Founder's Mentality Blog
As an insurgent, you had one major asset: speed. Sure, the incumbents had scale, but you could mobilize resources to solve customer problems faster than the big boys. You could concentrate all your resources on a few critical battles to overwhelm your competition. You and your team focused on picking the right battles and making sure you had the capabilities you needed to win. It was exciting. And fun.
You didn’t actually think about reallocating resources to fund those battles and capabilities—as an insurgent, you just did that instinctively, all the time. Your team understood resource supply and demand. They knew where to concentrate resources because everyone was clear about who your most important customers were and which capabilities would make them pick you over the competition. And supply wasn’t a problem because you were in control of all the firm’s resources. Every new growth initiative was a time for zero-based budgeting as you and your team constantly sought to fund the must-win initiatives that mattered most. And life was simpler then.
And it worked: This innate ability to mobilize more resources than the competition to serve your most important customers was a major source of growth. This knack for outinvesting your competition in the few capabilities where you knew you could differentiate served you well. You were always smaller, but when it came to the one or two capabilities that mattered most to your customers, you were always better. This is capability-led growth.
But as you grew, resource supply and demand became more complicated, and it was almost impossible to focus your investments on the capabilities that matter most to your most important customers. Your people all started screaming for resources: to solve urgent customer problems, to solve future customer problems, to improve specific capabilities your customers wanted, to improve general capabilities your people wanted, or to pursue general goals of “excellence.” All demand started to seem equally important. Rather than invest in a few capabilities to be better, you started to invest in all places to become average. Your customers noticed. Your people noticed.
And supply dried up: People became skilled at protecting their resources, warning you that their initiatives would fall apart without funding. Your annual budgeting cycle was no longer a way to free up resources; it was more like visiting them in jail. Zero-based budgeting morphed into zero-budgeting: Your new budget looked just like last year’s, which meant zero impact.
This inability to focus resources on the right things in order to overwhelm your competition in select, critical battles is a key reason companies fail to grow. It’s what we’ve referred to as the “lost engine of capability-led growth.” To restore it, you have to shake things up on both the resource demand and supply side. Here are some ideas to help you shake.
Solve the demand problem
To get the organization concentrated on those few areas where you can overwhelm the competition by focusing on the one or two businesses and capabilities that define your core, take these steps:
Step 1: Push your winners harder. Back the products or services that have the potential to lead and dominate. In our book Profit from the Core, we discussed the paradox of leadership, which is that your best-performing businesses are furthest away from their full potential. These are typically the businesses with strong leadership positions, but if you’re giving them average growth targets that the management team can easily deliver, these businesses are underperforming. You should insist that these winning businesses deliver double or triple your growth and ROCE goals. They may need more resources, but backing winning businesses with proven Repeatable Models® seldom destroys value. This first step will identify those few “spikey” capabilities in which you must excel and create huge demand for resources focused on your best businesses.
Step 2: Overwhelm competitors. I’m willing to bet you can’t point to where your current strategy and resource allocation are overwhelming your competition. More likely, you’re allocating enough to compete and winning your share of competitions. But are you influencing your competitors’ boardroom discussions? I doubt they are saying “Look, we can never win doing that because they will crush us. That is their turf.” But they should be. Capability-led growth is all about “spikiness”—a clear decision by you and your team about the capabilities and battles where you have committed to overwhelming your competition. Ikea has it with supply chain innovation to drive down costs. Lego has it with licensing. These are no-go zones for their competition. One founder, who is the master at this, refers to “the Power of 10,” meaning the very small set of investments to which he is confident he can allocate 10 times the level of resources vs. his competitors. While it’s unlikely all of us can outinvest our competitors 10 to 1, the notion is the right one. Get your organization to understand that growth requires overwhelming your competitors in your chosen areas of focus, and that this demands a resource allocation process that regularly frees up resources to be redeployed to these few areas.
Step 3: Starve the rest. Your aim is not to satisfy everyone; it is to prioritize winning businesses and convince the rest of the organization to do more with less. Declare war on “the tyranny of fade,” a favored weapon of bureaucrats, which goes something like this: “If you don’t fund my business at least as much as you did last year, revenues will fade away and I can’t guarantee we’ll even hit last year’s targets.” Call their bluff. And make it a heroic act to do more with less. Make sure worth is no longer measured by the resources under someone’s control, but by their return on resources. You want your best talent trying to convince you they are ready to lead a winning business because they’ve proven they can manage nonpriority businesses with less resources.
Solve the supply problem with four budgeting norms
To change your budgeting, eliminate funding for ongoing operations.
- Turn all costs into initiatives with distinct time and funding limits. These initiatives—to beat a competitor, develop a capability, launch a product—are funded for a period of time and then shut down and their resources redeployed. The end of each initiative is celebrated, the leaders are congratulated for a job well done and then they are redeployed to something else. This ensures that big activities are ending regularly, freeing up resources.
- Categorize each initiative into one of four buckets. Shifting from ongoing expenditures to one-off initiatives forces your teams to be very clear about the nature of each budget item. Your job is to make the last bucket of costs a tiny one.
- Bucket 1: Priority micro-battles. These are the 25–50 most important initiatives the company faces, and require massive investments to win or fund a “spikey” capability. Your goal is to do more with more. The life span of the full initiative can range from 30 days to three years, but the cadence of review and intervention is every 30 days. Some of these are binary initiatives that will fail or succeed. If they fail, you stop funding or radically readjust strategy. If they succeed, you might invest a lot more—back a winning business with the Power of 10. Your top leaders are allocated to these initiatives.
- Bucket 2: Other major build programs where resources are released each year. This is a category of important, time-constrained initiatives that are critical to achieving your growth targets, but aren’t on the priority list. These are often terrific places to put future leaders and give them space—and these are often initiatives where they must do more for less.
- Bucket 3: In line for outsourcing. These are ongoing operations or major cost areas where the goal of the initiative is to simplify and codify the model so you can outsource it or spin out operations to a separate company that will be managed as a vendor with annual cost downs.
- Bucket 4: Ongoing expenditures that are viewed as the steady cost of doing business. These are all the remaining costs that have not been allocated to critical micro-battles, nor are you learning to manage them better for less or preparing them for outsourcing. By definition, this should be a very small category of items that are mission critical to protect the firm, such as regulatory compliance. But in most budgets, these are actually the bulk of costs: huge expenditures with no clear time ambition to break out and become a huge initiative, no attempt to do more for less, no plan to outsource. It’s no wonder it’s so hard to find resources when you need them: They’re all trapped in this category.
Manage supply and demand with an attitude
Now that you’ve identified opportunities to overwhelm your competition and created a process to free up resources, the final step is leading your company’s new supply and demand approach to resource allocation.
- Liberate dynamic resource allocation from budgeting. Businesses need budgets, and someone has to hold everyone accountable for hitting their sales targets. But what you must do is restore the insurgent instinct to shift resources to today’s must-win battles by forcing continuing discussions about this. So let budgeting and budget reviews happen, but then you manage dynamic resource allocation—which you can do best by focusing your team’s time on the 25–50 micro-battles mentioned above and discussed in previous blog posts.
- Focus on proven Repeatable Models that you can back with the Power of 10. Your role is to find those winning businesses that leverage your core capabilities and flood them with resources. When you find a winning formula, force your whole team to figure out how to scale that business by 10X, not 6%. If you can’t identify a winning formula for a business, starve it of resources until the team proves it can be backed. Strategy is about making choices, not giving everyone a bit of what they want.
- Kill stuff off fast. There’s a saying in private equity that every decision not to sell a business is a decision to repurchase it. What they mean is that if they’re holding a business, it is because they believe in it more than anyone else, and know how to make it a winner. If they don’t believe that, then it’s time to sell to a buyer with more belief. In resource allocation, every decision not to kill a cost item is a decision to fully commit to that investment, believing that it will pay off massively. Of course, few costs meet that standard. Kill all the ones that don’t.
Your goal is to return to capability-led growth. Your other goal is to have confidence that you can reallocate the firm’s resources to build the critical capabilities required to win your most important battles, overwhelming the competition to meet customer needs. You won’t get there without shaking things up, imposing the Power of 10 and managing it with a bit of attitude.