The preoccupation these days with disruption and a rapidly changing business environment may be obscuring an important truth. While we worry about the external environment precipitating corporate failure, a recent survey of executives by Bain & Co. uncovered that the root cause of breakdown seems more likely to be internal.
The management consultants were looking at an important slice of business: Young, high-growth companies in developing markets that had attained well over $200-million (U.S.) in sales and had a promising future. Those companies are essential, producing the vital job gains economies need. So it's crucial to understand the internal barriers that defeat them.
In The Founder's Mentality, Bain consultants Chris Zook and James Allen zero in on the elements that led a firm's originator to initially succeed – and how, over time, growth diminishes that capacity. Mr. Zook, in an interview, compares their work to Passages: Predictable Crises of Adult Life by Gail Sheehy, the 1976 book that opened our eyes to the life cycles of human beings. Their book is similar, but for fast-growing companies.
Sometimes founders of fast-growing companies seem like geniuses. But the consultants instead point to three types of behaviour that combine to form what they call The Founder's Mentality:
An insurgent mission: Successful founders wage war against an industry on behalf of underserved customers. It's not just Elon Musk with Tesla Motors or Sergey Brin and Larry Page with Google. "Every local restaurant can be special at something," Mr. Zook said. A sharp, insurgent mission provides the company with focus and purpose. But time can dull the insurgency, and often companies fail to reignite or replace this rebellion with another.
Front-line obsession: Founders are obsessed with the front line because at the start they often are the front line, answering phones and serving customers, sensitive to the details that encourage success. As a young entrepreneur, the late luxury hotelier M.S. Oberoi became preoccupied with issues such as the temperature of the tea and the length of the bellman's trousers, and even in his eighties was visiting hotels to check that everything was right. But that obsession is missing in many large firms. "We looked at many companies that were run by people who never served a customer or manufactured the product," Mr. Zook said.
The owner's mindset: It's common in small companies for employees at every level to be so invested in the company they feel and act like owners. They take personal responsibility for their actions; they have a strong cost focus, treating money as if it was their own; they have a bias for action, and are willing to take risks. They have an aversion to bureaucracy but, of course, with growth, that can be overwhelmed by the need to standardize ways of doing things.
The founder's mentality can give small companies a big advantage as they challenge the behemoths of business. High-performing companies are four to five times more likely to exhibit the attributes of the founder's mentality than the worst-performing companies.
But as companies grow and become more complex, those attributes will wither. They lose their mojo, as they hit three predictable crises of growth the consultants outline:
Overload: New systems are required and the complexity slows things down as the company rapidly grows. The founders get caught up in other activities, new executives are parachuted in, and the zest that initially animated the company disappears.
Stall-out: After the period of rapid growth, rising levels of bureaucracy and internal dysfunction lead to a loss of momentum. The consultants stress this can happen very quickly, in a few years, before revenues even start to plummet. "Ninety-four per cent of large company executives cite internal dysfunction as their key barrier to continued profitable growth. The irony, of course, is that this dysfunction derives from the very things that young insurgents work so hard to achieve: Size, recognition, experience, capabilities, capital, and market position," the two consultants write in their book.
Freefall: Insurgents challenge the high-flier – this can happen at any stage, but is most prevalent later in life – and the company nosedives. The consultants estimate that at any given moment about 5 to 7 per cent of companies are in freefall or about to tip into it.
In each crisis, the three elements of the founder's mentality have dissipated. And the solution is to reinstate them, suitably reframed for the company's new situation. An insurgent mission, an owner's mindset, and a front-line obsession are vital through the corporate life cycle.
Harvey Schachter is a Kingston, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online column, Power Points. E-mail Harvey Schachter