A vet­eran strat­egy ex­pert de­scribes the power of ‘the Founder’s Men­tal­ity’.

Rotman Management Magazine - - FROM THE EDITOR - In­ter­view by Karen Christensen

on The Founder’s Men­tal­ity

All com­pa­nies strive for prof­itable growth, but you be­lieve it eludes many for a com­mon rea­son. What is it?

In my 25 years of re­search­ing this topic and work­ing with clients, one theme has come up again and again: com­plex­ity. In my view, com­plex­ity is the silent killer of growth, and it op­er­ates at many lev­els. For in­stance, over time you can ac­cu­mu­late too many busi­nesses, projects or as­sets. LEGO got into a lot of trouble 15 years ago by do­ing just that, and it had to strip all the com­plex­ity out and re­turn to its core. It has since en­joyed a great resur­gence.

Com­plex­ity can also come into the de­sign of your prod­ucts or ser­vices, via the num­ber of op­tions of­fered. There are great ex­am­ples of start-ups go­ing into the tele­com world and do­ing the op­po­site — cre­at­ing very sim­ple of­fer­ings. For in­stance, in the Nether­lands, tiny Ziggo went up against gi­ant KPN and al­most com­pletely took over the mar­ket with just three prod­uct of­fer­ings.

Or­ga­ni­za­tional com­plex­ity is also com­mon. Lay­ers and lay­ers of man­age­ment have been shown to hugely re­duce lev­els of em­ployee sat­is­fac­tion and to draw lead­ers even fur­ther away from the front line, leav­ing them out of touch. Com­plex­ity can even af­fect your stated mis­sion as a com­pany: If you over-com­pli­cate your busi­ness, peo­ple will not un­der­stand what you stand for. These are some com­mon ex­am­ples, and in my ex­pe­ri­ence, they of­ten go to­gether.

We have found that about 85 per cent of breakdowns in the mar­ket­place — whether it be prod­ucts that don’t work, cus­tomers los­ing in­ter­est or com­pa­nies be­com­ing too high-cost rel­a­tive to their com­peti­tors — re­late to in­ter­nal fac­tors, and two-thirds of those re­late to com­plex­ity.

You be­lieve the rem­edy for per­va­sive com­plex­ity is to em­brace the Founder’s Men­tal­ity. Please ex­plain.

There are three im­por­tant el­e­ments to the Founder’s Men­tal­ity: A clear ‘in­sur­gent mis­sion’ that gives peo­ple en­ergy and pur­pose; a front-line ob­ses­sion, be­cause that is where most in­no­va­tion comes from; and the ‘owner’s mind­set’, which re­lates to things like a bias for ac­tion and treat­ing each dol­lar spent as your own. These three el­e­ments are ob­serv­able, mea­sur­able and, in our view, are the best in­di­ca­tors of an or­ga­ni­za­tion’s in­ter­nal health.

As hu­mans, we are all very fo­cused on our health. When we go to the doc­tor for a phys­i­cal, there are a clear set of things to look at: heart rate, body chem­istry, weight. If you be­lieve our find­ing that 85 per cent of com­pany breakdowns can be traced back to in­ter­nal fac­tors, you have to ask, ‘Is there a way to track and as­sess the in­ter­nal health of an or­ga­ni­za­tion?’ I would ar­gue that the Founder’s Men­tal­ity pro­vides a way to do that.

Is there a com­pany that per­son­i­fies the Founder’s Men­tal­ity?

Some of the com­pa­nies I would put in this cat­e­gory in­clude En­ter­prise Rent-a-car, IKEA, Ap­ple, Nike and my own com­pany, Bain & Com­pany. In my view, the rea­son we’ve been called ‘the best place to work in Amer­ica’ for sev­eral years in a row is that we have main­tained a Founder’s Men­tal­ity. An­other one of my favourites is Ama­zon. To this day, Jeff Be­zos is om­nipresent in the com­pany; it has a very clear in­sur­gent mis­sion (‘To be the earth’s most cus­tomer-cen­tric com­pany’); it ex­per­i­ments all the time on the front line and has amaz­ing mea­sures; and it ex­em­pli­fies speed of ac­tion. On three re­cent ma­jor sur­veys of cus­tomer sat­is­fac­tion, Ama­zon came in at num­ber one, de­spite the fact that it has be­come a mas­sive or­ga­ni­za­tion.

Part of hav­ing a front-line ob­ses­sion en­tails re­lent­less ex­per­i­men­ta­tion. What does that look like?

Re­search shows that about 92 per cent of in­no­va­tive ideas — big and small — come from em­ploy­ees serv­ing cus­tomers di­rectly and see­ing their prob­lems day-to-day, or from work­ing with cus­tomers to co-cre­ate so­lu­tions. As more lay­ers creep into a com­pany and the fo­cus moves fur­ther away from the front line, this source of in­no­va­tion gets sti­fled.

There are a few things you can do to avoid this. For one, you can have a unit of your com­pany that fo­cuses en­tirely on in­no­va­tion. There is a Chi­nese gro­cery com­pany called Yonghui, started by two brothers from a small vil­lage who came up with a rev­o­lu­tion­ary way to bring fresh food to large Chi­nese stores. They have ‘red stores’ and ‘green stores’: The green stores are few in num­ber, but that is where they try out new and in­no­va­tive ideas and prod­ucts; then, the things that work best are rolled out to the red stores.

An­other thing you can do is to con­stantly iden­tify new in­no­va­tive ideas and pull to­gether a cross-func­tional team of six to eight peo­ple that fol­lows the prin­ci­ples of ag­ile teams, with very short cy­cle times to test things out. That’s what Ama­zon does. It’s amaz­ing how many things it has tried and then aban­doned — which is a great sign of in­no­va­tion. A few ex­am­ples are the Wal­let, the Fire Phone and some­thing called Des­ti­na­tions in the realm of travel. Be­zos refers to the at­mos­phere at Ama­zon as ‘still be­ing like day one’. It still feels like a start-up to him.

An­other strong piece of the Founder’s Men­tal­ity is more quan­ti­ta­tive: A strong cash fo­cus. Tell us a bit about that.

In the early days of any founder-run com­pany, the founder watches over the firm’s re­sources like a hawk. There is a strong ten­dency to not only be very care­ful with re­sources, but to be will­ing to re­de­ploy them. As most com­pa­nies grow, they cre­ate de­part­ments that end up fo­cus­ing on their own agenda of ‘func­tional ex­cel­lence’. It is ex­tremely dif­fi­cult to get re­sources out of these de­part­ments. Whether it be IT or mar­ket­ing, re­sources get trapped, and that’s the op­po­site of what hap­pens in a small, founder-led com­pany.

We are now see­ing some large com­pa­nies, such as AB Inbev, em­brac­ing an­nual bud­get ex­er­cises that try to repli­cate the dy­nam­ics of a founder com­pany. In AB Inbev’s case, they call it zero-based bud­get­ing, and they do it for all of their SG&A [sel­l­ling, gen­eral and ad­min­is­tra­tive] com­po­nents ev­ery year. Each leader ba­si­cally has to re-jus­tify his

92 per cent of in­no­va­tive ideas — big and small — come from em­ploy­ees serv­ing cus­tomers di­rectly.

or her spend­ing or stand the chance of hav­ing re­sources re­de­ployed. This is a very healthy ap­proach, be­cause to grow in a healthy way, you have to con­stantly lib­er­ate pools of re­sources and de­ploy them to growth as op­posed to al­low­ing them to get trapped. If you look closely at pri­vate eq­uity deals, the most suc­cess­ful ones of­ten en­tail busi­nesses pur­chased from huge con­glom­er­ates. These firms are ex­perts at find­ing trapped re­sources in these com­pa­nies, and that’s the essence of their high suc­cess rates.

How preva­lent is the Founder’s Men­tal­ity?

At the mo­ment, only about five per cent of large com­pa­nies have main­tained a Founder’s Men­tal­ity. An es­tab­lished en­ter­prise that is bu­reau­cra­tized can’t in­stantly go back to its youth­ful days, any more than some­one in their 60s can sud­denly have the youth­ful ex­u­ber­ance of a six-year-old. But there are plenty of things you can do to use the Founder’s Men­tal­ity as a play­book for re­newal.

Star­bucks, for in­stance, lost its way for a while, un­til Howard Schultz came back and re­newed the Founder’s Men­tal­ity. And Unilever has taken steps to re­new it­self un­der Paul Pol­man. We stud­ied these com­pa­nies closely and found that there are four el­e­ments that can be seen as a ‘play­book for re­newal’.

First of all, re­duce com­plex­ity in one of the ways I men­tioned at the out­set. Sec­ond, sharpen the com­pany’s mis­sion and pur­pose. That might mean go­ing back to what made it great in the first place. Third, re­ju­ve­nate the en­ergy on your front lines by giv­ing those peo­ple more power and mak­ing them the ‘he­roes’ of your busi­ness. As part of this, you should also get your se­nior man­agers to spend more time with cus­tomers. We have found that some lead­ers spend five to 10 per cent of their time in the field; but oth­ers spend up to 50 per cent of their time or more there, and that is a bet­ter model to keep en­ergy on your front line and main­tain your in­stincts. Fourth, fo­cus on every­thing you can do to in­crease speed. Cisco is a com­pany that has gone through wave af­ter wave of in­ter­nal ini­tia­tives to make sure that as it grows, it con­tin­ues to be very fast off the mark. This has al­lowed it to com­plete 180 ac­qui­si­tions very quickly, with an in­cred­i­bly high suc­cess rate. That is only pos­si­ble be­cause it’s main­tained a Founder’s Men­tal­ity.

Are or­ga­ni­za­tions that em­brace this mind­set more suc­cess­ful than their peers?

When we stud­ied the com­pa­nies with the long­est runs of sus­tained suc­cess, we found some­thing amaz­ing. We sep­a­rated For­tune 500 com­pa­nies into two groups: Those where the founder re­mained ac­tively in­volved af­ter step­ping down as CEO — such as Phil Knight at Nike and Mark Zucker­berg at Face­book; and those where the founder was long gone. The for­mer — i.e. those with a Founder’s Men­tal­ity — per­formed 3.1 times bet­ter in terms of share­holder re­turns. In ad­di­tion, over the last 10 years, those five to six per cent of com­pa­nies that gained scale while main­tain­ing a Founder’s Men­tal­ity made up 60 to 70 per cent of all the value cre­ation in the stock mar­ket.

Chris Zook is a Part­ner in Bain & Com­pany’s Bos­ton of­fice, where he was co-head of the firm’s Global Strat­egy prac­tice for 20 years.

His lat­est book is The Founder’s Men­tal­ity: How to Over­come the Pre­dictable Crises of Growth (Har­vard Busi­ness Re­view Press, 2016).

Com­pa­nies that have main­tained a Founder’s Men­tal­ity make up 60 to 70 per cent of all value cre­ation in the stock mar­ket.

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