January, 1998, Volume 2, Number 4

Turnover and Selection of Chief Executives

Rakesh Khurana has interviewed both company directors and executive search firms, and he finds that well connected directors -- defined as those who hold directorship with other leading companies -- acquire superior information about prospective outside candidates for the chiefexecutiveship of their firm. Because of better access to information about external possibilities, well connected directors are, as a result, more likely to pick an outside executive to become CEO.

Separately, Rakesh Khurana and Nitin Nohria examine the impact of a CEO's departure and replacement on later company performance. They find that when chief executives step down as they reach the natural end of their tenure, the appointment of an outsider can lead -- compared with the appointment of an insider -- to reduced financial performance. Conversely, if the CEO has been forced out for reasons of poor performance, the appointment of an outsider can lead -- again compared to the elevation of an insider -- to better financial results.

Implications: Add directors to your board who are familiar with an array of other leading companies and executives, and go for an outside replacement when poor performance has forced out the present executive.

Source: Rakesh Khurana, "Director Interlocks and Outsider CEO Selection: CEO Positions as Open and Closed to Competition," 1997; Rakesh Khurana and Nitin Nohria, "The Effects of CEO Turnover in Large Industrial Corporations: A Study of the Fortune 200 from 1978-1993," 1997, Harvard Business School. E-mail: <rkhurana@hbs.edu> and <nnohria@hbs.edu>

Into the Zone

Adrian Slywotsky and David Morrison urge that companies redraw their centers -- from product and market-share centric to customer and profit centric. With detailed portraits of how the greats have done it -- including Jack Welch of GE, Roberto Goizueta of Coke, Andy Grove of Intel, Michael Eisner of Disney, Percy Barnevik of ABB, and of course Bill Gates of Microsoft -- The Profit Zone identifies the strategic, organizational, and leadership choices for moving a firm out of a "no-profit zone." It chronicles and explains the choices that these executives faced and followed as they transformed their companies into the lucrative enterprises that they have become.

How do you discover your own profit zone? Find out what is important to your customers and then identify what you can best deliver them in that arena -- or a new one. A surprising number of companies fail to raise such issues, and in case you haven't, the authors offer a "handbook" to guide you through a rethinking of questions ranging from "who should be my customers" to "what is my strategic control point?"

Robert Goizueta posed the first question and concluded that his customers should number more than Coke-drinking consumers: They should include the independent Coke-bottling and distributing companies as well. He answered the second by moving to control the worldwide system for distributing his product to ensure its availability whenever and wherever anybody becomes thirsty -- and even better that it is the only choice available.

Source: Adrian Slywotsky and David Morrison with Bob Andelman, The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits. New York: Times Books/Random House, 1998.

Think Strategically

The Wharton School and the Graduate School of Education of the University of Pennsylvania are developing three programs for public officials and managers of state-owned enterprises in the People's Republic of China:

National School of Administration Senior Management Program: A two-to-three week course in Beijing for senior government officials that focuses on China's transition into a competitive economy in the global market.

Jiangsu Management Development Program: A six-to-eight week management development program in Philadelphia for officials and executives in Jiangsu province that concentrates on the economic principles and management practices of market-driven economies.

Shanghai Executive Development Program: A two-week program in Shanghai for managers of state-owned enterprises and multinational companies in China that focuses on general management development and leadership.

Information is available from Stephen Kobrin <kobrins@wharton.upenn.edu> and Scott Koerwer <koerwerv@wharton.upenn.edu>

What works and what does not work in building teams at the executive level:

"Self-managed senior teams don't work," for they "need a leader, or at least an agreed-upon leadership process."

"Remotely located teams work less well than teams in physical proximity."

"Laissez-faire or consensus leadership doesn't work."

"Ill-defined objectives, processes, and rewards hamper performance."

Teamwork "makes sense when" people have "real and compelling strategic or operational interdependence."

"Even the most effective teams need continuing maintenance."

"Teamwork starts with the CEO."

-- Paul A. Allaire, Chairman and Chief Executive, Xerox Corporation, 1998

Source: Paul A. Allaire, "Lessons in Teamwork," in Navigating Change: How CEOs, Top Teams, and Boards Steer Transformation, edited by Donald C. Hambrick, David A. Nadler, and Michael L. Tushman. Boston: Harvard Business School Press, 1998.