The CEO Conundrum
May 14 2010 by Matt Shlosberg
CEOs don’t hold their jobs forever. In fact, most won’t even do so for a short period of time. A Booz Allen survey conducted in 2007 revealed an astonishing CEO turnover rate of 14.3 percent in one year. Of those, 32 percent were fired due to poor performance or disagreements with the board. As a consultant to CEOs, I’ve witnessed numerous such exits and I’ve studied those that were well covered in the media and saw a clear but surprising pattern – CEO’s unawareness of their own company. CEOs focus on what they think is important, but they leave many other vital components on the table. I’ve compiled a list showcasing some of them:
Unawareness of self, others, or situation. This is the most common problem among CEOs. Most CEOs believe they are aware of themselves, others, and the situation, but research shows otherwise. But awareness is the key component of leadership and leadership is key to success. Unaware CEOs are poor leaders. I’ve participated in a number of engagements helping CEOs become more aware and saw clear results. Increased awareness resulted in improved leadership skills, which in turn positively impacted company performance. Carly Fiorina of HP serves as a great example of case in point. She wrote a book explaining why she was terminated, but this book clearly shows the real reason – unawareness of self and others. Her stories rotate around a common theme, stating that all success was purely hers, while all failures are attributed to gender discrimination, bureaucracy, and incompetence of others.
Unawareness of culture. CEOs often make decisions based on their prior experience or perceived industry best practices. While their decisions work in some organizations, they fail in others. One of the reasons for such failure is misunderstanding or ignorance of organizational culture. Jack Welch famously noted that he miserably failed in running Kidder, an investment bank he acquired. The culture was too different; he just couldn’t understand it. Decisions he made negatively impacted Kidder. He ended up selling the company. United Airlines is another great example. In order to establish a more competitive position, United tried to copy many features of the business model of Southwest Airlines, one of its rivals. But this effort proved unsuccessful. One of the reasons is because United failed to build the right culture, which was Southwest’s main competitive advantage.
Unawareness of customers. Many CEOs believe that customers buy simply because products are created and salespeople do their jobs. But that’s not always the case. Bob Nardelli found out the hard way that Home Depot customers bought products due to the great level of customer service delivered by associates that built a highly competitive culture. His focus on cost cutting and expansion paid off in the short term but hurt the brand long term. Many employees quit. Customers bought from employees, not from Home Depot. So, customers quit too. Bob Nardelli was fired because he was unaware of customers and their buying habits.
Unawareness of trends. Most CEOs believe in and embrace strategic planning, but many handle it more like strategic guessing. While strategic planning often is guessing, there are many things that can be done to reduce guess work and establish a clear contingency plan. The effect of the real estate bubble was clear to many, but few CEOs in the financial services sector did anything to prevent their companies’ failures. A number of studies published on the subject indicated that CEOs of Citi, Lehman Brothers, and other megabanks were warned about possible effects of the real estate bubble early enough to prevent failure, but they dismissed it.
Unawareness of solutions. Many CEOs came from top business schools where they learned numerous frameworks required to do their jobs. Later throughout their careers they picked up even more frameworks. Each one of these frameworks acts as a mental block. The more frameworks the CEO knows, the more he thinks inside the box. The more experienced he gets, the less he is able to challenge status quo. The less he can challenge status quo, the harder it is for him to design great solutions. Consider Cirque du Soleil. They challenged status quo and reinvented the industry. Yet, over two decades later, its competitors are still following the old status quo. Ford and General Motors are also great examples. They’ve been following status quo while Toyota has been slowly stealing their market share. Southwest Airlines has been growing while traditional airlines bleed. The common denominator between these market winners is their unique ability to challenge the common knowledge about their industries and come up with alternative solutions that dispute experience based mental blocks and industry status quo.
Unawareness of the system. Companies can be complex. Their success may depend on trends, product mix, customers, sales people, competition, marketing efforts, culture, customer service, industry, geopolitical trends, luck, and many other things. But these components of success can’t be viewed independently. They can have major effects on each other. Poor culture will create poor sales people. An incorrect product mix may hurt marketing efforts. A weak customer service department may misunderstand issues presented by unhappy customers, not communicate them to marketing, and negatively impact future revenues. The challenge is that many CEOs look at these components separately. A CEO may appoint one executive to run customer service, another to head sales, and the third one to run marketing. These executives will be great at running their functions but won’t necessarily be great at communicating among each other. Departments running independently is a recipe for disaster. CEOs should view their companies from the systemic view. They should manage companies as a whole, rather than manage individual company components. Consider Bernie Ebbers of WorldCom. Ebbers was a successful investor with a great high level vision, but he couldn’t get individual parts of his company to operate as one. He had divisions of the firm directly competing with each other (e.g. UUNet and IBI). Employees were unaware of the existence of 90% of the firm’s products and services. Some divisions didn’t target the right customers (e.g. IBI derived 80% of its revenue from customers who were outside of the firm’s target market). No one knew if individual products or services were profitable. Very few people could understand the company’s cost structure. Provisioning a service for customers took 30 to 90 days, most of which were spent figuring out internal bureaucracies. Ebbers didn’t run WorldCom as a company, but rather as a portfolio of acquisitions consisting of departments operating in individual silos. Allegiance Telecom represents another great example of system unawareness. Allegiance focused all of its efforts on sales, its core competency, forgetting to examine the effectiveness of its marketing, customer service, product management, and human resources strategies. The company also neglected its cost structure. By focusing too much on the sales process and not enough on what happens after the sale and by ignoring its financials, Allegiance drove itself to Chapter 11 and then ultimately to divestiture of the firm with a huge loss to shareholders.
There are many more components to awareness. To be successful, CEOs should understand their own companies, how they function, why customers buy, and why these companies are successful. They should understand how various components of the firm function as a system.
But this approach creates a hard to manage paradox. There are numerous components a CEO must consider, but there are too many of them for one person to handle. What’s even harder is that many of them carry a high degree of uncertainty (e.g. market risk). While we’ve designed and used a framework to assist us with solving this problem and we’ve seen some success using this framework, the level of the problem’s complexity makes it hard to make the right decisions 100% of the time. Until we significantly improve our framework, this problem will remain as a hard to manage paradox.
Matt Shlosberg is managing director of Columbia, MD-based Hanna Concern (http://www.hcglobal.com) , a management consulting firm specializing in organizational competency development through high impact learning and leadership development. He is the author of ”Firing and Laying Off” (2009), “Sun Tzu – The Art of Leadership” (2010) and is working on “The Chaos Strategy”, which will be published in the Fall of this year.