Founder's Mentality Blog
In meetings with clients over the past few weeks, a common theme has emerged regarding the perils of planning as companies grow. The latest instance was at a meeting in the US in which several founders on a panel were discussing the positives and negatives of being bought by a large corporation. One of them raised an issue I’ll paraphrase this way: “I don’t want this to be quoted back to me when we set this year’s budgets, but one thing has really struck me about joining a corporate parent—I’m being encouraged to think smaller.”
That echoed something I’d heard a few weeks earlier in a conversation with a partner at a private equity firm. “The bigger we get, the more conservative we’ve become,” he said. “It is now viewed as a good thing to hit the very conservative investment thesis formed at the time we did the original deal. As we grow, it is a lot harder to ‘think big’ and take risks to create a 10X deal.”
The third time this theme cropped up was at our recent meeting with founders in India. Several founders noted that as they’ve become bigger, the reference numbers for their own growth have become traditional industry growth rates. “When we started,” one of them noted, “we didn’t allow ourselves to be constrained by industry growth rates or ‘growth drivers.’ We were rule breakers and felt we could determine our own growth by creating new markets.”
By now, the common theme should be obvious: The bigger companies become, the smaller they think when it comes to strategy planning. Now, before the arrows start flying, I want to be clear I’m talking about a mindset issue here, not a math issue. Let me acknowledge a few quick math points before moving on:
- In terms of percentage growth, all companies face lower growth rates over time (although it doesn’t mean they have to accept them). If one customer is worth $10 in revenue, then acquiring the second doubles your revenue. But going from two to three lowers that growth rate to 33%.
- If we switch from percentage growth to absolute growth, then, of course, bigger companies think in much larger numbers than smaller companies. Doubling revenue for a small company might be measured in hundreds of thousands of dollars. A large company might grow “only” 7% but add billions of dollars to the top line.
- Finally, “growth drivers” really do matter. I often use an anecdote from a decade or so ago to show why: A salty snack company discovered that to maintain its growth rate for the next two decades, its customers would have to derive more than 100% of their calories from the company’s salty snacks. In other words, absent innovation, there was a natural limit to the company’s growth rate.
These issues are, without doubt, unavoidable. But it’s when math overcomes mindset that companies run into trouble. We’ve talked a lot in these blog posts about how insurgent companies can maintain the insurgency as they grow, citing the examples of Google and CavinKare, among others. The question I’m raising here is this: What is it about corporate planning processes that discourage the insurgent mindset by encouraging “smaller” thinking? Based on my conversations, let me suggest what seems to have happened in the examples that I quoted above:
- For the founder-led company joining a large corporation, the issue was about corporate planning processes. He noted several things: First, at no time during the planning process was he or his team challenged to think outside the box, put forward a 10X plan or think about changing the rules of their industry. Second, the corporate planning processes were not geared for small insurgent businesses on the cusp of explosive growth. The paradox to him was that even though his company essentially amounted to a rounding error in the larger company’s portfolio, nobody was willing to consider taking the risks required to achieve 10X growth. Instead, the pressure was on the founder to fit into the average growth targets, plus or minus single digits. The planning process itself was killing the insurgency.
- For the private equity firm, the issue revolved around the investment committee and deal-review processes. The partner explained that for all the right reasons, the due diligence process on deals was conservative and benchmark-oriented. The team considered the upside against their base-case scenarios, but to check deal fever these assumptions were heavily discounted, as a rule. Once the deal closed, however, the firm tended to rally around the base case instead of re-exploring whether 10X might actually be possible. No one was encouraged to step back and identify the one strategic insight that might transform the company’s fortunes.
- For the founder-led companies in India, the issue was flawed systems. As the companies grew, the founders saw the need to hire professional planners to create a robust planning process. The planners, wanting to add value, began to institute “reality checks” against internal growth projects. But over time, these checks hardened into targets and ended up checking aspiration. As one founder complained, “We decided it was a good thing to benchmark ourselves against our industry—targets that deviated from the best practices of the incumbents were viewed with supreme suspicion. Eventually, the heroes of the business stopped fighting and put in smaller numbers that would lead to less internal fighting and requests for backup. Life was too short, and time spent with planners was time not spent with customers.”
These issues aren’t new. We noted in our book Profit from the Core almost 15 years ago that company-planning processes actually stopped discussion of “full potential” and discouraged companies from backing their winning businesses disproportionately. This leads to broad-brush budgeting that encourages averages rather than supporting excellence. Within the Founder’s MentalitySM context, we’ve discussed what happens when flawed systems take over a company.
The good news is the remedies against “thinking smaller” are clear, albeit always hard to implement consistently well. Here are three:
- Separate customer and strategy debates from math debates. In our experience, the best planning processes start with deep discussions of customers and strategy. These are issue-oriented debates among senior executives, not template-driven reviews by staff. They focus on big issues, big opportunities and big risks and are forward thinking. Of course, the outcomes of these discussions are eventually translated into financial plans. But time and space are given over to thinking big before the inevitable arguments about budgets rein in the discussion.
- Force an insurgent discussion and resist the tyranny of incumbents. This is a mindset issue and starts at the top. The senior leaders should be seeking out 10X opportunities to back an insurgent business or transform an industry. The burden of proof should be “tell us why you feel constrained by industry growth rates” not “convince us you can exceed them.” Again, small thinking will take over soon enough as budgets are pulled together and risks assessed. But unless the debate starts big, there is nothing about the natural funnel of the corporate planning process that makes ideas bigger over time.
- Encourage the insurgent mentality. My Bain colleague Darrell Rigby has noted that if you want innovation you must encourage “BothBrain®” thinking—i.e., you must harness the energies of both right- and left-brained thinkers. You should not assume a corporate process would naturally do this; you have to build it by rewarding the creative disrupters as well as the more conservative realists. The same applies to thinking bigger in terms of growth. Often the best insurgent thinking will emerge from those fighting daily on the front line. Yet these folks are the least likely to translate their thoughts into PowerPoint templates or use the right “corporate speak” to sell their ideas up. Insurgent thinking goes against the grain of corporate planning, and you must assume that most corporate processes kill such thinking on an hourly basis. To encourage big ideas, you have to create a planning process and foster an environment that rewards insurgent thinking. As the founders noted in India, most people with an insurgent mentality eventually give up against the planners—life is simply too short and they’ll take their revolution elsewhere.
The bigger we get, the smaller we think. This should be on a warning label stamped across the box called “annual planning.” Heeding this warning could unlock those elusive 10X growth opportunities. Ignoring it might very well lock you into the tyranny of incumbent thinking.