An excerpt from the introduction, "The Paradox of Growth."
Growth creates complexity, and complexity is the silent killer of growth. This paradox explains why only about one company in nine has sustained more than a minimum level of profitable growth during the past decade, and why 85 percent of executives blame internal factors for their shortfall, not external ones beyond their control. The roots of sustained performance start deep inside—and they are predictable.
If you look carefully, you can always find two intertwining plot lines in the story of any business success or failure. The first, and the most visible, is the external story. This is the narrative that plays out in the marketplace, in the form of quarterly earnings, returns to shareholders, market share shifts, and profitable growth. This is the story that is easiest to track, and it’s the one that most people—boards of directors, investors, the press, the public—choose to follow. It’s a story about how a company wins on the outside by serving the customer better than its competitors.
The second story plays out inside a company. It’s much less visible. It’s the story of building the business, expanding and retaining a quality workforce, strengthening the culture, upgrading the systems, learning from experience, adapting the business model, holding down costs, and mobilizing the people to carry it all out perfectly again and again.
Some companies excel externally but are troubled internally; others are troubled internally but excel externally. Ultimately, though, companies have to excel in both arenas if they want to succeed. The plot lines have to converge. You can’t sustain profitable growth in a competitive market if you’re a disaster internally, and you can’t maintain a high-performance culture internally for long if you’re failing in the marketplace.
We’ve written four books about how to win the external strategy game, starting with Profit from the Core. This book is different. It’s about the inside game of strategy. It’s about how companies, both young and mature, can avoid what we’ve identified as the three internal crises of growth.
The Predictable Crises of Growth
Each of the three crises we’ve identified occurs at a different phase in a company’s life.
The first crisis, overload, refers to the internal dysfunction and loss of external momentum that management teams of young, fast-growing companies experience as they try rapidly to scale their businesses.
The second crisis, stall-out, refers to the sudden slowdown that many successful companies suffer as their rapid growth gives rise to layers of organizational complexity and a dilution of the clear mission that once gave the company its focus and energy. Stall-out is a disorienting time for a company: the accelerator pedal of growth no longer responds as it used to, and faster, younger competitors are starting to gain ground. Most companies that stall out never fully recover.
The third crisis, free fall, is the most existentially threatening. A company in free fall has completely stopped growing in its core market, and its business model, until recently the reason for its success, suddenly no longer seems viable. Time feels scarce for a company in free fall. The management team often feels it has lost control. It can’t identify the root causes of the crisis, and it doesn’t know what levers to pull to escape it.
These three crises represent the riskiest and most stressful periods for businesses that have made it successfully through their start-up and early-growth phases. The good news is these crises are predictable—and often avoidable. The killers of growth that these crises contain can be anticipated and even turned into a constructive reason for change.
The Founder’s Mentality
Our insights in this book are based on two simple but profound truths. The first is this: despite their many differences, most companies that achieve sustainable growth share a common set of motivating attitudes and behaviors that can usually be traced back to a bold, ambitious founder who “got it right” the first time around. The companies that have grown profitably to scale, while maintaining the internal traits of the founder’s mentality that got them there in the first place, often consider themselves insurgents, waging war on their industry and its standards on behalf of an underserved customer, or creating an entirely new industry altogether. Such companies possess a clear sense of mission and focus that everyone in the company can understand and relate to (in contrast with the average company, where only two employees in five say they have any idea what the company stands for). Companies run in this way have the special ability to foster deep feelings of personal responsibility in employees (in contrast with the average company, where a recent Gallup survey shows that only 13% of employees say they are emotionally engaged with their company). They abhor complexity, bureaucracy, and anything that gets in the way of the clean execution of strategy. They are obsessed with the details of the business and celebrate the employees at the front line, who deal directly with customers. Together, these attitudes and behaviors constitute a frame of mind that is one of the great and most undervalued secrets of business success.
We call it the founder’s mentality.