The inner health of an organisation is as important as the external forces that influence its ascent or decline
A recent survey of more than 300 business leaders revealed something truly remarkable. Nearly two out of three executives said that their major competitor in five years would be a different company than the one it is today, usually a younger, faster-moving company. Nearly 85% of those executives said they felt that the leadership team (of which they were a part) faced a severe challenge in adapting their business fast enough on the inside to deal with new threats and conditions on the outside.
For this group of executives, the challenge to future success in their business was much less about predicting the future than about perceiving its onset soon and adapting to it quickly. In many ways, this is the business equivalent of the biological adage that it is not the strongest or biggest species that survives in the long term but the most adaptable. It is why only 9% of businesses achieved even a modest level of sustained and profitable growth over the past decade, even though virtually every one of them aspired to perform at that level. How many things can you think of that everyone aspires to and plans for yet less than 1 in 10 companies actually achieve?
Yet, some businesses have consistently defied the odds, going from success to success in industries undergoing rapid change. The list of great adapters spans a full range from IKEA in furniture to Google in online information to Amazon in retail to Sodexo in catering to the Oberoi Group in hotels and resorts. Over the past five years, Bain & Company conducted a major study spanning dozens of countries to understand the root causes of sustained success, the key elements of which we call a Founder’s Mentality. Companies built on the inside with a Founder’s Mentality (which we define below) were four times more likely to be a top performer and eight times more likely to be confident in their ability to adapt to change than rivals without a strong Founder’s Mentality.
We came up with the concept of a Founder’s Mentality based on two noteworthy facts. First, companies in which the founder — or the founder’s heir (or heirs) — is still present and involved in the business performed more than three times better in terms of shareholder returns over the past 15 years than those in which the founder is long gone. This remained true even when we stripped out the founder-led technology companies that have been propelled by the rise of digital technology — namely, Facebook, Google, Apple, Oracle, Amazon and the like. This discovery took on even more significance when our research showed that 85% of executives blame internal factors, not external ones, as the major barriers to sustained success. The breakdowns, in their view, could be traced to controllable factors such as the ability to focus, mobilize, retain talent and adapt rather than to outside factors such as an unbeatable new competitor, a saturated market or unfair government practices.
For instance, take the well-documented case of the crisis that Starbucks faced in 2008 — namely, two years of declining sales leading to a stock price collapse. How could this happen so suddenly to a company that had exhibited decades of extraordinary growth and success? Was Starbucks’ market saturated? Were new coffee chain clones gaining share? Were people tired of Starbucks and shifting to different drinks?
Howard Schultz, the founder of the Starbucks coffee experience who led its amazing growth trajectory, agreed to return again as CEO in January 2008 to address the problem. What he found was telling: The company was the victim of self-inflicted wounds and had allowed its core coffee experience to erode like a sweater unraveling inch by inch. Schultz noted that Starbucks was in danger of losing the signature traits that were at the heart of its success. Products had been introduced (such as malodorous cheese sandwiches) that contaminated the coffee experience. The baristas, the heart and soul of the shops, were hidden behind bigger, faster impersonal machines. The newer, cheaper stores lacked warmth and soul. And the unique values and mission had been subordinated in the interest of short-term profits.
Schultz reversed course, shut the underperforming stores, and renewed the coffee experience through training, emphasizing core values, new products and rehumanizing the stores. Just 10 years after the collapse, Starbucks is three times more valuable than it was at its peak, and the company’s growth is reignited around the globe — from China, where it is opening stores at a rate of 500 per year, to India, where it is growing rapidly in a joint venture with Tata Industries. The moral of this story? Starbucks’ crisis was self-induced, and its solution involved renewing the core, returning to what made Starbucks great in the first place. The remedy was on the inside, driving renewal on the outside. In pursuit of the secrets of a Founder’s Mentality, my coauthor James Allen and I talked to hundreds of executives in dozens of countries, held more than 20 discussion sessions with a group of high-potential growing businesses around the world we called the Founder’s Mentality 100, analyzed a database we built of 8,000 global companies and mined insights from the Bain & Company archives of case studies. What emerged were three traits that we believe are the best measure of the inner health of a company and its ability to adapt on the outside.
The first of these traits is an insurgent mission — that is, a special purpose for the company that differentiates it from others and keeps it focused on what it is building in the long term. An example of an insurgent mission at the extreme is Elon Musk’s SpaceX, which wants to create the means to make human life interplanetary. But it can also be critical to companies such as India’s leader in woven rugs, Jaipur Rug (now Jaipur Living), the insurgent mission of which is not just to sell rugs but to sell a family’s blessing, linking directly to the special work of more than 40,000 weavers working in their homes throughout rural India. Most founders began their businesses to wage a virtual war within an underserved industry or on an industry standard that they felt was too low. Yet, over time, too many organisations lose that sense of what made them special in the first place. They run the risk of becoming “just another company.” A recent Gallup poll showed that only 13% of employees feel strongly connected emotionally to the company that employs them. This matters. Employees who feel the energy of an insurgent mission are four times more likely to offer innovative ideas. If you are a leader, ask yourself if your leadership team and other key employees at all levels can describe the company strategy and priorities on five fingers in a strong and consistent way. Many find that they can’t.
The second element of the Founder’s Mentality is a frontline obsession. Every founder was once the front line—that is, the first salesperson, the first product developer, the person who turned the lights on in the morning. Yet, with rapid growth and success, layers of organisation build up, departments gain power, and complex matrix reporting structures emerge to drive a wedge between the senior leadership team and the front line. When that happens, a company can lose its ground level instincts, and its frontline employees can become alienated. In the average company, the most alienated employees are those furthest from leadership as well as those most directly serving customers. When this separation occurs, innovative ideas are lost, and the intellectual curiosity so central to the ability to learn and adapt often deteriorates.
The Oberoi hotel chain is an example of an organisation built for frontline obsession. The typical guest has over 40 employee encounters during his or her stay. Systems are set up to make sure that every employee is aware of new guests at check-in and is empowered to solve a wide range of problems for guests on the spot. Current CEO Vikram Oberoi described how when he would visit on Sunday mornings, he would still find his grandfather and company founder M S Oberoi, who was well into his 90s at the time, with a pile of customer comment cards, busily making notes about how to solve their issues. That is a frontline obsession at its very best. Three indicators of the degree of frontline obsession in a business are a Net Promoter Score®, which measures the loyalty of frontline employees and customers; whether learning from customers ties directly to a competitive advantage in coming up with new product ideas; and the amount of time that senior leaders spend out of the office with customers and key frontline employees.
The third element of a Founder’s Mentality is an owner’s mindset. The founder is the owner and sees the business as his or her baby, fostering a sense of total responsibility and a bias toward strong and fast action. Restoring an owner’s mindset when it has been lost is central to the enormous rise of private equity in the world. Some large companies such as AB InBev, the global leader in beer, have gained success by harnessing the energy of an owner’s mindset through a tight set of internal processes—for example, zero-basing, or justifying every budget item from scratch each year, as well as setting aggressive goals that link the objectives of frontline salespeople directly to top leadership.
When a company loses its owner’s mindset, leaders can turn into managers, then custodians and ultimately bureaucrats. And it’s clear that bureaucracy inhibits the ability to adapt — that its complexity is the silent killer of profitable growth. When we go to our doctor for our annual physical, the key health indicators are well defined and scientific. Yet, when we ask about the inner health of our organisations (in which most breakdowns start on the inside), it is much less clear. Remember, if you are losing on the inside, it is almost impossible to win sustainably on the outside. We believe that the elements of a Founder’s Mentality are the best indicators of the inner health of a business and its ability to adapt to change.
M S Oberoi once said, “No task is too lowly and no ambition is too high.” That is the essence of a