Are You Focused on the Right Thing?
By Thomas a Stewart, Chief Marketing and Knowledge Officer of Booz & Co.
If you were to name this century's standout CEO in the consumer packaged goods industry, whom would you choose? Odds are you'd pick-me, too-Procter and Gamble's A. G. Lafley, who led the company from 2000 to 2009, during which time sales doubled and profits rose fourfold, an awesome performance by any standard.
But if you had to name the five companies in the category with the highest total shareholder return in that period, well, no one would win that office pool: From 1999 to 2009, the leaders are Reckitt Benckeiser, Alberto Culver, Inter Parfums, J. M. Smucker, and Tupperware, each of which delivered an A-plus return above 300%. (The company you’ve never even heard of, Reckitt Benkheiser, makes Woolite, Calgon, and French’s Mustard, among other products, and produced about 650% for shareholders.) My Booz & Company colleagues Steffen Lauster and Elisabeth Hartley explain the success of this quintet by arguing that the advantages of scale have generally declined in the industry (except when it comes to expanding into emerging markets) while the benefits of focus have soared, with the result that the biggest winners have been companies that concentrate their resources and collective intelligence to leverage capabilities in relatively narrow product portfolios (To read more, please see: Does Size Matter? Rethinking The Importance Of Scale in Consumer Goods Companies).
But get this: The more focused a company is, the more likely the CEO will lose his job. Or so it seems. Booz’s just-released annual study of CEO succession this year and looked at turnover rates for companies with four different leadership styles, ranging from the CEO who is hands-on and operational (think Alan Mulally of Ford) to the hands-off leader of a holding company (e.g., Warren Buffett at Berkshire Hathaway). In 2010 there were 291 changes in command at the world’s 2,500 largest companies. Among them, the study notes, “the tenure of a holding company CEO is a third longer, on average, than that of an operationally involved CEO.”
Now, these data are more like peaches-to-mangos than apples-to-apples. The turnover data look at all industries, not just consumer packaged goods; the time frames are different; and there’s not a one-to-one mapping between leadership style and company focus - it’s possible for successive CEOs of the same company to approach their role differently. Generally, though, there’s an understandable correlation between how focused a company is and the CEO’s direct involvement in operational decisions.
It’s troubling to think that company focus could be good for shareholders and bad for CEO tenure. There are benign explanations. Focused companies are more likely to be acquired. (Alberto-Culver, for example, is in the process of being swallowed by Unilever.) A takeover usually costs the target CEO his job.
Still, it’s troubling to ask: Could strategic decisions that benefit shareholders be bad for a leader’s job security? Can a CEO make moves that protect himself while hurting returns? There are at least three ways in which this happens:
Pursuing growth for growth’s sake: CEOs- especially new ones-are under tremendous pressure to show top-line growth. (Same is true for anyone with a p&l.) But market conditions don’t necessarily oblige. You might want to grow by 10% this year, but there might only be 4% worth of healthy, profitable growth out there-or next year, or the one after that. Do you have the guts to resist the temptation to fill out the rest with Hamburger Helper? London Business School professor Donald Sull writes about the strategy of “active waiting” for the right opportunity to grow. He’s right-but your boss (or your board) might not see it that way.
Diffusion of accountability: When things go wrong, an operationally involved CEO has a hard time pointing a finger at anyone but himself. The more remote you are from the details, the more opportunities you have to avoid paying the price for under-performance. It’s the old “ prepare three envelopes” joke. I actually lived it once, sitting at the table with a leadership team when our boss said, “I’m getting a lot of heat. We’d better reorganize.” A few months later, he escaped to a new job.
Copying your competitor: Your strategy is - or ought to be-different from your rivals’. Why is it, then, that executives find themselves tempted to imitate a strategy that worked for the other guy? Odds are it will be less successful for you. At the same time, though, chances are you won’t get criticized-after all, it’s a proven strategy, right?
These pathologies aren’t confined to people in corner offices. I’ve exhibited them. You have, too. It takes discipline to understand your company’s path to prosperity and stick to it, especially when it leaves you exposed.
Watch the video below featuring Guy Rigby, Head of Entrepreneurs of Smith & Williamson, discussing why it's important to develop a business strategy.
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