Short term performance vs. long term power
As I’ve written in earlier blogs, the single biggest challenge facing CEOs and other C-Suite leaders in well-established companies is how to find the right balance between funding the businesses they have versus making significant enough investments in next generation businesses so they can deliver material revenues and profits to the company. Said another way, this challenge pits the demand to deliver short term quarterly earnings against the desire to create long term market power. This framework and concept has been one that my brother, Geoffrey, and I have been developing together and sharing with senior leadership teams for the past several years. Even after numerous discussions and use case examples, it still tops the list as the toughest set of decisions they confront year in and year out.
Power generates performance but performance consumes power
The big aha moment for senior leadership occurs when they realize that while power generates performance, performance consumes power. This means that if the company continues to overweight investments in current businesses so as to deliver short term performance, it will eventually liquidate the company’s long term power to grow.
Then how should senior leaders make those internal investment decisions to enhance competitive performance on both fronts?
First, by understanding that decision making that optimizes short term performance and quarterly earnings is about management, while decision making that increases the company’s future power to grow is about leadership.
And second, by understanding the different skills and capabilities necessary to move from a management mindset to a leadership mindset.
Deciding between knowns and unknowns
In most cases, all the necessary data for a manager to make a performance-based decision is available and it’s a matter of assessing and comparing “known options” and selecting the one that has the best potential to deliver the desired short term results. By contrast, in many cases all the necessary data is not available to a leader who is trying to decide what new business opportunity has the greatest potential to improve the company’s long term growth prospects.
Leadership development is really management development in disguise
Most well-established companies have put together elaborate leadership development programs designed to identify their high potential managers and develop them into future company leaders. These programs include everything from:
- The Company’s Values and Code of Conduct
- Leadership skills and capabilities assessments eg: Myers Briggs
- University based development programs
- Offsite leadership team building exercises
- Job rotations
While a number of these programs help aspiring managers acquire broad skills and knowledge, in most cases all the practical examples and exercises are designed to help them make better management decisions not leadership decisions. Some of you reading this may be thinking – “so what’s wrong with that?”
What’s wrong with that is that the emphasis on management training, under the guise of leadership development training, only reinforces a silo based organizational structure. And silo-based decisions are primarily made within SBU’s and major support functions rather than across the enterprise. This results in management decisions that favor short term results trumping leadership decisions that favor long term growth.
I’ll give you an example of that in one word: Microsoft. For thirteen years they’ve been making these silo-based decision tradeoffs, and for thirteen years they’ve failed to launch a material next generation business and the market has kept the company’s stock flat during that time period.
How does a company break out of this management decision-making stranglehold?
The easy answer would be to say that the CEO is ultimately responsible for all major leadership decisions. In some cases, such as Apple’s extraordinary performance in the last decade (they successfully launched 3 next generation businesses that all delivered material new revenue and profits to the company), the primary driver of that performance was the company’s CEO, Steve Jobs. But in most organizations, the CEO needs to rely on input from a number of senior leaders who bring industry, market and customer experience and expertise to the table.
The hard answer then is to improve the quality of the decision-making process and not rely on the illusory promises of leadership development programs.
Based on our work with clients, here are four suggestions for how companies can change their leadership decision making processes:
1. Review and evaluate all next generation business opportunities the quarter before the company begins its annual planning and budgeting process. The reason for this is that if you allow next generation business opportunities to compete directly for resources with established businesses, the former always loses out to the latter.
2. Launch only one new business at a time. The biggest mistake well-established companies make in this arena is they spread their resources over multiple opportunities ensuring that no one will have sufficient support and funding to produce material returns.
3. Run each next generation business like a startup with a dedicated business development SWAT team who are compensated solely for getting the business to scale. The reason for this approach is that most well-established companies’ ability to support a new business opportunity that hasn’t produced material revenues and profits will stop after 24 to 36 months.
4. Allocate a significant portion of all the discretionary bonus of each member of the senior leadership team to the success of the new business. If not, they will have no incentive to provide resources and support for the new effort.
Following these four suggested process steps for leadership decision making is no guarantee of success, but it sure increases the odds of success over trying to develop leadership decision making skills and capabilities in a classroom or an executive retreat.
As always, I am interested in your comments, feedback and perspective on the ideas put forth in this blog. Please e-mail them to me at firstname.lastname@example.org.