2

The Three
Predictable
Crises of
Growth

How Great Companies
Lose Their Way

In most of this book, we will present practical approaches to anticipating and addressing the crises of growth, many originating in the practices of great founders. But before we turn to the solutions, we need to describe the problems. So let’s turn to them now.

Overload: The Crisis of High Growth

To grow a company from $100 million to $1 billion, or from $500 million to $5 billion, you have to change how you work. You can’t just do the same things you’ve always done, only ten times more often. You have to build new systems to handle escalating complexity, and you have to adapt your business to the marketplace. Once, you could do everything you needed to with an Excel spreadsheet personally designed by your CFO; now you’ve got an SAP installation in its place, manned by a department of IT specialists. Once, by force of will alone, your founding team, surrounded by an inexperienced staff, could carry the day; now your company’s size and rate of growth demand that you hire a different level of talent, from companies whose culture is not like your own. Once, your founding team knew everything at all times and could make its decisions in one place; now you need to push decisions down through the organization in consistent ways. Once, you yourself could be everywhere to model behaviors; now you simply can’t. Once, you knew your key customers by their first names; now you know them as averages on PowerPoint slides. Once, everyone in your company knew what made your mission special; now you have trouble conveying that sense to the outer reaches of the organization.

Overload hits when a company is scaling up aggressively—when it is moving up from the bottom-right quadrant of our founder’s mentality map, that is, and aiming to reach to the upper-right quadrant.

As companies scale, their leaders tend to undermanage or take the elements of the founder’s mentality for granted. This is natural, but the result is that they start to lose what made them great in the first place. Complexity, systems, and processes slow them down, soak up more of their profitability, and blur their original sense of purpose. Overload afflicts growing companies that have failed to prepare adequately on the inside for the strains of size and complexity. It feels horrible: you’re growing successfully and are working harder than ever, but with each passing day you feel more and more overwhelmed. You suffer from the sense that something dark is about to take hold.

Let’s turn to the example of Norwegian Cruise Line. Once the leader in the cruise industry, the company was innovative and had strong growth ambitions and aggressive investors. Nonetheless, it ran aground. Why? Because it couldn’t cope with overload. It hadn’t properly developed systems to implement its growth strategy internally, and so that strategy broke down at dozens of points of execution on the front line—with customers, crew, staff on the shore, and the company’s travel agent partners.

In what follows, we’ll describe how Norwegian got into trouble on the journey north, and then we’ll revisit the story in chapter 3, where we’ll discuss how new leaders stepped in and used the founder’s mentality to rebuild the business from the bottom up. The ultimate results were impressive: since that rebuilding effort, sales have nearly doubled, operating income has increased more than twelvefold, and growth has increased from zero to more than twenty percent.

Norwegian Cruise Line: Heavy Sailing

Norwegian Cruise Line launched today’s modern cruise industry. Its founders, Knut Kloster and Ted Arison, put their first vessel in the water in 1966: a cruise ship designed to carry cars and offer low-cost voyages from Miami to the Caribbean. Norwegian was an innovator in its field, the first company to offer round-trip cruises that nearly anybody could afford. Under Kloster’s leadership (Arison left to found Carnival Cruise Line), the company soon became a market leader, but then gradually fell behind its competitors. By the late 1990s, it had made a series of acquisitions and divestitures and taken in other investors, and overload hit. Struggling financially, with over $100 million in negative cash flow, the company agreed to be acquired in 2000 by Star Cruises, a leading cruise operator in Asia.

After the acquisition, Star Cruises announced aggressive plans to transform the company. Its first giant step was to introduce a break in the traditional cruise product by offering guests what it called Freestyle Cruising, which provided multiple dining and entertainment venues with flexible times, as opposed to the industry model at the time of single venues with set times. Ships not designed to handle this concept were dry-docked and retrofitted. The concept was revolutionary in the industry, but the execution proved difficult, especially for dining. Galleys were separated from dining areas, resulting in passengers waiting a long time for food. Guests grew exasperated, and the crew, feeling battered by dissatisfied guests and the stress of rolling out this new offering, grew upset and disengaged. But the company pushed ahead aggressively on expansion nonetheless, growing for the sake of growth, driving down prices through poor pricing discipline, and wreaking havoc on guest satisfaction and employee engagement. The bottom line? The company lost the trust of its front-line employees, the commitment of its travel agent partners, and the loyalty of its passengers, who increasingly switched to other vacation sources.

By 2007, having been unable to cope with overload, even under its new ownership, Norwegian had fallen seriously behind in its growth aspirations and profit plan. That’s when its board (and the new owner, Apollo Investment Corporation) appointed Kevin Sheehan, a veteran executive with experience in the car-rental and entertainment industries, first as CFO and later as CEO.

Sheehan, who in his youth had driven taxis in Queens, New York, was known as a leader with a practical sense of how businesses work at the front line. He and his team immediately saw what Norwegian needed—“a transformation from the ground up,” he told us, “starting with the front-line employees and our on-board customers.” He saw that Norwegian’s leaders had devoted too much of their time and attention to ideas generated in headquarters without sufficiently detailed front-line testing, follow-up, or practical embedding into the routines of the company.

We met with Sheehan on board Norwegian Star, one of his company’s ships, where he described to us the situation he encountered when he took over as CEO. “When I joined,” he said, “I spent a lot of time talking to front-line employees on ship and at the ports. I quickly realized that our biggest problems were internal, not related to the industry. We had pioneered Freestyle Cruising, but we were executing poorly, resulting in long lines and unhappy passengers. We were pricing in a uniform way, yet the truth is that there was a huge difference in value across cabins, and we needed a sophisticated yield system, like we had in the rental-car business, to match demand and value and pricing dynamically. Our travel agent partners were frustrated with us for last-minute price discounting and did not feel like real partners. And most importantly, our front-line employees had lost a sense of what was important. Were we a price cutter? An innovator? Customer-focused? What?”

This is a classic example of the breakdowns of overload. Norwegian was in a growing industry, in a leading position, with good ideas (like freestyle) about how the company would be differentiated and special. But as it grew, the company failed on several fronts. It failed to translate its strategy into front-line understanding. It failed to design systems to manage its more complex customer experience smoothly. It failed to involve the front line in the development of scheduling software for passengers and failed to connect the front line to the travel agent partners who were selling berths on the ships.

Chaos ensued inside the company. Unable to sell its new offering, and feeling it had no other option, it adopted a low-cost strategy on the outside, in the form of last-minute price cutting. And that strategy only made things worse. As the pressures of overload increased—a process compounded by the changes in ownership, which put more and more distance between management and the front line—Norwegian rapidly lost touch with the founder’s mentality. Sheehan recognized that when he took over the company. In the next chapter, we’ll explore how this insight helped him turn the company around and make it a successful scale insurgent.

Stall-Out: The Crisis of Low or Slowing Growth

Stall-out hits companies that have successfully scaled and are now struggling with the challenges of complexity. Rising levels of bureaucracy and internal dysfunction threaten to overwhelm the engines that powered them to success. Stall-out afflicts incumbents, which occupy the upper-left quadrant on our founder’s mentality map. It’s a disorienting crisis: leaders know their company is losing momentum, but when they pull the levers that have allowed them in the past to speed up or change direction, they get little response. They know something is different, but the complexity of their organization makes it hard for them to figure out what’s different or what to do about it.

Stall-out is a predictable but dangerous crisis. Consider the following:

It’s common. At Bain & Company, we track the performance of more than eight thousand global companies, and when we look at the data, here’s what we see: of the roughly one in five companies that managed to make it through insurgency to incumbency in a recent fifteen-year period, two-thirds faced stall-out.¹ That includes such notables as Panasonic, Sony, Time Warner, Sharp, Bristol-Myers Squibb, Philips, and Mazda. Moreover, of the large companies that hit stall-out, fewer than one in seven will recover its market power and prior momentum.

It can happen fast. We recently studied fifty large companies in stall-out, tracing their growth rate in revenues through time, and what we discovered was stunning. These companies stalled out surprisingly suddenly, losing their growth momentum in only a few years and then turning rapidly downward, with rates that often dropped from double digits to low single digits or even negative numbers (see figure 2-1). This mirrors the findings of an extensive earlier study by the Corporate Executive Board, which examined fifty years of stall-out in American public companies. “Growth does not descend gradually,” the authors of that study concluded, “it drops like a stone.”²

It’s an internal problem, caused by growth. Ninety-four percent of large-company executives cite internal dysfunction as their key barrier to continued profitable growth.³ 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. This isn’t really a surprise. As companies grow in size and complexity, they lose the dexterity and the flexibility they need to sustain growth, which calls to mind what a seventy-year-old yoga teacher once told one of us about the human aging process. “You don’t get old and get stiff,” he said. “You get stiff and then you get old.”

The Home Depot

Few stories illustrate the force of a stall-out better than what happened at The Home Depot, the largest home-improvement retailer in the world and the fourth-largest retailer in the United States.

The secret to The Home Depot’s initial success traced to its remarkable founders, Bernard Marcus and Arthur Blank, who devoted themselves to building a company that would establish a close and direct advisory relationship with customers—a classic example of the founder’s mentality in action. Their corporate mantra: “Whatever it takes.” The two would personally tutor store employees in customer service. Employees, in turn, would offer clinics to shoppers on home-improvement projects and were always available in stores to offer knowledgeable advice. The strategy set the company apart and generated powerful customer loyalty, and for years the company was a major success story. From the time of its founding in 1978 until 2000, The Home Depot consistently beat analyst expectations and eclipsed its 20 percent annual earnings growth targets. However, in December 2000, after missing an earnings target and being increasingly concerned about antiquated systems, especially IT, in a company that was approaching $50 billion in revenues, the board of directors brought on Robert Nardelli, a senior executive from GE, as CEO, to apply some big-company discipline.

Nardelli created a command-and-control environment. By early 2006, 98 percent of The Home Depot’s top 170 executives were new to their jobs, and 56 percent of the new managers at headquarters had been brought in from the outside. Instead of continuing to make customer relationships and front-line enthusiasm the company’s top priorities, as its founders had for so long, Nardelli and his team made cuts in those areas to boost quarterly profits, according to analysts. They replaced many long-serving full-time employees with lower-paid part-time workers, and customer service levels collapsed. “Do It Yourself,” some people joked, now became “Find It Yourself.” The bonds of trust among customers, store associates, and management were breached, eroding the founder’s mentality.

When the University of Michigan released its annual American Customer Satisfaction Index in 2006, The Home Depot had slipped to dead last among major US retailers, with a score of sixty-seven, eleven points behind its main competitor, Lowe’s, and three lower than even the much-maligned Kmart. From 2000 to 2007, the company’s market value declined by 55 percent, and its stores had experienced their fourth year in a row of declining foot traffic and loss of position to its competitors.

To take a reading on the business, the board of directors held meetings in the field to hear from front-line employees, and they soon recognized a consistent pattern in what they heard. Worried about the future, employees repeatedly brought up the same subjects, which one board member described to us as “disempowerment of longtime store employees, and a feeling that the social contract between the company, its employees, and the customers was being breached.”

We asked Greg Brenneman—a global turnaround expert who is also the company’s longest-standing board member—to tell us more. “You could see the serious trouble bubbling up under the surface as you probed in the company,” he said. “Though sales were increasing, foot traffic, the lifeblood of any retailer, had been going steadily down. Store managers were feeling shackled by dozens of financial templates and metrics that took time away from customers and running the stores. The most experienced store employees, the real experts on plumbing or electricity, had been let go and replaced with less experienced and cheaper part-time store workers. New stores, dialed up in their construction to push up growth and quarterly earnings, were not generating good returns, leading to further staff cuts. We were stalling out and needed to pursue a different course.”

Indeed it did. Fortunately, the company replaced Nardelli with a new CEO, Frank Blake, who, tapping into the power of the founder’s mentality, launched a series of initiatives focused on renewing bonds with front-line employees and the customer, and on running the stores well. In chapter 4, we’ll examine in depth how the company turned itself around.

Free Fall: The Crisis of Obsolescence and Decline

Free fall can happen at any point in a company’s life cycle. But it is most common in maturing incumbents whose business model has come under severe attack by new insurgents (think of bookstores attacked by Amazon) or is no longer as viable in a changing market (think of Blockbuster Video renting tapes in stores when the ability to download content began).

If you are one of the few ever to have lived through free fall, you know how terrible it feels. The loss of momentum and control. The anxiety as you feel your company tipping into a nosedive. The downward spiral of events. The prospect of onrushing catastrophe. The realization that the levers that used to work so well no longer seem to work at all.

In stall-out, which was bad enough, you had time to ponder your next move, and you probably had lots of options. In free fall, though, you’re hurtling toward a crash and you’re running out of time.

Of the three predictable crises of growth, free fall is the most treacherous. At any given moment today, about 5 to 7 percent of companies are either in free fall or about to tip into it. And here’s a sobering fact: only about 10 to 15 percent of those companies, depending on your definition of success, ever pull out of it. Moreover, half of those that manage this feat do so only by fundamentally redefining at least a part of their core business.⁴ The time is past for these companies to rediscover the insurgency. Quickly—very quickly—they have to redefine it.

At first, the causes of free fall usually appear to be external: a global financial crisis, a banking-system collapse, government deregulation, or, more commonly, a new business model or technology, harnessed by a nimble insurgent competitor. These forms of market turbulence are the visible face of the problem, and they’re on the rise. We estimate that in the decade from 1985 to 1994, only about half of markets were being buffeted by forces that we define as turbulent, whereas two decades later, from 2005 to 2014, close to two in three were.⁵ But turbulence tends to be the trigger of free fall, not the cause. Usually, the root cause is internal, not external: the company did not prepare for the external problem, did not adapt fast enough, or did not have a second-generation engine for its business ready to go when the first-generation engine became obsolete.

The symptoms of free fall are extreme. Your financial performance worsens rapidly. Your growth prospects and your market value tumble. Analysts and investors begin to shriek. Important physical measures of your success, such as customer loyalty and market share, deteriorate in ways you have not seen before. Your family and friends start to worry about you. Think of Kodak, which in the 1990s was the apparently unassailable leader in its market, with 80 percent market share in its core film business, but which then went into a free fall that led to its bankruptcy in 2012. Since 2000, all sorts of other once-dominant companies have taken a similar plunge, among them AIG, Blockbuster, Gateway, General Motors, Lehman Brothers, Nintendo, Panasonic, RIM, and Sharp, just to name a few.

When we asked a Kodak executive who lived through the company’s free fall to explain what happened, he gave us a simple answer: “Digital.” That’s the explanation you’ll usually hear when Kodak’s story comes up, and the sudden rise of digital technology is indeed an important factor in a growing number of cases of free fall. But to us, it’s dangerously incomplete. The rise of digital technology precipitated an industry shift that triggered Kodak’s descent into free fall, but what sealed the company’s fate was that it wasn’t prepared to weather a storm. And the reason for that was internal, not external.

To understand free fall a little better, let’s take a look at the story of Charles Schwab, a company that began its life imbued with the spirit of the founder’s mentality, became one of the best-performing stocks for over a decade, and then found itself in free fall, plummeting toward disaster.

Charles Schwab: Descent into Free Fall

The story begins in 1973, when Schwab, then a young investment adviser, decided to create a discount brokerage firm in San Francisco, California, that would cater to the small but competent investor. With the deregulation of brokerage commissions just two years away, he felt that he could create a unique firm that could reach do-it-yourself investors who wanted control over their accounts, valued simple tools of investing, and did not want to pay high commissions.

Schwab launched his company with a powerful and incredibly useful insurgent mission. “Chuck started the firm out of a deep sense of personal outrage that the brokerage industry systematically exploited its customers,” John Kador writes in Charles Schwab: How One Company Beat Wall Street and Reinvented the Brokerage Industry.⁶ Fueled by this founder-led sense of outrage, Schwab quickly became an innovation leader, offering its customers the first electronic investment tools, the first major mutual-fund supermarket (OneSource), the lowest rates in the industry, and the first online trading platform. In short, the company brought the Internet to the independent investor for the first time, and investors flocked to the company in the decades that followed. By the 1990s, the company’s stock price had increased more than a hundredfold, and it had become the best-performing company of its type in financial services. “We were buying lunch for everyone, hiring fast, feeling the wind at our back,” one executive told us about life at Schwab at the end of the 1990s. “Trades had doubled in the prior year alone, and we were bringing in people as fast as we could hire them.”

But then, suddenly, three different external storms blew in at once. One involved the collapse of the Internet bubble and the decline in the market values of technology stocks—a huge component of Schwab’s trading. Another involved the arrival of new insurgent competitors like E*Trade and Ameritrade, which emerged with super-low-cost business models that targeted Internet-empowered day traders and electronic traders, who had become a large part of the industry profit pool. And the third involved the decline in stock market volume caused by the outside market collapse. It was a triple whammy of disruption, and Schwab, it turned out, couldn’t cope. “Our trading volume collapsed by 50 percent,” the Schwab executive told us. “The people we had hired in such a frenzy were often not as good, degrading customer service. We began to see our customer scores falling. The decline in revenues and pricing compression due to new competitors revealed the extent we had let costs creep up. But the interpretation was very loose, and the solutions that were in the air at the time—some of which were to add even more customer services—were not going to restore order.”

In 2000, worried about its future, the company made a risky move away from its core: buying U.S. Trust, a high-end, old-school portfolio management business. This was precisely the sort of company that Schwab had been founded to oppose. Schwab executives made the move for reasons of diversification and to provide a broader suite of services to customers, but it served only to erode its core, not renew it. One high-level executive at the time, Charles Goldman, remembers feeling deeply concerned. “The U.S. Trust acquisition added huge complexity just when we did not need it,” he told us. “Suddenly, in the midst of crisis, we owned a bank on a different coast, with a different culture, with regulatory issues we did not understand. Huge management time was sucked into this, and it was a real distraction, given the burning platform in our core business.”

At the same time, in another effort to save the company, the leadership team launched an initiative titled Project Renaissance, which created eight different customer segments with different offers and new services. The theory was that more sophisticated customer offerings would preserve pricing, but in practice they created what one executive described to us as “a nightmare of complexity that started to really confuse our message to the customer.” The company then expanded further into the capital markets business and began branching out internationally. “We got sucked into one initiative after another that had the effect of pulling us farther from solving the real problem,” Goldman said.

As its free fall accelerated, Schwab saw its internal dynamics worsen and began to realize that the difficulty in responding to the crisis outside had deep roots inside the company itself. “The culture shifted to avoiding downside,” one executive told us. “People became more concerned with keeping their job than with doing it right. Senior executives were acting like agents rather than principals.” Another manager recalled, “We found that we had created an impossible bureaucracy. The voices that were the loudest were the voices of the staff who reported to the CEO. These people dominated the meetings, while the line managers closer to the customers would sit there in frustration. It was like we had disenfranchised the people who really knew best what the problem was.”

Mortifyingly for Charles Schwab himself, the low-cost upstart TD Waterhouse began running TV ads—featuring a crusty actor from the TV show Law and Order—that grouped Schwab along with Merrill Lynch and other traditional brokers: the big, complex, expensive companies that Schwab had always tried so hard to differentiate itself from. To make matters worse, the customer Net Promoter Score^® (a measure of customer advocacy and loyalty)⁷ in Schwab’s retail business had declined to negative 34. The company now had 34 percent more detractors than supporters in its own customer base.

Investors noticed. From 2000 to early 2004, Schwab’s market value dropped by about 75 percent. Aware of the need for an immediate and dramatic intervention, in 2004 the board of directors persuaded Charles Schwab to come back as CEO. Upon his return, Schwab declared that the company had “lost touch” with its heritage, and he promptly launched a restructuring program. To run the program, he enlisted Goldman, who shared his view that Schwab had drifted away from its roots. Recalling the period, Goldman told us, “The metrics around the decline were obvious. The customer statistics were falling, our stock price was plummeting, and we were losing market share. Our prices had crept up, and instead of looking at how to return to our strength and become competitive again, we began to convince ourselves that the answer lay in diversifying from our core and in finding ways to defend our high prices. Both ideas proved to be wrong.”

Like Norwegian Cruise Line and The Home Depot, Schwab managed to survive its crisis of growth with a return to the founder’s mentality. In chapter 5, we’ll explore exactly how.

What the Data Shows about Value Creation during the Three Crises of Growth

These three crises of growth—overload, stall-out, and free fall—represent moments of powerful uncertainty, when companies need to take action to preserve momentum or prevent disaster. If not addressed, they can destroy huge amounts of value. But here’s the good news: they also represent a major opportunity. If properly addressed, each can be leveraged into a moment of huge value creation.

When we recently reviewed the twenty-five biggest value swings that we’ve encountered through our work at Bain, we discovered a remarkable fact: every case involved a company facing one of these three crises. Why? Usually, it’s because a sustained increase or decrease in a company’s growth expectations (which can be fragile) triggers big swings in value (you can see this in the examples throughout this book).

To look at this process more systematically, we identified twenty companies that we knew well and that had a long history of value creation or of ups and downs, and looked at their last thirty years. As best we could, we separated the swings in value into two parts: (1) those where companies were in the midst of one of our three crises, and (2) times when they were not (steady-state growth, periods of multiple acquisitions, periods of diversification). The result: about 80 percent (and the largest spikes) of big value-creation swings occurred during the three crises.

You can see quite clearly in figure 2-2 that the biggest swings, accounting for a majority of all the value created, occur during the “journey north”—the insurgent period when a young company is trying to build the capacity to scale its business five or even ten times to be a major and sustained player in its industry. The second-largest swings occur during the later phase of a company’s growth cycle, when free fall has started to set in.

To connect the chart in figure 2-2 to our three predictable crises, think of overload as the crisis that insurgents must overcome to increase or maintain their growth (the insurgent bar), think of stall-out as a major challenge of incumbency (the incumbent bar), and think of free fall as a very complex period with wide oscillations in value and outcome (three bars: late maturity, renewal, and continued decline). We made this latter separation for several reasons. First, we wanted to highlight the wide range of value swings that we observed. Second, we wanted to separate out companies grappling with impending free fall, companies that have successfully renewed themselves, and those that were not able to do so.

What the Data Shows about How These Three Internal Crises Interact with the External Challenges Companies Face

We began this book talking about the paradox of growth—how success in scaling a business on the outside can release forces on the inside that inhibit the next wave of profitable growth or even reverse momentum. This does not mean that companies do not face challenges from competitors or customers with new needs, or from new technologies. On the contrary, well over half of all businesses today face at least one form of significant outside disruption to a part of their business model or market in the form of a substitute product or service, a major shift in the profit drivers of the industry, or a fundamental change in customer needs or buying behaviors. But when we do case studies, reflect on our own experiences at Bain, interview management teams, or survey executives, we find that more than four in five problems on the outside of a business trace to problems on the inside—problems that inhibited its ability to adapt, to decide and act quickly, to embrace new ideas, to keep costs down, or to scale its ability to serve customers. The plot lines inside and outside ultimately have to converge, of course: you cannot win sustainably on the outside if you are losing internally, and vice versa. This is even true in free fall, as we will illustrate in chapter 5, where we will explore the cases of not only Charles Schwab but also DaVita and Crown Castle.

Figure 2-3 summarizes two of the surveys in which we asked a sample of executives about their perceived barriers to growth.

The first set of results shown in the figure derives from our survey of 325 executives worldwide about their growth challenges; the second set, from the executives who attended our FM100 workshops in developing markets. What we saw in our research is that executives cited internal barriers to growth four times as often as external ones. Executives cited internal barriers to growth about five times as often as an external lack of opportunities to obtain new sources of profitable growth. Furthermore, a remarkable 94 percent of barriers cited by large-company executives had their roots in internal dysfunction and lack of internal capabilities.

So what are these internal barriers? In overload, they involve predictable forces that we call the westward winds, because of how they push companies west into the upper-left quadrant of our map. In stall-out, they involve a set of predictable forces that we call the southward winds, because of how they push incumbents south into the bottom-left quadrant of the map. And in free fall, they involve systemic dysfunction on the inside that prevents companies from being able to adapt to profound strategic challenges on the outside—what we call storms, often relating to the obsolescence of part of the business model itself. The example of Nokia, mentioned in our introduction, would be a classic example, exactly the type of “business disruption” Clayton Christensen identifies and discusses in his classic work on disruption.⁸

Now let’s get more specific.

The Westward Winds: Overload and the Erosion of the Founder’s Mentality

Growing a new business successfully involves pursuing the benefits of scale while staying true to the founder’s mentality. This is the essence of what we’ve been calling the journey north: the move from insurgency at the bottom-right of our map, to scale insurgency at the top-right. To make that journey successfully, however, companies need to anticipate and make plans to cope with the westward winds: the internal forces that can blow them off course. We’ve identified four of them, as shown in figure 2-4, which we’ll now briefly introduce one by one.

The Unscalable Founder

Everybody knows the type: the committed founder who finds himself out of his depth as his company grows but who simply can’t let go, creating a bottleneck that impedes growth. Our research indicates that this problem afflicts one in three growing companies, and research on initial public offerings has shown that it can dramatically reduce the average return on investment. When we’ve talked to leaders who have experienced a major struggle in their journeys north, about two in five have listed the unscalable founder as a root cause.⁹

Lost Voices from the Front Line

When successful insurgent companies find themselves hit with the rapid-fire demands of overload, their managers often react in ways that put distance between themselves and the front line, and this, in turn, creates a westward drift away from the benefits of the founder’s mentality.

The Erosion of Accountability

Accountability erodes surprisingly often during overload. Blinded by new layers of bureaucracy and complexity, and struggling to keep up with the short-term demands of growth, leaders and managers make decisions without direct accountability. Forty-six percent of the 325 executives we interviewed believed that they had experienced erosion in the founder’s mentality because of dysfunctional and unaccountable decision making—a process that can stop a company in its tracks.

Revenues Grow Faster Than Talent

As the pace of their growth increases, companies often begin to make errors and accumulate debris that ultimately will kill them. Nowhere is this more apparent than with hiring. As successful insurgents attempt to manage their own burgeoning complexity, they make staffing errors. At the top level, they hire professionals with large-company expertise who make dramatic, disruptive changes to the founding culture. Throughout the company, they staff up with great speed, and in doing so, they often sacrifice employee quality for quantity. Soon employees lose touch with the company’s original mission and principles, they turn their gaze inward and lose focus on the front lines, and they become thinkers more than doers.

The Southward Winds: Reversing the Benefits of Scale

Many executives seem bewildered by the painful slowdown that comes with incumbency. But they have no trouble describing the symptoms:

We’ve lost touch with customers. We’ve become too bureaucratic. We’re drowning in process and PowerPoint presentations. We have the resources and no shortage of opportunities, but somehow we’ve lost the ability or the will to make the most of them. Everything’s complicated, and everybody’s tired. Competitors seem faster than they used to be, and we can’t make decisions or mobilize quickly enough. A good day at the office used to involve making decisions and taking action, but now it means attending a big meeting of department heads, whose focus might be “creating alignment around strategy” or achieving a quarter-point increase return on average weighted capital. Running the business—once such a personal, high-energy ride—now feels like flying a huge, sluggish airliner. We’ve lost touch with what got us into the business in the first place, and we no longer know where we’re going beyond the annual budget, nor do we know where new growth will come from.

These are effects of the southward winds, which we’ve summed up in figure 2-5. They create internal complexity, they weaken and slow down decision making, they depersonalize the customer experience, and they erode or obscure the core mission, which leads to employees’ disillusionment and lack of engagement. Together, the southward winds can transform the power of incumbency into the vulnerability of bureaucracy, and they sap the life out of a company and the energy out of its people. They threaten to make it stall out.

Let’s now look at them one by one.

The Complexity Doom Loop

Every business begins with a single product, a single segment, and a single way of going to market. Then growth begins, bringing new opportunities, new customer segments, new geographies, new product lines, new businesses, new channels of distribution, and new services. These are the bright, shiny objects of business: they provide immediate gratification and energy. Yet they also add complexity, and that leads to what we call the complexity doom loop: unchecked complexity silently kills growth and sucks energy from the organization, creating tired leaders. And tired leaders become distracted from their key mission of translating strategy into simple actions and routines at the front line of the business.

Complexity doesn’t have to be a negative. Incumbents are multinational businesses with complex product portfolios, after all, geared to serve complex customer needs. Managed effectively, that can actually be a competitive advantage. Consumer goods companies that can efficiently serve the complex needs of multinational retailers gain a crucial edge on those that can’t. Construction companies adept at delivering bespoke solutions to solve convoluted customer demands can command higher margins.

Complexity, a central villain in this book, is obviously not homogeneous. It differs within and among organizations, and needs to be attacked at a variety of different levels. But here’s the point: to survive the southward winds, companies need to make complexity reduction a way of life.

Companies that do this have flatter organizations that put leadership closer to the customers, better maintain the founder’s mentality, and achieve more sustained profitability. Steve Jobs recognized this. That’s why, on his return to rejuvenate Apple, he focused first on the reduction of complexity in organization (he consolidated some departments), in product line (he eliminated 70 percent), in research (reduced to a handful of projects), in design (simplicity became a mantra again), and in the supply base (the number of suppliers was cut from a hundred to twenty-four). “People think being focused means saying yes to a thing that you have to focus on,” he said in 1997, at the Worldwide Developers Conference held annually by Apple. “But that’s not what it means at all. It means saying no to the hundred other good ideas that are out there. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things we’ve done.”

The Curse of the Matrix

Large, mature businesses often successfully run themselves as “matrix” organizations. These are companies in which responsibility is formally assigned to managers in cross-cutting slices of the organization, in functions (finance or sales), geographies (countries or regions), customer segments (government or small business), or product areas (hardware, software, or services).

The problem is that in matrix organizations, departmental priorities can blur the sense of collective purpose—the insurgent mission that’s so important to the founder’s mentality. As the matrix grows, so does bureaucracy. Internal politics consume more time and energy than ever. Nodes of interaction develop between middle managers and the people at each node whose only job, it sometimes appears, is to say no. The founder’s clarity—the notion that there are those who sell and those who support those who sell—gets lost in a sea of competing interests. We call all of this the “curse of the matrix.”

Successful organizations need to make good decisions and to coordinate actions fast. But the curse of the matrix works against that and, in doing so, makes stall-out a real possibility. One of our colleagues studied a large organization mired in bureaucratic sluggishness. He tabulated the number of hours that the company’s employees were collectively devoting per year to the weekly executive meeting, not only in attending it but also in coordinating departments, setting agendas, preparing reports, and so on. The total astonished everybody: 300,000 hours. One meeting, 300,000 hours!¹⁰

Inevitably, applying the matrix organizational structure to a growing company will lead to internal conflict. The problem is how conflict gets resolved. Insurgents understand this, and their bias for action and their obsession with the front line ensure that conflict doesn’t bog down the organization. But incumbents learn to hate internal conflict. Why?

First, they let conflict become personal. Employees in different parts of the organization lose their sense of perspective. They let general debates about how best to serve customers become personal fights. This means one employee or department has to “win” and the other has to “lose,” and this outcome produces shock waves that reverberate far beyond the specific decision being debated.

Second, they start to consider conflict “unprofessional.” Big organizations create processes that seem to be more about time management than customer issues, and so don’t like it when employees energetically start a conflict and take the meetings “off track or off schedule.” They want the agenda and decorum to rule.

Third, they let the energy vampires take over. Anyone who has worked in companies on the verge of bureaucracy will recognize the energy vampires right away. They schedule lots of meetings. They exercise pocket vetoes on key decisions and delay action with their requests for one more round of analytics. They send out a lot of templates. You hate it when they appear on your calendar. They wait at the other end of e-mail, ready to fire off missives that force your people to stop serving the customer and instead respond to yet another information request. Rather than breaking problems down into bite-sized chunks that people can take away and act on, they raise high-level issues that can’t be solved. They force everybody to fight shadow battles under the surface. They kill organizations like strangler vines.

The curse of the matrix even causes many companies to lose access to their own resources. Why? Resources in matrix organizations get trapped in departmental silos, often defended by ballooning central staffs that have become the ultimate experts at the internal game. This slows down decision making and makes it impossible to concentrate resources. Big companies that have lost the founder’s mentality tend to spread resources around evenly, an understandable instinct, but one that leads inevitably to mediocrity. Great founders work differently: often willing to invest overwhelming resources on a new capability or to deal with a crisis, they allocate their resources very selectively. Their approach isn’t smooth, it’s spiky.

Fragmentation of the Customer Experience

Everybody knows this problem. You call a big company with a question, but nobody seems to really want to help. Your experience as a customer is fragmented and depersonalized. Nobody actually “owns” your problem, and each employee you deal with seems eager to move you on to someone else. You get transferred on the phone from one person to another, always ineffectually. Everybody you talk to seems to care only about their little corner of the organization and wants to get you off the phone to rack up the total call-handled numbers. Nobody cares broadly about the whole. Nobody is accountable to you or for you. The case of The Home Depot, described earlier, is a perfect example of this problem and the consequences of not addressing it.

Death of the Nobler Mission

The executives we’ve interviewed about maintaining the founder’s mentality as their companies grow cite one factor more than any other: a tight, intense focus on principles and purpose. Lose the shared sense of nobler mission that animated your insurgency, they all agree, and you lose your company’s soul.

This is not a touchy-feely concern. Employee engagement with a nobler mission translates into behaviors that create success externally, because it causes people to go the extra mile for the company, for the customer, or for fellow employees. One study found that engaged employees are 4.7 times more likely than the average to recommend the company to a friend, 3.5 times more likely to make suggestions about how to improve the business, and 3.5 times more likely to take initiative to do something positive that was not expected of them.¹¹ When some of our Bain colleagues looked at this phenomenon in front-line call centers, they found that the most engaged employees take accountability to a higher level, give out their contact information for follow-up, and demonstrate more empathy toward the customer. Management teams ignore these factors at their peril.

The story of Hewlett-Packard, one of the true founders of Silicon Valley, illustrates the importance of these principles and shows what can happen when they are negated. Bill Hewlett and David Packard founded the company in 1938 with a very clear idea of the kind of company they were trying to build. “We wanted to avoid a bureaucracy,” Packard wrote in The HP Way, “and create a company where the problem-solving solutions would be made as close as possible to the level at which it occurred.” Not only that, he continued, “Bill and I had no desire to see HP become a conglomerate. More companies die from indigestion than starvation.”¹²

Hewlett and Packard exuded the founder’s mentality, and their focus on organic growth and the primacy of the engineer carried the company far. But starting in 1999, the first in a series of externally hired CEOs took the company in a different direction and bulked up the business with acquisitions, including, in 2002, the computer giant Compaq. Walter Hewlett, Bill’s son, hated what was happening and published an open letter to HP stockholders in the Wall Street Journal, in which he expressed his fears about the “loss of both focus and strategic clarity,” and about “clashes of culture and poor employee morale.”¹³

He was right to be worried. Four CEOs later, HP’s stock price underperformed the Dow Jones Industrial Average index by about 50 percent during that time. This was not the only reason for the company’s stall-out, but it was certainly an important factor. As the Harvard Business Review said of the company in 2011, “It has lost the ‘HP Way’—the values and behaviors and principles and commitments that made it more than just another company [italics added].”¹⁴ That’s the particularly insidious danger of this southward wind: it makes you lose a sense of your mission and direction, and turns you into just another company.

In the chapters ahead, we’ll be discussing all of this in greater detail. For now, though, we’ll just reiterate a key point: the three crises of growth—overload, stall-out, and free fall—are central to about 80 percent of major swings in value, up and down, for the average company during its lifetime. How you handle these crises matters. So let’s now turn to how a variety of leaders and their teams have coped with these crises, and to how they’ve relied on the founder’s mentality to help them succeed.

USING THE FOUNDER’S MENTALITY IN YOUR ORGANIZATION

Schedule a dozen workshops across the organization to discuss:

–Where is your business located on the founder’s mentality map and which winds are hurting you most?

–How are these forces reducing your ability to respond to customers and compete with speed and robbing your people of their energy and freedom to act?

–What actions can you start taking now to restore the founder’s mentality and what measures can you use to check your progress?

–What capabilities are missing or are not strong enough to keep your company competitive in the future? What actions can you take to acquire or strengthen them?

What can leaders do on their own, independent of an institutional response?