The Founder's Mentality: How to Overcome the Predictable Crises of Growth

Authors Chris Zook and James Allen have spent a decade studying the rise and fall of profitable growth in companies across more than 40 countries. This book draws on their discussions with over 100 executives around the world, so it's a trove of valuable advice from a range of successful business leaders.

Chris Zook is a partner at Bain & Company, and has been co-head of its Global Strategy practice for 20 years. Based in Boston and Amsterdam, he specializes in helping companies find new sources of profitable growth.

James Allen is a partner in Bain's London office and is co-head of its Global Strategy practice. Together, Zook and Allen have written five bestselling books on strategy.

So, keep listening to find out why the founder's mentality is the key to sustainable growth, to understand the three reasons why growth declines, and to learn how you can win it back.

"The Founder's Mentality" outlines three internal crises that happen at predictable stages of an organization's growth. They call these "overload," "stall-out" and "free fall." Each one is given a chapter, and collectively they form the central portion of the book. The authors use case studies throughout to show how even the most successful companies can suffer these three choking points. They also provide advice on how to overcome them and find a new path to market success.

The book's final chapter is dedicated to helping leaders secure profitable growth by spreading the founder's mentality across all levels of their organization. So, let's look in more depth at the founder's mentality, and why it's so valuable.

The authors' research shows that companies that grow profitably share certain motivations and attitudes, even if they're very different in other ways. These often reflect the values of the founding leader or the team that created the company's success in the first place. The evidence is impressive. Since 1990, returns to shareholders in public companies where the founders still have some involvement are three times higher than in other firms.

The authors have packaged these values into three main traits, which guide leaders in their daily decision making and behavior, and which need to be cultivated throughout an organization.

First is having what they call an "insurgent's mission." This is where you work with a clear sense of purpose and have a burning desire to fight on behalf of wronged customers or employees; to do the right thing and make a difference. Staying true to this founding mission in everything you do – and don't do – will keep you on the right path.

Second is an obsessive attention to detail in every aspect of your business and all your dealings with customers and employees, no matter how small the detail or how large your company.

The third and final trait is an owner's mindset, which means all employees must have a personal desire to make the company successful. The authors cite research showing that only 13 percent of employees feel emotionally connected to the company where they work. It's in every organization's best interests to improve this.

Employees with an owner's mindset feel engaged and empowered, and their professional approach is personal. This is their company, their customer base, their hard-earned profit. When people feel like that, they're three and a half times more willing to volunteer solutions to problems and come up with new ideas.

So, if the founder's mentality is this valuable, why do companies lose sight of it?

Well, if you're familiar with the Greiner Curve, you'll already know that organizations become more complex as they grow. Processes and structures dampen insurgency. Higher numbers of staff make it harder to hand-pick talent, and acquisitions dilute the original core purpose and focus.

Internal problems like these explain why market-leading companies can stall and lose their dominance. Take cellphone company Nokia, for example. Nokia used to lead the market, and then fell behind when it failed to adapt to changing conditions.

But there's always hope, and the authors are keen to illustrate how the right leaders can bring ailing companies back from the brink and up to their former glory. Think of Steve Jobs when he returned to Apple and stripped it back to its core.

As you heard earlier, the authors identify three crises of growth – overload, stall-out and free fall – and they offer advice on how to overcome each of them. Luckily, they're all predictable, so they can all be guarded against.

Let's take a closer look at each of these crises.

The first – overload – happens when a company scales up too aggressively and without enough internal planning. Close-knit teams that used to work together for shared outcomes and greet customers by name become overwhelmed by their new size and complexity. Internal communication gets spread across disparate locations, and frontline interactions are largely with anonymous customers.

The authors use Norwegian Cruise Line as an example of a market leader that failed to prepare internally for its external expansion. At NCL, ideas from headquarters were pushed through with no understanding of the practical impact they'd have on frontline employees. And, by failing to create systems that could cope with more complex customer service, the cruise line rapidly lost the trust and loyalty of its crew, its passengers, and its travel agents. In short, the managers lost their founder's mentality and the business spiraled into chaos.

Chapter three, titled "Combatting Overload," is packed with excellent, tried-and-tested advice from company leaders. We especially liked the idea of the "Monday meeting." This is a commitment from leaders to meet once a week to discuss and resolve internal company issues.

The benefits of these meetings can be far-reaching. First, they signal to the whole organization that problem solving should be quick – with progress sometimes becoming visible within a week. This means that no issue should fester, or get repressed. Leaders are held accountable, and they're taught how to break big problems down into fixable chunks.

By bringing leaders from around the company together to discuss internal problems head-on, these meetings encourage them to take responsibility. They also demonstrate how sharing different ideas openly and honestly can lead to positive resolutions.

Les Wexner, chairman and CEO of fashion retailer L Brands, has taken the Monday meeting promise one step further. His team holds a Tuesday follow-up meeting to keep the momentum going. Wexner says this helps resolve small issues before they grow, and prevents major problems breaking out further down the line.

The second crisis of growth is stall-out. Stall-out is experienced by companies that have scaled successfully, but are struggling with the complexity that comes with it. It's disorientating, because leaders know growth is slowing but their usual remedies stop working. They can't identify what's wrong or how to fix it, because the organization now has multiple layers.

Stall-out happens fast, and is extremely common. The authors estimate it happens in every two out of three maturing companies, and that only one in seven recover.

The third and final crisis of growth, free fall, is the most treacherous. Free fall tends to happen when maturing companies are hit by new insurgents and a rapidly changing market. It usually comes from an internal failure to prepare and adapt to external factors and to stay ahead of the competition. For example, the video rental chain Blockbuster failed to respond to the warning signs that its product was becoming obsolete, in the same way that Kodak wasn't prepared for the digital revolution in photography.

According to the authors, free fall affects five to seven percent of companies on any given day, and only 10 to 15 percent of these avoid crashing. Thankfully then, chapter five explains how leaders can stop freefall. LEGO Group, IBM and Apple, to name but a few, provide inspiring examples of successful growth after freefall. But be warned, returning to market health can take up to six years.

The authors provide six essential steps for what they term "refounding" your company. One of them is to build a refounding team that has plenty of energy, fresh ideas and new skills. Another is to focus on the core of the core – in other words, to re-evaluate the founding reason for your company. This inevitably leads to cutting away the areas of your business that fall outside this core purpose, simply because they waste resources and sap finances.

Take LEGO Group, for example. Its profits were negative 21 percent and losing value at an average of 3,000 euros a day when CEO Jørgen Vig Knudstop took over in 2004. Knudstop re-focused on the company's core product – the toy-brick system that was the reason for its worldwide success in the first place. This meant simplifying the Group's vast portfolio, which had grown to include theme parks, movies, video games, magazines, television shows, and retail shops.

The core product also needed cutting back. Knudstop's refounding team discovered LEGO sets had more than 14,000 elements in 50 colors, and 90 percent of these were only used once. Knudstop and his team immediately cut this back by 50 percent and, today, 70 percent of any LEGO set is made from universal pieces.

They did much more, of course, bringing in new product lines including LEGO for girls, co-branded products like the Star Wars line, and licensing the brand for movies. They also sold off the Headquarters building and moved the main office to the same modest location as their packaging plant. By shrinking the product line and concentrating on the core of the core, Knudstop and his team ensured Lego could grow for the long term.

However, the authors warn that once you hit free fall it's usually too late to try to revive your insurgency. Instead, you must redefine your mission statement and rebuild your company from the frontline. You must also fully commit to investing in new areas – think of LEGO and its product line for girls, for example. The authors admit that a decision to innovate and take risks during this time of stress and loss is extremely challenging, but it's vital for pulling your company out of free fall.

The book's closing chapter offers action plans and learning that leaders can put into practice right away, and identifies three valuable lessons they can take from it. These are self-awareness, common or focused ambition, and the value of creating a compass of core principles to chart your course.

This chapter also pinpoints the characteristics that define leaders who model the founder's mentality. Among them are the ability to recognize when to say "no" – especially to offers that don't fit with your core mission. They also understand the value of investing in the next generation of leaders – recruiting, mentoring and promoting talented employees secures the future of your organization. Related to this is the ability to think ahead and in the long term. But leaders must also act with skill and agility, to avoid the crises discussed throughout the book. As with all leadership, it's not easy, but the authors are keen to stress that all these skills can be learned.

So what's our last word on "The Founder's Mentality"?

This book sets out to help leaders navigate a safe passage through the internal crises that come with growth. It's all about the inner game of the business – the hidden organizational structures, values and mission statements that ultimately determine whether your company will achieve sustained and profitable growth.

So set your compass, check it regularly, and use this book as your guide.

"The Founder's Mentality: How to Avoid the Predictable Crises of Growth" by Chris Zook and James Allen is published by Harvard Business Review Press.

That's the end of this episode of Book Insights. Thanks for listening.