Chris Zook

They may have been the first product developer and they loved the detail, they have an intellectual curiosity for it, but as companies grow, they very often lose that and sometimes you even have decisions moving into the center of the company to people who have never visited a customer, may never have served a customer, never been in a factory, never worked in the frontline. You lose your frontline instincts when that happens.

The third element of a founder’s mentality was what we called an owner’s mindset. This links to the very deep feeling of personal responsibility to act on things quickly, solve problems, very anti-bureaucratic view that is the heart and soul of a lot of the great founders. When they’re gone, sometimes you see companies turn into just another company, just another bank and what our work is to look at the journey of companies through their life cycles, beginning with the Founder’s Mentality, and then looking at how some companies stay young and others age prematurely.

Peter: You’re not just leaving it to the variable of the founder itself but the mentality piece right? You’re saying that there is a mentality that founders have that need to permeate the organization. That feels really critical because you have companies where the founder is no longer there but the success continues because there is a founder’s mentality that permeates the organization.

Chris: Yeah young companies very often have a great idea, think of Netflix or think of Tesla, and some funding, some backers, a smart team but they’re going up against the world. They’re going up against enormous companies often with distribution networks, assets, money, cash, brands everything. How is it, how is it that so many young founder companies manage to gain against gigantic companies that seem to have everything. I think one of the key things, the huge differentiation of young founder companies are these human elements inside.

We did some work across hundreds of companies around the world and we found that right now, we had never seen this before, 85% of executives, senior executives and CEOs say their biggest barriers to achieving sustained success are internal, and in big companies it was 94%. These elements of the founder’s mentality are a little bit the inside game of strategy. These are the deep inner root causes of success and failure that often preexists, and are there before success or failure happens on the outside.

It’s like Usain Bolt last night when he was asked, “What is key to winning with such tight margins?” He said, “You know, this time for me it’s about maintaining mental toughness, true with the race, through my training.” This is a little bit the inner game of book strategy, how do companies maintain that mental toughness they have, they have to have frankly as the young founder company but as they get older and more bureaucratic and people are more distant from the frontline how do you maintain that life energy.

Peter: When you talk about the paradox of growth – that growth leads to complexity and then complexity kills growth – you talk about these 3 crisis of internal complexity that often follow growth. Can you describe those briefly and then I want to go into the challenge of developing a founder’s mentality in the context of these 3 crisis.

Chris: Sure, and some of your listeners may recall a book called “Passages” which was about the life cycle and predictable stages of humans, and there were predictable crisis in your 30s and predictable crisis in your 50s and predictable crisis of older age. We found that there were 3 sets of inflection points or moments in the life of a company that determined in terms of the decisions made and the actions taken about 80 to 90% of all the big value swings during their life. Each of them interestingly we found a very tight and this unique link to the elements to the founder’s mentality.

The first is what we called overload. This is what Tesla is trying to do, increasing by 10 times to get to the scale where they can compete sustainably against big car companies. It’s very tough to take a young company and scale it 10 times while maintaining it’s life energy. We call this the crisis of overload. The second is the more common one which is, a company that has been growing for a while and suddenly begins to slow down as it becomes larger. You saw this to an extreme degree a number of years ago at Starbucks when growth went negative, market value went down 85% and the founder Howard Schultz had to come back.

What he found were internal problems, not that the market had dried up or Starbucks was saturated, he said, these are self-inflicted wounds and they related to things that he could change, they lost the core sense of the company. We call that stall out, it happens to two thirds of companies over just a little more than a decade and only about one in seven or one in eight ever recover. The third crisis is a little less frequent, maybe at any moment in time, about 6 or 7% of companies are in that, and this is what we call free fall. This is when the fundamental elements of the business model propelling your company begin to become obsolete.

Think of a taxi company against Uber, or think years ago of Blockbuster against all of the downloading of information over the internet, those are cases of free fall, or Marvel Comics years ago when people were switching from reading comic books and stashing them under their bed, as I did when I was very young. Then the rejuvenation of Marvel was a complete change in its business model. Those are the 3 crisis and we found the founder’s mentality either to maintain it or in some cases if you’ve lost it to renew it to be at the essence of fixing companies on the inside so they can perform better on the outside.

Peter: Overload, stall out, and free fall are external factors that face an organization and what you’re saying is, the biggest challenge isn’t those factors themselves but it’s the way the organization confronts them and the internal complexity, the internal challenges that get in the way. I had also noted that figure that you described 90% of barriers cited by large company executives had their roots in internal dysfunction.

What I’m wondering about is specifically the turnaround element of this. How do we, from a strategy execution perspective, embed an organization with an owner’s mindset when the founder may not be there at all.

Chris: Yeah this is probably the greatest challenge and the way that many founders can add to greatest long term value to their companies is by trying to do that. There is a lot of interesting examples like Bob Iger it’s rejuvenating Disney and basically going back on our thing, many of the principles that made Walt Disney great in the first place. Going back and buying Pixar, and buying Marvel and purchasing the rights to some of the original characters that they had sold and placing the animation new repeatable formula, front and center, and it’s why people have been terrified about how they’re going to replace him. He keeps extending his CEO term or the rejuvenation of LEGO.

LEGO was 18 months from bankruptcy and was one of the great founder stories in Europe over several generations frankly through the son until the family began to depart from the principles that made LEGO great. The new CEO Jørgen Vig Knudstorp came in and he realized that there are 71 LEGO blocks on planet earth, for every man, woman and child, it’s amazing.

The question was, well who are they? Who are the people that are so addicted to LEGO. LEGO had gone into businesses beyond its core that sapped energy. He eliminated the complexity and got them out of all of them. They had big corporate headquarters, he moved the headquarters back closer to the frontline into the distribution center. They had lost a sense of the principles of the founder that were called the great principles of play. In fact LEGO means leg godt comes from that Danish word which means play well.

He found out where all these LEGO blocks were, that there are about 300 to 400,000 very deeply obsessed LEGO customers from architects who were older to children with certain obsessions, certain creative obsessions. They began bringing those people into the process of designing LEGO. Then they brought technology into the bricks and then in reducing complexity further they realized that about 70% of the parts in any LEGO set were not reused and this is hugely costly in terms of making molds in the factory.

They went to the opposite where 70 to 80% now are reused across many sets, and in reducing complexity, going back to the original founder’s mission that made it special. That made LEGO the number one toy of the century as voted by the British Toy Association. They rejuvenated it and now it’s the most valuable toy company in the world and it’s one of the great turnarounds in the last decade in Europe. In talking to Jørgen Vig, and him having been involved, a little bit involved in that one as it was happening, I think a lot of the rejuvenation of LEGO was about a return to the elements of the founder’s mentality of the new answer of the insurgent mission, dialed up of which people are now very excited about.

A return to make heroes at the frontline and get into contact with the customers, which they did, moving power from the bureaucracy out and third having a much more fast reaction time of owner’s mindset. You just see that pattern in many of the renewals.

Peter: I could safely say that my family has more than its share of 71 LEGO pieces per person so I’m certainly supporting that statistic. What you’re talking about – and you’ve written quiet a bit about this – is sticking with the core of your core. Understanding what it is that made you great and sticking with that. What made you successful is a key piece, but how do you know when diversification is important. How do you allow for change?

Chris: Diversification is an interesting word. Most of the companies that were sustainable did go into other businesses in one of two ways. They either found a very deep strength that they had that would allow them to spawn a new business. Amazon web services was derived from the amazing strength that Amazon had in its server firms and its technology in its core business. Then it began selling some of the capacity in those IT capabilities and now its two thirds of … It’s not two thirds of the revenues but it’s two thirds of the profits of Amazon.

Now in a way, it’s diversification, say oh my God, computer services all the way from retailing online but when you really drill down in, I think what you find is that it’s a pretty close adjacency, and that it reinforced the core to go into that, and it also extended the core as opposed to leaping to a complete new Lilly pad. It was the discovery of a hidden asset. We found that basically to be the pattern of growth. It’s a funny form of focus and expansion.

[Yong Wei 00:17:28] is a company in China. It’s a competitor to Walmart and their insurgent mission is creating the best freshest food for the Chinese mother which is an issue in many areas of China, but they have red and green stores now. The red stores are their historic format but the green stores are run by a different group in the company and are pushed to innovate and come up with new ideas, new formats sometimes radically different than what were being done in the red stores.

I think, imagine if Nokia had listened to the groups of engineers that were coming to senior management saying, let us go off with this mock ups of a smart phone and do this. Nokia was giving away more in dividends than any tech company in the 90s, buying back its shares, a sign they don’t know what to do with their money and had dominated the small camera business in their phones. The first email were theirs, they had touch screen technologies and they didn’t invest in inventing the future. I think the 2 ways you grow from your core are either spawning a new business that pushes the future out or finding an adjacent business that strengthens and reinforces your core at the same time.

Where companies get in trouble is like what happened with LEGO. LEGO jumped into a whole range of things thinking that the brand was a vehicle to go into new businesses. They said, we’re the best brand to families and so we’re going to have a joint venture with Steven Spielberg in miniature theaters. We’re going to buy theme parks to prognosticate the brand. We’re going to go into plastic watches for girls and clothing and all of that, and none of that reinforced the core. It distracted it and it almost brought the company down.

I think those are the two formulas that companies take and find growth from their core. We found that was true in about 90% of companies that constantly were able to sort of reinvent themselves on the fly.

Peter: Didn’t some of that work very well for Disney. I’m thinking theme parks, I’m thinking action figures and things that LEGO has tried. It failed for LEGO but has it been successful and very much part of the strategy for Disney?

Chris: I think Disney began to dilute itself when it began to get into a lot of the television programs and things that moved away from the characters and the cinematic cartoon core of the early years. I think LEGO doesn’t really have characters that are associated with it. It’s a brand and it’s a toy system where the essence I think of Disney was the range of characters from Mickey and Minnie mouse to Donald Duck and we can go on and on and on, that lend themselves much more naturally to adjacencies where people would feel kind of had emotional connection to the characters.

I think it also allowed them therefore to go into others. If you look at the revenue stream from The Lion King, a Disney great character example the overwhelming majority of the revenue stream for a long period of time were from the stuffed lions and the videos and other things that stemmed from those characters. In my opinion at least I really believed that Disney was more about the characters where LEGO was ultimately more about the play experience.

Peter: I’m speaking with Chris Zook. The Founder’s Mentality is his book, how to overcome the predictable crisis of growth. Chris, if I want to spread the founder’s mentality through the organization it requires more than just a communication plan and training. How do you move an organization to shift from a loss of accountability, a lack of insurgent mission, a sense of bureaucracy rather than an obsession with the frontline, how do you make those shifts in an organization so that the change reaps its benefit.

Chris: One of the things we did in looking at case studies was to go out and talk to executives who had been involved in doing exactly that. Some were founders who returned to their companies and are in the process of renewing it. Michael Dell would be an example and some are cases of executives who came into disastrous situations and basically refounded the company, like Kent Thiry did at DaVita. Bankrupt, near bankrupt, kidney dialysis company 15 years ago and now 5 times bigger healthcare company, the best performing stock up a hundred times since then.

You’re right it isn’t the top down set of ideas and communications and corporate plans that are done in corporate planning offices and presented in PowerPoint. These renewals actually have to come from the bottom up and we found many, many, many practices where a company, sort of a menu that they could select from. Let me just give you 4 or 5 because there are so many but they ultimately have to reach down to the frontline.

One example of a renewal is what George Buckley, Sir George Buckley did when he was CEO of 3M. 3M was losing its vital vitality in its core adhesives business and abrasives business, and it stemmed from a whole range of things that had been done over time to save money. One of those was actually dismembering some of the things that the founders put in that made the company great in the first place. He reinstituted some of those. For example, he found that they used to give engineers a day a week off in order to work on ideas if they had a great idea they could take a day a week to do that.

That’s where a lot of the great products of 3M had come from, and their new product Vitality Index had gone down by about 70%. When he began to do that and open up some of the R&D facilities again, the company was renewed and when he left he had over a thousand people waiting to shake his hands, mostly bench engineers because he had reached that down into the company and liberated energy where a company had began to diversify into pharmaceuticals and things like that.

Another thing you can do is to create mini founder experiences through the company. The person who has the founder’s mentality that will just have to be the senior team. It can be people who are in charge of initiatives or departments, even my own company Bain & Company we were last year, and I’m quite proud of this, voted by Glass Ceiling the best company to work for in America by young people, most desired place.

I actually think a lot of that has to do with ways that we reach down into the frontline and do … We used to do monthly and now we do two weekly and soon we’re going to do one weekly quick seven question surveys of every team in the company. Which is anonymously done and gives the younger people the analysts a voice, are we working on the right things, am I getting feedback et cetera, and this fast cycle time connectivity to the frontline I think are at the essence of keeping the founder’s mentality in having everyone, every team feel that they have a mini founder experience.

Another thing you can do is one thing Les Wexner has always done at L Brands and this is the best performing CEO founder for 35 years in the world according to Harvard business presence survey of global shareholder returns of founder companies. He told me that every Monday, they have a Monday morning meeting of the senior team and they say, “What are the big growth initiatives and performance initiatives?” They go through them and if there is anything blocking progress, they then have a Tuesday morning follow up every day, every week, 52 weeks a year where the person who was involved in being in the way says what they are going to do to solve that.

It hugely increases the metabolism whereas most companies make decisions by committees and they languish and they have to get together again, and that’s a second practice. Another thing you can do is we’re finding micro battles are very, very important. Very often companies say, we want to gain market share in beer in California as a target but what’s really powerful is if you then bring that down and you say, you know what, the epicenter, the best acid test of our ability to do that is what we do in these 5 Latino communities with this particular beer, over this particular time, in this particular outlet. The whole management team gets behind a particular micro battle and that’s very powerful also in getting people back to the ground level.

Final one, and I could go on I promise I won’t but, is I was in experience with a management team that made their mark, turned around a company by really rejuvenating the frontline. I asked them, as they were starting to slow down, I would go around the table and say how much more time or less they now spend at the customers. They looked at each other and they said, “Oh my God it’s really dissipated we are now spending most of our time in structured corporate meetings,” and decided to go back, x-ray their calendars and begin to force themselves to go back into the outlets and into the stores for a certain amount of time every month.

Many of the great founder led companies force their management to be in the factories, be in the stores, be in the customers, get off behind the desk. Those kinds of role modelling behaviors are just a few, but I think it’s a very practical thing. Symbolism is very important here and what the leadership team talks about and how they spend their time is of the essence.

I’ll just close with one observation, the grandson now CEO of Oberoi Hotels few years ago, it’s the greatest luxury hotel chain in the world told me that, even at the age of 93 he would visit his great grandfather M.S. Oberoi the founder in India from very poor rural area, amazing he did what he did, at home. He would say at 10:00 or 11:00 in the morning he’d be sitting there with customer comment cards, even though he could only see 3 inches in front of his eyes reading them and still scrolling his comments. That kind of detailed frontline obsession and passion is where companies have to start if they want to renew themselves.

Peter: The fundamental path back to greatness is usually in simplifying not becoming more complex. The challenge from a strategic perspective is to find that one thing that’s going to make the biggest difference.

In all of the work that we do around strategy execution, the first step is always to discover the one thing that’s going to make the biggest difference in what’s most important to this organization over the next 12 months, and really focus any work that is driven toward strategy execution on that one thing. That one thing usually ends up bringing a whole lot of other things along with it. The clarity you get from that is really powerful.

Chris Zook is the author, along with James Allen, of The Founder’s Mentality, How To Overcome the Predictable Crisis of Growth. Chris, it’s been such a delight having this conversation with you. Thank you for being on the Bregman Leadership Podcast.

Chris: Thanks, I’ve enjoyed it immensely.

Peter: If you enjoyed this episode of the Bregman Leadership Podcast, please subscribe and leave a review on iTunes, for more information about the Bregman leadership intensive, as well as access to my articles, videos and podcasts visit peterbregman.com. Thank you to Clare Marshall for producing this episode and to Brian Wood who created our music. Thanks for listening and stay tuned for the next great conversation.