A New Leader's Guide to Diagnosing the Business

In their 2008 article in the Harvard Business Review, Gottfredson et. al. noted that from 1999 to 2006 the average tenure of departing chief executive officers in the United States declined from about 10 years to slightly more than eight.  A 2006 survey by the outplacement firm Challenger, Gray & Christmas found that 40% of the CEOs who left their jobs that year had been in office for an average of just 1.8 years.  Data like this not only highlights the difficulties and risks associated with being a CEO, it also makes it clear that a new CEO has a very limited window, often no more than a few months, from the time she or he assumes the position to identify challenges, threats and opportunities and begin executing plans for the key tasks in front of them, which may include boosting profitability, increasing market share and/or overtaking competitors.
In order to have the best chance for getting off on the right foot, the new CEO must have a simple diagnostic tool to identify the company’s distinctive strengths and weaknesses and unique combination of threats and opportunities and determine what goals are reasonable and where the CEO and the rest of the management team should focus their performance-improvement efforts.  Gottfredson et. al., relying on collective decades of experience Bain and Company working with new CEOs, argued for a systematic diagnostic template that reflected an understanding of the fundamentals of business performance (i.e., the basic constraints under which any company must operate), was both comprehensive and focused (i.e., covering all the critical bases of the business, but only those bases, without requiring any waste of time or resources on less important matters), and lent itself to easy communication and action.  The recommended template, as presented in detail in the article, was built on the following four principles that defined any successful performance improvement program and certain questions associated with each of the principles:
First Principle: Costs and prices almost always decline.

• How does your cost slope compare with your competitors’?
• What is the slope of price change in your industry right now, and how does your cost curve compare?
• What are your costs compared with competitors’?
• Who is most efficient and effective in priority areas?
• Where can you improve most, relative to others?
• Which of your products or services are making money (or not) and why?

Second Principle: Your competitive position determines your options.

• How do you and your competitors compare in terms of returns on assets and relative market share?
• How are the leaders making money, and what is their approach?
• What is the full potential of your business position?
• How big is your market?
• Which parts are growing fastest?
• Where are you gaining or losing share?
• What capabilities are creating a competitive advantage for you?
• Which ones need to be strengthened or acquired?

Third Principle: Customers and profit pools don’t stand still.

• Which are the biggest, fastest-growing, and most profitable customer segments?
• How well do you meet customer needs relative to competitors and substitutes?
• What proportion of customers are you retaining?
• How does your Net Promoter Score track against competitors’?
• How much of the profit pool do you have today?
• How is the pool likely to change in the future?
• What are the opportunities and threats?

Fourth Principle: Simplicity gets results.

• How complex are your product or service offerings, and what is that degree of complexity costing you?
• Where is your innovation fulcrum?
• What are the few critical ways your products stand out in customers’ minds?
• How complex is your decision making and organization relative to competitors’?
• What is the impact of this complexity?
• Where does complexity reside in your processes?
• What is that costing you?

Gottfredson et. al. argued that use of the template should result in the identification of three to five critical change initiatives that should be at the core of the new leader’s actions toward improving performance.  The template is designed to help companies understand exactly where they are starting from and exactly where and how the business can be improved.  However, time is a scarce resource for the new leader and a lot of data must be gathered and analyzed quickly, which means that the she or he must be able to rely on other senior leaders of the company to form and manage teams that can address and answer as many of the questions posed above as possible and distill their findings down into short, focused presentations that highlight the main threats and opportunities and allow the CEO and other senior managers to quickly understand the decisions that must be made in the areas that are of the most immediate importance.
Getting the first change initiatives right is obviously important to a successful tenure for a new CEO; however, the work does not stop there.  As noted by Bower, the CEO must also have the the ability to judge where the world and the company’s markets are headed, and frame a vision of how the company should reposition itself; the ability to identify (and if needed recruit) the talent that can turn this vision into reality; an understanding, in a deep and substantive way, of the problems the company faces; and comprehensive knowledge of how the company really works, including being fully embedded into the firm’s administrative inheritance and deep and trusting relationships with key players.   Answering the questions above are a step toward competence in each of these areas.  For example, understanding the organization, and the problems faced by the company, begins with assessing the complexity of decision making and organization.  Insider CEOs, leaders who have grown up inside the organization, should already have a sense of the answers to each of the questions posed above; however, they must be prepared to bring an outsider’s cool objectivity to the process and make tough decisions that may disrupt the traditional way of doing things.  Hopefully, the deep relationships that insider CEOs have developed over the years will serve them well in convincing entrenched internal interests of the need for change.
The original source for this article is M. Gottfredson, S. Schaubert and H. Saenz, “A New Leader’s Guide to Diagnosing the Business”, Harvard Business Review, February 2008, 63; and J. Bower, “Solve the Succession Crisis by Growing Inside-Outside Leaders”, Harvard Business Review, 85(11) (November 2007).
This article appears in  “Corporate Governance: A Handbook for Sustainable Entrepreneurs”, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be accessed and download here.   Keep up with the activities of the Project by connecting with Alan Gutterman, the Project’s Founding Director, on LinkedIn and following him on Twitter and on Facebook.