INTRODUCTION

The Paradox
of Growth

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.¹ 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. This book 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 we’ve identified 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

Our insights in this book are based on a simple but profound truth. 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).² 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).³ 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 (see the sidebar later in this chapter, “How We Did the Research”), 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 (see figure I-1).⁴ The most consistent high performers exhibit the attributes of the founder’s mentality four to five times more than the worst performers.⁵ 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. Figure I-2, 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 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, Samsung, and soon Google 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.”⁶

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. But we’ve also encountered many remarkable and inspiring stories of the opposite nature (several that you will read in this book)—companies that seemed on the outside to have no hope but that were revived by leaders who virtually refounded the company from the inside.

One such company is DaVita, which has transformed itself since 1999 from a company that seemed headed for bankruptcy into one of the best-performing health-care companies in the United States today. Since Kent Thiry took over as CEO and publicly disclosed the full extent of the company’s troubles, its stock price (adjusted for splits) has increased by a hundred times and its market value has grown from almost zero to $15 billion. Thiry, still CEO nearly sixteen years later, engineered this transformation by first reenergizing the company on the inside with the founder’s mentality; later in this book, we’ll explore in detail how.

Why This Book Now

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.⁷

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.⁸ 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.⁹ 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.¹⁰

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 (see figure I-3). 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, 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.¹¹ It is a testament to the speed at which young companies can grow and become forces in their industries.

What You Will Get from This Book

We’ve written this book with a very practical goal in mind: to help companies achieve sustainable success by navigating a safe passage through the internal crises of growth. We believe that there are three types of readers who will benefit the most from the insights and ideas in this book. The first are members of leadership teams, including founders themselves, who are grappling directly with the challenges of achieving their growth targets. This includes all those in the organization who report to the senior team, those aspiring to greater leadership roles in the companies, and those in the middle layers who are responsible for implementing strategy and managing communication between upper and lower levels. The second type is the investor who is trying to assess a company’s growth prospects and the difficulty level of the challenges it will face on the way. The third is the board member who is concerned about the growth momentum or prospects of a company and wants a research-based means of asking the tough questions about preparedness for future challenges and barriers. All three types of readers—the leaders, the investors, and the board members—will find value in our research, our conclusions, and the stories we use to illustrate them.

This book is about how best to scale a business that has moved successfully beyond the start-up period while also maintaining the energy, focus, and obsessive attention to the customer that were the reasons for its initial success. It is different, in other words, from the recent tsunami of literature on the secrets of start-ups. For that, we refer readers to books such as The Lean Startup by Eric Ries or Zero to One by Peter Thiel. This book is also different from those that focus on the early start-up dynamics of founder- and family-led companies. Readers interested in that topic should start with The Founder’s Dilemmas by Noam Wasserman, which is perhaps the definitive work on this topic, and go from there.

We have devoted our careers to helping leaders of businesses find their next wave of profitable growth. Sometimes we’ve helped young companies as they struggle with an overload of growth opportunities, sometimes we’ve helped mature companies find ways to avoid stall-out, and sometimes we’ve helped companies in free fall completely redefine their business model. We look back on these experiences with enormous respect for the leaders in the center of the arena who must personally confront these challenges. We offer the ideas in this book with great humility but also confidence and optimism. They don’t represent an elixir. But they’re based on lessons we’ve learned from carefully studying some of the best-performing companies and leaders in the world, and we strongly believe that most companies facing growth crises can apply the principles of the founder’s mentality, as we define it in this book, to greatly improve their odds of success.

How This Book Is Organized

This book is built around the attributes of the founder’s mentality, and how they each can help management teams of all sorts understand and address the three predictable crises of growth.

In chapter 1, we’ll define the founder’s mentality, show how it interacts with the process of scaling, and introduce the three predictable crises of growth. In chapter 2, we’ll explore the forces that trigger these crises and will demonstrate their role in creating or destroying value through the life of a company. We’ll then devote a chapter to each of the three crises: overload in chapter 3, stall-out in chapter 4, and free fall in chapter 5. Finally, in chapter 6, we’ll look at the idea of scale insurgency as a model of how to achieve sustainable growth, and we’ll conclude with a discussion of the lessons that our work on the founder’s mentality holds for leaders at all levels of an organization.

Research is the bedrock on which we’ve based this book, but stories are how we’ve built it up: stories that we feel reflect the most practical ideas and lessons from our research, stories of how leaders have overcome the crises of growth, stories of disappointments that proved to be avoidable, stories of renewal. We’ve observed some of the world’s most effective leadership teams in action, and they’ve talked candidly to us about what has worked for them and what hasn’t. Drawing on that access, we’ll provide you with an in-depth look at what the founder’s mentality is, and we’ll show you how companies of all sorts have overcome the paradox of growth by continually using the founder’s mentality as the touchstone for everything they do. Our hope is that this book will empower leaders everywhere to infuse the founder’s mentality throughout their own companies, and to control the destiny of their companies in an uncertain future by mastering the internal game of strategy. Ultimately, this book is about addressing the pressing needs of the future—a future that more than ever rewards speed, open-mindedness, human motivation, and adaptability.

Let’s begin with the story of one of the great founders of our time.