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Stanford Business magazine

 

Extra Credit

Startups Need Consistent Employee Treatment

A decade-long study of Silicon Valley technology startups finds that companies were three times more likely to fail if at some point they altered the founder’s blueprint for employee relations. Thus, start-up firms should pay as much attention to how they manage their employees as they do to developing the vision for their product.

After tracking the success of more than 150 start-up firms founded since 1994, Michael Hannan, the StrataCom Professor of Management, and collaborators found that not only did altering the system for managing employees hamper success, but also firms that instituted change had long-term stock valuations nearly six times lower.

Changing employment relations patterns during the first decade proved even more disruptive to its success and growth in market capitalization than replacing a founding CEO with an outsider.

A new leader by itself did not significantly increase a firm’s failure rate even if it did temporarily depress the growth of stock prices. What counted was whether or not the original employment model was preserved.
Anecdotal evidence from interviews with Silicon Valley founders revealed that sometimes entrepreneurial ventures switched from a looser employee framework to greater controls, particularly during a financial crunch period. “Changes in how employees are managed are frequently made as a cost-cutting measure,” Hannan said.

His study was coauthored with former GSB professor James Baron and Greta Hsu and Özgecan Koçak, both PhD ’03. The research springs from the School’s Stanford Project on Emerging Companies (SPEC).  This latest study appeared in the October 2006 issue of Industrial and Corporate Change.

How to Arrange Corporate Marriages That Work

Financial or strategic goals are usually the publicly cited reasons for mergers or acquisitions, but success often depends on the ability of the two firms to integrate their workforces. A merger can fail for any number of reasons, says Glenn Carroll, the Laurence W. Lane Professor of Organizations, but cultural differences are increasingly thought to be a major cause of post-merger dysfunction. Carroll and a colleague, J. Richard Harison, PhD ’86, say the best thing for employees who won’t or can’t fit the new mold may be to encourage them to leave.

Merged organizations that failed to come together culturally include Compaq and Digital Equipment Corp., which was unsuccessful largely due to a culture clash that pitted Compaq’s high-volume, fast-to-market strategic focus against DEC’s more convoluted and lengthy sales cycles. The predicted success of a merger is based on analysis of cultural content—the norms, beliefs, and values that can be described as bureaucratic, entrepreneurial, freewheeling, or conservative, the authors say. To help with that analysis, they developed a demographic model of culture that encompasses the growth rates of the firms, the selectivity of the hiring processes, the type and extent of socialization once employees are members of the organization, the rates of employee turnover, and the degree of alienation felt by employees.

The strongest effects are associated with hiring selectivity, management-based socialization, and alienation, Carroll says.
As for encouraging some employees to leave, the recommendation sounds harsh, Carroll acknowledges. “It should be treated with caution. It is also only one of several effective demographic factors to merge the cultures.”