I have just returned from a week in India talking to business leaders about Founder’s MentalitySM and discussing the key challenge facing insurgent companies: As they grow, the leadership team implicitly trades the benefits of Founder’s Mentality for the benefits of scale.
The CEO and founder of one successful consumer goods company gave a sober laugh as he pointed out an even more troubling reality: “I certainly feel like we’re losing our sense of the original founding mission, but I’m also not sure we’re actually benefiting from scale.”
He went on to explain what has happened as his business has grown. “I’ve worked very hard to grow our company by developing strong business leaders. And as we grew, I divided the company into key product lines and put a strong leader at the top of each.” Along with a few functional heads, those business unit leaders now comprise his executive team, with each responsible for the growth of their unit.
“It is a good team with a good track record,” the CEO explained to me. “But it has become increasingly difficult to allocate resources in the right way. Choosing one product line over another inevitably feels like a decision to choose one business leader over another. So despite our attempts to be strategic, we more or less allocate democratically.”
“But the problem is that the polite discussions among our team and our even distribution of resources to the team are killing us. We’re starving some product lines where we’re leader. And we’re pouring good resources after bad in new high-growth segments of the market where we all know we won’t become a leader. All our businesses are growing, but not all of them are leaders. As a poor No. 3 or No. 4 in some of our product lines, I’m certainly not benefiting from relative scale. I feel I’m always playing catch-up, even as we grow.”
All companies can benefit from scale. They get better at manufacturing and supply chain, gain power over suppliers, buy better machine tools or organize their manufacturing lines more effectively. They improve their distribution networks and have more leverage when negotiating with their channel partners. They have more investment resources to improve the consumer proposition.
But strategically, companies primarily benefit from relative scale. A company can grow and improve, but if its competitors are growing at a faster rate, it will not gain competitive advantage. If a company remains a distinct follower, it will not benefit from leadership economics. The data here is pretty stunning. In an internal study of leadership economics involving almost 200 companies, we found that leaders enjoy three times the return on net assets as distant followers. Leadership, not just scale, matters.
That means that as insurgents grow, they have to back winning businesses. And that involves tough choices about where to invest: They can’t just back growth, they have to back leadership. As the CEO told me, “What I have to do now is make choices between businesses with very different market leadership potential. And I have to make clear with my business leaders that it’s not personal.”
For insurgents this is hard. Paradoxically, that is where elements of the Founder’s Mentality can hamper tough strategic choice. The team has grown together. Each leader feels like an owner and is absolutely committed to growing their part of the business. They have transferred the passion they used to feel for the whole company to a real passion and commitment for their piece of the business. Telling these leaders that resources need to go elsewhere is never easy. But it is necessary if the company is to gain the benefits of scale and leadership economics without losing its Founder’s Mentality.