“The founder’s mentality” is one of business’ “most undervalued secrets,” write Bain & Co. strategy leads Chris Zook and James Allen in their latest book, “The Founder’s Mentality: How to Overcome the Predictable Crises of Growth.”
“Looking at hundreds of companies around the world,” Zook told Fortune, “wherever we looked, we found that founder-led companies, or companies where the founder was still very central to the operation, performed 3.1 times better than all other companies.”
Growth creates complexity, and complexity is the silent killer of growth. This paradox explains why only about one company in nine has sustained more than a minimum level of profitable growth during the past decade, and why 85 percent of executives blame internal factors for their shortfall, not external ones beyond their control. The roots of sustained performance start deep inside, and they are predictable.
If you look carefully, you can always find two intertwining plot lines in the story of any business success or failure. The first, and the most visible, is the external story. This is the narrative that plays out in the marketplace in the form of quarterly earnings, returns to shareholders, market share shifts, and profitable growth. This is the story that is easiest to track, and it’s the one that most people—boards of directors, investors, the press, the public—choose to follow. It’s a story about how a company wins on the outside by serving the customer better than its competitors.
The second story plays out inside a company. It’s much less visible.
It’s the story of building the business, expanding and retaining a quality workforce, strengthening the culture, upgrading the systems, learning from experience, adapting the business model, holding down costs, and mobilizing the people to carry it all out perfectly, again and again.
Some companies excel externally but are troubled internally; others are troubled externally but excel internally. Ultimately, though, companies have to excel in both arenas if they want to succeed. The plot lines have to converge. You can’t sustain profitable growth in a competitive market if you’re a disaster internally, and you can’t maintain a high-performance culture internally for long if you’re failing in the marketplace.
We’ve written four books about how to win the external strategy game, starting with Profit from the Core. Our new book, The Founder’s Mentality is different. It’s about the inside game of strategy. It’s about how companies, both young and mature, can avoid what we’ve identified as the three internal crises of growth.
The Predictable Crises of Growth
Each of the three crises occurs at a different phase in a company’s life.
The first crisis, overload, refers to the internal dysfunction and loss of external momentum that management teams of young, fast-growing companies experience as they try to rapidly scale their businesses.
The second crisis, stall-out, refers to the sudden slowdown that many successful companies suffer as their rapid growth gives rise to layers of organizational complexity and dilutes the clear mission that once gave the company its focus and energy. Stall-out is a disorienting time for a company: the accelerator pedal of growth no longer responds as it used to, and faster, younger competitors are starting to gain ground. Most companies that stall out never fully recover.
The third crisis, free fall, is the most existentially threatening. A company in free fall has completely stopped growing in its core market, and its business model, until recently the reason for its success, suddenly no longer seems viable. Time feels scarce for a company in free fall. The management team often feels it has lost control. It can’t identify the root causes of the crisis, and it doesn’t know what levers to pull to escape it.
These three crises represent the riskiest and most stressful periods for businesses that have made it successfully through their start-up and early-growth phases. The good news is these crises are predictable and often avoidable. The killers of growth that these crises contain can be anticipated and even turned into a constructive reason for change.
The Founder’s Mentality
Despite their many differences, most companies that achieve sustainable growth share a common set of motivating attitudes and behaviors that can usually be traced back to a bold, ambitious founder who got it right the first time around. The companies that have grown profitably to scale, while maintaining the internal traits that got them there in the first place, often consider themselves insurgents, waging war on their industry and its standards on behalf of an underserved customer, or creating an entirely new industry altogether. Such companies possess a clear sense of mission and focus that everyone in the company can understand and relate to (in contrast with the average company, where only two employees in five say they have any idea what the company stands for).
Companies run in this way have the special ability to foster employees’ deep feelings of personal responsibility (in contrast with the average company, where a recent Gallup survey shows that only 13 percent of employees say they are emotionally engaged with their company).
They abhor complexity, bureaucracy, and anything that gets in the way of the clean execution of strategy.
They are obsessed with the details of the business and celebrate the employees at the front line, who deal directly with customers. Together, these attitudes and behaviors constitute a frame of mind that is one of the great and most undervalued secrets of business success.
We call it the founder’s mentality. The founder’s mentality constitutes a key source of competitive advantage for younger companies going up against larger, better- endowed incumbents, and it consists of three main traits: an insurgent’s mission, an owner’s mindset, and obsession with the front line. In their purest expression, these traits can be found in companies that are founder-led, or where the clear influence of the founder still remains in the principles, norms, and values that guide employees’ day-to-day decisions and behaviors.
In our analyses, surveys, and interviews we’ve found a consistently strong relationship between the traits of the founder’s mentality in companies of all kinds—not just start-ups—and their ability to sustain performance in the marketplace, in the stock market, and against their peers. Since 1990, we’ve found that the returns to shareholders in public companies where the founder is still involved are three times higher than in other companies. The most consistent high performers exhibit the attributes of the founder’s mentality four to five times more than the worst performers.
Furthermore, we’ve determined that of the roughly one in ten companies that achieve a decade of sustained and profitable growth, nearly two in three are governed by the founder’s mentality. These are all remarkable numbers.
All too often, however, companies lose the founder’s mentality as they become larger. The pursuit of growth and scale adds organizational complexity, piles on processes and systems, dilutes the sense of insurgency, and creates challenges in maintaining the original level of talent.
These sorts of deep, subtle internal problems, in turn, lead to deterioration on the outside. Based on a global survey we have conducted of 325 executives, shows the decreasing degree to which company leaders perceive the founder’s mentality at work in their own company, depending on its size.
How else to explain the disappointments of companies that once dominated their business and seemed to have everything— growing markets, massive investable funds, proprietary technologies, best-known brands, leadership in their channels?
In the 1990s, for example, Nokia (nok) rocketed to the top of the handset market. During that decade, we estimate, the company captured more than 90 percent of the market’s global profits and seemed poised to maintain its leadership for years to come. It even was putting in place many of the elements for next-generation smartphones: it had developed some of the earliest small-touchscreen technology, was the global leader in selling tiny cameras, had learned how to distribute music, and was one of the first companies to offer free e-mail on its phones. Yet somehow, overloaded by its own growth and blinded by its burgeoning organizational complexity, the company failed to capitalize on its advantages and take the lead in developing next-generation phones, despite calls from some of its own engineers to do just that.
None of this stemmed from a lack of resources or opportunity.
Nokia sat on top of one of the biggest growth markets the world had ever seen, and on top of one of the biggest piles of cash in history. But instead of thinking like an insurgent and investing in the future, it gave out 40 percent dividends and used its cash to buy back large quantities of its own stock. Within just a few years, Apple (aapl), Samsung (ssnlf), and soon Google (goog) had seized the smartphone market, and Nokia, once a model of innovation and insurgent- style thinking, was in steep decline. A board member, when interviewed about what happened, pointed to internal factors, not competitive moves, and concluded simply, “We were too slow to act.”
In our studies of growth crises, we’ve come across a plethora of companies like Nokia—companies that seemed on the outside to have everything (market position, brand, technology, customer base, enormous financial resources) but ultimately lost it all in shocking fashion, because of how they failed to play the internal game.
Overload, stall-out, and free fall may all be predictable crises, but we’ve discovered that good solutions exist for overcoming them. And overcoming them is vital: on average, more than 80 percent of the major swings in value in companies’ lives can be traced to the decisions and actions the companies take—or do not take—at these three moments of crisis.
Not only is overcoming these crises vital, it has also never been more urgent. That’s because business life cycles—and the metabolisms of whole industries—have been speeding up dramatically. Consider this: on average, new companies that reach Fortune 500 scale today are doing so more than two times faster than just two decades ago, and the fastest—the world record holders for scaling—are exceeding prior records by a wide margin.
Another indicator that young companies are achieving market power sooner: in 40 percent of the competitive arenas, the strongest company—that is, the company with the biggest share of industry profits and, thus, the greatest ability to reinvest—is no longer the largest. Advances in technology, and the increasing shift in value toward services and software where scale is less important, are eroding the advantages of size. As a result, young insurgents are becoming a threat to incumbents earlier than ever.
And here’s the other part of the story: once these insurgents themselves become incumbents, they are stalling out more often and more suddenly, and are having a harder time recovering than ever before.
This double whammy of faster growth early in life and faster stall-out later in life has resulted in a more rapid reordering of strategic positions in many industries, and has caused leaders and followers in many markets to change places with frightening speed.
Take the airline industry: a well-established, capital-intensive industry with high barriers to entry and no totally disruptive technology. This is not the kind of industry in which, traditionally, you would expect to witness a major strategic reordering. But that’s precisely what has happened in the past couple of decades. If you look at a list of the top-twenty airlines by value in 1999 and then compare that with today’s list, you find that the industry leaders have churned by more than half, that bankruptcies have been common, and that roughly half of the companies that were on the list sixteen years ago are not even independent companies today. The airlines that are the most valuable in the world, such as Air China (airyy), didn’t even make the top twenty in 1999.
And this phenomenon is by no means unique to the airlines. Well over half of executives from across all industries say that their main competitor in five years will be a different company than it is today. It is a testament to the speed at which young companies can grow and become forces in their industries.
Reprinted by permission of Harvard Business Review Press. Excerpted from The Founder’s Mentality: How to Overcome the Predictable Crises of Growth. Copyright 2016. Bain & Company, Inc. All rights reserved.