Why is profitable growth so hard to achieve and sustain? Chris Zook, partner at Bain & Company and co-author of “The Founder’s Mentality: How to Overcome the Predictable Crises of Growth” researched this question, and found that when companies fail to achieve growth targets, 90 percent of the time the root causes are internal—not external.
Zook will be speaking at an upcoming “Expert Perspectives: Betting on the Future” videocast series about the predictable internal crises that most companies experience as they grow, strategies for navigating through them, and ways that executive leadership teams can instill and leverage what Zook calls the “founder’s mentality” throughout their organizations.
In your research, you found that the majority of companies fail to achieve growth because of internal causes. Why is this?
Today, nearly all failures to perform in the marketplace can be traced to pre-existing, deeper root causes within an organization that could have been identified and addressed by leadership earlier. One of the biggest causes of these internal breakdowns is complexity. We refer to this as the “growth paradox,” which means: growth creates complexity, which kills growth.
Complexity creeps in over time like barnacles accumulating on a boat and reduces the focus on the core business, causing organizations to under-invest in, or even lose, what made them special in the first place. It also allows the rise of internal bureaucracy which slows down decision-making and the ability to adapt, and shifts power to people who may never have served a customer or worked more directly with the product. This is how companies lose ground-level instincts and stop innovating.
“Stall-out sets in rapidly, so leaders need to be constantly on guard for signs of complexity and the onset of bureaucracy.”
Can you talk about the stall-out crisis that most companies face?
Most successful companies eventually face a predictable crisis that we call stall-out—a sudden large drop in revenue and profit growth or a collapse of once-high shareholder returns to well below the cost of capital. For example, in our research, we found that two-thirds of companies over $1 billion stalled out or went out of existence over 15 years.
A common misconception is that stall-out happens because an organization’s business model has become obsolete, but the success or failure of a company ultimately lies in its ability to remain fast, perceptive, innovative, and adaptable. To make it worse, stall-out sets in rapidly, so leaders need to be constantly on guard for signs of complexity and the onset of bureaucracy.
How can business leaders recognize when a growth crisis is happening and what can they do to survive it?
Ultimately the key is for leaders to stay open-minded, humble, and in touch with the front line. I urge leaders to spend half of their own time in the field and with customers, to personally train high potential young leaders, and to push power down to the levels of the organization where value is created.
It’s important for all companies to remember that the competitive advantage in younger organizations comes from an idea, from passion and mission, and the love of detail. The key is to keep these things alive as companies scale.
How should companies be thinking about investments that will lead to successful growth?
Most companies set investments by taking the prior year and making small adjustments up and down, which results in a “peanut butter” spreading of resources and a dilution of big priorities and big bets. In a world where competitors and business models are changing so fast, the best companies are following three investment principles to counter this:
- Use a zero-based budgeting approach as if you are starting with a blank sheet, to reduce trapped resources and allow big bets.
- Invest first to protect and defend the core, second to re-invent the model of the core, and only last in diversification.
- Make big investments in new capabilities that are world-class and extend the boundaries of your core. An example of this is Netflix adding content-production capabilities.
How can companies develop next-generation leaders?
There are three things that companies should prioritize to create next-generation leaders. First, current leaders should be true role models. Get out to the front lines and spend time with the best people in the organization. Second, create experiences to give younger high-potential employees opportunities to lead. One way is to create major pilot projects around new strategic initiatives and let next-generation leaders run them. Lastly, companies should embrace and constantly strengthen meritocracy at all levels.
Join the upcoming “Expert Perspectives: Betting on the Future” videocast series with Chris Zook on October 17 to learn more.