Keeping the Zeal of a Startup as You Scale

jul16-05-523747118

There are many reasons that founder-led companies are so good at disrupting industries and making life miserable for slow-moving incumbents. But perhaps the most powerful is that founders create great insurgencies. They ignore established industry rules and boundaries. They create better ways to solve old problems. They disdain anything that blurs their focus on the front line. From top to bottom, they are at war against the industry leaders on behalf of underserved customers.

Our research on what we call the “founder’s mentality” shows that maintaining a strong insurgent mission is critical to long-term, sustainable growth. But to compete long term, insurgent companies also need to develop scale and scope, which very often dulls their insurgent’s zeal. In many ways, this is because their perspective on the future slowly changes. Insurgents see the days ahead—both long and short term—as ripe with opportunity. They embrace change and chaos. They invest in whatever

takes to innovate new solutions for customers. Incumbents, on the other hand, very often see the future as a threat: As leaders invested heavily in the status quo, innovation and disruption are not good for them. Turbulence erodes profitability, innovation marginalizes their current product offerings. The future is not better.

The companies that find a way to achieve scale without losing their insurgent mission—we call them “Scale Insurgents”—remain acutely alert to this difference in perspective. They actively fight back against the very natural tendency to retreat behind the castle walls to avoid future change and turbulence. Instead, they do what in some companies might seem like heresy—they commit to disrupting their own insurgency. They know that acquiring the benefits of scale requires ruthless focus on a well-defined core business and a commitment to building the systems and processes to support it. But they aren’t wedded to their business model—they are wedded to what will serve their customers best. Rather than erecting defenses against the future, they embrace the notion of limitless horizons—the idea that a company can intelligently extend the boundaries of its core ever outward.

This is, of course, easier said than done. But it begins by recognizing that large companies face an organic challenge. Of course, fighting the future is never a stated goal. It happens gradually over a period of years and is the sum of thousands of little acts—refusing to respond to a price war, trying to ignore an innovation from an insurgent competitor, coddling a slow-growing brand, etc. Seen in isolation, through the lens of the income statement, these acts are understandable—even clever. But their accumulation can destroy a company in a number of ways.

First, employees catch on quickly. They begin to understand that their main mission is to protect incumbency economics, not continue the insurgency of their forgotten founders. They see too many examples in which the company doesn’t do the right thing for customers, communities or the employees themselves.

Second, customers find out. They are loyal to brands and have often grown up with the incumbent. But the insurgents keep knocking on their door, with new and wonderful offers at better prices or better quality.

Third, insurgents find out. They bring the battle closer, convinced the incumbent will stay behind its moat. By not responding aggressively to their early hit-and-run tactics, the incumbent allows them to grow and to become bolder.

In our experience, embracing the future as you scale requires solving what we call the Engine 1 vs. Engine 2 problem. Engine 1 is your core business, the engine that got you here. Engine 2 is the one you will eventually need to power your company’s future. Developing both, side-by-side, forces the organization to keep its head up and eyes forward even as it wrestles with the day-to-day challenges of executing its core strategy.

Yonghui Superstores, for instance, has built a thriving chain of stores in China using a repeatable model that delivers on their mission to produce safe, fresh produce at reasonable prices to the mass consumer market. These Engine 1 outlets, which Yonghui calls its “red stores,” are devoted to learning, adapting and making the most of the company’s scale. But to keep innovating, the company also has created an Engine 2—a set of “green stores,” where leadership experiments with new formats and ideas, probing for propositions that will delight customers in entirely new ways. “Scale insurgents” such as Yonghui recognize that it is critical to build both sets of muscles, and they create processes that rotate talent between the two engines, cross-pollinating and learning as they go. By embracing both speed and scale, they create something new and more powerful—a market leader that profits from both scale and staying true to their original mission.

Both Engine 1 and Engine 2 need care and attention, but not in equal measure. There is obviously no hard and fast formula, but in rough terms we believe a 70-20-10 allocation of management time is about right. Engine 1 is like a Formula One race car, it must be constantly adjusted and fine-tuned, requiring at least 70% of your time. Those responsible for Engine 1 must spend another 20% considering how best to expand it into close “adjacencies”—new customers, new channels, new geographies and so on—that take advantage of the existing repeatable model as much as possible. Extending your model is always preferable to building a new one because it means you can grow with less complexity, using many of the same resources. Searching for those adjacencies is critical to sustainable growth.

The final 10% of management’s energy should be devoted to identifying and developing Engine 2 into a business model that can drive the next wave of growth. Engine 2 has the heart of a start-up, with hundreds of ideas, lots of experimentation, lots of failure and fast adaptation. It is open to different partners and willing to try “wild things” to support the customer. The best leaders for Engine 2, interestingly, are often the original founders. Their skills and interests are frequently more attuned to start-ups, and asking them to lead Engine 2 will reawaken their entrepreneurial drive without distracting the core Engine 1 business.

Building a two-way bridge between Engine 1 and Engine 2, however, is critical to success. On the one hand, you want Engine 2 to be a true disrupter, obsessed with the future and how the company can respond with radical new approaches. On the other, Engine 2 must be able to lean on important elements of Engine 1, or else it will fail. For one thing, it is important that the Engine 2 team embrace the company’s original insurgent mission as it looks for new opportunities. The mission should be broad enough and profound enough to allow for additional innovation beneath its umbrella. India’s CavinKare, for example, has defined its insurgency around the statement “Whatever a rich man enjoys, a common man should be able to afford.” But within that broad purview, it has used packaging innovation to disrupt consumer categories from shampoo to beverages.

The Engine 2 team should also think about Engine 1 as a tremendous, proprietary asset base that gives it a huge leg up as it looks for new ventures. It might eschew the current sales model, for instance, but find the distribution infrastructure something that can be used to advantage. Part of Engine 2’s competitive advantage stems from its link to the proprietary assets of Engine 1. Without that, the Engine 2 team is nothing more than a venture capital fund without the expertise—in other words, a bad VC fund. At the same time, Engine 1 has to welcome Engine 2’s input. At one extreme, the Engine 2 team might uncover innovations that completely redefine the company, leading to a rapid transition from Engine 1 to Engine 2. At the other extreme, it might make the most sense to pull all of Engine 2’s innovations directly into the current Engine 1 model to generate new product offerings that help the core business grow faster. Most of the time, it is a little bit of both.

What’s important is the recognition that Engine 2 is there to innovate and disrupt. It represents the company’s commitment to embrace the future—not hide from it. Managing your Engine 2 business as if it were a start-up is a powerful way to bring real strategic adaptation to your business—while keeping your insurgent mission alive. You want the majority of your people improving the existing model and keeping the Formula One car running strong. But you want some of your best minds challenging the core model down to its fundamentals to prepare for the day when the old engine loses power.