I recently returned from a trip to Boston and New York, and one of the highlights was a conversation I had with Stuart Gent, a managing director of Bain Capital and co-head of the private equity firm’s Global Portfolio Group. (Bain Capital is a separate company from my firm, Bain & Company.)
A key part of Gent’s role is to help the management teams running Bain Capital’s portfolio companies develop and execute multiyear plans for achieving full potential. He has worked on a number of major company transformations and I asked him if he has noticed a common pattern in what makes for a successful business transformation. His answer? A fundamental strategic insight:
In my experience, every successful transformation starts with a fundamental strategic insight. This could be a rediscovery of the core business of the company, the discovery that business definitions are changing and we can take advantage of industry turbulence to reposition the company, or a different way to think about a business portfolio based on a deep understanding of markets and industries, etc. The fundamentals of strategy are critical, and if you do the hard work of business definition, defining the core, understanding customers, etc. … you can get to the core insight that organizes the rest of the transformation. The reason this is so important is because it then helps you focus, prioritize and explain all the actions you need to take. A big myth about transformations is you just need to do one to two things. No, you need to do dozens of things, all at once, all fast, and you need to be able to make sense of that throughout the organization if people are to lead and implement it successfully. Building your plan off a fundamental strategic insight gives you that focus. You are not trying to do everything the same for every business—you can be ruthlessly focused on the key products and customer segments that really matter.
In the context of our work on the Founder’s MentalitySM, we would certainly agree with Gent’s perspective. Whether the company is an insurgent, taking on its industry on behalf of an underserved customer segment, or an incumbent, working to discover the next wave of growth, management must build its strategy around a fundamental competitive insight. Achieving sustainable growth and profitability requires a clear definition of the company’s core, based on a deep understanding of its most important customers and how to serve them differentially. This insight helps to focus the organization on reaching full potential, which in most cases means leadership in its core markets.
When it comes to large incumbents, there’s probably no better example of the power of a clear strategic insight than the story of IBM’s turnaround, as told by former CEO Louis Gerstner Jr. In his book, Who Says Elephants Can’t Dance?, Gerstner describes how he led a two-pronged approach to transform the company’s culture and reposition its strategy. What’s fascinating is how the shadows of IBM’s founders hovered over both efforts.
Gerstner shows how the core IBM beliefs, which were developed by Thomas Watson Jr., the founder of IBM’s mainframe franchise, had devolved into a paralyzing set of cultural and organizational straitjackets. Saving the company meant returning to a culture of innovation. In terms of strategy, Gerstner explains how IBM rediscovered the unique position it had always played in the technology industry and refreshed it to thrive in a world defined by e-business. Again, the solution was a return to the core, in this case a recognition that IBM was a trusted service provider with an extraordinarily deep well of technological talent.
The core strategic insight was that companies with increasingly complex IT requirements needed integrated technology solutions—not just equipment—and would pay IBM dearly to fix their problems. This was hardly how the rest of the industry was defining customer needs. Most of the major tech players of the time were “pure plays,” undercutting IBM by convincing customers its aging products were past their sell-by date. Few inside IBM saw the potential in services either, but by listening to customers, Gerstner repositioned the company as a technology integrator offering a full suite of solutions for companies big and small. That bet, more than anything else, altered the trajectory of one of the largest companies on earth.
This sort of clear strategic insight is what characterizes the most successful start-ups and growth companies—their founders have identified an underserved customer segment and have developed a product or service to serve it differentially. We’ve told a number of these stories:
- Yonghui in China. The founding insight of the Zhang brothers has transformed the grocery industry by delivering safe, fresh food to the Chinese consumer.
- Magazine Luiza in Brazil. The founding insight combines great value merchandise with accessible financing to help emerging middle-class consumers in Brazil furnish their first homes.
- Ciputra of Indonesia. The founding insight provides outstanding customer service in a construction industry that was plagued by broken customer promises.
- Mey of Turkey. The founding insight has created an owner mentality across the company and out-executed all competitors in delivering the best value proposition to the on-trade drinks business.
A strong “founder’s insight” can help propel a small company to extraordinary growth. Rediscovering the founder’s insight and reshaping it to meet new competitive challenges is what helps large incumbents transform. Throughout a company’s growth trajectory—from insurgent to incumbent—it is crucial for leaders to repeatedly and relentlessly test these insights to determine their freshness and vitality. Here are key questions to ask:
- What was the initial founding insight of your company? What were the underserved customer segments that the founder targeted and how did the company intend to serve them uniquely?
- Is that insight still relevant today? If yes, are we still the best at serving these customers, or are competitors and new insurgents eroding our offerings?
- If the insight has lost its relevance, who are our new core customers and how well are we serving them relative to competitors?
As Stuart Gent notes, real strategic insight helps to focus and helps to prioritize. Rediscovering that initial founder’s insight and testing its current relevance is a good place to start. It helped the IBM elephant dance again.