Growing a company is hard.
Only one out of nine companies sustain profitable growth for 10 years or more.
If you ask the others why they stopped growing, they don't usually blame external market forces; 85% of the problems they cite are internal.
This is the growth paradox.
Growth creates complexity, and complexity kills growth.
Bain believes that this is predictable and preventable, wherever companies are on their growth journey, if they understand what goes wrong and how to respond.
Most fast-growing companies are at war with their industry on behalf of underserved customers.
They are insurgents, with a bold mission to serve those customers better than anyone else.
For that reason, they are obsessed with the front line.
And these companies have a strong owner's mindset. They hate complexity and watch every dollar.
These are the elements of what we call the Founder's Mentality®.
Research by Bain & Company shows that the most sustainably profitable companies are those that nurture and maintain these traits.
Most successful companies don't achieve scale insurgency.
As they grow, they allow their Founder's Mentality to fade. They gain the size they wanted, but they become overloaded and vulnerable to forces that blow them off course.
Instead of becoming scale insurgents, they grow into incumbents.
They are big and successful, but without their Founder's Mentality, they become complex and slow, and their growth eventually stalls out. They are no longer nimble or flexible enough to respond to another set of forces that threaten to push them down into a struggling bureaucracy, or send them into complete free fall.
Bain research shows that 80% of all swings in value, negative and positive, occur as a result of decisions made during these three crises of growth:
1. Overload
Only one in 17,000 companies will grow to $500 million and become a sustained value creator because of the bottlenecks, systems breakdowns and complexity that accompany growth and lead to overload.
Overload refers to the internal dysfunction and loss of external momentum that management teams of young, fast-growing companies experience as they try to rapidly scale their businesses.
Overload afflicts growing companies that have failed to prepare for the strains of size and complexity.
As companies scale, their leaders tend to undermanage or take the elements of the Founder’s Mentality for granted, which can result in those companies losing what made them great in the first place.
2. Stall-out
Stall-out refers to the 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.
When stall-out hits, it can be sudden and drastic.
Of the 50 companies with the biggest market-cap declines in 2007, 13 had an average growth rate of 12% in the 5 years before stall-out, compared with a -1% rate in the five years during stall-out.
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.
3. Free fall
Free fall is the most existentially threatening crisis.
About 5% to 7% of companies are in free fall or about to tip into it at any one time; of those, only 10% to 15% will recover and redefine their business models successfully.
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.
But companies can avoid or survive these crises if they maintain or recover their Founder's Mentality.
Insurgents can grow to scale without losing their way. And incumbents, even struggling bureaucracies, can rediscover their Founder's Mentality.
They too can become insurgents again, and take advantage of size and scale, without succumbing to complexity.
