Tuesday, February 26, 2013

The Myth of the Great Man in Business Strategy

James Kwak has a very good post up on J.C. Penney's choice of CEO. The key point is that the new CEO was the head of retail operations at Apple and J.C. Penney's sales have fallen based on his new strategy.

Kwak mentions two questions that most companies don't bother to ask when looking for an outside CEO:

There are two important questions they tend not to ask, however. First, was Apple successful because of Johnson, or was he just along for the ride? Yes, he was the main man behind the Apple Store (although, according to Walter Isaacson’s book, Steve Jobs was really the genius behind everything). But was the success of the Apple Store just a consequence of the success of the iPhone?

Second, even if Johnson was a major contributor to Apple’s success, how much of his abilities are transferable to and relevant to J.C. Penney? There’s a big difference between selling the most lusted-after products on the planet and selling commodities in second-rate malls. When someone has been successful in one context, how much information does that really give you about how he will perform in a new environment?
Based on these questions there are a couple of points I want to pick up.

Related to the first question companies rationally realize that picking the wrong strategy can be absolutely disastrous. A new CEO provides an opportunity for a new direction and new vision for the company.

The mistaken conclusion from this observation is twofold. First, the ability to pursue a strategy has much more to do with the long investment of the company in its personnel and internal organization than it does with the man at the top. This is the great man myth in action and is a major problem with American corporations which tend to be biased towards top management, leading to erosion of talent at the bottom and a need to promote people who have a strong comparative advantage in their current position but that need to be promoted to be retained due to wage differentials (someone being a spectacular salesman/programmer/administrator has nothing at all to do with whether they would be successful in a more senior position; different skill sets requiring different aptitudes; compressed pay scales at the bottom and exponentially increasing salaries above median income mean that specialization in front line positions is a career killer in most fields). We see this in frequent complaints about the inability of businesses to find skilled workers at lower levels (of course they're in short supply, we no longer invest in training them or with providing them with adequate wages) and with the disproportionate incomes going to top positions (this problem is present in non-profits as well, though there is the problem with non-teachable assets like social network connections for fundraising or for opening the door to large accounts).

Second, there is the illusion that a winning strategy can be foreseen by someone of talent and ability rather than being a random product of the pressures of competition and unforeseeable shifts in the marketplace. Where a winning strategy can be foreseen by genius we generally see multiple more or less equivalent entrants simultaneously (this is most easily illustrated by scientific inventions, such as the telegraph, than by business practices). Since markets usually can only support a limited number of competitors over time consolidation and large fortunes can be made by a correct strategy, look at Microsoft for a great instance of this. In general, however, while a losing strategy is extremely costly there are numerous competing equally plausible strategies that can be inferred from the information available. Only a handful of these strategies will be successful. The major pitfall here is that while choice of strategy couldn't matter more we deceive ourselves into thinking that choosing among those strategies is a rational choice and pay CEOs and other high level executives based on this. In actual practice, there will be more rational strategies than there are successful participants making this choice essentially random once obviously flawed strategies and the obviously unqualified are eliminated.

Regarding the second question raised by Kwak, there is a tendency for people to think of merit as being something holistic rather than task specific. My experience since rejoining the private sector (and this is admittedly anecdotal) is that the price signal tends to send too easy of a metric for most businesses to bother with more difficult to measure metrics. This is in stark contrast to when I worked for the state where a great deal of time and effort went into finding ways to make difficult to quantify qualities measurable. While this was not always remarkably successful, it did point to a realization that what is important isn't always easy to measure and that it is necessary to find ways to measure these qualities as objectively as possible. In business, the ease with which the bottom line can be measured tends to shut off discussion of the need for other metrics and a more granular analysis meaning that long term strategy, efficiency, and internal development gets pushed out in favor of easier to quantify metrics like volume and short term profitability.* This of course isn't limited to talent management, though I think it is part of the problem with selection at the upper reaches of the corporate hierarchy and with pay scales that are out of proportion to the marginal contribution.

I'd also add that I see a generally poorly conceived of notion of talent/merit (or whatever else you want to call it) in business. There is a tendency to thinking success is transferable and that it is inherent to the individual. I believe a stronger conception is that the main difference between individuals is learning curves, outside of absolute extremes of individual aptitude, most anyone can learn to do most any job; the difference is in how long it takes an individual to master the necessary skillset. As talent development programs have eroded (we see few apprenticeship programs today, and strong internal development programs and lifetime employment are the exception rather than the rule in the US today, unlike when we were true global leaders in business), it has become more difficult to find individuals with the necessary skill set bidding up salaries for individuals lucky enough to have held these positions as well as making businesses look at often irrelevant criteria for choosing leadership. Very few jobs require an individual to be able to quickly pick up new skills or rapidly internalize new information, even most high level jobs require the repeated application of a limited skill set rather than continual absorption of vast amounts of new material (not that these jobs don't exist, but they are relatively rare and swamped by the need for high level social connections).

The end result is that we are compensating individuals in top positions vastly beyond what they are worth and hollowing out the skills of those beneath them through underinvestment. We have a narrative of the great man** which justifies this and that downplays the systemic and institutional factors that are the true controllable drivers of success or failure. This is not to downplay the importance of business strategy, but to point out that the choice of a correct strategy is generally not something that has a rational or predictable basis. It is much more possible to control internal talent development*** and to develop an organization internally than it is to correctly guess the best choice for top talent. Yet our business culture seems to focus on the top and has generally weak measures for assessing how to develop efficiency throughout the organization.

* This isn't to say that the bottom line isn't important. But we continue to see obvious inefficiencies, both at the individual corporate level and systemically. For instance, cost saving environmental changes changes are instituted only slowly (though picked up very quickly at the marketing level, which I feel is a strong piece of evidence for my thesis here); we see lights left on and businesses seem to be unable to adapt to seasonal weather changes (why are office buildings always too cold for business casual even when it costs a fortune to cool these buildings, in a rational world suits would be largely optional during summer?). We see a push for long hours despite evidence that productivity begins to drop sharply after 40 hours a week (and actually starts dropping before 40 hours, more like around 30 something, though this drop is not as sharp). Systemic issues seem invisible, why American businesses haven't been lobbying the government to take medical obligations off their books and reduce pension obligations through stronger social insurance is one of the strongest pieces of evidence I'm aware of that businesses' voice is just that of their wealthy owners rather than independent. I could go on at some length, but it is very obvious that business rarely think much beyond volume, direct costs (so lighting or heating/cooling costs aren't figured into production), and profitability without much attention paid to long term development or systemic issues.

** People like a good story about the individual, look at most any American movie. We attribute corporate success not to decades of focus on talent development and internal culture but to the individual at the top. In rare cases this focus is correct, but more often we are looking at survivorship bias where many equally talented people vied for few available positions. It's hard for most of us to pay sustained attention to indirect factors so we tend to attribute causes to individual will rather than the efforts of the thousands of individuals who deserve credit for the success of a project.

*** This is made difficult by the increased tendency towards mobility and the willingness of businesses to poach each others talent. It is often an optimal strategy to redirect the funds that a business would be paying to internally developing talent to instead offering higher salaries to poach the talent developed by others. While these strategies are individually rational they serve to make all of us poorer. I don't really see a solution but have to add this as another mechanism where private interest makes us collectively, and many of us individually, poorer.


  1. I see this happening in the government as well. There is a deskilling of the workforce - the training provided is mostly for soft issues - and real, actual work being contracted out. I guess the contractors are not getting the golden pension. And then you see how the incompetence and lack of understanding of problems at high level stalls improvement and efficiency in service delivery and cost reduction.

  2. I definitely somewhat agree with that, though I think deskilling is further along in the private sector than the public. We recently moved for her job again so I am back on the job market, something I have observed is how much better public sector job ads are at accurately describing a position and desired qualifications than private sector ones are. The human resources departments just seem to have their shit together to a greater extent than private sector employers.

    That said, my experience in the public sector has also taught me that despite having relatively good HR these people often have their hands tied by overly restrictive employment oversight as well being inefficiently slow for a number of reasons. Also, some private sector employers do stand out from the pack for having great HR, but this is minority. I'd also add that based on many interviews I've been on over the past few weeks even good HR in the private sector is more likely to have some communication issues with the local people doing the hiring than I've experienced in the public sector.