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Importance of founder-led firms seeing resurgence - Chris Zook

Chris Zook, author of management books and cohead of the Global Strategy practice at Bain and Co., has made a name for himself advising CEOs on developing a systematic and scientific approach to growth. He was in India recently to meet some founder- or promoter-run firms, because, according to Zook, “around
the world we are seeing resurgence in the importance of founder-led companies” and founders returning to save their companies, he said in an interview.

This whole trend of promoters returning to save companies in India. We have the recent example of N.R. Narayana Murthy returning to save Infosys Ltd. How significant is that?

I think we have seen more cases of founders coming back in the last five to seven years than I can ever remember seeing before. The Howard Schultz story at Starbucks is amazing in the sense that how fast the turnaround  appened in terms of performance. When you delve into it, (among) the things that he brought back was the culture of the barista, the person who makes the coffee, redesigning the equipment.

I am not sure it is a pattern: the founder having retired and then having to come back and rescue the business, but there are a lot of examples (of this) that we are seeing now. In a way, it may be a sign of failure (of the founder) to set up succession perfectly. What is interesting for me is how many times they (founders) actually help the case.
Another trend is going back to the founding mentality, without the founder coming back—(such as) the  rejuvenation of Lego or Burberry. I think it’s a very interesting thing to observe how businesses that lost the founding mentality, sometimes rediscover themselves by going back to the founding principles.

So, it doesn’t always take the founder?

We are talking about 5% of a phenomenon that feels like it happens more often by virtue of the story of Howard Schultz or Steve Jobs. In those cases, the founders had to reinstitute some of the beliefs and practices that have got lost along the way. Usually, these have to do with being more in touch with the customers. What Howard Schultz did to Starbucks was to refocus. First thing he did was that he shut all the stores…800 stores for an entire day, which is quite expensive, if you calculate the amount of money. He retrained the staff, redesigned the equipment, stopped cheese smelting in the stores to magnify the coffee experience...

Jobs wanted to get closer to what the customer would need in the future. I think he was amazing.

The impact of most of the founders coming back is to drive the company much closer to the customers, which is fundamentally a good thing for the business—but it doesn’t always take the founder to do that. There are a number of iconic companies, owned by families, where an outsider CEO came in and turned the things around by bringing back the founder’s original principles. So, I think that sometimes the founding mentality is lost and it takes a founder to bring it back, and sometimes it can be done by a CEO.

We also have a counter-phenomenon in India. Of promoters who continue to cast a long shadow on the business, who control every aspect, is that a good thing?

I think it is great. I think it’s the life force of the great companies. I remember a piece of a research, that I saw years ago, that we had done. It looked at great teams, business teams, development teams and some other teams and then poor-performing teams. For poor-performing teams, 80% of the comments were internally focused while 70-80% of the comments in the best performing teams were externally focused - on frontline behavior and the customers.

Every business begins with one founder, one product and one customer and over time there are natural forces which take the business away from the closeness of the frontline, away from treating businesses like your own, away from the real intensity of the customer and all the things that the founder does. I think you used the word control; I would use the term externally-focused and obsessed with the details of the business, which is incredibly important. I think these details really make the business. Ideally, what you would like to do is to transmit that to the next generation.

When you start to lose attention (to) those details and start becoming internally focused, then I think you are on the path to extinction.

Businesses, if they don’t fight against this, can turn into bureaucracies, lose the voice of the customers and make themselves very vulnerable to (competition from) founder mentality types of companies. You have seen that happening in Sony versus Apple, or Michelin versus Hankook.

Finally, a question on the current economic situation. You meet a lot of CEOs. Are they still cautious about the future? When do they see things improving?

There are huge amounts of cash that have built up. Companies, private equity and sovereign wealth funds—they are not sure of where to invest. Still, things are beginning to improve. We are seeing a return of the US economy. But Europe is still troubled except for a couple of economies and the developing world has slowed down. India is down from 8% (growth) to 5%. From the point of view of multinationals outside, that is still very attractive growth. I think when I look at the mix of work that we are doing at Bain and Co., during the more difficult recessionary period, the focus (of companies) was towards cost reduction but now they are shifting more towards growth projects.

It is more about the future.