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BOOK REVIEW: Governed by the founder’s mentality

Aug 16 2016 06:41
*Ian Mann

The Founder's Mentality: How to Overcome the Predictable Crises of Growth by Chris Zook and James Allen

ONLY about 1 in 9 companies have sustained a minimal level of profitable growth over the last decade, according to authors Zook and Allen, of the top-tier consultancy, Bain & Company.

The popular explanation for this lacklustre performance is the tough business or industry climate. While the context in which every business operates plays a significant role, what is commonly overlooked is what is happening inside the company.

This book is about the functional strategy – how companies must function, irrespective of the current state of the context. Both young and mature companies can avoid the slowdown in profit and growth, and the research underpinning this book shows how.

The studies have identified that “the most consistent high performers exhibit the attributes of the founder’s mentality, four to five times more than the worst performers”.

The founder’s ‘mentality’ is not the founder’s ‘personality’. A mentality is a set of specific behaviours and attitudes that the founder exemplified and, if properly inculcated in the organisation, reliably leads to sustainable profit and growth. “We’ve determined that of the roughly one in ten companies that achieve a decade of sustained and profitable growth, nearly two in three are governed by the founder’s mentality,” the authors found.

An emphasis is needed here. There are many books filled with suggestions on how to keep a business growing and profitable, but this is not. The prescription Zook and Allen are describing is based on research that indicates with an overwhelming statistical clarity, that of the few companies that achieve a decade of profitable growth, nearly two-thirds have the same three operational traits. These traits can usually be traced back to a bold, ambitious and successful founder’s way of operating.

This founder’s mentality is comprised of an insurgent’s mission, the desire to make changes to the way business is done to satisfy an unsatisfied need. It is fuelled by a focus on the frontline where the business interacts with the customer, and with the sense of ownership in every member of staff.

Consider these examples of the founder’s mentality.

Leslie Wexner, is the founder and still CEO of L Brands, a retail chain he began in 1963, at the age of 25, with the goal of building a very different retail business. His chain of stores, valued at $28bn, include The Limited, Express, Bath & Body Works, Abercrombie & Fitch, Henri Bendel, La Senza, and Victoria’s Secret.

Wexner reports learning a profound lesson from Sidney Lumet’s book “Making Movies”. A movie is a result of all the creative talents of designers, actors, producers, directors, costume designers, musicians and more. When you watch a great movie, it’s cohesive, as if one person did it all.

A growing, profitable business is no different – it too feels like one person has guided the entire operation. Everyone understands and relates to its clear purpose and focus. The average company, by contrast, has only two in five employees who say they have any idea what the company stands for.

Yonghui Superstores is a fast-growing grocery business in China that is challenging larger rivals, including Walmart. The founders grew up helping their mother do her work, and later opened a small grocery business selling local beer and common packaged foods.

When in 1999, the first hypermarkets opened in China, the brothers studied the model and gradually realised they could do better. Instead of selling fresh produce purchased from distributors, they could eliminate the middle layers by partnering directly with local farmers. This would allow them to sell “safe, fresh, good-value food for the Chinese mother”. Their first store, opened in 2000, Yonghui Pingxi Fresh Product Supermarket, was an instant success and it has grown at an annualised rate of 32% with profitable revenues of $5bn.

“In everything they did, the brothers operated with a sense of insurgent mission, waging war on behalf of the underserved customer,” the Chinese mother. This was the founder’s mission.

The second trait of the founder’s mentality is remaining obsessed with the frontline, always aware that the details make all the difference - no matter how big the companies become.

Most founders were their company’s first salesperson, and where the founder’s mentality remains, their principles, norms and values still guide employees’ day-to-day decisions and behaviours.

MS Oberoi began his career as a penniless hotel clerk in rural India, and went on to found the Oberoi hotel chain in 1934, on a shoestring budget. This necessitated his obsessing about every detail that might affect the customer experience in his hotels. Today, Oberoi is rated the best hotel brand in the world by Travel & Leisure.

Employees at Oberoi are trained on emotional intelligence so they can understand each guest’s unique needs. They maintain the personal connection with each customer, through a nightly review of the next day’s arrival list with each guest’s history and preferences.

The founder’s frontline obsession requires deep curiosity, and deep understanding of details of the frontline experience. This is clearly not limited to the high-touch consumer business of luxury hotels; it is no less true in all sorts of businesses.

The last of the three traits of the founder’s mentality is the ‘owner’s mindset’. Simply put, this is the difference between devoted parents and paid babysitters.

The closeness to the operations of a small business seems to make it easier for employees to make decisions, and pursue the owner’s objectives.

However, as businesses grow and become complex, and hire professional managers, employ huge numbers of people, this fades. Surveys indicate that only 13% of employees feel any emotional connection or engagement, with the company at which they work.

In 1989, three Brazilian private equity investors purchased a barely profitable local brewer, Brahma. This became AB InBev, now the largest and most profitable beer company in the world, (soon to include SABMiller) with revenues of $50bn, and valued at about $186bn.

Their objective was to make the company the most efficient brewery in the world by giving every group in the business targets, so that every cost item matters. They have never changed this core, repeatable model - a company of owners, because owners take results personally.

This is how one manager interviewed by the authors described this trait: Compare how the owner of a restaurant feels when a new restaurant opens across the street serving the same food. Contrast this with how a waiter would feel. We work tirelessly to create restaurant owners, he explained.

“On the surface, the three traits of the founder’s mentality look like basic business,” Zook and Allen note, but they are surprisingly hard to retain as companies grow. But retain them you must. That is what the research that forms the basis of this extremely valuable book, shows unequivocally.

This insight is too important to dismiss. Don’t. And it is never too late to get working on this.

Readability           Light ---+- Serious
Insights               High +---- Low
Practical              High -+--- Low

* Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.

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