Getting Growth Back at Your Company

SARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green Carmichael. I’m talking today with Chris Zook, a partner at Bain & Company, and a regular contributor to HBR. His latest book is The Founder’s Mentality: How to Overcome the Predictable Crises of Growth written the co-author James Allen. Chris, thank you so much for talking with us today.

CHRIS ZOOK: My pleasure.

SARAH GREEN CARMICHAEL: So the way I understand it, the central premise of this book is that we too often look to external factors when we’re trying to grow our companies. And what we need to do more is not forget those internal factors that make such a difference. Have I gotten the right end of the stick on that? And if so, how did you come to those conclusions?

CHRIS ZOOK: Sure. Well, the book was really borne by the collision of two striking statistics that, in a sense, almost feel paradoxical. One is that right now only about– barely one in 10 companies in the world achieve even a modest level of sustained and profitable growth over the course of a decade on average, even though every single company aspires to do that. It’s quite remarkable, really, that 90% of companies fall short of their long term growth objective.

And the second statistic came from a number of fairly large studies we did, each of them about 400 executives around the world, where we probed the barriers that they perceive to achieving their growth objectives now. And we found something that we actually haven’t seen in 15 years of doing research on growth. We haven’t seen it to this degree– which is that 85% of executives said that their major barrier to achieving growth was not the absence of opportunities on the outside, it was not a huge technology that they couldn’t get a hold of, it was not a competitor in the market that was, let’s say, subsidized by government and they could do nothing about it. It wasn’t external factors that was holding them back.

It was internal barriers. And, in large companies over $5 billion, senior executives felt that 94% of the time. They felt that their biggest barriers were internal and not on the external chessboard of a strategy.

SARAH GREEN CARMICHAEL: That’s so interesting. So I want to get into some of those internal barriers. Are these common things we would probably recognize from our own organizations? Or where they a little bit more unexpected than you were expecting?

CHRIS ZOOK: Well, if there was a single theme that characterized all of the barriers actually– for young companies trying to scale and for more mature companies concerned about their growth engine running out of energy, it was actually what we call the paradox of growth. Which is that growth creates complexity, creates internal complexity, creates external complexity. It just creates complexity.

And the accumulation of complexity turns out to be the silent killer of profitable growth. It might be companies going into too many businesses. It might be organizations that have decision processes that have become so complex they can no longer decide quickly and mobilize. It might be organizational layers so that information is distorted and senior managers no longer have a ground level feeling of what’s really going on. But if there was a single theme running through it, it had to do with complexity.

SARAH GREEN CARMICHAEL: So it’s interesting to hear you talk a little bit about that because in some ways it sounds like– as I’m thinking through how this might look in an organization, if you wanted to reduce complexity you might do something like simplify your decision making processes. But then you would probably end up with people who sort of realized that that was necessary but at the same time would fight to stay involved. Because no one wants to give up any turf.

So it seems like it’s almost a tragedy of the commons problem in some ways. Because it’s like, we can all see that this is too complex but no one wants to give up their a little bit of control over this fiefdom. As you think about how companies can resolve these issues, is that the kind of thing that companies run into? How can a leader or even someone who’s not a leader but just sort of a peer who sees this going on– how can someone jump in and cut down complexity?

CHRIS ZOOK: Well, we called the book The Founder’s Mentality because the initial step for every single company with every single founder is, in a sense, the essence of simplicity. The typical founder was very often the first salesperson, the first product developer– maybe even in their garage– and the person who turned the lights on and off at night. They had what we called the founder’s mentality.

The three elements of it, which we defined quite rigorously, we feel as if it’s a great measure of how companies age and how companies also fight complexity. The three elements of the founder’s mentality were number one, a very clear insurgent mission that really inspired and attracted young talent and really helped the companies stay focused. And over time that can become obscured. And when it does, things become complex.

The second element of the founder’s mentality was what we called front line obsession. And it’s just epitomized for me by MS Oberoi, the founder of the Oberoi hotels in India. Voted a number of times the best hotel chain in the world– the biggest luxury hotel.

And even at the age of 94, his grandson told me he would be sitting when he could not even hardly see and holding customer comment cards one inch away from his eyes. Still writing on them, still obsessed about the detail. And yet as the typical organizations become large and complex, very often the senior managers may not even see customers, let alone be involved in that detail. And complexity rains in those environments.

And the third element was what we called the owner’s mindset, which is about speed, anti bureaucracy, and a willingness to take personal responsibility. And when complexity sets in, people often avoid responsibility, incentives become politicized. Organizations that are matrix organizations have a lot of places to hide. Where the essence of the founder’s mentality is about responsibility. No place to hide. Front line instincts and a insurgent mission that is a unique and very motivating.

When those things go away, complexity can kill those things. And the absence of those things allow complexity.

SARAH GREEN CARMICHAEL: So your talking about these three elements of the founder’s mentality reminds me that I also wanted to ask you about the three predictable crises of growth that you outlined in the book. Because I think people find that really interesting. So walk us through those predictable crises.

CHRIS ZOOK: Sure. I remember quite a number of years ago there was a book called Passages which was a big hit at the time. It was about the predictable crises of adult life. And it was interesting. There were characteristic crises that everyone, no matter what their circumstance was, tends to encounter when they’re 40, and when they’re 50, and when they’re 60, and beyond.

And similarly, in the life cycle of companies, we found that there were three phases where the decisions and the actions that were taken– all around growth, all linked in different ways to the founder’s mentality– drove about 80% to 85% of all the typical value created or destroyed. The big swings of value during the life of a company.

And these were number one, what we called crisis of overload. This is a company that is growing and has to scale its systems, has to maintain its level of talent, has to stay close to the customer. And very often when companies are trying to grow three, four, five times those systems can break down. And that’s a point of crisis for company.

A second crisis is what we called stall out. An example of this would be, let’s take Starbucks, a company we all know, just to illustrate it with an example. In 2007 into 2008, Starbucks, after growing its revenues 15% a year, suddenly started having negative same store sales. And stock prices are very responsive to small changes in growth forecasts of public companies. And amazingly the stock price collapsed almost 85% percent.

It caused the founder Howard Schultz to come back. But what he found was not that there was a new competitor with coffee, or a new form of consuming coffee, or that people had switched to tea. He actually found that it was– as he put it, it was completely self induced. His great phrase he said, it was like unraveling a sweater inch by inch over time.

And he took a whole range of internal actions to renew the coffee experience, to get bad smelling cheese sandwiches out of the stores, to make the new store formats a little bit more like the original ones that made people so comfortable, to make the baristas again the star of the show. And they were internal and the stall out reversed itself. The company is now growing. And not only did it claw back the 85% of value it lost, its stock is now three times what it was when Howard Schultz came back to renew it on the inside so that it could succeed on the outside.

And third crisis, much less common, but it is so when your entire business model begins to become obsolete. And so the collapse of Marvel Comics years ago when no one was reading comic books anymore and its renewal to become a producer of television and movie and games around its characters is a successful example of a company encountering what we call the crisis of free fall.

But only about one in 10 companies that have their business model become obsolete are actually able to renew themselves and fight free fall. So the three crises, free fall, stall out, and overload are what we built the book around. And in each case we found that the elements of the founder’s mentality, either by renewing them or investing to maintain them, were very important for companies to keep their mojo.

SARAH GREEN CARMICHAEL: So it’s interesting to me that you mentioned Howard Shultz in particular because I think that is a great example of a case where– and we’ve seen this over and over again unfortunately in the business world. Where you have either a founder or just a really effective CEO coming back to save a company that they helped either grow or build or sustain over time. And I think the question always then becomes, well, eventually that person will leave again. Whether it’s because they are finally going to actually retire or because they actually die in office– and that’s happened.

I think that there’s a big open question for those companies of whether then someone else will be able to pick up the baton and carry forward, or whether the company will face another crisis. And I’m wondering, given that dynamic, do you see a lot of success in these people who have the founder’s mentality being able to transmit that to someone else? Either people lower down in the organization or at least to whoever they’ve prepared for their succession plan? How can a leader really get that going in other places in the organization?

CHRIS ZOOK: Yeah, the founder’s mentality– while we use the term founder, it doesn’t necessarily have to require the presence of the founder or even that the founder in that case was 100% right. There are a lot of cases where the founder’s mentality was renewed by an executive that was neither a part of the family nor part of the founding team.

One example that probably is familiar to most listeners would be the case of LEGO, just to illustrate it with an example. LEGO begun by a woodworker in the ’30s in Denmark who, during the Depression, found that people weren’t buying furniture anymore. And so he started making toys. And as he did that he discovered these blocks and a block system where the pieces would link to each other.

His son, the son of the founder, came in and was also a very good CEO. And he shifted it to plastic– the LEGOS that everybody knows now. And amazingly 71 LEGO blocks exist for every human on planet Earth, which is remarkable.

SARAH GREEN CARMICHAEL: Oh, whoa.

CHRIS ZOOK: Yeah, in older audiences I always have somebody put their hand up and say, yeah, half of them are in my garage. But then the next generation, for reasons still a little bit peculiar, begin to say no, no our core is not a toy system. Even though it was voted the best toy of the century by the British toy association, our strength is actually our brand. We’re the best brand to families.

And they began going into theme parks, and plastic watches, and games. They even had a joint venture with Steven Spielberg for a theater product where children could produce their own programs. None of those things made money. They sucked energy from the core. And the core LEGO block business collapsed completely and margins went from positive 20% to negative 21%.

So the new CEO came in who had been in the planning department and had done a study for the board. And Jorgen Vig Knudstorp came in. And what he did was to actually exit all those businesses, go back to the original core, but rejuvenate it in a contemporary fashion.

He brought back the founder’s principles of play and made them front and center again. He moved the headquarters from a big glitzy corporate office back into the warehouse facility where the original founder and his son had headquarters. And he brought the customers back into the business.

He figured out who owned all these 71 LEGOS per person. And there about 300,000 people who are LEGO addicts. And they brought those back– people to be involved in the production. And so when you look at it, it was a renewal of all three elements of the founder’s mentality.

But not by the founder. By somebody who actually had not even really known the founder. But certainly a new insurgent mission around rejuvenating the toy. And it’s now probably one of the top turnarounds in Europe in the last 10 years.

A real focus on front line obsession, bringing the customers in to product design online and in person. And third is definitely a return to the owner’s mindset. And a massive increase in speed in metabolism and an elimination of a lot of corporate overhead.

And so you do have many cases where a non founder can come in and renew a company by using the template of these internal principles around the founder’s mentality to rejuvenate.

SARAH GREEN CARMICHAEL: This is interesting, that story, because I feel like there’s other companies– I’ve heard of two doing kind of similar things. Alibaba, for instance, I think they make new employees or new executives do some time in Jack Ma’s old apartment where he started the company to kind of give them a feel for this is where we come from. It’s sort of using the corporate history in a way to sow the seeds of future growth. So I think that’s a really interesting story.

CHRIS ZOOK: Yeah, yeah. No, I think very often these iconic stories of the founders hold great lessons. Probably the fastest growing company in China is Haier, which is now the biggest home appliance company in the world actually. And it was founded by a man named Zhang Ruimin who had taken over a government owned factory that made refrigerators.

And he discovered that the refrigerators were very low quality. And he found this outrageous. And so on his first couple days in the job in charge of this factory– which was very small and now it’s a company employing over 100,000 people– he said, you have to bring all the bad refrigerators, which was a very large percentage of them, onto the streets.

And he bought a number of sledgehammers equal to the number of refrigerators that he brought on to the streets. And he took a number of employees and gave them each a sledgehammer and said, I want you to destroy these on the street. And he took a sledgehammer too. And today the sledgehammer, which epitomized that equality at all cost for the customer, actually stands in the corporate headquarters. You can see the sledgehammer in a glass case when you walk in.

And I think you’re right. I think these founders’ stories are very powerful. And can even be brought back sometimes later on, as in the case of the principles of play at LEGO.

SARAH GREEN CARMICHAEL: Well, that is a great story to, I think, wrap it up on. Can’t do much better than sledgehammering your products in the street. Well, Chris, thank you so much for talking with us today. This has been a really interesting conversation.

CHRIS ZOOK: Oh, my pleasure. Thank you for having me on.

SARAH GREEN CARMICHAEL: That was Chris Zook, a partner at Bain & Company and the co-author with James Allen of The Founder’s Mentality: How to Overcome the Predictable Crises of Growth. For more go to hbr.org.