o,1],

= 1 for F > 1.
Inserting eqs. (1) and (2) in quadratic specification into (4) and rearranging yields within the
constraints of the interval [0,1]
(5) F(t+1) = b(t) F(t) + (3-b(t)) F(t) - 2 F(t) .
2 3
The non-linear difference equation (5) implies a bifurcation. The more the size of the firm
organization grows, the more likely the level of work effort among the employees will break down
despite all monitoring effort. When, for small values of 8, b(t) in eq. (4) goes from close to -1 to 1
as n(t) grows, the attractors of the process given by eq. (4) bifurcate. For b(t) = -1 the attractor F*
= 0 would be globally stable. As n(t) and, thus, b(t) grows another attractor occurs in F** = 1. The
bifurcation is graphically displayed in Figure 2 by the changing basin of attraction of F* and F**.
When two attractor exist simultaneously in the interval [0,1], each one is only locally stable. Their
respective basin of attraction is separated by an unstable fixed point F/. As can be seen from Figure
(1)
2, for b(t) = -1, F/ = 1 ; the entire interval [o,1] is the basin of attraction for F*. Upon further
7
(2) (3)
growth of n(t) and b(t) F/ moves down the 45 -degree line into F/ and further on into F/ . For b(t)
o
= 1, F/ converges to 0. The attractor F* vanishes and eventually gives way to a globally stable
attractor F** with [0,1] as the entire basin of attraction.
8
17
------------------------------------------
Figure 2 about here
------------------------------------------
This is a point of organizational crisis to which the entrepreneur may, or may not, respond.
Without any response by the entrepreneur to the emerging growth crisis the further development of
the firm organization is likely to result in a low profile state of organizational disarray. This is a
situation in which an entrepreneur who owns the business may be tempted to solve the problem by
selling the company. Indeed, it is not unusual that firms running into a crisis after an extended period
of initial growth become objects of mergers and acquisitions. However, the example of Siemens &
Halske in the previous section shows that a monitoring regime can avoid or overcome growth crises
when extended by introducing additional layers of management that takes over the monitoring tasks.
What thus results remains a monitoring regime – only with an ever more differentiated hierarchical
structure.
A very similar self-organizing transition process underlies the crisis of a cognitive leadership
governance regime. though a further growth of the firm definitely requires a metamorphosis of the
governance regime into a divided cognitive leadership regime. The mechanisms underlying the crisis
of the cognitive leadership regime are based on motivational attitudes, communication, and social
cognitive learning as discussed in Section II. Let the relative frequency of firm members who
conflict in their attitude with the entrepreneurial business conception and, moreover, are little
intrinsically motivated at time t is denoted by F(t). Let p(t) be the likelihood that someone changes
at time t to such an attitude. The likelihood that someone who has so far diverged from the shared
vision and model of behavior may be denoted by v(t). However, given the characteristic asymmetry
in transition rates from extrinsic to intrinsic motivation that was mention in Section II, v(t) is very
small. Under the influence of intra-organizational communication and social learning, i.e. the
observation of the behavior of other firm members and the consequences of their behavior, the
respective probabilities can again be written as a function of the corresponding relative frequencies
of the two attitudes:
(6) p(t) = > (F(t)), where >' > 0, >'' > 0
and
(7) v (t) = . (1-F(t)), where .' > 0, .'' > 0.
If again a quadratic specification is chosen for the two functions, the motivational asymmetry
implies that .' '.
Now let n(t) grows over time. The frequency of a face-to-face interactions with, and the
entrepreneur’s influence on, each single organization member declines. Exercising cognitive
leadership therefore becomes increasingly more difficult. Let this again be expressed by a bias
variable b(t) as in eq. (3), this time with a parameter 8, 0 < 8 # 1, reflecting the entrepreneur’s
social skills and the intrinsic quality of her/his business conception. The change over time of the
relative frequency of those employees diverging from the entrepreneurial business conception can
then be written as a first-order difference equation
18
= 0 for F < 0,
(8) F(t+1) = F(t) + (1-F(t)) p(t) (1+b(t)) - F(t) v(t) (1-b(t)) for F 0 [o,1],

= 1 for F > 1.
If eqs. (6) and (7) are inserted into (8), a non-linear difference equation results, that again implies
(2)
a bifurcation phenomenon. However, this time the analogue to the unstable fix point F on the
o
45/- line is significantly closer to 0 than in Figure 2. This means that, unlike in the monitoring
regime, there is a strong asymmetry: the probability for a random cumulation driving out the
intrinsic motivation attitude as a prevailing model of behavior is much larger than the probability
of going from an extrinsic motivation as a prevailing model to an intrinsic motivation as a social
model.
In other words, once the underpinnings of a cognitive leadership regime in terms of a shared
cognitive frame and a shared model of (intrinsically motivated behavior) are lost, this is next to
impossible to restore. A return to a cognitive leadership regime is then very unlikely, even when the
organization size is reduced. Without any response by the entrepreneur to the emerging growth
crisis, or in case of an aborted transition attempt, the further development of the firm organization
is likely to result in a low profile state of organizational disarray. This is again a situation in which
an entrepreneur who owns the business may be tempted to solve the problem by selling the
company.
However, as the discussion of the cases of Southwest Airlines and Arthur Andersen & Co.
has shown, under certain a transition to a divided cognitive leadership regime may be possible. This
requires on the one hand that cognitive leadership to be taken over by managers in separate divisions
of the organization. On the other hand, these managers with entrepreneurial function must be
coordinated on an overarching business conception which they share among them. From the logical
point of view, yet another alternative open to the entrepreneur is to try to make a transition to a
monitoring regime. To succeed a more or less extended hierarchy of managers directing and
controlling the activities of the firm members would have to be created, and the managers would
have to be supervised. Yet, in view of the asymmetry in changing motivational attitudes of the
employees, the strong reliance of a monitoring governance regime on incentive schemes based on
extrinsic motivation makes it impossible to return from a monitoring regime to cognitive leadership
(or, in general, to go from a monitoring regime to a cognitive leadership regime).
In the present analysis of the growth driven organizational development, four organizational
states have been distinguished: the cognitive leadership regime, the monitoring regime, the divided
cognitive leadership regime, and a state of organizational disarray. These states are depicted in
Figure 3. The three double circled states represent possible points of departure for a firm’s
developmental path. If the firm founder(s) fail(s) to implement any of the two other governance
regimes, a firm can start right away in organizational disarray. The arrows in Figure 3 represent the
19
The exit option that can, in principle, be exerted by selling/closing the business or
9
by declaring insolvency in any state at any time is suppressed in the Figure and in the argumentation
based on it.
possible transitions between organizational states implied by the theory. Because of the asymmetry
9
in changes of motivational attitudes, the state of a cognitive leadership regime can, for instance, not
be reached from any of the other possible states. A divided cognitive leadership regime, to give
another example, can only be reached when a cognitive leadership regime had been implemented
before.
As far as the factors relevant for coordination and motivation are concerned, the growth
driven development of a firm organization can thus be characterized by a possible transition or a
sequence of possible transitions between organizational states along the arrows in Figure 3.
Altogether eleven different developmental paths not passing through any of the states twice can be
enumerated: five single possible transitions, four transitions passing through one intermediate state,
and two passing through two intermediate states. The number of possible paths can, of course, be
arbitrarily extended by allowing repeated transitions between the states of a monitoring regime and
organizational disarray.
----------------------------------
Figure 3 about here
-----------------------------------
As it turns out, thus, the theoretical restrictions derived above imply a rather small number
of distinct developmental paths a firm organization can take regarding its mode of coordination and
motivation. Moreover, the developmental paths are clearly directed in the sense that they cannot
arbitrarily be reversed. From a logical point of view, the states of a monitoring regime and
organizational disarray represent an absorbing set, since they can be reached from any of the two
other organizational states, but the converse is not true. However, this does not mean that the
historical development of firm organizations is likely to end up in this set (before a firm ultimately
exits). In fact, in the present analysis we did not try to assign probabilities to the various transition
possibilities, and we do not see a basis for any such attempt.
V. Conclusions
In search for systematic influences on the development of firms, focus has been here on the growth
of the organization. More specifically, we have investigated the impact that a growing organization
size can have on accomplishing the specific entrepreneurial tasks of coordinating and motivating
the firm members. Within this framework it has been explored whether there are growth thresholds
at which existing entrepreneurial governance regimes start to face a crisis and, if so, why. The
answer to this question is crucial for understanding the developmental path of firms. A second
important question is how the firms respond to the emerging growth crisis. Constraining the analysis
to the interaction between organizational growth on the one hand and the entrepreneurial approach
to accomplishing coordination and motivation of the employees on the other, two different
20
entrepreneurial governance regimes have been singled out as point of departure of a firm’s
developmental path. The one is a cognitive leadership regime, the other a monitoring regime. They
differ fundamentally in the way in which coordination and motivation is achieved. It has been
argued that they differ systematically also in the way in which the growth crisis materializes, in the
options for overcoming the crisis, and in the chances for restructuring the governance regimes so
that further growth becomes feasible.
In support of the developmental approach presented here and the hypotheses that were
derived from it, evidence from the history of four companies has been discussed: Southwest Airlines,
Andersen, DeLany & Co., Siemens & Halske, and Bouchayer et Viallet. These companies were
deliberately chosen to represent different industries, different cultural background, and different
historical epochs. Given the focus on coordination and motivation, a limited number of
developmental paths has been identified and theoretically explained. The paths are characterized by
transitions between different governmental regimes as the firm organization grows. In a simplified
model, the transition process was shown to display self-organizing features, in which the
organization size is indeed the crucial explanatory variable.
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employees coordinated by

employees
motivated by

detailed
directives

sharing business
conception &
allowing discretion

primarily extrinsic rewards,
tight action controls

monitoring
regime

----

outcome responsibility,
balanced intrinsic/extrinsic
rewards

----

cognitive
leadership
regime

Figure 1: Entrepreneurial Governance Regimes

cognitive
leadership
divided
cognitive
leadership
monitoring
organisational
disarray

Figure 3: Possible Transitions Between Organizational States

25

Firm Founders Country, Year of
Founding

Industry

Southwest Airlines

Herbert D. Kelleher
Rollin W. King

U.S.A. 1971

Air Passenger
Transport

Andersen, DeLany &
Co.

Arthur E. Andersen
Clarence M. DeLany

U.S.A. 1913

Services
(Accounting)

Siemens & Halske

Werner Siemens
J ohann G. Halske
J ohann G. Siemens

Germany, 1847

Engineering and
Manufacturing
(Electrical
Equipments)

Bouchayer et Viallet

J oseph Bouchayer
Félix Viallet

France, 1870

Manufacturing
(Metal Constructions)

Table 1: Investigated Firm Cases
26
0,0 0,2 0,4 0,6 0,8 1,0
0,0
0,2
0,4
0,6
0,8
1,0
F
o
(1)
F
o
(4)
F
o
(3)
F
o
(2)
F(t)
F(t+1)
b=-1
b=0
b=0.5
b=1

Figure 2: Bifurcation of Attractors in the Transition between Entrepreneurial Regimes
27

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