Summary: While building culture at a startup is challenging, entrepreneurs often, implicitly or explicitly, follow five core patterns of hiring and managing people. These “employment models” have profound effects on the culture and performance of the firms. E-mail. Tweet.
In my previous post, I discussed some rules of thumb for designing and building culture at startups. Here I’ll dive into a little more detail into the academic underpinnings of those ideas, stemming from a course I took called Designing & Leading the Entrepreneurial Organization while at MIT Sloan, taught by Diane Burton. This is my retelling of that information, so I take no credit for the theories and research behind it…so I’ll do my best to do it justice.
The research, by the Stanford Project on Emerging Companies (SPEC), sampled 175 young high-tech firms in Silicon Valley, over the course of 1994 – 2000. They analyzed these companies along three core dimensions of how they approached managing people, and arrived at five prototypical employment models (whether intentionally or unintentionally)…which you can think of as like a business version of the famed software Design Patterns.
Dimensions of Analysis
Three separate dimensions of how the founding teams approached the nature of work, were examined.
How the companies viewed the nature of their employees’ motivation for joining and staying with the firm, fell into three main categories. First was the “work”, meaning the primary motivator for their employees was the desire to do exciting tasks. Second was “love”, or the strong family-like bonds and relationships with their peers. The final category was “money”, as the simple transaction of work for pay.
The next dimension examined the bases used to select new employees. Generally, the companies used three different methods: skills, potential, and fit. Some viewed the company as a set of tasks that required people with the skills to accomplish them, while others focused on how employees would grow & tackle problems over time, and the final group valued how prospective hires would connect with others in the team.
3) Coordination & Control:
Each company was analyzed in terms of its method to coordinate and control operations, of which four different types emerged. The first, and most common, was to rely informally on peers and the overall organizational culture to align employees. Second, was the “pedigree” or well-known professional standards by which employees were conditioned in, such as coming form elite organizations or academic institutions. The third approach of control was more traditional, in relying on explicit, formal procedures and systems. The final method had founders themselves controlling and coordinating work personally, by direct oversight.
The Five Employment Models
When looking at the variants of each of the three dimensions, the potential 36 unique employment models (3 x 3 x 4) ended up converging into five main models, as follow:
Star cultures are the ones that aim to recruit top “rockstar” talent, and pay top dollar for them to reach their maximum potential.
Engineering cultures are built around the attachment to the work, in a performance driven, achievement oriented, environment revolving around team-based problem solving.
Commitment cultures are found at the companies that want to be like “families”. There is strong loyalty to the company, and employees are recruited for their fit, and stay connected via their “love”
Bureaucracy cultures have more formalized management, and while not necessarily overly hierarchical, rely on procedures, systems, and rigorous methodologies to accomplish their goals.
Autocracy firms mainly are focused on the transactional exchange of skills and performance for money. Relationships here are more transactional, and focus less on the “warm and fuzzy”. There is centralized coordination of a highly competent group of people to accomplish a well-understood mission.
Choosing the right model for the right job
The above employment models are meant to be descriptive, meaning not implying a value judgment on which model is “better” than another. However, when examining common patterns of business strategy, there become clear correlations to the employment models. Here are four common business strategies.
Innovation as a form of competitive advantage, where firms seek first-mover advantages by winning a technology race.The emphasis of these firms is to develop ground breaking new technology, to create a new market.
Enhancement of existing technologies, or what Steve Blank & Bob Dorf call a resegmented market. The main approach here is to find an approach that is “slicker, quicker, or better” than the existing incumbents.
Marketer approaches seek competitive advantage by relying on building key relationships, or specialized access to markets, via high degrees of customer service, brand building, or customized services. In many cases, this type of firm will start out by building specialized niche products in close coordination with their customers.
Cost strategies seek to build a sustainable low-cost advantage via superior production, economies of scale, and other operational efficiencies. While minimizing cost, or “capital efficiency” is essential at a startup, low-cost strategies are less common.
When mapping the various employment models to each of these strategies, the following patterns emerged amongst the sample set of companies.
Effect on Business Results
So the real question was what effect these models had on business results; here are some of the findings:
- Commitment models were the most likely to go public and the least likely to fail outright
- Star firms had some correlation to IPOs, but when they did had the largest increases in market capitalization
- Hybrid models, or models that changed, were the least likely to IPO and changing the model increased the likelihood of overall failure
- Autocracy and engineering firms did the worst post-IPO
Another interesting note was that when employment models changed, they tended to move from star or commitment model toward bureaucracies. Changes in general, were more disruptive to the organization when it was to a hybrid or something outside of one of the five models.
Takeaways and Applications
Using the employment models can help understand organizational culture in the following three contexts. First, if you are thinking of starting a company, it’s worth spending time thinking about the factors you’ll want to look for in building your team, and put more clarity around the type of model you’ll want to build, so as to build a competitive advantage from your HR strategy. Second, if you’ve already started a company, without this level of rigor in your hiring approach, it’s worth thinking about why people really work at your company, what makes them get out of bed in the morning, and the modes of control in place. Finally, if you’re looking to join a company you should apply this lens to think about how they approach their HR strategy. This stuff is hard to change once it’s started, so if you don’t like it, you’ll likely be stuck.
Burton, M. D. (2001). The company they keep: Founders’ models for organizing new firms [Electronic version]. In C. B. Schoonhoven & E. Romanelli (Eds.), The entrepreneurship dynamic (pp. 13-39). Stanford: Stanford University Press.