Entrepreneurs Need To Focus As Much On Organization Structure As Business Model

Working on the business model is a fundamental part of pretty much every “lean startup” program, which makes it a fundamental part of pretty much every accelerator and incubator. Research from INSEAD reminds us, however, that simply having a good business plan is not sufficient to make a startup a success.

The business model canvas is a central part of the entrepreneurship process, with advocates arguing that it’s a key visual guide to help you communicate your idea and flesh out your thoughts. Of course, critics, such as Steve Blank himself, argue that business plans are often a waste of time and largely demanded by investors, who in turn will largely ignore what you produce.

Organizational structure

The INSEAD paper suggests that the focus on the business model also prompts entrepreneurs to place more emphasis on the idea itself and less on the business, and especially its structure. In the startup world, there is an unmistakable emphasis on speed, with minimum viable products designed to test the proposition, and pivots rapidly undertaken to integrate one’s learning into future iterations.

This haste can prompt entrepreneurs to overlook basic organizational questions, such as how the work will be divided, who will actually perform the work, and how team members will be motivated. In many startups, there is a tendency towards bootlegging these vital tasks and hoping that it will all fall into place in the end.

“The spirit of decentralization is in the DNA of what we do,” says Benedikt Schuppli, cofounder and co-CEO of fintech startup FQX. “Our vision is to build the decentralized debt infrastructure for the future of finance, and so we really wanted this to be reflected in the way our team is structured and operates. Indeed, with team members operating in 6 different time zones, this decentralized, multi-national approach was key to get the best out of our people, while also enabling a single, globally standardized financing instrument to be developed.“

The paper shows that this is the dominant outcome for many startups today, with far more thought and attention given to business models than to organization design. Instead, any thoughts of organizational design are typically wrapped up in popular buzzwords such as building an agile or flat organization, which usually translates as chaotic.

Forced hand

The authors explain that this often continues until such a point as investors get involved. This is when managers are often forced upon the founders to try and whip their organizations into shape. Perhaps the best example of this was former Google CEO Eric Schmidt, who joined the firm a few years after it was founded and was hugely responsible for the commercial behemoth it subsequently became.

The researchers conducted detailed examinations of eight early-stage startups over an 18-month period. This analysis included numerous visits to the premises of each business to explore how they worked, the layout of their office, the language used when communicating, and various other aspects of organization design.

The analysis revealed that all eight of the companies had implemented a basic form of organization design covering task division, task allocation, reward provision, information exchange, and problem resolution. Few of these designs had been consciously planned, however, with many simply implementing what felt instinctive or natural, with many utilizing approaches outlined in the Lean Startup methodology, which obviously places significant emphasis on soliciting feedback from customers and refraining from any kind of structure that goes against the notion of agility.

Indeed, just two of the founders were able to articulate any real logic behind their organizational structure, albeit with both describing a largely ad hoc and emergent structure.

Changing picture

With the researchers in-situ for 18 months, they were also able to determine any changes to the business, whether in terms of their business model or their organizational structure. In total, they found 121 incidents related to either of these factors that resulted in the company changing tact in terms of its organizational design in at least one of the five dimensions mentioned earlier.

Most of these changes were at beast incremental and at worst myopic, however. For instance, in the vast majority of cases, three dimensions or fewer were modified, which undermines the very notion that all elements of organizational design are connected and interdependent.

Often, these changes would coalesce around whatever was cheapest and quickest. A common thread among the entrepreneurs was to try and solve problems with as little effort as possible., even if this ultimately fails to tackle the underlying problem.

Lack of focus

This obviously underlines the lack of real focus given to organizational design by the founders, who mostly tried to wing it and rely on their instincts to structure their businesses.

Suffice to say, this isn’t a great strategy when it comes to creating a scalable and successful business. According to the researchers, the first step to rectifying matters is to take the matter seriously. From there, you can utilize an organization design canvas, which operates in a similar way to a business model canvas but allows entrepreneurs to think systemically about the key issues affecting the operations of their business.

It’s well established that firms will struggle to grow without a good business model, but the INSEAD paper reminds us that organizational design is equally important, as it’s unlikely that even the best business models will succeed without the right organization to deliver them. It’s high time that founders focus on both if they want to succeed.


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