Why do some companies consistently outperform their peers?

The debate on CEO pay may seem to be only simmering for the moment, while other events dominate the news cycle, but it has not gone away. Working where I do, one of the things we study is the value of, and how to recognize, effective leadership – now, the Best Companies for Leadership; later, the Most Admired Companies.

Some strategists will argue (citing, for simplicity, concepts similar to what Michael Porter promulgated decades ago: relative position regarding competitors, suppliers, customers, substitutes and threat of entry), but after observing some highly (and some less than…) effective executives during my career, I think that good leadership, often more than anything else, determines whether an organization will succeed or not.

What I think everyone can agree on is that an organization’s leadership has significant flexibility over where, how and when to compete. It is their choices which ultimately determine success or failure. Business history is rife with examples of both successes and failures

  • American car companies, for example, dominated for decades, until supplanted by the Japanese, who are now threatened by the Chinese and Koreans, just as the Americans, staring into an abyss brought on by the recession, might be at the beginning of a resurgence.
  • In IT, who remembers the BUNCH (if not, see below)? These were all thought to be challengers to IBM – mainframes – until client-server computing arrived. And, in turn, most of today’s leading IT competitors were forged in the dot.com boom and bust. Every industry has examples.

Given that all companies in an industry have had, at least initially, equal access to input factors (talent, technology, raw materials, distribution channels, production processes, capital markets, etc), why is it that some succeed – often wildly – while others fail? I think it boils down to leadership. And the most important leader, of course, is the CEO (or equivalent) – it is he or she who is responsible for the choices of the organization, including the choices of the other leaders in the organization.

What does the CEO do?

My Hay Group colleagues, since the late 1960s, have collected 5.5 million individual leadership assessments of 516,000 individuals, including 46,000 executives, from 4,675 organizations. What they’ve learned is that the CEO job, unlike other leadership roles, has five unique features:

The CEO is responsible for the enterprise

The CEO represents the entire organization and must make decisions that take into consideration the entire business, its functions, products, and full array of stakeholders. Whereas business unit or functional managers and certainly lower-level managers’ main concern is optimizing a single line or area, the CEO must optimize the business as a whole. This responsibility is markedly more complex to think about, interpret, and act upon than the responsibilities of other leaders and is a rare capability in the population

The CEO must consider multiple contexts and constituencies simultaneously

A chief executive manages simultaneous demands from an extremely large and complex array of internal and external constituencies, including (and not limited to):

  • A board of directors
  • Investors and analysts
  • The industry
  • Customers
  • Employees, including the top team

At the same time, Chief executives must anticipate and respond to shifts, challenges and opportunities from:

  • The global economic context in an increasingly interdependent world
  • Communities in which the business or entity operates
  • Regulatory agencies and other institutional forces
  • Competitors and other actors in the industry

No other leadership role within the organization requires that the individual be aware of, construe, balance and act upon such an array of simultaneous and often conflicting demands. While CEOs may call upon others to help with both the information processing and relational demands of that work, it is the CEO who inherently bears the responsibility to do so.

The CEO defines and delivers the organization’s strategy

The CEO holds primary responsibility for defining an organization’s strategy and for ensuring the capacity to deliver on that strategy. Strategizing well requires an array of capabilities that include deep knowledge of the business and its context, conceptualization skills, and knowledge of organizational capacities and limitations. The primary challenges to any organization are continued survival and growth. As a consequence, a CEO must have a causal map or conceptual model that contains the pattern of relationships between the environment (threats, opportunities, resources), internal capabilities, and possible organizational outcomes (growth, performance, etc.).

The complexity of the map must correspond to the complexity of the operating environment. Chief executives are required to find, create, and maintain organization-environment alignment by elucidating a long-term strategy for organizational action. Primary functions in the strategic role of a chief executive are environmental scanning, interpretation and sense-making. The cognitive demands of the role cannot be overstated. The CEO holds main accountability to formulate the organization’s mission, including broad statements about its purpose, philosophy and goals. To do so, he or she must understand and develop an organizational “profile” that reflects its present resources and capabilities; s/he must assess the environment and the options it offers, select alternatives based on organizational capabilities (now and in the future) and develop both long-range strategy and shorter term (annual) strategic priorities and goals. While a Chief Executive may invite input into the formulation of the strategy he or she has the ultimate accountability.

Moreover, leading an organization with the capacity to implement its strategy also requires understanding tradeoffs among action choices and the capacity to effectively execute the appropriate behaviors as called for, understanding of the organization as a system so as to act in ways that align that system around focused objectives, “selling” the strategy to a Board of Directors and other key constituencies and creating a leadership team capable of managing organizational resources effectively.

The CEO is the face of the organization

To internal and external constituencies alike, the CEO uniquely embodies the organization. As a consequence, what the CEO says or does is watched with a level and kind of scrutiny not applied to any other individual. A chief executive has symbolic impact through his/her actions, words and even his/her daily habits in ways other leaders do not. A CEO has unique influence on the tone, values and culture of the organization and provides understanding (or not) of the challenges and purposes of the organization.

The CEO is at the top

The CEO position also is unique because she or he does not have to “manage up” or “manage sideways” in the same way that other leaders in the organization must. In ways unlike other leadership roles, the CEO role is a lonely one. CEO constituencies include the Board of Directors, but peers are external to the organization and are likely other leaders of (for example) strategic partners. These external relations are different in character and are frequently critical to the long-term survival and growth of the organization.

Read more about The Best Companies.

BUNCH =

  • Burroughs
  • Unisys
  • NCR
  • CDC
  • Honeywell
Advertisements