1

The Founder’s
Mentality

The Key to Achieving
Sustainable Growth

Every great business founder has an origin story to tell. For Leslie Wexner, that story began one day in 1963, when, at the age of twenty-five, he concluded that he could create a retail business that would achieve better results than the one run by his parents.

Wexner had been born and raised in Dayton, Ohio, the son of a Russian-Jewish immigrant father who had emigrated to avoid persecution. His father, Harry Wexner, who never learned how to write, had worked his way up at a Chicago department store from package wrapper to store walker to window trimmer to manager; his mother, Bella Wexner, who had started at the Lazarus department store as an administrative assistant, had risen to become the youngest buyer in the store. Together, despite working long hours, they had never made more than $9,000 a year. “We had absolutely no money,” Wexner recalled. “Zero.” In 1951, hoping to do better on their own, they opened a small store, with a storefront only thirteen feet wide. They named it Leslie’s, after their son. But their situation didn’t improve much.

This nagged at Wexner, who had studied business as an undergraduate at Ohio State University in Columbus. How was it that his parents, who were always working so hard, hadn’t managed to get further ahead in life? Part of the answer came to him after college, when he was helping out at the store and came across a set of invoices. As he studied them, he realized that his parents had filled their store with big-ticket items that sold with lower net margins, such as dresses and coats. What were selling at higher profitability and keeping the store afloat, however, were the average-priced items, such as shirts, skirts, and pants. To Wexner, the solution was obvious: sell more of the merchandise with the best economics. Wexner enthusiastically took this idea to his father, who, less than receptive, told him to get a job.

So he did. Convinced that he could succeed, Wexner founded his own business: a specialized clothing store for women at the Kingsdale Shopping Center, in Upper Arlington, Ohio, that, in contrast with his parents’ general-merchandise strategy, would stock only a limited selection of clothing and focus on what sold best. He called his store The Limited.

To launch his business, Wexner turned for help to his Aunt Ida, who lent him $5,000 as collateral. With that money, he got a $10,000 bank loan and set to work. This was no tentative venture. Convinced it would succeed, he signed a lease for a second store and ratcheted up his liabilities more than $1 million even before he opened his first store. He was all in and had a powerfully personal sense of what was at stake. “With $1 million of debt and no equity,” he said, “I felt that a bear was chasing me and would eat me if I stood still for a second,” adding, “If it didn’t work, I would be the most notorious bankruptcy in Ohio.”

Receipts in The Limited’s first year were $160,000, not enough to reduce Wexner’s anxiety but enough to keep him going a bit longer. Despite his fragile finances, he embarked on an ambitious plan of growth, opening a new store in each of the next five years; each succeeded, thanks in large part to his force of will. “I felt that I could win by always outworking my competitors,” he said. “If they worked twelve hours a day, I would work sixteen. I was determined to make sure that everyone left the store with a reason to come back. I thought, ‘We do not have much money, we do not have many stores, but at least I can be enthusiastic.’ You can describe it as passion for success.”

Wexner also succeeded in his early years by developing an unrelenting focus on the front line. “I treated each customer as a friend,” he said. If they didn’t like what they’d bought from him, he decided, they could bring it back for a refund, not a common practice at the time, and one his father told him was crazy. But he did it anyway. From the start, too, Wexner imbued The Limited with a sense of personality and purpose. The Limited, he believed, should exist to serve the needs of a very precise kind of customer: a smart, strong, independent modern woman, typified by Jenny Cavalleri, the beloved character played by Ali McGraw in Love Story. “I built my store around an image of a woman like her,” he said, “and what she would want to wear.”

In 1969, with six successful stores in operation, Wexner took another unconventional risk: he decided to take The Limited public with an intrastate offering, in order to provide his employees with real equity that would make them share his owner’s mindset. People ridiculed the decision at the time, but it turned out to be a good one. If you had invested $1,000 in The Limited when it went public, your stake today would be worth $60 million.

Today, L Brands, as Wexner now calls his company, employs a hundred thousand people. Running the company poses all sorts of complex management challenges, but as Wexner and his management team confront them, they remain as focused as ever on their core mission and ideals. “I knew that we needed to become a big company in order to be able to compete economically,” he said. “But above all, I wanted to build a good company with a special purpose and clear values.” In working toward that goal, Wexner learned an important lesson by reading Making Movies by Sidney Lumet. “You have to think of all of the creative talents when you make a movie,” he said, “like designers, actors, producers, directors, costume designers, musicians. Yet when you see a great movie, it’s cohesive, as if one person did it all. Great brands have that cohesive point of personality and require attention to coherent detail.”

In the decades since he founded The Limited, Wexner’s businesses have moved from success to success. Today, as the head of L Brands, he is the longest-serving CEO of any major Fortune 500 company in North America. Over the course of the past fifty-two years, he has made a success of not only The Limited but also Express, Bath & Body Works, Abercrombie & Fitch, Henri Bendel, La Senza, and—the jewel in his crown today—Victoria’s Secret. In doing so, he has produced a return of nearly 20 percent per year for his shareholders, and L Brands has a market value of roughly $28 billion. In large part, he has succeeded because he thinks and acts like an insurgent. “When you stop to smell the roses,” he said, “is when you get hit by a truck. Success does not naturally beget success. The hardest thing to do is to keep your edge and stay on your game as you succeed and grow. Consequently, I refuse to accept the fact that I am mature, or that the business is mature. As soon as you accept that, you begin to die.”

The Founder’s Mentality: Three Defining Traits

Les Wexner and his L Brands team exude the founder’s mentality. They live and breathe their insurgent mission. No matter how big their companies have become, they remain obsessed with the front line, always aware that the details there make all the difference. And theirs is an owner’s mindset, a powerful sense of responsibility for all of their employees, customers, products, and decisions.

These three traits—the insurgent mission, the front-line obsession, and the owner’s mindset—are key traits of the founder’s mentality, and our research shows that assiduously cultivating them leads to success (see figure 1-1).

In the following section, we’ll describe how three founders instilled those traits in their companies during the early days and then maintained them as the companies became large. Our point here is basic but important: the founder’s mentality does not have to wane over time, as companies age, nor does it have to disappear when a founder retires or dies; it can help companies of all ages and sizes achieve sustainable growth. We have chosen to focus here on the stories of founders simply because, in those stories, we’ve found the purest and most enduring expression of the founder’s mentality.

An Insurgent Mission

The first element of the founder’s mentality is the sense of an insurgent mission. As we mentioned in our introduction, some of the most successful founders have likened the start-up phase to waging war against an industry on behalf of underserved customers—this is why, in the early years, Wexner held company meetings in what he called his “war room.” Others have described their purpose as redefining the rules of their industry. And still others see the insurgency as creating totally new markets, as SpaceX is doing in space travel, or perhaps as Netflix is doing in on-demand television. Typically, the insurgent mission derives from a company’s founder, but in many of the really sustainable businesses, it ultimately takes hold at every level and can far outlast the founder. Let’s look more closely at the components of insurgency, using the example of Yonghui Superstores, a rapidly growing founder-led grocery business in China that is challenging larger rivals, even Walmart.

Yonghui’s founders, Zhang Xuansong and Zhang Xuanning, are brothers who grew up in humble circumstances in rural Fujian in the southeast corner of China. Their father was a contractor in the local village, and their mother made extra money at home by processing tea leaves and making pastries. The brothers grew up helping their mother do her work. Inspired by this experience, in the mid-1980s, they founded a small local grocery business selling local beer and common packaged foods. The business quickly expanded to five small locations. Then, in 1999, something happened that changed everything for the brothers: China got its first hypermarkets.

These new stores were giant by Chinese standards, spreading over more than ten thousand square meters, and they carried packaged goods and produce: the traditional grocery profile. Intrigued, the brothers began studying how the stores were run and gradually decided that they could do it better. They saw, for example, that the hypermarkets were purchasing fresh produce from distributors and earning about 17 percent gross margin. Why not eliminate the middle layers of distribution, they thought, and just purchase directly from the farmers? That would allow them to more than double the gross margin while also forging partnerships with local farmers and bringing produce faster and fresher to customers. They began to imagine a hybrid: stores that were big, clean, and air-conditioned, like the hypermarkets, but that also developed a supply chain directly to the farmers that allowed them to sell lower-cost, higher-quality produce. They decided to give it a try, and in 2000 they opened their first store, the Yonghui Pingxi Fresh Product Supermarket. It was an instant success.

As they prospered, they opened more stores, which allowed them to further increase their supply-chain advantage. For instance, they were willing to pay the farmers in cash, something the large chains were not willing to do. They also developed relationships with the local farmers to take all of their produce and offer guaranteed minimum reimbursement in years of bumper crops—a huge concern for rural farmers.

In everything they did, the brothers operated with a sense of insurgent mission, waging war on behalf of the underserved customer, who in Yonghui’s case was the Chinese mother. “Safe, fresh, good value food for the Chinese mother” is how the company’s mission statement reads today. Xuansong explained it to us. “To deliver that mission,” he said, “demands that we focus most of our attention on the supply chain, and to source the highest-quality food from the most trusted suppliers. You would think this would be clear to all; what really matters the most and differentiates us ultimately is our supply chain. That is where we must be the most excellent.” But this is not so easy to do, he continued, in a complex, fast-growing business, in a fast-growing country, and in an industry that is rapidly spawning new competitors and witnessing major shifts in channels and delivery modes due to the Internet and mobile digital technologies.

The secret to their success, the brothers told us, is that they have focused relentlessly on the essence of their insurgency as they’ve grown, and have paid special attention to what differentiates them. “When I was growing up in China,” Xuansong said, “there was a great volleyball player who helped us win the medal in the 1984 Olympics. Her name was Lang Ping and she was called the Iron Hammer. She was known for her spike; if you could set her up well, she would win the point. In our business, a major role my brother and I play is to remind people that our supply chain is like Lang Ping. We win if we spike it. We have become convinced that this focus and awareness is the thing that matters more than anything else we can do as leaders and founders. Leaders must keep things simple and focused, especially in the turbulent and distracting environment in which we now compete.”

So far, it’s working. The Yonghui fresh-produce core was so successful that it now accounts for around 40 percent of the store’s economics, compared to less than 20 percent for its rivals. Over the past five years, Yonghui has grown at a 32 percent annual rate. The company now operates more than three hundred stores and takes in $5 billion in profitable revenues.

The most powerful insurgencies have several mutually reinforcing attributes. One is a bold mission, of the sort that has fueled the phenomenal growth of Yonghui. Another is spikiness: a constant emphasis on what differentiates the company and makes it unique. Yet another, the idea of a limitless horizon: the idea that a company, if massively successful, can intelligently extend the boundaries of its core further and further outward. You see this especially come into play in the stories of companies that have maintained their insurgent focus and energy even at large scale—companies such as IKEA and Apple.

A sharp insurgent mission should provide a company with its focus and purpose, both inside and outside. It is at its most powerful when pushed down into personnel systems, advertising, product features, and customer focus in a way that makes it real and forces trade-offs that shape the company, by helping determine who to hire and promote, which suppliers to choose, and what investments to make. Great statements of insurgency jump right out at the people they are supposed to reach. Google’s objective—“Organize all of the world’s information”—grabs you right away with its ambitious simplicity. CavinKare, an Indian consumer-products company that has enjoyed an almost eightfold increase in revenues since 2000, has built itself and its product offerings around this core idea: “Whatever a rich man enjoys, the common man should be able to afford.” IKEA is an especially good example of the lasting power of a great insurgent mission. Founded in 1943 and still family owned, the company is now into the third generation of ownership and has grown to 150,000 employees, yet it has barely strayed from its original mission, originally articulated in a document titled “Testament of a Furniture Dealer.” That mission—“to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them”—is nothing less than the company’s soul, as every great mission should be. The lesson is simple: stay true to your mission in everything you do, no matter what your size, and you’re more likely to succeed. Lose touch with it, and you’re more likely to fail.

Front-Line Obsession

Most founders were their company’s first salesperson, its first product developer, or both. They lived and breathed the front line, driven by an intellectual curiosity about every detail of the customer experience and of how everything in the business works. They used instincts formed at the ground level to make every decision.

An obsession with the front line is fundamental to the founder’s mentality. It shows up in three ways—as an obsession with front-line employees, with individual customers at all levels of the company, and with the details of the business. This is the mentality that Wexner has brought to L Brands, and it’s the mentality that the young M. S. Oberoi, who grew up poor in what is now Pakistan, brought to the Oberoi Group, one of the world’s great luxury-hotel companies. Oberoi began his career as a penniless hotel clerk in rural India, learning the business absolutely from the bottom up. He founded the hotel chain in 1934 on a shoestring. Three years later he raised the money to buy the Grand Hotel in Calcutta, which he was able to acquire because its price had hit rock bottom after a cholera epidemic. That’s the kind of classically courageous move that young insurgents make. During World War II, to finance his purchase, Oberoi resourcefully turned the hotel into a barracks for British soldiers.

Oberoi obsessed about every detail that might affect the customer experience in his hotels: the length of bellmen’s trousers, the temperature of the tea, the freshness of the flowers, the placement of signage. Even in his eighties, he was still visiting his hotels to make sure employees were getting everything right. In doing so, he established a culture by which all employees shared in his obsession, which is why, more than a decade after his death, Oberoi hotels are still some of the world’s most successful. In 2015, Travel & Leisure named Oberoi the best hotel brand in the world, and its hotel in Udaipur, India, as the best hotel in the world. The founder’s mentality lives on.

The front-line obsession is the essence of Oberoi’s competitive advantage, and the company maintains it by ensuring that all aspects of staffing—from hiring to training to promotion—track back to attention to customer detail. At any Oberoi hotel, the employees on the front line are individually responsible and empowered to directly create value for the customer. During an average stay, an Oberoi customer will come into contact forty-two separate times with staff members, each of whom has the discretion to make decisions as he or she sees fit, even at the level, say, of giving a scarf to a customer on the way to visit a sick friend. To maintain a personal connection with each customer, the staff members meet nightly to go over the next day’s arrival list and to review each new guest’s history and preferences. Employees get special training on emotional intelligence, with two aims: listening with empathy and understanding each guest’s unique needs. Even the most senior managers are encouraged to be humble and to model behaviors, by checking in guests when necessary, by clearing tables at busy times, or even by moving bags. Every month, groups of employees meet in an organized way to share experiences and capture best practices. In one of the hotel kitchens we visited, we saw a sign above the vegetable-washing table that read “Improve Everything You Touch.”

The hotel tries to segment customers in a way that they can anticipate special needs. Poornima Bhambal, an assistant manager at The Oberoi Udaivilas, Udaipur, described how the hotel builds systems to look for patterns of past stays and cultural indicators, so that the staff members can anticipate needs that customers may not yet even have. For instance, they know that some types of guests always ask for special dental or shaving kits and put them in the room. Other guests expect twenty-four-hour child care, so the hotel simply offers it at check-in. Guests with very long trips to the hotel have a special fast track that gets them to their room within two minutes of arrival. As Bhambal said, describing their methods for anticipating needs, “Unless you put yourself in a guest’s shoes, you will never know.” The attention to detail and front-line empowerment, parts of a finely honed and highly data-driven guest-management system, are the core of the Oberoi’s competitive advantage in an industry where customer service standards are constantly rising. Oberoi has succeeded for decades by leading the way, not following.

Today, the CEO of the group that controls the Oberoi and Trident Hotel chains is Vikram Oberoi, a grandson of M. S. Oberoi. When we met, he told us about visiting his grandfather when he was in his nineties. “My grandfather’s sight declined with age,” he said, “and he had to resort to very thick glasses and would have to hold reading materials about four inches away. But I remember, time after time, visiting him at his house and finding him holding guest surveys up to his nose and constantly making notes to send to the hotel managers about his observations. He remained obsessed with the smallest detail about how the hotels were serving our guests right up until the end. He was the ultimate role model.”

Another critical element of the front-line obsession is deep curiosity about how the business is working in its details at the front line. M. S. Oberoi demonstrated this by attending to every last detail in his hotels around the world. He insisted that his chefs visit food markets themselves, rather than ordering food to be delivered unseen. He discussed plumbing problems with his managers. He lasered in on the right detail at the right time. His son, P. R. S. Oberoi, now the chairman of the group that runs the business, has carried on this tradition. He has been known to randomly check even eggs in the kitchen, cracking them and inspecting their color. But M. S. Oberoi did not let his belief in the importance of attention to detail slow anything down. He had a reputation for clearing his desk of every file before leaving every day. Without a haystack, he felt, you can’t lose any needles.

In the high-touch consumer business of luxury hotels, an obsession with the front line is the essence of competitive differentiation. However, you can find the same trait in all sorts of great founder-mentality companies, across a wide range of industries. These are often the most lasting performers. Think of Steve Jobs at Apple, and how much he focused on the simple elegance of the motherboard design inside his products, even though the customer would not see it. Or think of how obsessively Toyota focuses on the front-line jobs in its factory production system, where all operators have the right, indeed the obligation, to shut down the line and trigger a problem-solving effort if they see any kind of production problem in front of them. The most enduring companies in fast-changing industries manage to maintain their front-line obsession and love of detail even as they grow large.

The Owner’s Mindset

Small companies possess one great competitive advantage over incumbents. At every level of the business, the employees of small companies make their decisions and pursue their objectives motivated by an owner’s mindset. They’re so invested in the company, that is, that they feel and act like owners, something that can’t be said of the layers of staff and professional managers at large incumbents. As we noted in the introduction, surveys show that only 13 percent of employees feel any emotional connection or engagement with the company at which he or she works.¹ That’s a startling number, and it represents an opportunity for companies to inspire their employees with an owner’s mindset. The difference between employees who operate with the owner’s mindset and those who don’t can be as great as the difference between devoted parents and restless babysitters.

Three ingredients make up the essence of the owner’s mindset and establish it as a source of competitive advantage. The first is a strong cost focus—treating both expenses and investments as though they are your own money. The second advantage is what we call a bias to action. Adi Godrej, who runs Godrej Group, a leading Indian consumer-goods company, exhibits this bias in how he runs its operations. “It is our superior speed to make big decisions and take actions on them,” he told us, “that lets us constantly outmaneuver larger global consumer-goods companies that come into our markets.” The third advantage is an aversion to bureaucracy—an aversion, that is, to the layers of organization, headquarters departments, and hordes of corporate staff that can accumulate, capture power, and create complex decision processes that clog the arteries of a business and slow it down.

Many companies lose the competitive edge of the owner’s mindset as they grow. That’s because they become complex, turn into public companies with diffuse ownership, hire professional managers with short tenures (the average public-company CEO lasts only about five years), build up enormous corporate staffs, and experience a balkanization of budgets that traps resources inside of departments with their own agendas, making them hard to find and to redeploy. Again, this creates an opportunity: those companies that can grow large while still maintaining some of the speed, efficiency, and focus of a young founder-led company have an enormous competitive advantage and, our research shows, are the big winners when it comes to value creation.

Take AB InBev, the largest and most profitable beer company in the world, with revenues of $50 billion, a market value of $186 billion, and a profit margin of 39 percent, more than ten points above the average of its largest rivals. Not many people would have bet on AB InBev at its start, but the company has succeeded beyond expectations by assiduously cultivating the owner’s mindset as it has grown.

The story begins in 1989, when three Brazilian private equity investors—Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira—purchased a marginally profitable local brewer called Brahma. They knew from looking around the world that a strong local beer business could be a huge money maker, and they set out with the objective of making their new brewery the most efficient in the world. To that end, they hired an expert in the Toyota Production System and launched an effort to benchmark and capture the practices of the lowest-cost global brewers. “From 1989 to 1999,” Telles told us, “it was primarily an operational improvement story, and a story of creating a new culture with young, hungry talent, mostly from outside of the beer industry. The competitive culture we created essentially wore down Antarctica, our Brazilian competitor, who eventually had to merge with us, giving us strong leadership of the market.”

Their plan succeeded well. Within just a few years, the company reapplied its cost systems and cultural practices in breweries from Bolivia to Paraguay and created the largest and most profitable beer company in South America. When we visited Telles in his office in the humble outskirts of São Paulo, on a hill overlooking a favela, or slum, he described the types of practices that the young company was using to reinforce an owner’s mindset. There were no offices, even for the CEO, because the leadership team believed that closed offices led to a culture of hiding and of hierarchy. Targets for every group, all the way to the CEO, were projected onto a big screen in the main office area, with the targets color-coded according to their status. Everyone could see how others were doing, and how each piece connected to the whole. Hiring focused heavily on young people with a hunger to succeed. Budgets were looked at from the ground up each year, and every cost mattered.

Today, the company has become a global powerhouse that has captured nearly one-fourth of the world’s beer market. It merged with Interbrew in Europe, acquired Anheuser-Busch in America, and acquired Modelo in Mexico, along with a host of local brands and breweries. The company even launched a bid for SABMiller in 2015. In consolidating the global beer industry, it has constantly refined its practices and culture, embedding them into each new business acquired on the way, without ever changing its core repeatable model. The company works hard to instill the owner’s mindset in all of its employees. “We are a company of owners,” the company’s statement of principles reads. “Owners take results personally.”

One manager we met during our visit memorably summed up the company’s approach. “We create restaurant owners, not waiters,” he said. “If you’re a restaurant owner, and a new restaurant opens across the street serving the same food, how do you feel? You feel like someone is putting your livelihood at risk, threatening you, threatening your family. It’s personal, because the restaurant is your dream. But if you are a waiter, and a new restaurant opens across the street, how do you feel? At best, indifferent. Actually, there’s now competition for your services. Many companies inadvertently create waiters. We work tirelessly to create restaurant owners.”

But its founders have not stopped with beer. Their private investment firm, 3G Capital, recently purchased Kraft and Heinz, and intends to rebuild those companies using the same principles and owner’s mindset that worked so well for them at AB InBev.

For more than twenty years, we’ve encouraged clients to “think like an owner”—to review their strategies with an owner’s mindset, which means aligning the broad interests of the company’s leaders and shareholders. The power of this approach has been central to the rise of the private equity industry. We see it as a reaction against the bureaucracy, poor cost management, and complexity that beset many large companies as they drift away from the founder’s mentality. When we analyzed the returns of a range of different types of deals within several private equity funds that we know well, we found that of all deal types, the ones that earned nearly 50 percent more than the others were businesses sold by large, public companies in which the management had seemingly lost the owner’s mindset and the incentives of ownership. When private equity firms restored the owner’s mindset at these companies, this consistently increased speed, reduced bureaucracy, caused a more critical evaluation of noncore businesses, and improved the management of costs. The consistency with which a return to the owner’s mindset propelled high returns to private equity firms is one of the most profound phenomena of the past few decades in business. In the interviews we’ve conducted with founders and founding families around the world, we’ve heard the same thing—that the owner’s mindset has provided them with a consistent source of competitive advantage.

For the past couple of decades, many of us have talked about the owner’s mindset as the best way for companies to succeed. But we’ve come to realize that there’s more to the story than that. The owner’s mindset is only part of the story. That’s why we’ve made it just one of the three defining traits of the founder’s mentality, which, we believe, represents a significantly more powerful way for companies big and small to achieve sustained profitable growth. The owner’s mindset aligns the interests of leaders and shareholders, but the founder’s mentality goes beyond that and also aligns the interests of leaders and the employees who work at the front line, where a business meets its customers. It demands innovation and is profoundly customer-centric: a posture that, we believe, ultimately creates the most value.

In the owner mindset discussions of the late 1980s and early 1990s, people very rarely talked about the front line. The focus on aligning the interests of leaders and shareholders at times led to an incumbent mindset: a concern with hunkering down and extracting value from the existing business, and a loss of the impulse to innovate, serve customers uniquely, and fully value the employees on the front line. That’s a major impediment to sustainable growth, one that, as we’ll explain in this book, the founder’s mentality can help you avoid.

Learning How to Infuse the Founder’s Mentality in Your Organization

Though all of our examples so far have been founder-led companies, we should note here that many founders do not exhibit the founder’s mentality. All founders are different, of course, and many succeed or run their companies into the ground because of the unique strengths and weaknesses of their personalities. Our focus in this book will be on a mentality, not a personality—a collection of specific behaviors and attitudes, best exemplified by the traits of great founders, that if properly cultivated in the rest of the organization can lead more reliably to sustainable growth.

It doesn’t matter if your company is decades removed from the era of its founding. Our point is that just about every company, at any stage in its life, can benefit from the attitudes and behaviors that make up the founder’s mentality. Young companies need to build the founder’s mentality; older companies need to rediscover or even redefine it. This book will show how.

What the Data Shows

We’ve explored the three traits of the founder’s mentality at length by surveying executives and examining databases of companies and their behaviors, and we’ve found that 90 percent of the time, leaders cite at least one of these traits as a source of the founder’s advantage.² Our work with this data has also made clear to us that the founder’s mentality can provide benefits not just to young or small companies. Companies of all ages and sizes that were able to maintain the founder’s mentality are more likely to be top performers. In fact, companies able to attain a reasonable level of scale and market power while maintaining the founder’s mentality prove to be the best-performing companies in the world. The best fifth of performers in our own database, for example, had high insurgency characteristics 74 percent of the time, versus 19 percent for the poorest-performing fifth. For front-line obsession, the difference was nearly a factor of five—57 percent versus 12 percent. For the owner’s mindset, the difference was about the same—50 percent versus 9 percent (see figure 1-2).³

On the surface, the three traits of the founder’s mentality look like basic business. But they’re surprisingly hard to retain as companies grow. Complexity sets in, rewarding the masters of internal politics and process; power shifts away from the front line to the center; bureaucracy takes over. Gradually, internally, companies lose the founder’s mentality, and externally they start drifting off course, onto the path toward failure.

How does your company rate on the traits of the founder’s mentality? Take the brief survey in the sidebar to find out.

The Founder’s Mentality Map

By harnessing the power of all three of these traits, companies like L Brands have managed to scale and—even more difficult—sustain profitable growth over time. But few businesses make that journey successfully, and fewer remain there for decades. Most, buffeted by the predictable crises of growth, are gradually pushed away from the benefits of the founder’s mentality and the benefits of scale, and instead drift off course in predictable ways. Before we start exploring them in detail, though, let’s start by taking a schematic look at the terrain on which this all plays out.

Figure 1-3 is the general map that we will use to chart the predictable stages and crises of companies as they move through the business life cycle. The map has two dimensions. The east-west axis represents the net benefits of the founder’s mentality (a measure of the internal strength of the company and its culture) and the north-south axis represents the net benefits of size (a measure of the external strength of a company relative to competitors in its industry, a product of market power and scale).

Companies in the bottom right, where most companies start their journeys, are what we refer to as insurgents. They are young and have attained relatively little scale, but are propelled by a big idea and the internal strengths of the founder’s mentality: namely, a missionary zeal for changing the standards in their industry; an obsession with the people and the work done at the front line of the business; and the owner’s mindset, a sense of deep personal responsibility for results that leads to a bias for speed and against bureaucracy.

Endeavor, a nonprofit organization dedicated to fostering the growth of young companies in developing economies, now has a network that extends to more than a thousand companies in more than twenty markets. These companies, with whom we spoke extensively during the course of our research, are exemplary insurgents. For instance, Alessandro Gardemann runs GEO Energética, a fifty-person Brazilian company that has a proprietary method to turn unused sugar-cane waste into energy—a process that has the potential to fill a large share of the demand for new energy in Brazil’s rapidly growing economy. This company has the potential to scale to a large size, but with no shortage of practical challenges to go from insurgency to scale. It is an example of what we mean by a business that has made it through the start-up phase, has proven the power of its idea, and is now a young insurgent trying to achieve the benefits of scale.

In the upper right of our map in figure 1-3, you’ll see what we believe most business leaders should strive for: scale insurgency. Scale insurgents are companies that have stayed true to their insurgency for a long time, have built market power and influence in the process, and retain the human vitality of the founder’s mentality. AB InBev, Enterprise Rent-A-Car, Google, Haier, Apple, Victoria’s Secret, and IKEA have all achieved scale insurgency. Ultimately, all of the advice in this book is designed to help companies achieve scale insurgency. Here, companies have grown to scale and achieved a position of leadership, yet they also manage to maintain the benefits of the founder’s mentality. Only about 7 to 8 percent of all companies that grew to $500 million (only about one start-up in two thousand makes it to that size at all) reached the position of scale insurgency over the past decade, but on average those few that did accounted for much more than half of the net value created in the global stock market each year.⁴

Incumbency, the position in the upper left of our map, is quite different. Companies here have largely lost the entrepreneurial energy and flexibility of the founder’s mentality, yet they have attained a position of sustained strength, and perhaps even industry leadership, because of the assets and capabilities that they possess. They have created barriers to competition that serve as imposing defense fortifications, and they tend to be the largest companies. Well-known examples in this position include Microsoft, Gazprom, Unilever, and SAP.

The worst place to be on our map is the lower left: the realm of struggling bureaucracy. Companies in this position long ago lost the internal strengths of the founder’s mentality, but they’ve either lost or never developed those defensive fortifications that protect successful incumbents. Most of the companies that end up here never recover their momentum. At the extreme, these are companies in which the scourge of complexity has disabled the ability to react rapidly to change, has slowed down the rate of learning to a crawl, and has driven up costs. Familiar examples include General Motors, Kodak, Sony, and Kmart. Though rapid, external events triggered the traumatic decline of each of these companies, their poor state of inner health made them especially vulnerable to the trauma and determined their fate.

Many companies don’t exist at the extremes but instead drift toward the middle of the matrix—an inherently unstable position characterized by waning market power, internal dysfunction born of complexity and bureaucracy, and a sluggishness that impedes quick decision making. On balance, as these companies drift downward, they do not earn their cost of capital, and they therefore destroy value in the stock market.

The Journey North: Achieving Profitable Growth at Scale

As we’ll show in the chapters ahead, success along both dimensions of our map leads to sustainable growth. We call this process the journey north: a journey from the realm of start-up insurgency, at the bottom right of our map, to the realm of scale insurgency, at the top right (see figure 1-4). This is the journey that Wexner has made successfully with L Brands, but it’s a hard one to make without encountering trouble along one axis or the other. Success on one but not the other leads to instability for all but a handful of businesses. Failure on both leads to decline and eventual demise.

The Default Path: Problems That Come with Scale

Time and again in our research and our practice, we’ve observed companies following a default path on our map (see figure 1-5). It begins in the lower-right corner of the map. The company here is endowed with the positive traits of the founder’s mentality and is often still founder-led, but it has little else but an idea and an enthusiastic team to work with. It needs to reach critical mass to compete; it needs to garner market power to create profitability; and it needs to do both at once to earn returns for investors and opportunities for employees. From there, the growing company moves north on our map, gaining in size and market power, yet often adding systems and complexity that dilute the internal energy of the founder’s mentality.

This is where the paradox of growth comes into play. The internal strength and vitality of young companies, which allowed them to take on larger incumbents in the first place, often decline as those companies grow and succeed, adding process and structure, which detract from the personal intimacy of the earlier founder years. As we will show, the problems that emerge in growing companies often trace directly to internal changes that erode the founder’s mentality. That is why 85 percent of executives perceive that the key barriers to sustained and profitable growth that they face are on the inside.⁵ Most observers don’t recognize the extent of this problem, however, because nearly all measures of success—in a company’s own reporting or in the analysis of those who follow it—track external results in the form of financial returns, growth rates, market share, and sometimes customer advocacy. These are critical, of course. But nobody would value a racehorse based solely on its past wins. To make sure its performance is sustainable, you also need to gauge its inner health—very carefully.

Three of the four quadrants on our map—insurgency, incumbency, and struggling bureaucracy—represent the terrain on which the predictable crises of growth play out. In the next chapter, we’ll take a look at these crises and how they arise.

A quick note, however, before we do. In the chapters ahead, we will not be outlining a program for how businesses can engineer lasting cultural change within themselves. That’s a process that requires years of sustained effort on the part of leadership teams, and it’s beyond the scope of this book. Our goal here is to identify practical ideas for achieving sustainable growth that can lead to results in a much shorter time frame than the five to seven years that experts on culture estimate is required for deep cultural change.

USING THE FOUNDER’S MENTALITY IN YOUR ORGANIZATION

Using the survey in this chapter, interview front-line employees and customers to assess how well your company embraces the founder’s mentality.

Armed with interview results, start one-on-one discussions with your top managers, asking:

–Does everyone understand the company’s insurgent mission?

–Are we focused on empowering/supporting the front line?

–Do we think and act like owners?

–Do we share the ambition to become the scale insurgent in our industry?

–Can we learn from competitors, especially newly emerging insurgents, who embody the founder’s mentality better?

–How do answers to these questions change our business priorities?