Human resource practices are critical to a new firm's survival and growth, but few founders appear to give much thought to them. Marketing and financial issues receive much more attention than recruiting, hiring, and managing new employees, not only by founders but also in the research and entrepreneurship education literature. Human resource management practices' contributions to firm growth are also relatively neglected. Discussions of growth typically focus on financing and marketing issues, rather than personnel.
Founding and growth constitute two phases of the developmental process
typically posited by life cycle models of the firm. Life cycle models
assume that firms go through a sequence of change and growth, with the
process driven by organizational learning and increases in size, as well
as other processes associated with a firm's aging (Churchill and Lewis,
1983; Covin and Slevin, 1997; Hanks, et al., 1994; Whetten, 1987).
A major feature of this ideal-typical sequence is increasing formalization
and rationalization of business practices (Scott and Bruce, 1987).
Implicitly, widening formalization also applies to human resource management
(hrm) practices. But, is this an accurate characterization of the
founding and growth process for small and medium-sized enterprises?
In this paper, we examine the link between organizational life cycles and hrm practices. Specifically, we search for evidence that organizational aging and increasing size are associated with a movement away from personalistic and informal hrm and toward more impersonal and formalistic hrm practices.
We use an evolutionary model of organizational life cycles to examine the conditions under which firms might change as they age and grow. Founders of new firms must work with the resources available to them, and their ability to mobilize and use what is available depends on various personal, organizational, and environmental conditions. Changes over an organization's life span are influenced not only by age but also by whether founders put their resources to use in growing the business (Eggers, Leahy, and Churchill, 1994). Learning opportunities multiply as an organization ages, but without the hiring of more employees, founders' gains in understanding hrm will translate only slowly, if at all, into organizational change.
Founding Conditions and Sources of Employees.
Almost all firms began small, in part because founders are often uncertain about their prospects and are tentative in committing themselves, but also because of the terms on which resources are available (Duncan and Handler, 1994). Few investors are willing to loan money to an unproven venture, and potential suppliers and employees are also skeptical about the firm's chances. With regard to human resources, founders want people whom they can trust and also to whom they can delegate a great deal of responsibility in the start up phase of their business. Because a clear division of labor is not yet set, and because people will be operating with a great degree of uncertainty, owners look for early hires whom they can trust implicitly, and who can be counted on to take responsibility.
Family members thus constitute a valuable pool of potential employees, as their personal characteristics have already been revealed to founders, and their degree of trustworthiness and competency is harder to disguise from their potential employer (Upton and Heck, 1997). However, the personal circumstances of potential family employees may limit their availability to founders. The founder's children may be too young or too old to work in the business. For family members who have already begun families or careers, the opportunity costs of switching to working in a family business may be too costly.
Family members may also be difficult to recruit because they may view employment in the new venture as a risk, rather than an opportunity. Only a few family members may be able to take the gamble of working for a startup. Some family may be willing to become part of the new venture if they are given a chance to acquire an ownership share in it. Family members are also a likely source for employees who might be willing to work without pay, at least at the start. Founders' spouses, children, and elderly parents are potential unpaid employees, although they may have careers or obligations that prevent them from serving without pay. Indeed, a working spouse who has income from another job sometimes helps a founder to subsidize a startup, and perhaps also enable it to survive in spite of minimal cash flow in the early months.
Personal networks are another potential source of employees whose characteristics might be known to founders. Founders can ask early hires to recommend people they know, or ask other business owners for their recommendations. Founders may also turn to their friends, or other people they know personally, in their recruiting efforts. If the picture we have drawn is accurate, then young firms will initially be built through the labor of owners and employees they have recruited via family and personal networks. But what happens if firms begin to grow?
Growth, Learning, and Changes in Human Resource Practices.
Even if a new venture survives, it still may not grow. If it does not grow, then founders will feel few pressures to change their recruiting channels or hrm practices (Willard et al., 1990). If a new venture not only survives but also grows, then recruitment channels and hrm practices will require more attention from founders, and changes are more likely. Greater resources may permit founders to hire more family members, if issues of trust are still highly salient, but we believe other forces will outweigh pressures to hire more family. Instead, we hypothesize:
H1: Founders will adapt to growth by creating less personal and more formalized recruiting and hrm practices.
Growth creates a need for more specialized competencies than those possessed by the early hires. Relying on family and personal networks limits founders' access to strangers who may have the desired skills. Thus, owners may begin casting a wider net in their recruiting, using more formalized sources of employees. Also, as firms expand, they are able to afford commercial hiring services, such as employment agencies and newspaper advertising.
As more strangers are hired, other changes in hrm practices may also be necessary. Increasing size and specialization eventually require more delegation of responsibility. As firms grow larger, they need to adapt more formalized hrm practices to maintain control, as specialists began to outnumber generalists. We would expect larger firms to adopt formalized job assignments, job descriptions, training programs, and written personnel records.
Limits To Adaptation And Learning.
The picture we have painted thus far is a very familiar one, as it fits the typical life cycle model of the firm portrayed in the organizational development and business strategy literature. However, from an evolutionary perspective, the picture is incomplete: opposing the forces generating pressures for adaptation and learning are those sustaining the status quo. In particular, lack of business experience and desires to maintain a "family business" limit adaptability, and we propose a second hypothesis:
H2: Founders' adaptations to growth will be limited by lack of experience and desires to protect a "family business."
Ecological-evolutionary analyses of organizations have identified inertia as a powerful limiting force in organizational change. In spite of contingencies that would seem to require adaptation, many organizations steadfastly persist in maintaining their structures undisturbed over long periods. Two forces especially relevant to inertia in small and medium sized ventures are lack of business experience and limited goals for the business.
Adapting to growth by creating more impersonal and formalized hrm practices will be facilitated if founders have previous managerial experience. Having previous experience as a business owner, and experience in the same industry, will also prepare founders for making changes in response to the new situations they encounter (Baker and Aldrich, 1997; Stuart and Abetti, 1990; Schollhammer, 1991). To some extent, lack of previous experience can be offset by"learning on the job," and so we expect business age to be moderately associated with greater formalization. Some writers have also argued that prior experience might even hamper an entrepreneur (Shane, Kolvereid, and Westhead, 1992; Starr and Bygrave, 1991).
Owners who wish to preserve a strong family orientation in their business,
by having many family members as owners or employees, may find their hands
tied when decisions must be made about hrm practices. To the extent
that personal relations limit founders' discretion, adaptation to growth
will be difficult.