Strategy Execution Strategic Change, Culture and Leadership

Contributors: By: John A. Parnell
Book Title: Strategic Management: Theory and Practice
Chapter Title: “Strategy Execution Strategic Change, Culture, and Leadership” Pub. Date: 2014
Access Date: March 24, 2018
Publishing Company: SAGE Publications, Ltd City: 55 City Road
Print ISBN: 9781452234984
Online ISBN: 9781506374598
DOI: http://dx.doi.org/10.4135/9781506374598.n11 Print pages: 292-325
©2014 SAGE Publications, Ltd. All Rights Reserved.
This PDF has been generated from SAGE Knowledge. Please note that the pagination of the online version will vary from the pagination of the print book.

Strategy Execution Strategic Change, Culture, and Leadership

Chapter Outline

Organizational Culture and Strategy
Cultural Strength and Diversity Shaping the Culture
Global Concerns

Strategic Leadership
Leadership Style

Executing Strategic Change
Recognize the Need for Change Create a Shared Vision Institutionalize the Change

Summary Key Terms
Review Questions and Exercises Practice Quiz

When a new strategy is executed, an old one is discarded. Managing strategic change can be a difficult task even when everyone in the organization agrees that it is needed and understands what will occur as a result. Even so, techniques to institutionalize the change must be developed. Barriers and resistance to change should be recognized so that strategies can be developed to overcome them.

Executing a strategy can become quite challenging—especially when a strategic change of great magnitude is involved. When the environment changes rapidly or abruptly, progressive firms take steps to capitalize on new opportunities and/or minimize the negative effects of the changes.1. Change can be brought about by factors such as the need to address increased competition, improve quality or service, reduce costs, or align the firm with the practices and expectation of its partners. Strategic change can be revolutionary, such as when a firm changes its product lines, markets, or channels of distribution. Strategic change can also be less radical, such as when a firm overhauls its production system to improve quality and lower its costs of operations.

Because changing strategies is often a complex process, it may not be desirable even when changes in the macroenvironment and/or industry suggest problems for the current strategy. Shifting the strategic intent may confuse customers and employees, may require structural changes in the organization, and can result in major capital investments. In short, the costs associated with a major strategic change are not always justified by the benefits.2.

Evaluating the appropriateness of strategic change is a complex process. Consider several examples. In 2003, McDonald’s faced its first quarterly loss as a public company. Rather than increase its efforts to market inexpensive products to children, the burger giant responded with higher priced items such as the $4.50 California Cobb salad and the $3.89 grilled chicken club sandwich, all the while retaining its dollar menu with items such as double cheeseburgers, chicken sandwiches, and side salads. As a result, revenue increased 33% from 2002 to 2005, while profits more than doubled. McDonald’s also responded with a more aggressive approach to new product development instead of relying on its franchises to generate ideas, a slow process that led to the Big Mac in 1968, the Egg McMuffin in 1973, and the Happy Meal in 1979. The firm hired chef Dan Coudreaut as director of culinary innovation in 2004, a decision that led to the successful Asian salad and the value-priced snack wrap in 2006.3. The fast-food giant added premium coffee and related offerings to its product line in 2006. The results have been positive with McDonald’s experiencing strong growth in profits, market share, and stock price through the early 2010s.4. Same store sales declined in late 2012 for the first time since 2003, however, renewing the debate over how McDonald’s can balance its premium and dollar menu items while its own food costs are on the rise.

McDonald’s also faced an intriguing challenge when it introduced drive-thru serve in its Chinese restaurants in 2006. Customers there were not familiar with a drive-thru and could not figure out how to use it. The company responded with flyers illustrating the process and had employees stationed in the parking lots to direct customers to the drive-thru lane.5.

Strategic change is more common in some industries than in others. For example, a number of strategic shifts have occurred in the airline industry since the early 2000s. Southwest Airlines has reported profits every year since its inception, fueled by a consistent reliance on low costs, no frills, and low fares. In the early 2000s, however, younger low-cost carriers such as JetBlue, Frontier, and America West experienced more rapid growth thanks in part to a greater emphasis on factors such as entertainment, food service, and first-class seating. In late 2003, Southwest announced it would begin flying into Philadelphia—a hub for U.S. Airways—in 2004, a move signaling a possible shift from the airline’s historical avoidance of busy airports ruled by major carriers.

Southwest made another similar jump when it moved into Denver International Airport in January 2006, where airport fees average around $9 per passenger as opposed to the industry average of $5. Southwest had avoided such costly airports in the past and faced intense price competition there with Denver-based low-cost carrier Frontier Airlines, and some extent from United Airlines, which controls over half of the Denver market.6. Some analysts believed that this strategic change marked the beginning of a departure from Southwest’s strict low-cost position.7. Others believe that Southwest’s growth and success in the early 2000s, coupled with intense competition from low-price upstarts, has begun to erode Southwest’s cost advantage. Southwest acquired low-cost rival AirTran in 2010, giving Southwest a significant presence in the Hartfield-Jackson Atlanta International Airport.

Strategic change of a great magnitude can be difficult to implement (see Strategy at Work 11.1). Employees resist change for a variety of reasons, including personal factors, lack of information about the change, and poor design of the support system. Simply stated, strategic change is easier said than done.

America image. Sears then attempted to convert its antiquated image into a financial supermarket by purchasing Dean Witter Financial Services and Coldwell Banker Real Estate. However, in-store kiosks never caught on with customers, and the expected synergy between these two subsidiaries and Sears’ Allstate Insurance and Discover Card business units failed to materialize.

Next, management modified the store’s image to one that sold nationally branded merchandise along with private-label brands at “everyday low prices.” The idea was to create individual “superstores” within each of the Sears outlets to compete more effectively with powerful niche competitors. Sears departed from its traditional practice of holding weekly sales to save on advertising expenses and inventory handling while offering everyday low prices, which turned out to be, in some cases, higher than Sears’ old sale prices. By this time, customers were totally confused. In 1992 alone, Sears lost almost $4 billion, its worst performance ever.

In 1993, Sears terminated its big catalog operations, began spinning off some of its businesses unrelated to general merchandising, overhauled its clothing lines, eliminated more than 93,000 jobs, and closed 113 stores. In 1995, Sears reentered the catalog business. This time, instead of a big book Sears catalog, it set up joint ventures to provide smaller catalogs. Sears provides its name and its 24 million credit card customers. Its partners select the merchandise, mail catalogs, and fill orders.

By 1996, Sears had begun to benefit from its strategic shift to moderately priced apparel and home furnishings. In 1999, Sears branched out further, developing “The Great Indoors” to attract women to the traditionally male-dominated home improvement market. This format was in response to the fragmented nature of the home remodeling business, particularly on the higher end where services such as decorating and installation are often involved. The format targeted as its primary customers women 30 to 50 years old earning in the $50,000 range.

In late 2001, Sears announced another strategic shift designed to position the firm as a solid, even more discount-oriented retailer. The company announced the elimination of a substantial number of cashiers and other employees, the integration of centralized checkouts, and shifts in the product mix, all designed to improve efficiency in the stores. In late 2002, Sears acquired Lands’ End, a leading marketer of traditionally designed clothing and related products. By the mid-2000s, Sears had incorporated the brand into its retail outlets, but performance continued to wane. The once prosperous American icon had been unable to meet the challenges of a changing retail environment.

Kmart acquired Sears in 2005 for $11 billion (see Strategy at Work 6.1 in Chapter 6), but sales for the combined firm have declined every year since through 2011.9.

The decision to institute a strategic change or not can be a difficult one. This chapter discusses two key areas associated with executing strategic change: (1) organizational culture and (2) leadership. Both dimensions must be aligned with the strategy and managed properly if a strategy is to be implemented effectively.

Organizational Culture and Strategy

Organizational culture refers to the shared values and patterns of belief and behavior that are accepted and practiced by the members of a particular organization.10. It includes work practices, traditions, and accepted work practices and also defines how managers and workers treat each other and can expect to be treated. It fosters peer pressure that encourages members of the organization to behave in certain ways. Ideally, the strategic decisions rendered by top management should be consistent with the culture of the organization. Strategies that contradict cultural norms are more difficult to execute. An emphasis on cost leadership, for example, is not easy to implement when members of an organization are conditioned to spend company time and resources on new products and ideas.

Because each organization develops its own unique culture, even organizations within the same industry and city will exhibit distinctly different ways of functioning. The organizational culture enables a firm to adapt to environmental changes and to coordinate and integrate its internal operations.11. Ideally, the values that define a firm’s culture should be clear, easy to understand by all employees, embodied at the top of the organization, and reinforced over time.

Cultures not only form at the organizational level but within the organizational culture as well. These organizational subcultures can develop around such factors as location, functional responsibility, or managerial level. Cultural similarities among sales representatives at an organization may differ from those among production workers.
The first and most important influence on an organization’s culture is its founder(s). Some founders have strong beliefs about business practice or have strict procedures for transacting affairs. Their assumptions about success—as well as those of other early top managers— form the foundation of the firm’s culture.12. For instance, the primary influence on McDonald’s culture was the fast-food company’s founder, Ray Kroc. Although he passed away in 1984, his philosophy of fast service, assembly line food preparation, wholesome image, cleanliness, and devotion to quality are still central facets of the organization’s culture.13. Likewise, Steve Job’s influence on Apple will remain long past his untimely death in 2011.

Views and assumptions concerning an organization’s distinctive competence comprise one of the most important elements of culture, particularly in new organizations. For example, historically innovative firms are likely to respond to a sales decline with new product introductions whereas companies whose success is based on low prices may respond with attempts to lower costs even further.14. However, it is possible to modify the culture over time as the environment changes, rendering some of the firm’s culture obsolete and even dysfunctional. New elements of the culture must be added as the old elements are discarded.

Stories are also an important component of culture. Whether true or fabricated, accounts and legends of organizational members can have a great influence on present-day actions of managers and workers alike. UPS employees tell stories of drivers who go the extra mile through adverse weather to deliver packages on time. Microsoft employees retell stories of programmers who work long hours to meet demanding production schedules. These stories create expectations and can inspire workers to perform similar feats in their daily jobs.

Organizational culture can facilitate or hinder the firm’s strategic actions. Studies have shown that firms with “strategically appropriate cultures”— such as PepsiCo, Apple, and Google— tend to outperform other corporations whose cultures do not fit as well with their strategies. A strategy-culture fit can support strategy execution because the activities required from middle managers and others in the organization are consistent with what is already taking place. When the strategy does not fit with the culture, it is necessary to change one or both. For example, a firm caught in a changing environment may craft a new strategy that makes sense from financial, product, and marketing points of view. Yet the strategy may not be implemented because it requires significant changes in assumptions, values, and ways of working.15. All things considered, changing a strategy is easier than changing culture, and both are often required for organizations to be successful.16.

For many firms, achieving a strategy-culture fit means an adaptive culture whereby members

of an organization are willing and eager to embrace any change that is consistent with the core values.17. Such a culture values taking initiative and risk, exhibiting creativity, trust and employee involvement, and a desire for continuous, positive organizational change. Adaptive cultures are especially important for firms that emphasize high growth or innovation (e.g., prospectors), as well as those operating in turbulent environments. Adaptive cultures emphasize innovation—developing something new—and encourage initiative whereas inert cultures are conservative and encourage maintenance of existing resources. For companies like Google and eBay, an adaptive culture is an essential part of their success.

Cultural Strength and Diversity

Some cultures influence firm activities more than others. A strong culture is characterized by deeply rooted values and ways of thinking that regulate firm behavior. Top managers model that behavior and create peer pressure that reinforces the notion that others in the organization should behave likewise. Strong cultures develop over an extended period of time
—generally a decade or longer.

When a strong culture embodies appropriate values, it can be a valuable resource for a firm when it reinforces values inherent in the organization’s strategies. Effective strategy execution occurs when all facets of the organization—including the culture—are “on the same page.” When this occurs, effectiveness is likely to increase when a firm’s strategy and culture reinforce each other.18. J. C. Penney’s strong culture grounded in its key principles on ethics and customer orientation has contributed to its success and survival as a leading U.S. retailer for over 100 years.19.
When a strong culture is unhealthy and embodies destructive characteristics, it can strain firm performance. For example, such characteristics include a strong emphasis on politics to get things done, a disregard for ethical standards, territorialism among departments, and strong resistance to change. Of course, strong dysfunctional cultures can hinder organizational performance.20.

Unlike a strong culture, a weak culture lacks values and ways of thinking that are widely accepted by members of the organization. There is no clear, widely accepted business philosophy, and managers approach their responsibilities in different ways. In general, this lack of cultural consensus does not support strategy execution. There are exceptions, however, such as colleges and universities where disparate perspectives may be deliberately fostered across campus to expose students to different view and ideas during their educational experience. Such institutions emphasize diversity, the extent to which individuals across the organization are different.

It is common today to speak of the need to pursue diversity as a means of competitive advantage. The term can be defined in a number of ways, however. Some use it to reference differences over which individuals clearly have no choice, such as age, race, ethnicity, gender, and physical disability. Others extend this definition to include behaviors over which individuals exert control, such as marital status, religion, and sexual preference.21. Still others use the term simply to reference differences in ways of thinking.

Research linking diversity and firm performance is largely inconclusive, however, in part because of competing conceptualizations of what it means for an organization’s membership

to be diverse.22. Diversity’s link to cultural strength is an interesting one. The latter, simpler notion of diversity—differences in ways of thinking—is strikingly similar to the concept of a weak culture. In this respect, greater diversity can hinder firm performance. A number of research studies focusing on diverse top management teams, however, have found that diverse ways of thinking among top managers lead to more creative, comprehensive, and effective strategies.23.
The value of diverse ways of thinking appears to be most critical when a strategy is being formulated. A diverse top management team can pool its vast backgrounds and perspectives to create innovative strategies without blind spots. For those responsible for executing a strategy, typically middle- and lower-level managers, less diversity is required. In this stage, processes for implementation may be clearly defined, and managers are simply charged with following them. Hence, a strong culture—one with less diversity of thought—is likely preferable in this regard.

Shaping the Culture

Cultural change is a complex process. Just as cultures do not develop overnight, they are rarely changed in a short period of time. Culture change is possible, but efforts often fail due primarily to a lack of understanding about how a culture can be changed and how long it is likely to take.24.
Top executives can influence and shape the organization’s culture in at least five ways25.— the first of which is to systematically pay attention to areas of the business believed to be of key importance to the strategy’s success. The top executive may take steps to accomplish this goal formally by measuring and controlling the activities of those areas or less formally by making specific comments or questions at meetings. These specific areas should be ones identified as critical to the firm’s long-term performance and survival, and may include such areas as customer service, new product development, or quality control.

The second means involves the leader’s reactions to critical incidents and organizational crises. The way a chief executive officer (CEO) deals with a crisis, such as declining sales or technological obsolescence, can emphasize norms, values, and working procedures or even create new ones. Organizational members often take their behavioral cues from their leaders.

The third means is to serve as a deliberate role model, teacher, or coach. When a CEO models certain behavior, others in the organization are likely to adopt it as well. For example, CEOs who give up their reserved parking places and park among the line workers send a message about the importance of status in the organization.

The fourth means is the process through which top management allocates rewards and status. Leaders communicate their priorities by consistently linking pay raises and promotions, or the lack thereof, to particular behaviors. Simply stated, rewarded behavior tends to continue and become ingrained in the fabric of the organization. This not only applies to middle and lower-level managers but can apply at top levels of the organization as well.

The fifth means of shaping the culture is to modify the procedures through which an organization recruits, selects, promotes, and terminates employees. An organization’s culture can be perpetuated by hiring and promoting individuals whose values are similar to those of the firm and whose beliefs and behaviors more closely fit the organization’s changing value

system. Firms should spend the time necessary to properly screen candidates and evaluate them on their fit with the desired organizational culture. The easiest way to affect culture over the long term is to hire individuals who possess the desired cultural attributes.

Global Concerns

A number of global concerns can also complicate the role of organizational culture. In many respects, an organization’s culture can be viewed as a subset of the national culture in which the firm operates. As such, operating outside one’s own country can create special challenges in areas such as leadership and maintaining a strong organizational culture. For example, leaders of some nations resist innovation and radical new approaches to conducting business whereas others welcome such change. Such national tendencies often become a part of the culture of the organization in those countries.

The self-reference criterion—the unconscious reference to one’s own cultural values as a standard of judgment—also presents a potential problem. Managers often believe that the leadership styles and organizational culture that work in their home country should work elsewhere. However, each nation—like each organization—has its own unique culture, traditions, values, and beliefs. Hence, organizational values and norms must be tailored to fit the unique culture of each country in which the organization operates—at least to some extent. The need to customize values and norms can create special challenges when firms from different countries become partners or even merge their organizations.

Strategic Leadership

Announcing a strategic change usually does little to inspire those responsible for implementing the change. The top management team has several means at its disposal to encourage managers and other employees to implement the strategy, one of which is leadership. The CEO is recognized as the organization’s principal leader, one who sets the tone for its activities. A manager exhibits (managerial) leadership when he or she secures the cooperation of others in accomplishing a goal (see Strategy at Work 11.2).

members so they know what the board expects from top management.

3. Firms should discuss potential conflicts associated with the new roles for both the incoming and the outgoing CEOs. Plan to address any potential problems. Like Walton, Glass stayed on in an advisory capacity after he stepped down as CEO.
4. The new CEO should conduct meetings in conference rooms to facilitate open participation, not from the executive desk.
5. Everyone involved should stay humble and not overestimate the new CEO’s ability to institute rapid change.

Strategic leaders articulate the firm’s vision. Whereas the mission describes what you strive to do best every day, the vision is a view of the future when your mission is achieved in the present. For example, a relatively small car producer’s mission may be to produce reliable, economical vehicles for value-conscious consumers. Its CEO might articulate a vision of the firm as a leader in providing reliable transportation throughout the world. Such a vision stretches the firm’s ability to grow and develop but looks to the future and is realistic because it is attainable if the company continues to fulfill its mission.

Broadly speaking, the vision sets the stage for the firm’s strategy by focusing members of the organization on key capabilities, offering a sense of direction, and even providing a mental picture of what the firm should look like in the future. Of course, vision statements have little impact on organizations if they are not sufficiently focused and articulated clearly. In this respect, the notion of a vision is the linchpin between the CEO and the components of the strategy. Diffusing the vision—and ultimately the strategy—throughout the organization is a key top executive function.27.

Strategic leadership is more than managerial leadership. In addition to creating the vision and mission for the firm, it also includes developing strategies and empowering individuals throughout the organization to put those strategies into action. It includes determining the firm’s strategic direction, aligning the firm’s strategy with its culture, modeling and communicating high ethical standards, and initiating changes in the firm’s strategy when necessary. Strategic leadership establishes the firm’s direction by developing and communicating a vision of the future and inspires organization members to move in that direction.28. Unlike strategic leadership, managerial leadership is generally concerned with the short-term, day-to-day activities.29.

Effective strategic leadership is the link between strategy formulation and strategy execution. Without it, otherwise effective strategies will not likely be implemented as planned. Developing a firm’s mission, vision, and strategies is not sufficient. Effective strategic leaders inspire managers and even non-managers to take the necessary steps to realize them. They build and promote an organizational culture that supports firm strategies, and they set the tone for ethical behavior.

Exerting effective strategic leadership is not always easy. Indeed, the leadership component of strategic management is often characterized by the same lack of decisiveness inherent in one of its forerunners, the field of economics. Former U.S. president Harry Truman became so frustrated with economists that he once lamented, “I want a one-armed economist so that the guy could never make a statement and then say ‘but on the other hand.’” One could argue that one-armed strategists are also in short supply. There are at least two sides to most strategic issues from downsizing and outsourcing to takeovers and corporate restructuring. Sage strategists are well versed

Leadership Style

Every leader has a distinctive leadership style—a consistent pattern of behavior that a leader exhibits in the process of governing and making decisions. Some leaders are flamboyant whereas others are reserved and contemplative. Some seek broad-based participation when making decisions whereas others arrive at decisions primarily on their own with little input from others. Regardless of style, participation can help build employee commitment to the firm’s goals and strategies and is generally seen as a positive approach to decision making.30.

There is little agreement on what might constitute a single best leadership style. Moreover, research has identified a wide variety of leadership styles, a complete analysis of which is beyond the scope of this chapter. To demonstrate the link between leadership and strategy, two basic approaches are presented herein.31. Leaders employing a transactional leadership style use the authority of their office to exchange rewards such as pay and status for employees’ work efforts and generally seek to enhance an organization’s performance steadily, but not dramatically. By contrast, leaders employing a transformational leadership style inspire involvement in a mission, giving followers a vision or higher calling, thereby seeking more dramatic changes in organizational performance. In effect, transformational leaders like Sam Walton and Steve Jobs motivated followers to do more than they originally expected to do by stretching their abilities and increasing their self-confidence (see Strategy at Work 11.3)32.

Strategy at Work 11.3. Johnson & Johnson Leadership Emphasizes Innovation33.

To say the least, Johnson & Johnson (J&J) chairman Robert Wood Johnson was ahead of his time when he wrote the Company Credo in the 1940s. The Credo took the unusual step of declaring that the organization’s primary responsibility was to “the doctors, nurses, and patients… mothers and fathers and all others who use our products and services.” This customer-driven focus had been the basis of J&J’s success to that point, and it continues to pervade the company today, serving as common ground for the organization’s 170 operating companies. J&J’s business today is driven by three basic commitments:

1. Commitment to the Credo
2. Commitment to decentralized management
3. Commitment to the long term

Within the Credo’s framework-and in some ways because of it—J&J constantly emphasizes innovation, often measuring its success by the percentage of sales from products introduced in the past 5 years. In the 1980s, this percentage was around 30%. Today, it is close to 35%. As a result of this high level of innovation, the organization has increased its sales by more than $3 billion and added more than 8,000 new employees over the past decade, growing to more than 116,000 employees in more than 60 countries by 2011.

Transformational leadership is typically associated with strategies that emphasize innovation, a frequently referenced but elusive concept. Austrian economist Joseph Schumpeter identified five types of innovation: (1) new products, (2) new materials or resources, (3) new markets, (4) new production processes, and (5) new forms of organization.34. It often occurs through a process Schumpeter called creative destruction, whereby managers consciously and constantly destroy old ways of doing things by recombining their elements into new

forms.

A leader is typically categorized as transactional or transformational based on his or her overall pattern of behavior. Contrary to popular opinion, the transformational leader is not always a dynamic, vibrant, charismatic personality type.35. A number of CEOs have transformed their organizations during times of turbulence without being charismatic figures. Indeed, a charismatic personality can be an asset to a transformational leader (and to a transaction leader, to a lesser extent), but it is not a prerequisite for success (see Strategy at Work 11.4).

Strategy at Work 11.4. Strategic Leadership at Southwest Airlines36.

Herb Kelleher built Southwest Airlines into one of the most profitable and fastest- growing airlines in the country through an emphasis on low-cost operations. In doing so, he also managed to win the trust and respect of his employees through his leadership style.

Texas businessman Rollin King and attorney Herb Kelleher founded Air Southwest in 1967 as a regional airline linking Dallas, Houston, and San Antonio. Southwest made its first scheduled flight in 1971 and passed the billion-dollar revenue mark in 1989. Today, Southwest Airlines remains a predominantly short-haul, high-frequency, low-fare airline providing service within the United States. The Dallas-based carrier offers approximately 2,700 daily flights throughout much but not all of the country.

Southwest is a classic no-frills airline, although service is generally perceived to be excellent, and on-time performance rivals or exceeds its larger peers. Meals are not served, although passengers are encouraged to bring their own food on the plane. In addition, there are no reserved seats. The first 30 passengers to check in at the gate are allowed to board first (and select seats), followed by the next 30, and so on. Southwest minimizes costs by operating out of smaller, less costly airports whenever possible.

Southwest has enjoyed 29 consecutive years of profits, including 2001 when the 9/11 terrorist attacks riveted other American carriers into deep losses. High productivity, combined with the airline’s lack of frills, gives Southwest a 43% cost advantage over its large Dallas-based rival, American Airlines. In fact, the airline has been the only major
U.S. carrier to avoid layoffs and maintain a full flight schedule since that time. The company even began hiring additional employees in early 2002.

Southwest is known for its fun-loving, service-oriented culture. Flight attendants seem to be amateur comedians, a practice that subsided after the events of 9/11 but had reemerged by 2003.

Chairman Herb Kelleher, who stepped down as CEO in 2001, helped establish a reputation for the company as one of the top employers in the United States. Fortune typically recognizes Southwest as one of the most admired companies in its annual surveys.

Most leaders exhibit both transactional and transformational styles, to varying degrees (see Figure 11.1). Consider General Electric’s (GE) Jack Welch, who retired after two decades as GE CEO in 2001. Welch was known for his impatient, aggressive, and alternatively charming and overbearing image, and he pushed workers in GE plants and offices to constantly improve efficiency. However, Welch also demonstrated an uncanny charisma and strong drive as top executive. Widely known as one of America’s most effective CEOs, Welch integrated components of both transactional and transformational styles.37.

Firms often seek leaders with certain styles that complement the organization. Three months after an ice storm stranded passengers and created chaos at JetBlue Airways in 2007— costing the airline an estimated $30 million—founder and charismatic leader David Neeleman was removed as CEO. Neeleman was replaced by then president Dave Barger, a leader with an operations perspective and a more transactional style.38.

Figure 11.1 Leadership Style Continuum

Regardless of leadership style, a leader’s likelihood of success has also been tied to emotional intelligence, one’s collection of psychological attributes, such as motivation, empathy, self-awareness, and social skills. Executives who possess a passion for their work, are socially oriented, and understand their own needs as well as those of their subordinates are more likely to gain the trust, confidence, and support necessary to lead their

organizations.39.

Other facets of leadership are also important. DaVita, Inc., is one of the largest dialysis- treatment operators in the United States. CEO Kent Thiry created an immersion program for his senior managers, requiring them to spend several days each year alongside technicians or other practitioners. Loews Hotels executives are required to spend a day each year in an entry-level job at one of the hotels. This type of ground-level perspective earns trust and favor with the rank and file in an organization, as well as valuable strategic insight.40.

Although transformational leadership styles have gained increased popularity in recent years, transactional styles may be most appropriate in relatively predictable environments. Because predictability has become less common in recent years, however, many scholars and practitioners see a movement toward a transformational style as attractive for many organizations. Changing the predominant style in an organization—especially from transactional to transformational—can be a difficult process.

Executing Strategic Change

This chapter has outlined the benefits, costs, and considerations for implementing a strategic change. The process can be complex, however, especially in global markets. When German retailer Metro AG entered India, for example, it had to teach farmers how to pick, store, and transport vegetables. Workers used to piling produce on the ground were required to place them in crates to minimize the infiltration of bacteria that can reduce shelf life.41.
Not only is strategic change a complex process but clear, detailed steps for instituting a change are difficult to develop because organizations differ markedly in terms of industry, external environment, strategy, structure, culture, leadership, and other factors. For this reason, a simple three-step process for executing an effective strategic change is presented.42. This model can be applied regardless of the type of strategic change under consideration. In this context, the notion of “strategic change” is broadly defined and includes both changes in a strategy and changes in related factors (e.g., structure, leadership, and culture) that support the success of a strategy.

Recognize the Need for Change

First, the need for change must be recognized, and key managers in the organization must be made aware of that need. Although this step may appear simple at first, some individuals inevitably perceive the need for change before others. In addition, this task may be difficult if the organization currently seems to be going well. From an implementation standpoint, however, the best time to initiate change is when the organization is functionally well, not when it is in crisis. From a practical standpoint, it is difficult to execute a strategic change when only a visionary top executive sees the need to change in the first place.

Firms that are performing poorly are usually first to recognize the need for change and often replace their CEOs with outsiders. These new leaders can sometimes make the decisions that an insider might be reluctant to make while bringing a fresh perspective to the firm and its problems. On the other hand, outsiders may have to spend months learning the intricacies of

the business and developing a network of contacts before they can make decisions of any magnitude. However, hiring an outsider can send a message that current executives are not worthy of promotion.

An organization tends to allocate resources to the factors that led to current success, not necessarily the factors that are associated with future success. To overcome this tendency, leaders should broaden their measurement of performance to include comparisons to their competitors and to industry norms, not just last year’s performance. In addition to the typical economic indicators, such as profitability, earnings per share, and market share, performance measures should also include factors such as customer satisfaction and product quality.

Create a Shared Vision

Once the need for change is established, leaders must inspire organizational members with a vision of what the organization can become if its members are willing to change. The vision might be one of excellent customer service, industry leadership, or a leaner firm following a restructuring. The change effort is not as likely to be successful when members of the firm do not share the same vision for the company’s future organization.

The CEO should lead the effort and should identify and model high performance standards. Transformational leaders seek to stretch their followers’ abilities, and high-performing organizations rarely pursue moderate goals or performance standards. Their public behavior should reflect their own excitement and energy at all levels of the organization.43. Transformational leaders must also effectively communicate their vision to all members of the organization. A lack of vision can cloud organizational efforts whereas clear communication of a vision creates a focus for the employees’ efforts.

Institutionalize the Change

Finally, the firm’s leadership must institutionalize the desired strategic changes. The adage “change starts at the top” is true in this regard. Without a strong commitment from the top executive and his or her top management team, the proposed strategic change is less likely to succeed.

The top executive must also realize that building a lasting change takes time. For example, encouraging organizational members to work and interact in different ways may require a new reward system, and changes may be necessary in systems for pay increases and promotions. Without adequate rewards, employees are unlikely to see involvement in initiating change as worthy of their efforts.44. Minor changes in the system will likely produce minor changes in behavior.

The need for concise, accurate, and timely information is critical at all three stages of the change process.45. A leader should not rely exclusively on his or her associates for information but should be accessible to all the members of the organization and to its customers. CEOs should also actively encourage others on their top management teams to act as devil’s advocates so that group members seek agreement even in the face of conflict.
Top-down change efforts are not always successful. Top managers may attempt to institutionalize an ambitious change without pretesting, education, or employee participation, or they may follow a rigid change procedure that appeared to work elsewhere without

considering unique characteristics of the organization.46. For this reason, a number of bottom-up approaches have been suggested whereby managers and line workers recognize the need for change and develop new strategies jointly. Regardless of approach, the importance of employee participation in the process at all levels cannot be easily understated47. (see Case Analysis 11.1).

Case Analysis 11.1 Step 23: How Should the Alternative(s) be Implemented?

After alternatives have been evaluated and one or more have been selected, a plan for their execution must be developed. Some of the key considerations-structure, culture, and leadership-have been outlined in this and the previous chapter. Concepts concerning the processes of external and internal analysis discussed in previous chapters are relevant as well.

There are no simple outlines for effective implementation, however; each plan is unique to the organization and the alternatives recommended in the previous step. Nonetheless, it must clearly detail precisely how the organization should implement the selected alternative(s). In doing so, potential problems may arise-many of which are an extension of some of the pros and cons aforementioned-and must be addressed. For example, if raising product quality and prices is proposed, the problems associated with present customers who may not perceive the increase in quality or who may not be willing to pay a higher price should be considered. “Hiring a consultant” is not an acceptable recommendation!

Consider the following restaurant example. Suppose, based on the analysis, that it is recommended that Pizza Hut introduce a low-fat pizza. Stating that the organization should “just do it” would not be sufficient. Key questions that would be considered in the plan for implementation include the following:

1. What are the characteristics of the new product (i.e., low-fat cheese, “lite” crust; actual fat and calorie levels should have been discussed in the pros and cons earlier)?
2. Should this product be implemented at all locations simultaneously? What are the pros and cons of doing so?
3. How should this new product be marketed?
4. How will this new product affect sales of existing pizzas? Compared to the low- fat option, some customers may view the regular pizzas as being high in fat.
5. What problems have other fast-food restaurants had in delivering high-quality, low-fat products to their customers?
6. Specifically, what should Pizza Hut do to avoid the pitfalls and/or capitalize on the successes?
7. How much will this new product introduction cost?

Summary

Executing a strategy can be challenging, especially when a significant strategic change is involved. Hence, the decision to institute such a change is not easy. Two key areas associated with executing strategic change—(1) organizational culture and (2) leadership—must be considered. Organizational culture can facilitate or hinder the firm’s strategic actions. Successful strategy execution requires a strategically appropriate culture—one that is appropriate to, and supportive of, the firm’s strategy. Modifying the culture is sometimes necessary, but doing so is usually difficult.

The leadership style of the top executive, and the top management team is also closely linked to a firm’s ability to implement a given strategy. Each leader may adopt a transactional or a transformational style, although most effective leaders utilize both styles to some extent. Effective leadership is critical when a firm seeks to implement a major strategic change.

Key Terms

Adaptive Culture: A culture whereby members of an organization are willing and eager to embrace any change that is consistent with the core values.
Creative Destruction: A process whereby managers consciously and constantly destroy the old by recombining its elements into new forms.
Diversity: The extent to which individuals within an organization are different; what constitutes “different” is often debated, however.
Emotional Intelligence: One’s collection of psychological attributes, such as motivation, empathy, self-awareness, and social skills.
Inert cultures: Conservative cultures that encourage maintenance of existing resources.
Innovation: Developing something new.
Leadership: The capacity to secure the cooperation of others in accomplishing organizational goals.
Leadership Style: The consistent pattern of behavior that a leader exhibits in the process of governing and making decisions.
Organizational Culture: The shared values and patterns of belief and behavior that are accepted and practiced by the members of a particular organization.
Self-Reference Criterion: The unconscious reference to one’s own cultural values as a

standard of judgment.
Strategic Leadership: Creating the vision and mission for the firm, developing strategies, and empowering individuals throughout the organization to put those strategies into action.
Strong Culture: A culture characterized by deeply rooted values and ways of thinking that regulate firm behavior.
Subcultures: Culture within broader cultures.
Transactional Leadership: The capacity to motivate followers by exchanging rewards for performance.
Transformational Leadership: The capacity to motivate followers by inspiring involvement and participation in a mission.
Vision: A view of the future when the mission is achieved in the present.
Weak Culture: A culture that lacks values and ways of thinking that are widely accepted by members of the organization.

Review Questions and Exercises

1. Give an example of an organization whose culture is appropriate for its strategy. Explain.
2. Strategies involving mergers and acquisitions are particularly vulnerable to cultural problems. Mergers between two organizations often are easier to accomplish on paper than in reality. Reality may reveal that the cultures of the organization fail to mesh as easily as corporate assets. Research on the Internet the history of the DaimlerChrysler merger. Learn as much as you can about each original company’s organizational culture. What problems have the companies experienced in combining their cultures?
3. Explain transformational and transactional leadership styles, and give examples of each. Identify the conditions under which each is likely to be effective.
4. To what extent can leaders institute change in their organizations? Practically speaking, how is this accomplished?

Practice Quiz

True or False?

1. Organizational culture can facilitate or hinder the firm’s strategic actions.
2. Because each organization develops its own unique culture, even organizations within the same industry and city will exhibit distinctly different ways of functioning.
3. Transactional leaders inspire involvement in a mission, giving followers a “dream” or “vision” of a higher calling.
4. Most effective leaders exhibit traits associated with both transformational and transactional leadership styles.
5. Because environments have become less predictable in recent years, a transformational leadership style may be most appropriate for the majority of firms.
6. The first step in initiating strategic change is to create a shared vision.

Multiple Choice

7.

Deeply rooted values and ways of thinking that regulate firm behavior characterize .

A. a strong culture
B. a weak culture
C. the organizational culture
D. none of the above
8.

A lack of values and ways of thinking in a firm characterize .

A. strong culture
B. weak culture
C. organizational culture
D. none of the above
9.

In general, an organizational culture .

A.
B.
C.
D.
10.

cannot be changed
can only be changed by a transformational leader
can be changed easily if proper procedures are followed none of the above

The unconscious reference to one’s own cultural values as a standard of judgment is known as .

A.
B.
C.
D.
11.

emotional intelligence
the self-reference criterion global awareness
none of the above

One’s collection of psychological attributes, such as motivation, empathy, self-awareness, and social skills is known as .

A.
B.
C.
D.
12.

emotional intelligence leadership traits leadership style
none of the above

Top-down change efforts .

A. are not always successful
B. can be augmented through employee participation
C. are not necessarily more effective than bottom-up efforts
D. all of the above

Student Study Site

Visit the student study site at www.sagepub.com/parnell4e to access these additional materials:

Answers to Chapter 11 practice quiz questions Web quizzes
SAGE journal articles Web resources eFlashcards

Notes

1. R. D’Aveni, “The Empire Strikes Back: Counterrevolutinoary Strategies for Industry Leaders,” Harvard Business Review 80, no. 11 (2002): 66-74.
2. J. A. Parnell, “Strategic Change Versus Flexibility: Does Strategic Change Really Enhance Performance?” American Business Review 12, no. 2 (1994), 22-30; D. D. Bergh and J. F. Fairbank, “Measuring and Testing Change in Strategic Management Research,” Strategic Management Journal 23 (2002): 359-366.
3. S. Gray, “McDonald’s Menu Upgrade Boosts Meal Prices and Results,” Wall Street Journal, February 18-19, 2006, A1, A7; J. Adamy, “For McDonald’s, It’s a Wrap,” Wall Street Journal, January 30, 2007, B1, B2.
4. M. Marcus, “Gotta Love McDonald ‘ s P rofits,” Forbes, January 22, 2010, www.forbes.com/2010/01/22/mcdonalds-burger-starbucks-markets-equities-earnings- dollar.html (accessed October 28, 2011).
5. G. Fairclough and G. A. Fowler, “Drive-Through Tips for China,” Wall Street Journal, June 20, 2006.
6. S. Warren, “Move to Denver Signals Threat to Southwest’s Low-Cost Model,” Wall Street Journal, November 29, 2005, A1, A6.
7. M. Trottman, “Southwest Air Considers Shift in its Approach,” Wall Street Journal,
   December 23, 2003, B1, B5.
8. E. Scardino, “Sears Looking for the Best Fit,” DSN Retailing Today, February 23, 2004; “Sears Retrenches for the Future: Retailer’s Makeover Includes Layoffs and a Discount Image,” National Home Center News, November 19, 2001; “Home Goods Concept Anchors Multi-Format Strategy,” DSN Retailing Today, December 11, 2000, 49; K. Hutchison, “Sears to Announce Long-Term Plans, Creating Buzz Among Many Analysts,” DSN Retailing Today, October 22, 2001, 2-3; A. Ward, “Sears ‘On Course’ Despite Hard Retail Conditions, CEO Says,” Wall Street Journal Interactive Edition, May 9, 1996; K. Fitzgerald, “Sears, Ward’s Take Different Paths,” Advertising Age, July 31, 1995, 27
9. J. Wohl, “Lampert Offers ‘No Excuses’ for Sears Poor Performance,” Reuters, May 3, 2011, www.reuters.com/ article/201 l/05/03/us-sears-idUSTRE7423OJ20110503 (accessed October 28, 2011).
10. W. J. Duncan, “Organizational Culture: ‘Getting a Fix’ on an Elusive Concept,” Academy of Management Executive 3 (1989): 229-236.
11. M. J. Rouse and U. S. Daellenbach, “Rethinking Research Methods for the Resource- Based Perspective: Isolating Sources of Sustainable Competitive Advantage,” Strategic Management Journal 20 (1999): 487-494.
12. E. H. Schein, “The Role of the Founder in Creating Organizational Culture,”
    Organizational Dynamics 12 (Summer 1983): 14.
13. J. F. Love, McDonald’s: Behind the Golden Arches (New York Bantam Press, 1995).
14. G. A. Yukl, Leadership in Organizations (Upper Saddle River, NJ: Prentice Hall, 2002).
15. E. H. Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1985), 30.
16. D. Tosti and S. Jackson, “Alignment: How It Works and Why It Matters,” Training 31 (April 1994): 58-64; T. Brown, “The Rise and Fall of the Intelligent Organization,” Industry Week, March 7, 1994, 16-21; D. Lawrence Jr., “The New Social Contract Between Employers and Employees,” Employee Benefits Journal 19, no. 1 (1994): 21-24.
17. M. Driver, “Learning and Leadership in Organizations: Toward Complementary Communities of Practice,” Management Learning 33 (2002): 96-126.
18. J. W. Barnes, D. W. Jackson Jr., M. D. Hutt, and A. Kumar, “The Role of Culture Strength in Shaping Sales Force Outcomes,” Journal of Personal Selling & Sales Management 26 (2006): 255-270.
19. G. L. Davis, “Business Ethics: It’s All Inside—JCPenney Grounded in Golden Rules of Business Conduct,” Mid-American Journal of Business 19, no. 1 (2004): 7-10.
20. H. M. Sabri, “Socio-Cultural Values and Organizational Culture,” Journal of Transnational Management Development 9, no. 2, (2004): 123-145; D. W. Pitts, “Diversity, Representation, and Performance: Evidence about Race and Ethnicity in Public Organizations,” Journal of Public Administration Research and Theory 15 (2005): 615-631.
21. The extent to which individuals can control some of these factors is widely debated but is beyond the scope of this text.
22. O. R. Richard, D. Ford, and K. Ismail, “Exploring the Performance Effects of Visible Attribute Diversity: The Moderating Role of Span of Control and Organizational Life Cycle,” International Journal of Human Resource Management 17 (2006): 2091-2109; A. Alesina and
    E. LaFerrara, “Ethnic Diversity and Economic Performance,” Journal of Economic Literature 43 (2005): 762-800; S. K. Horwitz, “The Compositional Impact of Team Diversity on Performance: Theoretical Considerations,” Human Resource Development Review 42 (2005): 219-245.
23. S. Auh and B. Menguc, “Diversity at the Executive Suite: A Resource-Based Approach to the Customer Orientation-Organizational Performance Relationship,” Journal of Business Research 59 (2006): 564-572.
24. A. R. Jassawalla and H. C. Sashittal, “Cultures That Support Product-Innovation Processes,” Academy of Management Executive 16, no. 3 (2002): 42-54.
25. Schein, Organizational Culture and Leadership.
26. A. Zimmerman, “Defending Wal-Mart,” Wall Street Journal, October 6, 2004, B1, B10; A. Zimmerman, “How Wal-Mart Transfers Power,” Wall Street Journal, March 27, 2001, B1, B4;
    B. Ortega, In Sam We Trust: The Untold Story of Sam Walton and Wal-Mart, the World’s Most Powerful Retailer (New York Times Books, 2000); P. Pitcher, S. Chreim, and V Kisfalvi, “CEO Succession Research: Methodological Bridges Over Troubled Waters,” Strategic Management Journal 21 (2000): 625-648.
27. M. A. Köseoglu, J. A. Parnell, and S. Ocak, “Strategic Diffusion and Job Satisfaction Among Physicians: Evidence From Turkish Private Hospitals,” International Journal of Strategic Change Management 3, no. 3 (2011): 169-187.
28. J. R. Darling and T. M. Box, “Keys for Success in the Leadership of Multinational Corporations, 1990 Through 1997,” SAM Advanced Management Journal 64, no. 4 (1999): 16- 20; M. Driver, “Learning and Leadership in Organizations.”
29. W. G. Rowe, “Creating Wealth in Organizations: The Role of Strategic Leadership,”
    Academy of Management Executive 15, no. 1 (2001): 81-94.
30. G. Trumfio, “Managing from the Trenches,” Sales & Marketing Management 146 (February 1994): 39; J. A. Parnell and E. D. Bell, “A Measure of Managerial Propensity for Participative Management,” Administration and Society 25 (1994): 518-530.
31. D.J. Brown and R. G. Lord, “The Utility of Experimental Research in the Study of Transformational/Charismatic Leadership,” Leadership Quarterly 10 (1999): 531-539.
32. J. M. Beyer, “Two Approaches to Studying Charismatic Leadership: Competing or Complementary?” Leadership Quarterly 10 (1999): 575-588.
33. R. M. Fulmer, “Frameworks for Leadership,” Organizational Dynamics (March 2001): 211- 220; and R. M. Fulmer, P. A. Gibbs, M. Goldsmith, “Developing Leaders: How Winning Companies Keep on Winning,” Sloan Management Review (Fall 2000): 49-59.
34. J. Schumpeter, The Theory of Economic Development (Cambridge: Harvard University Press, 1934).
35. J. M. Crant and T. S. Bateman, “Charismatic Leadership Viewed from Above: The Impact of Proactive Personality,” Journal of Organizational Behavior 21 (2000): 63-75.
36. J. Barlow, “Legendary Herb Has Done It His Way,” Houston Chronicle, March 22, 2001, online edition; P. Adams, “Southwest Air Founder, Kelleher, Yielding Reins,” Baltimore Sun, March 20, 2001, 1C; K. Labich, “Is Herb Kelleher America’s Best CEO?” Fortune, May 2, 1994, 44-52; P. O’Brian, “Southwest Airlines Is a Rare Air Carrier: It Still Makes Money,” Wall Street Journal, October 26, 1992, A1.
37. M. Murray, “Why Jack Welch’s Brand of Leadership Matters,” Wall Street Journal,
    September 5, 2001, B1, B10.
38. S. Carey and P. Prada, “Course Change: Why JetBlue Shuffled Top Rank,” Wall Street Journal, May 11, 2007, B1.
39. D. Goleman, “What Makes a Leader?” Harvard Business Review 76, no. 5 (1998): 92-105.
40. J. S. Lublin, “Top Brass Try Life in the Trenches,” Wall Street Journal, June 25, 2007, B1.
41. E. Bellman and C. Rohwedder, “Western Grocer Modernizes Passage to India’s Markets,”
    Wall Street Journal, November 28, 2007, B1.
42. N. M. Tichy and M. A. Devanna, The Transformational Leader (New York: Wiley, 1986).
43. A. M. Mohrman Jr. et al., Large-Scale Organizational Change (San Francisco: Jossey- Bass, 1989), 106.
44. A. J. Nurick, “The Paradox of Participation: Lessons from the Tennessee Valley Authority,”
    Human Resource Management 24 (Fall 1985): 354-355.
45. W. Bennis, “The End of Leadership: Exemplary Leadership Is Impossible Without Full Inclusion, Initiatives, and Cooperation of Followers,” Organizational Dynamics 28, no. 1 (1999): 71-80.
46. N. P. Archer, “Methodologies and Tools for E-Business Change Management,” presented at the 24th Annual McMaster World Congress, Hamilton, Ontario, Canada (January 15-17, 2003).
47. M. Beer, R. A. Eisenstat, and B. Spector, “Why Change Programs Don’t Produce Change,” Harvard Business Review 68, no. 5 (1990): 158-166.

Strategy + Business Reading: CEO Succession 2010: The Four Types of CEOs

Booz & Company’s annual study of turnover among chief executives — now increasingly diverse, as the world’s largest companies migrate to emerging economies — suggests that the nature of the job varies with the role of the corporate core.
by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson

Every year, Booz & Company takes a long and penetrating look at CEO succession among the world’s top 2,500 public companies. Our research now goes back consecutively to 2000, giving us 11 years of perspective on the tenure and position of these global business leaders. Each year we consider a new dimension in our study of CEO succession. This year, we looked at the role of the CEO and its effect on tenure and turnover. How hands-on are the CEO and his or her senior team? How do they engage themselves with the businesses they lead? We found that these factors have a noticeable effect. The more involved headquarters is in operational decision making in any given company, the more tenuous the CEO’s tenure is likely to be.

Exhibit 1 Global CEO Turnover, 2000-10

Source: Booz & Company analysis

We also found several noteworthy trends this year. There is a steep decline in CEO turnover worldwide: A higher proportion of chief executives are staying in office than we saw in 2009. (See Exhibit 1.) That doesn’t mean that governance is growing more relaxed; the rates of CEO turnover are still much higher in general than they were in the 1990s, and the pressure on performance remains as great as ever. But it does suggest that some basic trends in CEO hiring and oversight have solidified as standard practice. Last year, we referred to the 2000s as a “decade of convergence and compression,” and this pattern continued in 2010. Around the world, for example, fewer CEOs are also board chairmen this year than was the case the year before, and more CEOs are being appointed from inside companies, rather than from outside.

In one respect, however, the largest public companies are becoming more diverse: They are increasingly based in emerging economies, rather than in the mature economies of the United States, Canada, western Europe, and Japan. For years, in compiling our list of the 2,500 largest publicly held companies in the world (as ranked by their market capitalization), we have observed this gradual migration. (See Exhibit 2.) To explore the implications more closely this year, we divided our study sample over the past 11 years into mature and emerging economies (based on the United Nations’ Human Development Index for 2010), and then further broke out the BRIC countries (Brazil, Russia, India, and China). We found that the share of companies from emerging markets in our sample has grown at a compound annual growth rate of 14 percent over the past 11 years; BRIC representation has shot up 24 percent annually. China, in particular, shows staggering growth, accounting for one in five new entries in our sample this year (83 of the 415 new members of the world’s 2,500 largest companies).

Exhibit 2 The World’s Largest Public Companies by Region

Source: Booz & Company analysis

Note:See “Methodology,” for an explanation of how countries were classified.

For those who see North America and western Europe as the commercial centers of the world, the news is even more striking; for the first time, almost half the companies on the list are located outside those two regions. In fact, the number of the top 2,500 companies based in the U.S., Canada, and western Europe has fallen some 28 percent altogether since 2000.

Finally, a significant milestone was reached in 2010: More than one-quarter of the top 2,500 public companies now have their headquarters in emerging economies. Could this suggest that global enterprise is nearing a geographic tipping point? Within a few years, if this pattern continues, the companies in the world’s mature Western economies could represent a minority of our sample. Already, the Asian economies (China, Japan, rest of Asia) are the new center of gravity in terms of global market heft, with 895 companies in this year’s sample versus North America’s 772 companies and Europe’s 619 companies.

Global Turnover in 2010

This shift in the mix of companies in our global sample is already influencing CEO succession trends, as companies with new governance structures and different growth arcs come to the fore. (See “A Tipping Point for the Global Economy,” by Ivan de Souza and Edward Tse, below.)

For example, one can surmise that the growing presence of Chinese companies in our sample helped bring down the global rate of CEO turnover this year. Because of their high degree of government ownership, China’s biggest companies manifest extremely low CEO turnover—half the global average. In 2010, CEO succession worldwide hit a six-year low of 11.6 percent; Chinese companies’ turnover was only 5.2 percent.

However, the overall drop in turnover in 2010 is not solely China’s doing; in general,

there was a sharp reduction in both forced and planned turnover at the top. There are several possible reasons for this. First, the global recession’s lingering effects influenced companies to keep a steady, seasoned hand at the helm. Second, boards have gotten better at selecting CEOs and ensuring their smooth succession. Finally, given the historically high rates of forced turnover in the last few years, there were fewer companies that hadn’t made a recent change in chief executives.

Global Governance Trends

We broke down the data to assess what it means for today’s boards as well as for sitting and aspiring CEOs. Many long-term trends in governance still hold. Boards around the world increasingly separate the roles of chairman and CEO, especially in North America, where only 14 percent of incoming CEOs were assigned both titles in 2010 (versus 52 percent in 2001). Related to this trend is the practice of appointing an outgoing CEO as board chairman, to apprentice the incoming CEO. We continue to see this model growing in prevalence—except in Japan, where it has long been the norm (it accounts for more than two-thirds of successions there).

Another Japanese tradition, appointing insiders, is also becoming a worldwide phenomenon. Among the 291 succession events we assessed in 2010, insiders ascended to the CEO spot 81 percent of the time. Insiders also last longer — in 2010, those insiders leaving office had lasted on average 7.1 years, versus 4.3 years for outsiders. This is not surprising; insiders have historically produced superior returns for their shareholders. Last year was no exception. Insider CEOs leaving office generated total shareholder returns on a regionally adjusted basis of 4.6 percent as compared with 0.1 percent among outsiders.

On average, compared with 10 years ago, CEOs are being appointed at a later age. The average appointment age among outgoing CEOs in 2010 was 52.2, versus 50.2 in 2000. This suggests that boards continue to value experience in selecting a CEO. In tracking outgoing CEOs, we found that the percentage of chief executives who had previously served as CEOs of a public company has risen markedly over the past 11 years, from 4.3 percent in 2000 to 15.2 percent in 2010. And in 2010’s incoming class, more than half (51 percent) of new outsider CEOs came from within the same industry
—suggesting that boards are getting more particular about the type of candidates they are seeking.

Exhibit 3 The Growth of Public Companies in Emerging Economies

Source: Booz & Company analysis

Companies in emerging economies-not only in Brazil, Russia, India, and China (the BRIC countries), but also in the “next 11” countries named by Goldman Sachs: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, and Vietnam-are in hyper-growth mode. They are on the early and steep side of what we at Booz & Company call the arc of growth: the natural evolutionary cycle of any country or region as it enters the industrialized economy. Meanwhile, the mature economies of North America and western Europe are confronting challenges in generating further growth- challenges that have only been exacerbated by the economic turmoil of the past few years. The global recession has exaggerated the dichotomy between rapidly growing BRIC and the next 11 countries on the one hand, and those in the Organisation for Economic Co-operation and Development on the other.

Furthermore, companies based in these emerging economies have far greater access to capital markets than they did even five years ago. Investors now perceive these economies more favorably, and the senior management of these companies have become more worldly in their outlook. Companies can now capitalize through IPOs, finance additional activity, and fund acquisitions in their own geographies as well as abroad (including in North America and western Europe).

Finally, companies in the world’s emerging economies enjoy significant resource advantages. It’s little wonder that demographically advantaged countries, such as India and China, and countries endowed with natural resources, such as Russia and Brazil, have seized the lion’s share of the growth in global GDP over the past several years.

Although these general truths apply to all emerging economies, China’s story has some unique elements. First, despite being publicly listed, the largest Chinese companies in our sample are still controlled by the state, which retains a substantial ownership stake. (Of the 232 Chinese companies on our global list of 2,500, the state owns all of the top 10.) The Communist Party appoints the chairman and the CEO of these enterprises from a roster it maintains of industry experts. (That said, the Chinese government has installed Western-style boards of directors in the top government-owned enterprises in China, and these boards exercise a good deal of authority.) Finally, given the high degree of government oversight, companies in China often enjoy distinct positional advantages, at least domestically, and M&A activity is rare. These factors all help explain why China’s CEO turnover is so low compared with that of other countries. (See Exhibit 4.)

Exhibit 4 CEO Turnover Rate by Region in 2010

Source: Booz & Company analysis

In the coming years, we should see Chinese companies and their emerging- market peers open up more and more to the rest of the world, in terms of both mind-set and footprint. Chinese business leaders, by necessity, will maintain a more international outlook; this will undoubtedly have an impact on CEO succession in years to come.

Methodology

The 2010 CEO Succession study identified the world’s 2,500 largest public companies as measured by their market capitalization (per Bloomberg) on January 1, 2010. Booz & Company research team members based in India, China, Romania, Chile, the United

Arab Emirates, Italy, France, and the United States then identified the companies among the top 2,500 that had experienced a chief executive succession event and cross-checked data using a wide variety of printed and Electronic sources in multiple languages. For a listing of companies that had been acquired or merged in 2010, we again used Bloomberg. In considering relative market capitalization, we did not adjust for currency exchange rate fluctuations, which have an insignificant effect over time because they quickly adjust to market reality. (We also note that China’s currency is pegged to the U.S. dollar.)

We investigated each company that appeared to have changed its CEO to confirm that a succession event occurred in 2010, and for the 291 confirmed companies, we compiled demographic, career, and governance structure details on both outgoing and incoming CEOs (as well as any interim chief executives), including age, tenure, title, career path, prior experience, education, and chairmanship, among others. In the analysis of CEO succession by tenure of outgoing CEO (Exhibit 6), insider/outsider status (Exhibit 7), and CEO background (Exhibit 9), we excluded turnover events involving interim-appointed CEOs, and those resulting from mergers and acquisitions.

We accepted company-provided information for all data elements except for the reason for the succession. For that, we consulted outside press reports and other independent sources.

Total shareholder return data for a CEO’s tenure was sourced from Bloomberg and includes reinvestment of dividends, if any. Company return data was then regionally market-adjusted (against the return of the local regional index over the same time period) and annualized.

Corporate core classification of each of the 291 companies experiencing a succession event in 2010 was based on multiple factors (e.g., number and diversity of business units, degree of shared activities, number and percentage of top-line versus functional managers), as well as Booz & Company expertise on industry and geographic operating models.

To distinguish between mature and emerging economies, we followed the United Nations’ Human Development Index 2010 ranking, which classifies countries with a score above 0.788 as “very high.” Mature economies include South Korea, Australia, the Czech Republic, Poland, and Hong Kong; emerging economies include Turkey, Saudi Arabia, Mexico, and South Africa. For the purposes of this study, Hong Kong and Macau are classified as separate from China.

CEOs are also staying in office for less time, compared with 11 years ago. For outgoing CEOs, the mean tenure was 18 months shorter: 6.6 years in 2010 versus 8.1 in 2000. In particular, the length of planned tenures—in which the CEO departs on a date that has been prearranged with the board—has dropped by 30 percent over the last 11 years, from 10 to seven years. These findings suggest that CEOs are finding the demands of the job more pressing than their predecessors did.

Four Models of Management

This year we applied an additional lens to our study of CEO succession events at the world’s

largest companies by examining the impact of the corporate core. The corporate core is made up of the CEO, his or her senior team, and a defined set of support functions necessary for the entire corporation. Back when the senior management team of a typical large company could all have offices in one location, this was known as headquarters. All corporate cores provide leadership, create the context for growth, represent the corporation to the public and investment community, and provide essential services to the business units, which are consigned maximum responsibility for money-making activities. That’s where the similarities among companies end. As any CEO can tell you, each corporate core is a unique blend of skills, responsibilities, and personal management styles tailored to the nature of the businesses it oversees and the competitive environment in which it operates. On the basis of our in-depth experience with hundreds of corporations at Booz & Company, we have found that they fall along a spectrum of four different corporate models — defined by the way senior management and the corporate core engage with the rest of the business. (See Exhibit 5.)
The first model, at one extreme, is the highly diversified holding company—distinguished by its arm’s-length approach to managing its subsidiary operations. Holding companies add value through strong portfolio management. The second model is the strategic management company, which offers guidance and leadership on strategic direction and provides expectations of performance for its group of related businesses. The third model involves more active management. These corporate cores oversee more tightly linked businesses and advise on operational issues. The fourth corporate model is the highly operationally involved company, in which senior management plays an active role in day-to-day business decision making.

Exhibit 5 Models of Corporate Management

To briefly sum up each model from the point of view of a business unit leader: Holding companies want your results. Strategic management headquarters want to know what you will do. Active management corporate cores want to know how you will do it. And operationally involved executive teams want to work closely with you in running the business.

As part of our research on CEO succession and related issues, we have interviewed chief executives working within these models. Their experience sheds light on the operation of these models, the patterns of CEO succession that seem to follow the models, and the implications for business leaders.

Holding companies (Model 1) manage their businesses much as a financial fund manager oversees a portfolio of investments. The CEOs of this first group of companies have a minimal degree of involvement in operational decisions. They are primarily interested in results, not in how the results are generated. The corporate core establishes and ensures managerial and financial discipline. Holding company chief executives are a level removed—they focus on portfolio management while the second-tier executives run the businesses. If there is a problem, more often than not, its fallout is felt at that second management tier.

Warren Buffett, CEO of Berkshire Hathaway Inc., typifies this type of management. As he noted in his letter to shareholders in the 2010 annual report, “At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years…and call me when they wish. And their wishes do differ. There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A ‘hire well, manage little’ code suits both them and me.”

Strategic management companies (Model 2) exercise a bit more oversight in managing their operations. The corporate core offers strategic guidance to its local businesses, but not the supervision of operational decision making. A good example is the Korea-based LG Corporation, a US$104 billion company originally known for its brand name Goldstar. (LG once stood for Lucky Goldstar.) At first glance, because of its global operations spanning consumer electronics, mobile communications, home appliances, chemicals, and more, LG might seem to fit the definition of a diversified holding company such as Berkshire Hathaway. But Juno Cho, president and CEO of LG Corporation, notes that the company’s corporate core has always operated more in a strategic management model.

Cho describes his role, and that of other senior management, as closely engaged in strategic goal development with executives of subsidiaries such as LG Chemical and LG Electronics, where central core team members often sit on the boards. “We effectively agree on strategic goals and targets with the businesses and give them accountability,” says Cho. Once each year the group chairman of LG Corporation conducts a consensus meeting with the presidents of all the business units to discuss, understand, and agree on their annual business plan. “This is the backbone of our communication,” says Cho. “Corporate executives chair the board of each business unit, so we have a real-time understanding of performance, but it would be impractical to get deeply involved in operational matters. Since LG is such a big organization, the corporate core limits its voice to brand-building, R&D expenditures, high- level human resources decisions, and capital investment.”

Active management companies (Model 3) have a corporate core that starts to share accountability with the business units for major operational decisions and adds value through close guidance and expertise. John H. Hammergren, chairman, president, and CEO of the McKesson Corporation, a leading pharmaceutical distributor and healthcare IT company based in North America, describes his corporate core as moving back and forth between the strategic and active management models.

“We want our businesses to drive the McKesson culture,” says Hammergren, “but the corporate executive team also wants to guide the businesses on how they do it. We follow a similar approach when it comes to leadership development—whereas with sales training, we expect the businesses to take the lead, because sales training is more specific to their business.”

Hammergren says that the corporate officer group at McKesson performs several key roles. “First, it sets the culture: the tone at the top—for example, what standards we are going to hold for ourselves, both at the executive committee level and in our interactions with the leaders of the business units. Second, corporate upholds a set of principles that ensure all of our business units put the customer at the center of everything we do. Third, we manage the cadence of the management team: in other words, how we plan our strategy; how we conduct our operating reviews; what we expect of the business units; and what processes, like Six Sigma and the corporate calendar, we use to drive results.” The top group also establishes the rules of engagement between the corporate core and the business units, determining when businesses should expect that headquarters will be involved, and when they can assume the authority and decision-making power to move forward on their own.

“We manage the corporation through two key management teams,” says Hammergren. “The first is the executive committee, comprising my direct reports; the second is an operating team that consists of the presidents of the major businesses. I inspect each major business at least quarterly, and I’m actively involved in the budget-setting process and leadership decisions at the business unit level. The executive committee meets every other week to take up performance within the various businesses, large M&A transactions, Wall Street expectations, deployment of capital, leadership development, succession planning, balance sheet management, board reporting, overall corporate strategy, and those kinds of issues.”

Hammergren notes that it would be extremely difficult to move McKesson to a model of full operational involvement. “Given the complexity of our company, it would be impossible for the CEO to call the orders every day on the execution side. I wouldn’t be close enough to the fight to know which way to send the troops; and the people who run these businesses would get disenchanted and disheartened, because I would probably not do their jobs as well as they do them.”

Operationally involved companies (Model 4) are enterprises in which the corporate core is involved in management more directly. This does not mean that the CEO and top team are involved in every aspect of day-today management; execution remains the business units’ domain. Rather, the corporate core adds value through the development of cross-company capabilities and functional expertise, and gets involved in strategic decision making for most or all business units. Because of the highly engaged nature of the corporate core in managing the business, these companies are typically focused within a single industry.

Ford Motor Company under CEO Alan Mulally is a good example of an operationally involved corporate core. According to an Economist article published December 9, 2010, Mulally began to convene weekly meetings of his senior team soon after he arrived in September 2006. He pushed the attendees to bring up operational problems and collaborate in solving them. When the head of Ford’s operations in the Americas admitted that his group had a serious problem with defective parts, instead of falling from grace, he was applauded by Mulally, who exclaimed, “Great visibility.”
To maintain a tighter rein on the carmaker’s fundamental business, Mulally and his key lieutenants decided to concentrate on the Ford brand and divest the Premier Automotive Group—a collection of high-end brands that had been acquired under previous regimes. The company quickly sold Aston Martin, Jaguar, Land Rover, and Volvo. Ford also decided to produce a much narrower range of cars built on a few core platforms, focusing on quality and flexibility. At one point, Ford produced nearly 100 different models around the world; now it is down to a third of that number and may go lower. For clarifying and simplifying the

management challenges at Ford, “you cannot believe the difference this makes,” noted Mulally.

The Most Challenging Corporate Model

As part of this year’s study, we identified which of the four corporate core models applied most closely to each of the 291 companies that experienced a succession event in 2010. We based our analysis on such factors as the number and diversity of business units, the degree of activity sharing among those units, and the number and proportion of senior line and staff managers. We also called on our own firm’s industry expertise and our direct experience with many of these companies. The breakdown that emerged from this sample was broadly consistent with what we have observed in the general population of global corporations—10 percent were holding companies, 20 percent were strategic management companies, 30 percent were active management companies, and the most numerous, at about 40 percent, were operationally involved companies.

The corporate core model clearly seems to influence the CEO’s experience in office. For the 291 succession events that occurred worldwide in 2010, the tenure of the CEO in the operationally involved companies was unquestionably shorter and riskier. In fact, the tenure of a holding company CEO is a third longer, on average, than that of an operationally involved CEO. (The median tenure of a holding company CEO departing office in 2010 was 6.5 years, whereas the median tenure of an operationally involved CEO was only 4.9 years.) Moreover, CEOs in Model 4 companies are much more likely to depart during their first four years than CEOs in the other three models. (See Exhibit 6.)

This departure rate at operationally involved companies was particularly high for outsider CEOs—those who were hired from another company. Outsiders are generally more pressured; in all categories except holding companies (in which only one outsider CEO left in 2010, a chief executive who had lasted for a statistically anomalous 17 years), they stayed in office for less time on average than their insider counterparts. Outsiders at Model 4 companies had the shortest tenure of all: on average, only 3.3 years in office. (See Exhibit 7.)

Exhibit 6 Tenures of Outgoing CEOs

Source: Booz & Compay analysis

Note: Excludes interim-appointed CEOs and turnover resulting from M &B. Sums may not total 100 due to rounding.

Why was CEO turnover higher in Model 4 companies? It wasn’t because of inexperience: The proportion of Model 4 outgoing CEOs who had prior CEO experience was higher than in any other model group. Nor was it a matter of a lack of coaching or support. The apprentice CEO model is more prevalent at operationally involved companies than at holding companies (38 percent as compared with 32 percent), and Model 4 headquarters organizations are much larger, as a rule. However, CEOs in Model 4 companies face some particular challenges:

Exhibit 7 Tenure for Insider and Outsider CEOs

Note: Excludes interim appointed CEOs, turnover resulting from M&A, and outsiders in holding companies.

Source: Booz & Company analysis

1. Operationally involved companies are more likely to be acquired. M&A successions are most common among Model 4 firms (in 2010, they represented 52 percent of non- planned turnover, versus 40 percent at Model 1 companies and 26 percent at Model 2 companies). Because Model 4 companies typically focus on a single industry or business, they are often attractive targets for acquisition. And although Model 1 and 2 companies may engage in M&A activity more frequently, they typically buy and sell subsidiary units, not whole companies, so the CEO position is usually not affected.
2. Operationally involved CEOs more often succumb to board and power struggles. These struggles accounted for 57 percent of the forced (non-planned and non-M&A) turnover at Model 4 companies in 2010. By contrast, in Model 2 companies, poor financial or managerial performance was the main driver of forced succession. (See Exhibit 8.) In a single-line or closely related set of businesses, it is easier for the board to apply strict scrutiny to a CEO’s strategy, and power struggles with other knowledgeable insiders are more likely.

Exhibit 8 Caused of Non-Planned Turnover Sums may not total 100 due to rounding Source: Booz & Company analysis
Note: Forced Turnover Cases—all those except M&A in this exhibit—are categorized on the basis of official company statements, multiple press releases, or other verified

sources. “Job demands” are cases in which the CEO position was deemed to have been too demanding or not a good fit for the outgoing CEO’s capabilities.

3. Operationally involved and active management CEOs are more likely to also hold the chairman title. This is twice as likely, on average, as it is in the other two models. Overall, only one in 10 CEOs has this dual role, but the more involved the corporate core is in the business operations, the more likely the double role is to appear. (See Exhibit 9.) The correlation between actively engaged corporate cores and “double- hatted” CEO/ chairmen is particularly strong in Europe.

Exhibit 9 Some CEO Characteristics among Corporate Models Note:Excludes interim-appointed CEOs and turnover resulting from M&A. Source: Booz & Company

At first glance, this correlation seems puzzling. Double-hatted CEOs are subject to immense job demands in any company; they run both the board—which is charged with scrutinizing their strategy—and the business. In Model 3 and Model 4 companies, their roles would be even more demanding. One may surmise that this trend is either an anomaly (in which case we will probably see it diminish in future years) or a sign that some boards still believe that a single leader accountable for the entire company provides the most effective form of governance.

Advice for the New CEO

Few CEOs would interpret these findings as a suggestion to adopt the holding company model. After all, most companies have developed their corporate core structure over time, to match their unique portfolio of businesses and their competitive strategy. No one model is inherently better than another, and it is neither practical nor desirable to move your corporate model away from what the business requires.

However, if you are the CEO in a Model 4 company, you should recognize the especially demanding nature of this job. It requires hands-on management and greater accountability, and your exposure to disruption is therefore higher. More than one-third of operationally involved CEOs are replaced within four years; indeed, your role may involve quietly building value to become an acquisition target. Model 4 boards tend to be more informed and engaged in monitoring strategy, and the competition for the chief executive position can be more intense — there are often several candidates well versed in the business vying for the position. These challenges will be all the more formidable if you are hired from outside.

Of course, CEOs at companies with other core models also face great pressures. As we noted earlier, planned-succession tenures, overall, have dropped from 10 years to seven since 2000. In a large company, seven years can be a very short time to set an agenda and execute it. Nonetheless, as an incoming CEO, you should adjust your expectations accordingly, and be prepared to demonstrate early wins in the first few years to solidify your position.

If you are a board member or senior executive in search of a long-term CEO, you face a different, but equally immense, challenge. As they develop through their careers, very few candidates will automatically receive the breadth of general management experience and

functional expertise needed to oversee a large global enterprise. In a Model 1 company, up- and-coming executives have the early opportunity to run a P&L, but they may not get a broader sense of the whole portfolio or develop strong functional skills. By contrast, in a typical Model 4 company, there will be a cadre of executives with high levels of functional expertise and strong industry knowledge, but their general management experience may be less robust.

It is the responsibility of sitting CEOs and boards to plan for succession by building a bench of well-rounded candidates that transcends any management development limits in their corporate core model. Model 1 and 2 companies need to help their general managers cultivate functional and portfolio management skills. Model 3 and 4 companies need to give their functional specialists general management experience. Thoughtful executives planning their own careers would do well to take on roles that help fill the gaps.

If you are a new CEO, awareness of your corporate core model can help you establish a better position. For example, a new CEO coming from the outside into a company with an active management model can lay the groundwork for success early by appointing well- regarded insiders to one or two top jobs, to engage the organization more effectively. Similarly, in last year’s study, we highlighted the growing importance of regarding the board of directors as a strategic partner. This advice is crucial if you are the CEO of an operationally involved company, especially given the fact that skirmishes with the board account for most CEO dismissals in those companies. The more effective your engagement is with the board, the more likely your succession is to be a planned one.

In general, chief executives need to adapt their personal management style to the company’s corporate core model. This may be particularly challenging if you are a new CEO in a Model 1 or Model 2 company. More likely than not, you were an operationally involved business unit head before taking the top job. Now, you will have to deliberately learn to delegate accountability for running the businesses so you can focus on adding value to the larger organization.

No matter where you sit on the corporate core spectrum, the challenges of being the CEO of a major corporation are considerable and growing, while the window you have to address and overcome those challenges continues to narrow. Never has the job been more exciting … or more daunting.

Reprint No. 11207

Author Profiles:

Ken Favaro is a senior partner with Booz & Company based in New York. He leads the firm’s work in enterprise strategy and finance.
Per-Ola Karlsson is a senior partner with Booz & Company based in Stockholm. He is managing director of the firm’s European business.
Gary L. Neilson is a senior partner with Booz & Company based in Chicago. He focuses on operating models and organizational transformation and is a leader of the firm’s work on organizational DNA.
Also contributing to this article were Booz & Company senior associates Alexis Bour and Kenji Chikada and s+b contributing writer Tara A. Owen.
http://dx.doi.org/10.4135/9781506374598.n11