All leaders constantly must address the growth paradox: Growth creates complexity, and complexity kills growth. In these blogs, we have talked a lot about the first half of that paradox—that is, how growth creates complexity. We’ve highlighted how companies gain from the benefits of their new size as they grow—including scale and scope advantage, market power and influence—but lose their Founder’s Mentality. And we’ve examined the organizational costs of this loss—namely, speed, employee engagement and clarity about which talent matters.
In the next couple blogs, though, we’re going to focus specifically on the second half of the paradox—that is, how complexity kills growth—by discussing what we call the “lost engines of growth.” Below are the three engines we see companies losing most often.
One of the most striking attributes of companies with strong Founder’s Mentality is your obsession with the front line. Your whole organization is focused on the customer and the people internally that serve customers. Everyone has absolute clarity: You do what it takes to support customers and gain the benefits of customer advocacy. And most important, all of your great innovations—your next waves of growth—occur at the front line of the business. You are constantly cocreating new products and services by working with customers in cross-functional teams. Frontline activity is characterized by relentless experimentation. The mission is to scale these innovations across the entire customer base (and occasionally say no to solutions that cost a lot but serve only a few).
As companies grow, however, three things tend to happen. First, you lose your ruthless focus on the front line, and the talent that serves customers comes to be seen as just one of many interest groups lobbying for management time and money. Second, those cross-functional teams that tackled customer issues retreat back into their functional siloes. Your people realize that their career is best served by serving the needs of their direct bosses rather than working in integrated teams with peers from other functions to serve customer needs. And third, no one seems to care about cocreation with customers. Your new source of innovation is a centrally managed pipeline of ideas generated by a central function, and people come to view customer feedback as pesky input that only threatens to derail this.
And when that happens, you lose your first engine of growth—that is, the customer-led growth that happens when integrated teams tackle customer problems and cocreate solutions.
Employees in companies with strong Founder’s Mentality have an owner mindset. You constantly redeploy resources to the best growth opportunities or use those resources to build the capabilities needed to fuel growth. Just like R&D, your SG&A line is viewed as the capability currency: It is the sum of investments you have made in capabilities to secure a competitive advantage and create growth. You scrutinize every resource to ensure it is deployed on the next wave of growth priorities. This creates a tremendous engine of growth because when you do this, you win the most important competitive battles by overwhelming the competition.
But here again, the paradox kicks in as the company grows. Resources start getting trapped in micro cells. It was easy to deploy resources when the organization model of the company was simpler and there were fewer initiatives to fund. But as the company gets larger, the organization model starts to diffuse: You build a geographic vector of markets, a product vector, functional vectors, customer vectors and so on, and each initiative creates a cell of resources. For example, a statement such as “we are going to build a new widget for our German telecom customers” means resources are committed to that one cell for a period of years. People build careers around that resource commitment—and there are hundreds of these cells. Instead of using the annual budgeting process to zero-base and recommit all the firm’s resources to the next biggest growth issue, your annual budgeting process involves hundreds of negotiations to adjust these micro cells up and down by a single percent. Redeploying even 1% of the firm’s resources is exhausting, and true zero-based budgeting is a distant dream.
In such an environment, your people quickly realize that it is best to think like a bureaucrat and fight to preserve the resources they were given than to think like an owner of the broader business. The guy who says “I can do more with less” is a fool to be ridiculed at the water cooler.
And your people no longer view R&D and SG&A as capability currencies—in fact, SG&A is just a tax on doing business. You discuss it in complex overhead debates, reducing it during lean years and allowing it to expand in fat years. No one thinks about it as a resource to fuel new growth. Not really. And another growth engine is lost—and it’s the one that redeployed resources quickly to the most important competitive battles and reinvested them in next-generation capabilities.
Companies with strong Founder’s Mentality are insurgents: You are at war against your industry on behalf of underserved customers. You typically hate your industry and feel unconstrained by its boundaries. You are a disrupter, trying to shake up the industry, redefine the incumbent rules of the game and shift around profit pools so that they serve customers better. This role of disrupter or challenger creates an internal mindset that all assumptions can be challenged and creates a lot of new growth ideas—both within the industry and across a wide variety of adjacent markets. This can cause chaos, but it can also lead to new growth platforms. Nothing is settled, everything is up for grabs, and bold, creative solutions abound.
It is always remarkable to look at the early decades of any great company to see how many different growth paths it pursued. These companies welcome industry turbulence because the industry challenger is most likely to benefit.
But as your company grows, three things happen (and yes, I am aware of the discouraging similarity in each of these tales about how growth engines die). First, a dominant growth engine—the core—emerges from the early chaos. The core is valuable: It demands—and should get—the bulk of your firm’s resources. Achieving the full potential of the core becomes a strategy byword, and all other disruptive initiatives fall by the wayside as distractions. This is not a bad thing—in fact, we wrote an entire book, Profit from the Core, about how good this can be. But it can come with a collateral cost—that is, less focus on disruption.
Second, as your organization matures, you bring in more and more experts who know a lot about the core but less about the industry boundaries, the adjacent businesses and the actions of new insurgents. Rewards go, as they should, to those who optimize the core through expert actions to gain further scale and scope benefits. But too often, there are no rewards for challengers and disrupters. They are seen as sideshows, and many leave. The result: Fewer people ask disruptive, challenging questions.
And finally, you become the incumbent. You are the guardian of the profit pool. You are the one most hurt by disruption. Your energy is spent fighting the future, defending yourself against industry turbulence, crushing the next wave of insurgents. And you have lost another engine of growth—and it’s the growth that once occurred because you had limitless horizons and were willing to challenge industry boundaries, to welcome the best ideas of insurgents and to expand into adjacent markets. You lose the growth that comes from challenging the rules of the incumbents rather than playing by them and defending them at all costs.
(Learn about Using Five Lenses to Restore Disruption-Led Growth.)
Growth creates complexity, and complexity kills growth. This is the growth paradox and must be top of mind for all business leaders. They need to declare war on complexity as an end in itself, but they also must recover these lost engines of growth. Over the next several blogs, we will look at stories of companies that lost their engines and how some have rediscovered them. In the next blog, we’ll tackle the first of these engines—customer-led growth—and explore the role of micro battles.