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01/23/95

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Study charts growing pains of emerging firms

STANFORD -- For Ed O'Hara, MBA Class of ¹95, sitting down with the founders and CEOs of 18 young Silicon Valley firms to ask them how their companies had evolved was a great experience. "I'd always worked for large organizations. This was an opportunity to see how these people thought and processed ideas," he says.

O'Hara, with second-year classmates Paola Bonomo and Eric Smith, has a key role in a Business School research project designed to gather basic information about how entrepreneurial companies are created and evolve, and how their employment practices and organizational structures change over time. The research project's goal is to answer a single important question: How does the success of entrepreneurial firms depend on the management of human resources?

The three MBA students spent the summer interviewing key people in 100 Silicon Valley companies founded since 1984, producing both audio tapes and written summaries of the interviews for the Stanford Project on Emerging Companies.

"Most of what we know about human resource management is based on studies of mature firms and bureaucracies," says James N. Baron, associate dean of the Business School and one of the project's creators. "I frequently am asked to point people to research that discusses systematically the transitions that emerging companies go through. There's really nothing."

The emerging companies project is breaking new ground by sampling high-tech Silicon Valley startups less than 10 years old with 10 or more employees. The project's principal investigators, Baron and Michael T. Hannan, professor of organizational behavior and human resources, have broadened their study far beyond the traditional subject of human resource research. They want to understand how employment practices relate to and shape a company's business strategy, organizational design and production technology, as well as its culture. Baron and Hannan conceived the project after a Business School faculty seminar held in 1992 to set the agenda for future academic work in human resources.

How do firms get locked in?

"One observation that intrigued seminar participants was the difficulty organizations face in changing their personnel practices," says Baron. "For instance, despite mounting evidence of the beneficial effects of systems such as the team-based organization at Toyota, many American companies have been slow to emulate these practices.

³It appears that employment relations in mature firms can be changed only slowly and at great cost. This raises the question: How and why do firms get locked into a particular way of organizing and managing their workforce that limits their options down the road?"

One answer is to examine organizations in their formative years, as their human resource policies and practices evolve, and then track them over time.

"We hope to describe broad patterns about how human resources are treated in different types of firms," says Hannan. "We have a lot of information about how firms were put together, and we should be able to see if this makes a difference - for instance, how the involvement of venture capitalists, legal counsel and public offerings affects human resource policies."

Hannan will draw on information from the emerging companies project spring quarter, when he teaches his elective class Human Resources in Entrepreneurial Companies.

Although it is too early to draw any firm conclusions, "it is already abundantly clear that among young firms doing basically the same thing, one sees dramatic differences in their HR policies and philosophies and huge variations in the strategic importance placed on human resource management," says Hannan. "We're eager to learn where those differences come from and how they affect performance and survival over time."

Baron and Hannan meet weekly with a group of MBA and doctoral students to discuss the research in progress. "This partnership with MBA students is a good example of research and teaching complementing one another," says Baron.

Bonomo interviewed leaders in 32 firms. She noted that the founders, who were generally very experienced, had developed management philosophies and human resource policies prior to starting their own firms. "Hearing their ideas was a way of starting to form my own organizational values and beliefs," says Bonomo.

Baron and Hannan are planning a workshop for company participants at the Business School in March. If participating firms are willing, the researchers hope to follow them for at least five years, adding more firms to replace those in the original sample that do not survive. "We would like to re-interview our informants in 1996 and 1999 to gather information on subsequent changes and to update information on success and failure," says Baron.

"Being involved in this project benefits both us and the school," says Smith. "The opportunity to work with faculty on this kind of academic research really enriches our educational experience."

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