Breaking on Through

You were CEO of Nivo International and Collectech Systems, where you built a $150 million business before selling the company to GE Capital and Harvest Partners. Why did you leave the tech field for consulting?

I had two little kids, one was five and one was eight. I couldn't figure out a way to have the relationship I wanted with my kids and be in 60 countries every year. So that's one reason.

Examining more than 7,000 yet-to-mature companies as research for your book, The Breakthrough Company: How Everyday Companies Become Extraordinary Performers was ambitious. What drove you to take it on?

I felt that my academic background and my experience of actually running businesses for 10 years put me in a unique position to study the question. Actually, my fear was that our screen would turn up primarily tech companies, and I would have to write a tech book, which is where I grew up but not really that interesting to me. But we turned up a diverse mix of companies and many that people don't know about.

What screening criteria did you use?

We took the history of each company for as long as it had been around up until 2004 and looked at revenue growth and profitability. We had to correlate and crunch a lot of data. We compared breakthrough companies with peer companies of the same size and in the same industry pretty deeply. We were able to identify elements that breakthrough companies had that the comparison companies didn't have. It took us five years, but we needed to do a fundamental empirical study of the growth company segment. The 60 field studies we did with 60 companies were the richest data source; we spent a minimum of 90 days and, in some cases, four years working with them on a quarterly basis.

What findings surprised you most?

The first surprise is that you don't have to be in a really sexy industry with a hot, cool, new iPhone-like product to have sustained growth and profitability. That was the first ah-ha. The second is that the general assumption that at some point the founder gets in the way is a myth. Of the companies we identified, all of the founders except one were still deeply involved in the business. We also found a research study from the University of South Carolina that found that over a 10- to 15-year period founder-run businesses outperformed non-founder-run businesses by 10 percent.

There are a lot of examples that suggest the opposite.

Sure, that happens. But our research suggests that the CEOs of breakthrough companies have a different approach from the very beginning about what kind of business they wanted to build. They are very careful not to make the business about themselves or their families. We call that crowning the company.

But don't most entrepreneurs assert that their company is not centered around themselves?

That's true. Last year, Scott   Cook, CEO of Intuit, gave every one at the Inc. 500 Conference entrepreneurs and their direct reports-a two-question survey that underscored this delusional aspect of entrepreneurial leaders. The results showed that the entrepreneurs really believe that they listen and that everybody gets to take a full swing at the issues. But when their direct reports are asked the same question, they say that does not happen. 

That survey demonstrates that even in the most entrepreneurial, fastest growing companies in America, it's a struggle. You have to proactively encourage people to be "insultants," those who question the fundamental assumptions in business, and to take a full swing at issues.

What other commonalities did you find among breakthrough companies?

One of the executives I interviewed said, "There's no such thing as corporate culture." His point was that the minute you start talking about corporate culture, it be comes somebody else's problem-the leader's problem. He said, "We don't focus on corporate culture. We focus on character." When you use the word character, that's everyone's responsibility. It's about how we treat each other. I found that to be a recurring theme in these companies.  

Polaris, the snowmobile and alter - native terrain vehicle manufacturer [in Medina, Minn.], was a wreck when W. Hall Wendell bought it. Wendell walked into a company meeting and said, "Everybody in this room's going to have a 30 percent cut in pay because the business does not make sense financially. If you help me turn this business around, which we can do, I promise I'll make it worth your while."  

Polaris has a plant in Roseau, Minnesota, which is right above the Canadian border and as cold as Siberia. Today, Roseau has a population of 2,500 and 1,500 of those people work at the Polaris plant. So everybody in that room knew that where Polaris goes, so goes Roseau, right? Wendell was a man of character and people at Polaris still talk about that day. 

What other myths does your re - search debunk?

There's an assumption that entrepreneurs are risk-takers. We gave 250 entrepreneurial CEOs a psychological test and found them to be as evenly distributed on risk tolerance as the general population. There was no correlation between entrepreneurship and risk-taking.  In fact, research suggests there is a decrease of risk tolerance as an entrepreneurial leader begins to achieve some success. 

Often, entrepreneurs start a business because they want freedom from a boss. Everybody places big bets in the beginning. Then when they start getting some success, they fall prey to loss aversion. We found that with our comparison companies. They stopped placing the big bets. To draw on a sailing analogy, when most companies reach a certain size, they turn their bow to a quiet bay where the water looks calm and the wind seems soft. They get seduced into believing there is such a thing in business as a calm bay. 

And breakthrough companies? 

Breakthrough companies turn the bow of their ship into the waves and say, "Come on, men!" They have this visual understanding that there is no such thing as safety in business. Maybe they're a little neurotic. They have the sense that if they're not investing and growing, their competitors will be-and that when they bet, they're not really betting. They're actually making investments.