Article

Westward wind: The unscalable founder

A company naturally tends to lose sight of its core as it builds a complex, multifaceted portfolio of businesses with divergent goals and requirements.

By James Allen, Dunigan O’Keeffe and Chris Zook

Published on February 11, 2014
min read


As insurgent companies gain scale and scope, they can easily succumb to a number of forces—we call them the four westward winds—that push them to become more like the dominant incumbents in their industries. The best companies maintain or regain their Founder’s Mentality^® by resisting those forces. What are some of the challenges that founders face as they scale up? Changing rules of thumb. Founders often believe that the rules of thumb they have been using to run their business will apply forever. But the rules that work for small companies are very different from the ones that apply to more complex, multiproduct and multigeographical businesses. For example, founders may focus on the short-term cash generation they once needed to stay afloat rather than think about building the foundation for long-term market leadership. Long March syndrome. Founders stay fiercely loyal to the compatriots who helped build the company in its early years. This loyalty often means founders defend not just the people, but also the ideas and prejudices they bring to the business—even if they are no longer valid. The octopus myth. In the early days of the company, founders get used to having their hands in every aspect of the business. As their business grows, founders become an octopus of sorts, with enough hands to take part in every decision. Rather than hiring individuals who can assume key decision-making roles, these founders hire second-tier talent in an effort to extend their reach. The result: Even the most talented members of the management team abdicate their responsibilities, because they believe—with good reason—that the founders will make the final decision anyway. The "big fish, small pond" problem. The founders believe the rules that governed success in their home markets (where they are big fish in small ponds) should determine their strategies in new markets. Even when the home market rules don’t apply, they want to go back to the original playbook, without realizing that the game has changed. The Midas touch. Founder-led companies often benefit from local advantages at the initial stages: proprietary access to talent, capital and government relationships, which only increase as those companies prosper. This leads to the illusion of the Midas touch: Everything the founder touches seems to turn to gold. However, this can quickly lead to opportunistic expansion that distracts from the core business and overextends the company so it becomes a sprawling portfolio of related and unrelated businesses. Problems often surface first during international expansion, when the founders overestimate the transferability of their management skills and underestimate how much of their success depends on those domestic assets. The fog of governance. Tensions build because of differences between a founder's personal goals and family members' ambitions, as well as the need to "professionalize" the company. Unless addressed early, and in a thoughtful manner, the fog of governance can lead to paralyzing governance debates that divert attention from the company’s overall mission and key business priorities. Acknowledging that these challenges exist is the first step. Staying the course requires a conscious and early effort to build Repeatable Models® for expansion that embrace the company's original core rather than distract from it, while also ensuring that those models are truly repeatable on a global scale. The key here is building the right organization and governance model that can scale up the business in the long term and defining the founder’s role for an organization that is 10 times larger and more complex than it is currently. Repeatable Models ensure that growth strengthens—not weakens—the Founder's Mentality that led to the company's initial success. That, in turn, is a natural defense against complexity on the path to scale and scope. Main: Founder's Mentality \| Paths: One \| Two \| Three \| Perils: Westward winds \| Southward winds Founder's Mentality^®, Great Repeatable Models^® and Repeatable Models^® are registered trademarks of Bain & Company, Inc.

As insurgent companies gain scale and scope, they can easily succumb to a number of forces—we call them the four westward winds—that push them to become more like the dominant incumbents in their industries. The best companies maintain or regain their Founder’s Mentality^® by resisting those forces.

What are some of the challenges that founders face as they scale up?

Changing rules of thumb. Founders often believe that the rules of thumb they have been using to run their business will apply forever. But the rules that work for small companies are very different from the ones that apply to more complex, multiproduct and multigeographical businesses. For example, founders may focus on the short-term cash generation they once needed to stay afloat rather than think about building the foundation for long-term market leadership.
Long March syndrome. Founders stay fiercely loyal to the compatriots who helped build the company in its early years. This loyalty often means founders defend not just the people, but also the ideas and prejudices they bring to the business—even if they are no longer valid.
The octopus myth. In the early days of the company, founders get used to having their hands in every aspect of the business. As their business grows, founders become an octopus of sorts, with enough hands to take part in every decision. Rather than hiring individuals who can assume key decision-making roles, these founders hire second-tier talent in an effort to extend their reach. The result: Even the most talented members of the management team abdicate their responsibilities, because they believe—with good reason—that the founders will make the final decision anyway.
The "big fish, small pond" problem. The founders believe the rules that governed success in their home markets (where they are big fish in small ponds) should determine their strategies in new markets. Even when the home market rules don’t apply, they want to go back to the original playbook, without realizing that the game has changed.
The Midas touch. Founder-led companies often benefit from local advantages at the initial stages: proprietary access to talent, capital and government relationships, which only increase as those companies prosper. This leads to the illusion of the Midas touch: Everything the founder touches seems to turn to gold. However, this can quickly lead to opportunistic expansion that distracts from the core business and overextends the company so it becomes a sprawling portfolio of related and unrelated businesses. Problems often surface first during international expansion, when the founders overestimate the transferability of their management skills and underestimate how much of their success depends on those domestic assets.
The fog of governance. Tensions build because of differences between a founder's personal goals and family members' ambitions, as well as the need to "professionalize" the company. Unless addressed early, and in a thoughtful manner, the fog of governance can lead to paralyzing governance debates that divert attention from the company’s overall mission and key business priorities.

Acknowledging that these challenges exist is the first step. Staying the course requires a conscious and early effort to build Repeatable Models® for expansion that embrace the company's original core rather than distract from it, while also ensuring that those models are truly repeatable on a global scale. The key here is building the right organization and governance model that can scale up the business in the long term and defining the founder’s role for an organization that is 10 times larger and more complex than it is currently. Repeatable Models ensure that growth strengthens—not weakens—the Founder's Mentality that led to the company's initial success. That, in turn, is a natural defense against complexity on the path to scale and scope.