Entrepreneur

Book review: The Breakthrough Company by Keith R. McFarland

(Editor’s note: Javier Rojas is a managing director leading U.S. investment activities for Kennet Partners. He submitted this story to VentureBeat.)

“The Breakthrough Company” helps entrepreneurs navigate the hyper-growth that companies pass through on the way to becoming market leaders.

In the spirit of Jim Collins’ Good to Great, author Keith R. McFarland undertook an extensive study of small growth companies that grew from $5 million to $250 million in revenue, comparing them with peer companies that didn’t fare as well. In this study, he covers several themes relating to growth: shifting goals from the founder’s success to that of the company; investing in new markets and approaches (including how and when to do that); and making the transition from being nimble to competing with scalable advantages.

He also does an impressive job of identifying the support resources that great founder/CEOs use to navigate the path to success, including board members and internal challenges. This is easily the best business book I have read for founders, CEOs, or leaders seeking to manage high-growth organizations.

McFarland happens to be dean of the Pepperdine University School of Business – and he did his homework for this book. The multiyear academic study looked at more than 7,000 companies, and included 1,500 interviews with executives.

Big ideas from “The Breakthrough Company

Counterintuitive observations:

•   None of the nine success stories received early-stage funding. They only obtained growth capital after they had already achieved success.

•   At the time they started out, the leaders were not in Wall Street’s “hot categories.”

•   Level of education doesn’t seem to matter much. Although two of the founder/CEOs attended Harvard Business School, the others’ educational backgrounds varied widely.

•   The classic business-school advice “Stick to your knitting” doesn’t always lead to victory. Sometimes you need to change markets and redefine skills for success.

•   Rather than look for extraordinary people, build an organization that lets ordinary people do extraordinary things. (I love this quote!)

Crowning the company – Founder/CEOs need to focus their employees on the company’s success rather than the founder’s success. As organizations grow, the organization’s ideas, decisions, and employees need to focus on building the company. That’s their business and mission.  Key areas to focus on include:

•   Put the customer first.

•   Aim high to motivate the best employees.

•   Shift from “commander” to coach.

•   Don’t let loyalty (to underperformers) become a liability. (I see this problem regularly.)

•   Encourage chaotic communication (with an open-door policy across the board).

•   Avoid corporate royalty perks that separate management from other employees.

•   Share ownership.

Upping the ante – Most companies start by finding and exploiting an unaddressed niche. To become a market leader, founder/CEOs need to find market “bets” that let them expand into broader markets or adjacent markets. Bets that are smart and relate to the core business lead to cumulative learning. And sometimes, unsuccessful bets still create long-term growth.

The Bermuda Triangle – Small companies succeed by being nimble. Their size lets them deliver high customer service (since they don’t have too many customers); deliver low cost through sweat equity, hard work, and heroics; and deliver quickly with small, focused teams.

As the business grows, all these advantages dissipate. So growth companies need to invest in structural adjustments that make large size an advantage. This may take capital investment, an area in which bootstrapped founders often run into trouble. They need to differentiate between keeping all costs low and increasing capital or operating expenses in order to keep product costs low.

Scaffolding – Successful CEO/founders use scaffolding — help and advice from outsiders — to navigate growth and changes. Board members and investors play a key role: Intuit and Microsoft, for example, raised money expressly for the purpose of getting business advice from experienced investors.

Insultants” – Myopia and inertia are two big growth killers; people defer to authority and are prone to follow the herd in the company. Address this through “insultants”: not actually people who insult, but people who challenge conventional thinking. To develop these, company leaders should:

•   Celebrate product failure, and encourage learning from it.

•   Involve people in issues so they can make contributions.

•   Focus on defectors — among both customers and employees.

•   Use humor to encourage frankness and trust. Openness leads to more input.

Applied knowledge

So many of the points in “The Breakthrough Company” resonated with my own entrepreneurial experiences that I found myself constantly marking pages that contained great insights. “Upping the ante” was my favorite: One company I worked with grew revenues tenfold in four years by entering adjacent markets to expand its revenue streams.  Mark Leslie, founder of Veritas, calls this “strategic transformation,” and he credits it for making Veritas a multibillion-dollar bootstrapped success story.

At a glance:
TitleThe Breakthrough Company
Author: Keith R. McFarland
Publisher: Crown Publishing Group
Length: 304 pages


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