Incumbents and the Journey North, part 1

Founder's Mentality - Incumbents and the Journey NorthWhen I attended business school in Boston in the late 1980s, the big buzz was the notion of the “owner mindset.” We studied American economist Mike Jensen‘s classic paper, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, and spent a lot of time debating what it meant for business leadership.

The core idea went this way: An owner mindset encourages company leaders to think about the resources they expend and the value they create as if these were their own. The purpose is to reconnect the interests of management and shareholders and discourage leaders from acting as if they were mere dispassionate custodians of a business institution. The idea, of course, became one of the most important business concepts over the past few decades and eventually spawned the spectacular growth of the private equity industry. For more than 20 years, Bain consultants have encouraged their clients to “think like an owner”—to review their strategies with an owner mindset and to align the broad interests of the company’s leadership and its shareholders.

But our work on the Founder’s MentalitySM has produced an important evolution in our thinking about what really inspires performance. Frankly, we’ve come to believe that a founder mindset is significantly more powerful than an owner mindset in mobilizing companies big and small to achieve that most elusive of corporate goals: sustained, profitable growth. A founder mindset, of course, includes this notion of “thinking like an owner.” But it also goes significantly further. While the owner mindset aligns the interests of leaders and shareholders, the Founder’s Mentality aligns leadership with the “kings” of the business—those on the front line empowered to deliver to customers the things that you sell. And while the owner mindset reorients business leaders to the “value creation” mission, the founder mindset orients business leaders to something more potent: the “insurgent mission.” This is the idea that a company’s goal is to change the rules of the industry to meet the needs of underserved customers. It is innovative at its roots and profoundly customer-centric, which, we believe, ultimately creates the most value.

This connection to the kings was, in many ways, woefully absent from a lot of the owner mindset discussions in the late 1980s and early 1990s. In fact, too many of the rewards went to business leaders and too few went to those on the front line creating value. We think the owner mindset does not automatically lead to more customer-centric behavior, nor does it force business leaders to continue to innovate and disrupt their industries. In fact, the owner mindset can, depending on time horizon, lead to an “incumbent mindset”—a concern with hunkering down and pulling value from the existing business, losing the impulse to innovate and serve customers uniquely. We will fully explore the negative consequences of an incumbent mindset in future blog posts.

What’s been clear during our recent work with DM100 companies on the Journey North is that many of the issues facing insurgent companies have broad implications for incumbents struggling to stay on the path to full potential. The major difference is that insurgents are fighting to retain their Founder’s Mentality, while many incumbents are (or should be) on a quest to revive the essential focus and energy long buried below layers of complexity.

For these companies it is not enough to use incentive systems and other tools to align the company around an owner mindset. What’s crucial is for leadership to “think like a founder” and reconnect with the company’s original insurgent insight and mission. We’ll take a look at this important idea in depth in upcoming posts. But first we’d like to offer some context via four important observations aimed at incumbents:

1. Insurgent companies will become your most important competitors (and potential partners). It’s an easy bet that any leader of a large multinational company is deeply familiar with the rules of incumbent vs. incumbent engagement. The game is typically a multiyear effort characterized by slight gains and losses in share across a large global chessboard of market/brand “cells.” In the future, however, the big swings in value won’t be determined on that chessboard. The issue will be how well you and other incumbents compete against rising insurgents—the group of founder-led businesses that are grabbing share in China, in Brazil, in India, and so on, and those that are creating new industries or redefining old ones in the developed world. These companies are where innovation will happen and where new business models will emerge. The good news is that while they may be fierce competitors, they may also become important business partners that can help improve your own culture. The lesson is clear: If you don’t know the top two local insurgents in each of your major markets, you are probably focused on the wrong competitors. Insurgents are playing on a different game board with different rules. It’s time to learn them.

2. You are probably not getting all the benefits of scale you should. Founders suffer from size envy. They are in awe of your scale and talk endlessly about what they would do if they were your size. You have a global brand and reputation and can meet with any customer, supplier or recruit on Earth. For founders, every call is a cold call, where the first three minutes is spent trying to establish bona fides. When you face a problem, you are one phone call away from a true in-house expert who has “been there, done that.” For founders, every wheel needs to be invented; every question needs to be answered for the first time.

Yet the founders we talk to also observe that incumbents seldom seem to take full advantage of their scale. They fail to appreciate what they have and don’t systematically review whether they are making the most of it. That raises two questions for incumbents: First, where you lead, do you really act like a leader, working to capture leadership economics and shape the rules of your industry to your favor? (See our checklist to help determine your answer.) Second, are you really using your scale to learn? It is fine to talk about your wealth of experts, and it is self-evident that leaders have the most accumulated experience. But are you learning from those pools of expertise and mountains of accumulated experience to serve customers more effectively? Are you actually smarter than the followers in your industry? Because founders believe learning systems are such a critical part of the Journey North, they find it paradoxical that industry incumbents invest so little in building them.

3. Complexity is killing future growth, slowing you down, and sucking the energy from your people and your company. The reason founders find it so perplexing that you don’t make the most of your scale is that they understand how much scale costs you. The complexity scale creates is a competitive liability—it erodes your ability to redirect resources toward growth, it slows decision making and it encourages “energy vampires” to fly wild in your organization. Indeed, so much of an insurgent’s competitive strategy assumes that you will fail to address those costs and remain mired in soul-destroying complexity. They know they can act faster (speed is their No. 1 weapon against you) and they know they are more “spiky” and decisive than you.

The question you need to ask, then, is: How do we climb out from beneath the complexity to free our people to take full advantage of scale? How can we zero-base our organization to generate speed and responsiveness? Insurgents have plenty to teach in this regard. Faced with almost no resources, they learn to simplify and redeploy constantly, zero-basing everything they do to ensure they are deploying the next month’s resources where they are needed most. This leads to several more questions incumbents should ask themselves but rarely do: Are you in love with your product? Who are your kings and how can you reorganize around them? Are you embracing conflict and chaos? What is your scaling model? Are you using a Monday meeting to solve problems and set the right tempo for your business? Insurgents use these tools in an attempt to defeat complexity as they grow. Incumbents can use them to dismantle the complexity that is slowing them down and threatening their competitiveness.

4. You may not recognize it, but you have the resources needed to lock in the Founder’s Mentality through Strategic Planning 2.0. We’ve asserted rather arrogantly in a previous blog post that 97% of your strategic planning process is a waste of time. While this may seem like a downer, it is actually good news: It means that you have a huge reservoir of time, resources, energy and talent that can be redeployed to construct a new and better process. One of the topics we will begin to investigate in this blog is how you can design a “Strategic Planning Process 2.0” that locks in the founder mindset rather than wasting time and energy on a disjointed set of initiatives.

We are confident here. Just as an entire industry (private equity) was born and an entire generation of management tools was invented to create value from an owner mindset, we believe the time is right to adopt a set of tools to redefine your management processes and create value from a founder mindset. The fact is, you spend hours and hours on strategic planning. If it can become a force for good and not evil, the transformation can begin. Imagine if your strategy planning cycle redefined the insurgency for each of your business areas. Imagine if it allowed you to identify the kings of your business and then reinvent the organization to support and motivate them. Imagine if it sorted through your Engine 1 vs. Engine 2 problem, allowing you to embrace, rather than fight, the future.

Large, increasingly bureaucratic organizations have a choice: They can either sink under the weight of their own complexity or they can take steps to rediscover their original sense of mission, translate it into strategy and recruit the front line to deliver it to customers. The owner mindset does a wonderful job of aligning the interests of leadership and shareholders. But rediscovering the Founder’s Mentality unifies the company from top to bottom around a more sustainable mission—creating value for customers.

Learn more about The Journey North and its steps:

This entry was posted in The Journey North, The paths to Great Repeatable Models by James Allen. Bookmark the permalink.

About James Allen

James Allen is a senior partner in Bain & Company's London office and recognized as a leading expert in developing global corporate and business unit strategy. He is co-head of Bain’s Global Strategy practice and a member of Bain & Company's European Consumer Products practice. He is co-author, with Chris Zook, of Repeatability (HBR Press, March 2012) and Profit from the Core (HBR Press, 2001 and 2010).

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