Professionalizing entrepreneurial firms: Managing the challenges and outcomes of founder‐CEO succession

• Date: 01 September 2019
• Author: Caroline Kaehr Serra,Jana Thiel
• DOI: http://doi.org/10.1002/sej.1329
• Published date: 01 September 2019

SPECIAL ISSUE ARTICLE

Professionalizing entrepreneurial firms: Managing

the challenges and outcomes of founder-CEO

succession

Caroline Kaehr Serra

1,2

| Jana Thiel

3

1

Department of Management, University of

Berne, Bern, Switzerland

2

Desautels Faculty of Management, McGill

University, Montreal, Quebec, Canada

3

Department of Management, Technology

and Economics, ETH Zürich, Zürich,

Switzerland

Correspondence

Caroline Kaehr Serra, Desautels Faculty of

Management, McGill University, Montreal QC

H3A 1G5, Canada.

Email: caroline.kaehrserra@mail.mcgill.ca

Abstract

Research summary:The transition from a founder-led start-up

to a professionally managed firm entails significant change in

the firm's organizational design. This transition can constitute

a critical juncture for the entrepreneurial firm, and there is a

risk of losing key talent. We posit that limiting the disruptive

effect of changing organizational structures requires organiza-

tional members to not only adopt new roles but also embrace

new behavioral norms regarding how the firm operates. We

use an inductive multicase study paired with exogenous data

on company morale to explore outcome variation in such

transitional processes and elicit managerial strategies that can

guide successful founder-CEO succession and the accompa-

nying organizational change of the entrepreneurial firm.

Managerial summary:Adapting the organizational structures

of an entrepreneurial firm to match the needs of its expan-

ding operations represents a critical moment in a firm's life.

During this phase, the founder-CEO is often replaced by a

professional CEO. This event coupled with reorganization

can be highly unsettling for the venture's workforce and can

lead to turnover with negative performance implications. To

minimize disruption, we studied change strategies employed

by incoming professional CEOs. We find that most effective

CEOs jointly use three change levers—change readiness

activation, shared pathway creation, and founder legacy

fairness—to help team members adapt to the new situation

and align their behaviors with how mature firms operate.

Received: 28 July 2017 Revised: 24 May 2019 Accepted: 14 June 2019 Published on: 6 August 2019

DOI: 10.1002/sej.1329

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2019;13:379–409. wileyonlinelibrary.com/journal/sej 379

KEYWORDS

founder-CEO succession, organizational blueprints, organizational

change, professionalization, threshold firms

1|INTRODUCTION

An important factor in the growth of an entrepreneurial firm is the ability of its leadership to address the continuous

challenges that emerge as the business evolves. One of the most challenging crossroads arrives when the managerial

structures initiated upon the founding of the firm are no longer adequate to support growth opportunities

(e.g., Boeker & Wiltbank, 2005; Haveman & Khaire, 2004; Wasserman, 2003). Firms at this defining point in their

evolution have been referred to as “threshold firms”(Daily & Dalton, 1992). To successfully pass this evolutionary

threshold, founders or other stakeholders must initiate a professionalization process: new organizational structures,

incentive systems, and knowledge sources need to be put in place (e.g., Certo, Covin, Daily, & Dalton, 2001;

Colombo & Grilli, 2013; Gedajlovic, Lubatkin, & Schulze, 2004; Kazanjian & Drazin, 1990). This process comes with

changes to hierarchical relations (or their installation in the first place), new levels of decision authority, increased

functional specialization, and formalized rules and procedures (Colombo, Rossi-Lamastra, & Matassini, 2015). Often,

organizational restructuring is accompanied by a change in leadership from the founder-CEO to a professionalman-

ager (Boeker & Karichalil, 2002; Wasserman, 2003).

Such profound organizational restructuring presents a critical juncture in the life of a young firm. It can alienate

organizational members and lead to employee turnover with a significant decrease in performance (cf. Baron,

Hannan, & Burton, 2001). If accompanied by a leadership succession, further significant disruption can be expected

(Friedman & Saul, 1991; Shen & Cannella, 2002). Therefore, it is not surprising that many threshold firms struggle or

fail altogether to master this important phase (Daily & Dalton, 1992; He, 2008). However, there is surprisingly little

literature on the managerial aspects of professionalizing threshold firms. Despite having our increased understanding

of organizational design features that are critical for sustained growth—notably, organizational structure, team com-

position, and organizational culture (refer to De Santola & Gulati, 2017 for an extensive review)—research has not

addressed the question of how a change in any of these features can be managed effectively while minimizing the

disruption for the young firm; this is the gap we aim to address in this article.

Based on an interpretive case study approach, we explore key factors that facilitate the development and imple-

mentation of a mature organizational design during a transition from founder to professional management.We iden-

tify managerial change facilitators that enable a professionalization of the organization with respect to the

delegation of decision authority, specialization of roles, and formalization of organizational processes

(e.g., Colombo & Grilli, 2013; Sine, Mitsuhashi, & Kirsch, 2006), which are all typical characteristics of mature organi-

zations. We find that an incoming professional CEO can draw in particular on three important levers—change readi-

ness activation,shared pathway creation, and founder legacy fairness—to effect organizational change while

concurrently maintaining company morale, that is, employee satisfaction and an overall “collective sense of confi-

dence and enthusiasm about the future”(Friedman & Saul, 1991: 623).

Our study offers a contribution to the research on effective venture leadership (e.g., Garg & Eisenhardt, 2017;

Hallen & Eisenhardt, 2012), specifically how leaders can approach critical transitions that require substantial change

in the organization. By highlighting the concept of company morale as an important cofactor, we contribute empirical

evidence to the recently theorized importance of duality in the positive response and active engagement of organiza-

tional members during organizational change (Oreg, Bartunek, Lee, & Do, 2018). Furthermore, we hope to advance

research on how organizational blueprints may change throughout the evolution of the entrepreneurial firm, which is

typically regarded as a difficult and risky undertaking (e.g., Baron, Burton, & Hannan, 1996; Baron & Hannan, 2002).

380 KAEHR SERRA AND THIEL