Founder's Mentality Blog
2019 brings a milestone: I’ve been working with clients on strategy issues for three decades. I mentioned this to a client, and he asked me to summarize any changes I’ve seen during this time. I promised him a blog where I would offer some personal reflections, which I’ve divided into three sections. First, I argue that we have entered a new era of business that demands a new approach to strategy. Second, I outline how micro-battles help companies execute good strategy and compete on the basis of scale and speed. Finally, I provide six questions all CEOs should ask themselves.
This has been a personal journey, and I will not attempt to cover every topic in the world of strategy. I don’t address the role of technology—others have done that better here. I don’t discuss how a “future back” approach has led to advancements in responding to industry turbulence—if you’re interested, you can read more about that here. Instead, I follow one trail—the path that led me from Profit from the Core to micro-battles. It may be somewhat limited in scope, but in the words of the Grateful Dead, “What a long strange trip it’s been.”
Part 1: Strategy in the era of the scale insurgent
I’ll start off with the good news. For old-timers who seek relevance in a fast-changing world, much of the way we think about strategy remains the same.
- Strategy is alive and well. For every year that I’ve worked on strategy, someone has written a book arguing that strategy is dead. And every year, I’ve worked with amazing CEOs who look at the facts of an industry, figure out a path to leadership and create huge value for shareholders.
- Strategy is about choices. A good strategy helps you decide what to do and how to prioritize between two or more options. It determines the best resource allocation to increase the value of the company. And the best way to increase value is to grow sustainably and profitably. Growth is hard—only about 1 in 11 companies achieve sustainable profitable growth. Of that 1 in 11, 95% lead in their core business.
- Therefore, the best strategies use facts, not opinions, to clearly define the core business and provide a plan to lead with that core business. In about 60% of industries, we define leadership by scale—the company with the most market share (measured by revenue or volume) wins. In about 40%, the company with the highest share of industry economics is not the scale leader. These companies do something else. They have the most loyal and profitable customers. They have the most differentiated products, brands or manufacturing process. They dominate an industry “control point”—they are positioned to control far more profit than one would expect, from revenue or a differentiated niche game.
- The best strategies always depend on a rigorous understanding of business definitions and the industry’s rules of the game. You don’t always have to play by your industry rules, but you must understand how money is made. We discuss this in our books, Profit from the Core and Beyond the Core, which remain good primers for good strategy.
Second, although the changes have been gradual, over the past three decades we’ve seen a transformation in how strategies are developed. There are three specific shifts:
- From perfect anticipation to fast adaptation. When I joined Bain in the late 80s, many of our clients were putting together 5- and 10-year plans. I remember, with clarity, the first time we talked about “Strategy 2000,” or the strategy that would guide the company for a decade toward the new millennium (I also remember the joy of putting ’00 and ’01 in the years row of Lotus 1-2-3—the spreadsheet program that predated Microsoft Excel, for any millennial readers). There was a general belief that if you developed the right fact base and anticipated industry trends, you could establish a base case projected out 10 years that would actually happen! Everyone assumed that a perfect strategy was about perfect anticipation. Today, the one case we all know won’t happen is the base case. Strategy is about turbulence, scenarios, moves and countermoves. The best strategy is about fast adaptation—we set out a clear and constant destination and agree on multiple paths of approach. Strategy is more like a compass, telling you where North is, and less like a map, giving you one route.
- From “where to play” to “how to win.” Thirty years ago, some of the best strategies we worked on were about “where to play.” For example, we would help a client define their core business, direct more resources toward the core, and reduce investments in or dispose of noncore businesses. This demanded deep work to clearly define the boundaries of each business and determine which ones could become leaders. Three decades later, we find that more of our work on strategy is about “how to win.” Companies need to achieve superior execution by building the capabilities of the team and managing complexity along the way. We wrote our book Repeatability to highlight this shift, noting that the best companies are not simply winning with “where to play” strategies. They are also defining clear Repeatable Models® to execute strategy in a world of uncertainty and complexity.
- From push to pull. I will exaggerate this a bit, but frankly not much. Thirty years ago, most strategies were “push” strategies. The process of developing a strategy was held tightly by the executive committee. It might take up to nine months, with all actions done in secret and all documents held closely. It made sense, of course: If strategy is about “where to play,” then you are dealing with critical decisions. You might dispose of entire businesses. Once the process was completed, the strategy was pushed out to the organization through the “grand tell.” Leaders would say, “This is our strategy, and we will tell you what it means for you. If our goal is to achieve 100x, your piece of that is 2.1x. Good luck.” Thirty years later, in a time when strategy is about “how to win,” the best processes create “pull” for the strategy. Leaders want to engage the organization, particularly those employees who work directly with customers, or the front line. The executive committee no longer spends months privately debating. They want the front line to own decisions by defining the right routines and behaviors to beat the competition. They no longer announce strategy through the “grand tell,” but instead capture hearts and minds at all levels of the organization through co-creation. They help the front line “pull” the strategy to customers. This is a massive change.
Finally, there has been an even a bigger change, one that has accelerated in the last decade—sustainable competitive advantage is not simply about scale any more. It is about scale and speed. Over the last five years, this shift has led to an explosion of creativity in how we think about strategy.
We are moving from an era of incumbents to an era of scale insurgents. How did we get here? For the last 100 years, the “professional managerial class” has run things. We all know the story of General Motors’ Alfred Sloan vs. the Ford Motor Company’s Henry Ford. Henry Ford was a great founder and innovator, but the industry moved faster than his ability to adapt. A cult of personality, the Ford Motor Company lost share to GM, the “professional enterprise” run by a cadre of brilliant, and fungible, professional managers. The focus on the institution, rather than the individual, was revolutionary. For the next 70 years or so, the biggest businesses were the most dominant, and the professional manager’s role was to extract more economic value from increasingly larger companies. Small niche companies existed, but their strategies were defined in relation to the scale strategies of industry leaders. There was a lot of good created by the professional managerial class—they created routines, transferred the benefits of scale to customers and managed risk. But they also created huge complexity. Eventually, their organizations fell victim to the growth paradox, as defined in our book The Founder’s Mentality: Growth creates complexity and complexity kills growth.
Organizations that compete on scale alone become weighed down by complexity. In response to this, we’ve seen the rise of the scale insurgents—companies that compete and win on the basis of scale and speed. Think Amazon in the US. Think Yonghui in China. What’s the magic dust of these scale insurgents? We argue that they not only benefit from size as they grow, but they also retain a sense of “Founder’s Mentality®.” To renew your sense of Founder’s Mentality, you must reconfirm the insurgent mission of your company, reorient your focus toward customers and the front line, and introduce an “owner mindset” into your culture. We explain this in detail in The Founder’s Mentality and dozens of blogs about founders.
Why is the Founder’s Mentality so important for strategy? The new, faster and more adaptable competitors in your industry are likely to be founder-led insurgents. We’re in the early days of scale insurgents. But one thing is clear—if you aren’t using your strategic process to compete on scale and speed, your strategy won’t be fit for purpose for tomorrow.
Part 2: The path toward scale insurgency through micro-battles
In response to these changes, we’ve tried to really understand “what goes wrong” with big incumbents. What happens when you view the benefits of size and speed as trade-offs? We found that there are several “winds” that blow companies off course. One is the “curse of the matrix.” Eventually, large companies forget a key component of organizational design: Organizations build conflicts through the matrix of roles they create. These conflicts are necessary, because customers massively benefit when the organization debates the “three great conflicts.” These three conflicts are:
- Scale vs. intimacy. The head of Indonesia for a global multinational might need to fight on behalf of her consumers for spicier soup. She brings intimacy. She knows consumers well and wants to tailor the global offering to local tastes. She can deliver a better product by emphasizing difference. But the head of supply chain needs to deliver the benefits of global scale to the same consumer. He counters that sameness delivers cost savings. This is a conflict. Some might say it’s consumer vs. costs. But it’s really scale vs. intimacy, or sameness vs. difference—ultimately, both sides deliver benefits to the consumer. What’s the solution? They agree that they can tailor the local soup offering, but they should minimize how many types of mustard seed they use. We must resolve these conflicts fast.
- Routine vs. disruption. About 85% of a firm’s activities are carried out by following routines. Consumers benefit greatly when companies flawlessly execute against a common playbook. I don’t want to board a flight to Brazil and hear that my pilot wants to test disruptive landing procedures. I want my pilot to follow a known playbook built on the experience of a century of aviation. But the remaining 15% of a firm’s activities are about disruption—trying new products, services and business processes, or challenging the business model itself. Customers benefit from routine and disruption.
- Short term vs. long term, or “deliver vs. develop”: Someone in an organization should be losing sleep about tomorrow’s trading numbers or deliveries to customers. But someone else should be worrying about what the business will look like for the next generation of consumers. Your people should constantly work to either deliver today’s business or develop tomorrow’s business.
We need to resolve conflicts fast to act with speed, but most organizations aren’t set up to do this. Companies have no problem building conflicts—they assign individuals to be responsible for scale, intimacy, routine, disruption, short term and long term. That is the matrix. For example, you ask your markets to deliver intimacy on one side of the matrix, and your functions to deliver scale on the other side. This prevents the fast resolution of conflicts. Why? The answer could fill a book, but here are two ideas. First, the matrix keeps both sides far apart, by geographic miles and organizational layers, so they can communicate only at the executive level. Second, because organizations don’t value speed, they don’t reward fast decision making. There is no cost to using up time, but there are massive costs to bad choices. So when in doubt, companies slow down decisions.
Good strategy execution demands that companies become faster and better at decision making. We’ve devoted our energy to finding new paths of strategy execution that quickly resolve the three great conflicts. Micro-battles—discrete, time-boxed initiatives that rapidly bring strategic choices to action and formulate ways to scale the results—are a path that reimagines the organization. For each micro-battle, we insist that the team include individuals in charge of each side of the conflicts. Members are empowered to resolve the conflicts as quickly and as close to the customer as possible.
Micro-battles also help companies develop the capabilities of successful founders. Why do we focus on founders? We think they are masters at the art of business building. Strategy is increasingly about building new businesses, rather than running existing businesses. Founder-led organizations execute these strategies through three activities:
- Winning. The best founders translate a strategic initiative into a minimally viable product that they can test in the marketplace (think Agile). In a sense, the first 10% of a strategic effort is identifying a set of initiatives, and the other 90% is adapting new products and services, collecting customer feedback and releasing the next version. Customers become critical to strategy. The ability to translate strategy into a product or service for testing is a rare skill. It’s how companies with a strong Founder’s Mentality act with speed. These winning companies are already testing in the marketplace, while their competitors are still completing PowerPoint presentations.
- Scaling. Winning is necessary, but not sufficient. In fact, if you consider the step alone, it sounds a lot like “pilots,” which have been the rage for the past three decades. There are two rules of pilots. First, pilots always work. Why? The CEO makes them a priority and they are overresourced. Second, pilots never scale. Why? When management teams try to replicate the pilot in the real world, with competing resource priorities and dreaded day-to-day tasks, it isn’t repeatable. So how do you industrialize a winning proposition to work everywhere and fit into your daily rhythms? Great founders focus equal time on winning (testing the next version) and scaling (releasing the innovation at scale across the company). They think about “go-to-market issues” (how and where do we sell?) and partnership issues (how do we bring on partners to achieve scale fast?).
- Amplifying. In micro-battles, empowered teams of six to eight people turn strategic initiatives into new businesses through winning and scaling. It’s the job of the executive leadership to “amplify” their results. We’ve found that the most common cause of failed strategy is the leadership team. They are trained to slow and complicate the organization. They don’t know how to make the matrix work effectively. Good strategy execution demands profound behavioral change within incumbent organizations. Therefore, the final step of strategy execution is pattern recognition. Leaders must make sure that all teams are learning from all strategic initiatives. They find patterns across the initiatives and identify common ways to accelerate good ideas and remove obstacles for faster implementation. To do this well, leaders need to adopt a “growth mindset.” They must encourage and empower their micro-battle teams to make ideas bigger and discover their own path. They have to avoid the “protective mindset,” whereby leaders block action and discourage teams, usually with the tired phrase, “We’ve tried this before.”
As we’ve worked with clients on micro-battles, the most common pattern we’ve seen is that companies have lost the art of business building—particularly when it comes to scaling. Few companies value people who know how to scale good ideas. We call these people the “scaling community.” Today, we believe nurturing this community is critical to the successful implementation of your strategy. Here are three lessons on the scaling community:
- Organizations are made up of three communities. First, your company is home to the execution community—this is 85% or more of your people. They’re the ones who execute ideas and strategic initiatives flawlessly, using established playbooks, fixed routines and common behaviors. They are your heroes. Second is your disruption community. They're steeped in Agile ways of working and encouraged to disrupt current products and services, business processes—even the company’s business model—in a quest to create new value. There is also a third, less-recognized community: the scaling community. These people provide a critical bridge between those developing innovative prototypes and those executing industrialized solutions.
- The scaling community is critical to results, yet few value it. Sadly, companies simply don’t recognize their importance. In our recent studies on this community, we’ve found good news and bad news. The good news is you have scalers in your company. The bad news is they don’t like you very much. They are frustrated because they are perceived as anti-innovation. They are the ones who interrupt discussions with questions like, “This is a great idea, but how can a salesperson explain it to a customers when they have 50 sales visits a day?” They are not anti-innovation—they are pro-execution. But leaders get confused.
- Strategy isn’t just about innovation, but building fast, effective businesses. Companies don’t value the scaling community because they’ve forgotten the critical goal of strategy—growth by building new businesses. The scaling community not only focuses on the innovation, but also on building a business that can be handed off to the execution community. Once you’ve confirmed that you have a good product, the scaling community determines how to get these ideas to customers, how to create leadership economics, how to partner, and how to determine the thousands of decisions that must be made in the future.
The goal of micro-battles is to create a consistent approach to business building. The fast-moving initiatives help leaders relearn the skills of winning, scaling and amplifying, and in the process, build the three communities. Companies can deal with the conflict of scale and intimacy by asking the two people responsible for delivering these benefits to work together on a micro-battle. They can deal with the conflict of disruption and routine by asking the scaling community to translate winning ideas into playbooks and routines for the execution community. They can deal with the conflict of deliver and develop by managing a portfolio of micro-battles that focuses on competing with today’s businesses and creating tomorrow’s businesses.
Companies that engage in micro-battles also rediscover the “experience curve” in their businesses by reintroducing a learning agenda. Several authors have focused on business learning recently—most notably, Cal Newport with his notion of “deep work,” Matthew Syed with his notion of “purposeful practice” and Malcolm Gladwell with his notion of “10,000 hours.” Through micro-battles, we want companies to bring back learning by focusing their best people on their deep work, helping them with purposeful practice (particularly in scaling), and giving the leadership team at least 10,000 hours to master business building.
Micro-battles have another key benefit. They help companies rediscover the importance of Engine 2. For all 30 of my years in strategy, the idea of Engine 1 and Engine 2 has been around. Engine 1 is your core business and your primary source of cash. It’s often a “mature” business. Profitable growth depends on everyone working hard to “sweat the assets,” pulling out every benefit of scale. Engine 2 is your newer growth businesses. It has great potential, but it won’t generate cash for years to come. Engine 2 requires new ways of working. You are building the assets, not sweating them. As CEOs rediscover the importance of business building, the idea of building and nurturing Engine 2 becomes critical. Engine 2 can be a place to experiment and reinvent ways of learning. It can generate new ideas that can be applied to Engine 1. The CEO becomes a portfolio manager between the two engines. We have found this idea helps CEOs realize the need to liberate time from delivering today’s business, Engine 1, to help develop tomorrow’s business, Engine 2 (read more on this in our blog, “Engine 2: A Conversation in Mumbai”).
Does this focus on micro-battles, or “how to win,” mean that “where to play” questions are no longer relevant? Absolutely not. Companies are facing huge turbulence in their industries. Beyond new scale insurgents, technology is changing what customers want and how they get it. “Where to play” issues remain critical to strategy, particularly when it comes to digital. Many companies are asking the fundamental question, “Where should we play in our industry in the digital age?” We’ve found that one of the most important things a CEO can do is get started—because strategy is less about perfect anticipation and more about fast adaptation. By focusing on execution, speed and building businesses, CEOs can navigate toward the right digital destination.
Part 3: The key questions every strategy should answer and key tensions every CEO should embrace
After 30 years, the core questions about strategy remain the same.
- What is our core business, and can we lead in that business? If not, how can we create a path to sustainable, profitable growth?
- What are the biggest threats to the core business over the next decade, and what can we do now to start responding to these threats?
- How can we manage the complexity of execution? What is the set of Repeatable Models that will help us win in our core markets?
But we’ve added some additional questions, which must be answered as well.
- How can we compete not only on scale, but also on speed? How can we rediscover our sense of Founder’s Mentality?
- How can we get better and faster at business building? How can we nurture the three communities that will help us create new businesses?
- What leadership qualities do I need in my executive team and top 100 leaders to respond quickly in times of uncertainty, to create the required pull from the front line and to act like scale insurgents?
As I’ve worked with teams to answer these questions, I’ve realized that every strategy is about navigating five core tensions:
- Delivering the core business vs. developing new businesses
- Competing through scale (Profit from the Core) vs. speed (The Founder’s Mentality)
- Launching horizontal initiatives (debate the trade-offs all at once with a top-down effort) vs. vertical initiatives (align the strategic ambition with the execution team, learn by doing and win in the marketplace)
- Discovering your business definition during the strategy process vs. shaping and influencing your business definition to gain competitive advantage
- Developing your strategy as a map vs. a compass that guides through alternative futures.
These five tensions are inherent in all strategies. Here is my advice, based on my 30 years: When CEOs find that their organization is settling on one side of any of these tensions, they must bring back balance. If the strategy is focused on the current business, the CEO should ask, “But what businesses are we failing to build for tomorrow?” If the strategy says we can only compete on speed, the CEO should ask, “But where can we leverage our scale to prevent new insurgents in our industry?” Tension and conflict are good things. Be paranoid if everyone agrees.
These new questions and tensions have led to a burst of creativity in strategy. I am confident that the next decade will lead to even more innovation as we learn to compete in the era of the scale insurgents.
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