In September, we started a discussion exploring how our work on the Founder’s Mentality® applies to industry incumbents. In Part 1, I warned the leaders of these large, established companies that insurgents would increasingly become their main competitors, especially in emerging markets or industries. I also noted that most incumbents could do a much better job of delivering on the promise of their size and could definitely do more to liberate their people from the complexity that is sapping their energy.

In this blog post, I want to dive deeper into this complexity issue, making reference to something that my colleague Chris Zook has coined “The Inner Game of Strategy.”

Chris is a keen tennis player and has long urged me to read W. Timothy Gallwey’s classic, The Inner Game of Tennis. Since it was first published in 1974, the book has spawned a family of Inner Game titles, and the concept has spilled over from sports to something called “Inner Game Corporate Coaching,” designed to help executives thrive in the workplace. I didn’t read the book when Chris recommended it to improve my horrible tennis game, but I picked it up after Chris started talking about The Inner Game of Strategy. What I found is that it is highly relevant to our thinking on the Founder’s Mentality.

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About the Founder's Mentality

The three elements of the Founder's Mentality help companies sustain performance while avoiding the inevitable crises of growth.

In his book, Gallwey argues that when we play tennis, we are essentially two selves. One self (the player) is trying to focus on putting the racket to the ball and hitting that ball somewhere sensible on the opponent’s side of the court. The other self (the critic) is worrying about the game, the point, the opponent, the score, his or her reputation, progress and so on. Problems arise when the critic distracts the player and performance suffers. If you don’t think this is true, argues Gallwey, why are tennis players always yelling at themselves? If there aren’t two selves on the court, who exactly is the player talking to? The inner game is all about getting the critic out of the way and letting the player play.

And this is one of the main themes in our work on the Founder’s Mentality. In most customer-facing interactions or competitive situations, there are two groups participating from your side. There are the kings, working to deliver the customer promise or beat the competition. And there is the court, the group of people whose job is to support the kings. As companies grow and become more complex, they eventually reach a series of tipping points. These emerge when the court starts hampering the kings, rather than helping them. The Inner Game of Strategy says that, too often, we fail to achieve our strategic goals because we’re simply getting in our own way. That doesn’t mean the kings are perfect and the court is always the problem. It simply means that performance would improve if they could pull in the same direction.

Early in 2015, we will begin to define these tipping points in a more systematic way. But to get you warmed up for the new year, let’s introduce three:

1. Strategy and turbulence. At some point, there is the danger that the organization will shift from future maker to future taker, which erodes innovation and long-term thinking. This hampers your kings’ ability to compete in the field, because the rest of the organization fails to diagnose turbulence in the marketplace and doesn’t come up with better ways to compete. Instead, the company starts hunkering down, protecting what it has and trying to dissuade customers from trying the new and better products or services offered by competitors. Think of what this would feel like to the frontline folks. They would see that you’re no longer responding to insurgents. And they would see you’ve stopped innovating, while day after day, they are trying to explain to customers that the opposite is true.
2. Customers and costs. There’s also the danger that the organization will stop believing in the power of the experience curve and stop tying costs to what the customer is willing to pay for. As a start-up, you focus on gross margin, because you know that on an operating basis you’re running a loss. Riding down the experience curve means that you constantly improve what you’re doing so the customer gets more, even as you figure out how to drop costs and price to keep margins steady. Because revenues are growing so quickly, your SG&A costs are plummeting as a percentage of sales. If you add costs, they will have to pass a strict litmus test: What will the customer pay for? But at some point, you begin adding costs with little thought to customer utility. Instead of driving down SG&A costs relative to sales, you raise your costs in line with projected revenue increases. In fact, you set budgets to keep the SG&A-revenue ratio constant. The tipping point comes when nobody (except the kings, who have to explain higher prices in the marketplace) asks why this makes sense. Costs operate independently of customer utility and stop benefitting from the experience curve.
3. Organization and energy. The time will come when the next interaction within the company is seen as a negative, not a positive. What do I mean? For smaller companies, teamwork is almost a luxury. Time is such a precious resource and people are so overextended on so many crises that any chance to team up with peers or the senior folks is a positive. It makes your work better. Net-net, this remains true as the company begins to professionalize and add new talent. You look forward to cross-functional teaming, because you know that the costs of complexity are more than outweighed by improved performance. Over time, however, this is no longer the case. Rather than enabling you to do your job better and serve customers, all these interactions begin to seem like they are serving somebody else’s purpose or sapping your energy. You feel like you are ticking off boxes on a list designed to keep you from doing something wrong instead of help you to do something right. You start trying to figure out how to avoid interactions in the company, because interactions suck the life out of you.

These are three pretty important tipping points that disrupt a company’s ability to perform as well as it should. They mean the inner game is bleeding out into the open. Rather than Self 1 (the king) feeling like he or she is supported by Self 2 (the court), these conflicts just get in the way. The organization is not embracing the future. It’s not worrying about how increased costs create customer benefits and how daily interactions are sapping energy not enhancing it. We will dedicate much of 2015 to exploring how we can apply the lessons of insurgents to incumbents to take the dysfunction out of the inner game. But for now, happy holidays.