Small companies possess one great competitive advantage over incumbents. At every level of the business, the employees of small companies make their decisions and pursue their objectives motivated by an owner’s mindset. They’re so invested in the company, that is, that they feel and act like owners, something that can’t be said of the layers of staff and professional managers at large incumbents. Surveys show that only 13 percent of employees feel any emotional connection or engagement with the company at which he or she works. That’s a startling number, and it represents an opportunity for companies to inspire their employees with an owner’s mindset. The difference between employees who operate with the owner’s mindset and those who don’t can be as great as the difference between devoted parents and restless babysitters.
Three ingredients make up the essence of the owner’s mindset and establish it as a source of competitive advantage. The first is a strong cost focus—treating both expenses and investments as though they are your own money. The second advantage is what we call a bias to action. Adi Godrej, who runs Godrej Group, a leading Indian consumer-goods company, exhibits this bias in how he runs its operations. “It is our superior speed to make big decisions and take actions on them,” he told us, “that lets us constantly outmaneuver larger global consumer-goods companies that come into our markets.” The third advantage is an aversion to bureaucracy—an aversion, that is, to the layers of organization, headquarters departments, and hordes of corporate staff that can accumulate, capture power, and create complex decision processes that clog the arteries of a business and slow it down.
Many companies lose the competitive edge of the owner’s mindset as they grow. That’s because they become complex, turn into public companies with diffuse ownership, hire professional managers with short tenures (the average public-company CEO lasts only about five years), build up enormous corporate staffs, and experience a balkanization of budgets that traps resources inside of departments with their own agendas, making them hard to find and to redeploy. Again, this creates an opportunity: those companies that can grow large while still maintaining some of the speed, efficiency, and focus of a young founder-led company have an enormous competitive advantage and, our research shows, are the big winners when it comes to value creation.
Take AB InBev, the largest and most profitable beer company in the world, with revenues of $50 billion, a market value of $186 billion, and a profit margin of 39 percent, more than ten points above the average of its largest rivals. Not many people would have bet on AB InBev at its start, but the company has succeeded beyond expectations by assiduously cultivating the owner’s mindset as it has grown.
The story begins in 1989, when three Brazilian private equity investors—Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira—purchased a marginally profitable local brewer called Brahma. They knew from looking around the world that a strong local beer business could be a huge money maker, and they set out with the objective of making their new brewery the most efficient in the world. To that end, they hired an expert in the Toyota Production System and launched an effort to benchmark and capture the practices of the lowest-cost global brewers. “From 1989 to 1999,” Telles told us, “it was primarily an operational improvement story, and a story of creating a new culture with young, hungry talent, mostly from outside of the beer industry. The competitive culture we created essentially wore down Antarctica, our Brazilian competitor, who eventually had to merge with us, giving us strong leadership of the market.”
Their plan succeeded well. Within just a few years, the company reapplied its cost systems and cultural practices in breweries from Bolivia to Paraguay and created the largest and most profitable beer company in South America. When we visited Telles in his office in the humble outskirts of São Paulo, on a hill overlooking a favela, or slum, he described the types of practices that the young company was using to reinforce an owner’s mindset. There were no offices, even for the CEO, because the leadership team believed that closed offices led to a culture of hiding and of hierarchy. Targets for every group, all the way to the CEO, were projected onto a big screen in the main office area, with the targets color-coded according to their status. Everyone could see how others were doing, and how each piece connected to the whole. Hiring focused heavily on young people with a hunger to succeed. Budgets were looked at from the ground up each year, and every cost mattered.
Today, the company has become a global powerhouse that has captured nearly one-fourth of the world’s beer market. It merged with Interbrew in Europe, acquired Anheuser-Busch in America, and acquired Modelo in Mexico, along with a host of local brands and breweries. The company even launched a bid for SABMiller in 2015. In consolidating the global beer industry, it has constantly refined its practices and culture, embedding them into each new business acquired on the way, without ever changing its core repeatable model. The company works hard to instill the owner’s mindset in all of its employees. “We are a company of owners,” the company’s statement of principles reads. “Owners take results personally.”
One manager we met during our visit memorably summed up the company’s approach. “We create restaurant owners, not waiters,” he said. “If you’re a restaurant owner, and a new restaurant opens across the street serving the same food, how do you feel? You feel like someone is putting your livelihood at risk, threatening you, threatening your family. It’s personal, because the restaurant is your dream. But if you are a waiter, and a new restaurant opens across the street, how do you feel? At best, indifferent. Actually, there’s now competition for your services. Many companies inadvertently create waiters. We work tirelessly to create restaurant owners.”
But its founders have not stopped with beer. Their private investment firm, 3G Capital, recently purchased Kraft and Heinz, and intends to rebuild those companies using the same principles and owner’s mindset that worked so well for them at AB InBev. For more than twenty years, we’ve encouraged clients to “think like an owner”—to review their strategies with an owner’s mindset, which means aligning the broad interests of the company’s leaders and shareholders. The power of this approach has been central to the rise of the private equity industry. We see it as a reaction against the bureaucracy, poor cost management, and complexity that beset many large companies as they drift away from the founder’s mentality. When we analyzed the returns of a range of different types of deals within several private equity funds that we know well, we found that of all deal types, the ones that earned nearly 50 percent more than the others were businesses sold by large, public companies in which the management had seemingly lost the owner’s mindset and the incentives of ownership.
When private equity firms restored the owner’s mindset at these companies, this consistently increased speed, reduced bureaucracy, caused a more critical evaluation of noncore businesses, and improved the management of costs. The consistency with which a return to the owner’s mindset propelled high returns to private equity firms is one of the most profound phenomena of the past few decades in business. In the interviews we’ve conducted with founders and founding families around the world, we’ve heard the same thing—that the owner’s mindset has provided them with a consistent source of competitive advantage.
Contributed to Branding Strategy Insider by: Chris Zook with the permission of Harvard Business Review Press. Excerpted and adapted from The Founder’s Mentality: How to Overcome the Predictable Crises of Growth.
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