Why is that that some companies age well, but so many others age badly? Why do only 1 in 10 companies worldwide manage to sustain profitable growth over a decade? Chris Zook, coauthor of The Founder's Mentality: How to Overcome the Predictable Crises of Growth and partner in the Global Strategy practice, discusses three traits of the founder's mentality that can determine how a company will age.
Read the transcript below.
CHRIS ZOOK: Why is it that some companies age phenomenally well? They, even after decades in business, attract the best young talent, they push the boundaries of their industry out, they create excitement, they're viewed as the innovation leader. Yet so many other companies age badly. And we find it is a reason why right now only one in ten companies in the world manages to sustain a successful run of profitable growth, for even as little as one decade.
When we probed into this what we found is something very, very interesting. We found that 85% of the root causes for failure to maintain profitable growth are now internal to the company, and therefore controllable to the management team and the executives. Sometimes their first manifestation is outside, in terms of a customer breakdown, but when you actually trace it back, you find that so often it has deeper, hidden root causes inside of the company that relate to how the company was put together and evolved inside in the first place.
There are three traits that we call the Founder's Mentality, which determine how well a company will age. The first of these is what we call business insurgency. And that is, in some ways, as simple as having a very clear purpose that gave the company a unique reason for existing in its industry and its marketplace, and gave its people enormous energy because they felt they were doing something very important.
The second element of the Founder's Mentality is what we call frontline obsession. What this means is a clear obsession from everyone in the business with the details, with the customer experience, and a willingness and ability to endow people at the frontline with both power and also to celebrate them as the heroes of the business.
The third element is what we call the owner's mindset. In a way, this is the rocket fuel at the center of private equity. When you have the owner's mindset, your sense of responsibility goes up, you care more for resources, you care more for resources at the company level versus husbanding them for your own purposes, and this is enormously powerful. There's abundant evidence on the power of the Founder's Mentality. It's everywhere.
One example is that if you look at the last 15 years of public companies in the world, you find that those where the founder is a chairman, a CEO or still deeply involved in the company, on average, perform three times better, in terms of shareholder return, than all the other companies, many of which have bureaucratized and lost the Founder's Mentality long ago.
Second, in our surveys, companies that were rated very high on all three of these traits of the Founder's Mentality, were about five times more likely to be a top quartile performer in their industry. It is possible to renew the Founder's Mentality, but more important is to invest to maintain it, and we call this the inner game of strategy. And just as in sports, or just as in so many areas of life, the inner game is actually becoming more important, in many ways, than the outer game.