The 'What if...?" scenario aids in succession plans

By John A. Lanier

Succession planning may have an undeservedly morbid connotation. Many entrepreneurial leaders, including family business founders, define themselves through their business. Ironically, failing to plan may bury their legacy with their coffins. William J. Rothwell makes a holistic and compelling argument for succession planning in his book Effective Succession Planning: Ensuring Leadership Continuity and Building Talent from Within (4th edition). Rothwell advises leaders to proactively develop a talent pool in response to, and in support of, strategy.

In my more than three decades of advising business owners, I have encountered some unfortunate succession planning scenarios. One such example is shared here. Concurrent with the phenomenally successful growth of a manufacturing company was the founder’s obvious discomfort in delegating authority. High-potential subordinates eventually pursued other opportunities when they realized the lack of career development potential. Consequently, bench strength evaporated. The CEO’s children entered the business out of college. Unfortunately, he lacked the patience to mentor them. Because of the earlier talent exodus, there was no logical coaching alternative. The board of directors consisted of friends who were disinclined to question the leader’s tactics. Informed stakeholders—including lenders, customers and vendors—discreetly speculated that the company would fold should the owner become indisposed.

The business had evolved into one the largest employers within a wide radius; thus, the local economy became increasingly vulnerable to the fate of the firm. According to the U.S. Bureau of Economic Analysis data, the loss of a manufacturer has a 1.4 economic multiplier effect. Although civically minded, the founder did not grasp the systemic implications. A succession disaster was narrowly averted, but the company endured unnecessary stress amid a plethora of painful lessons.

Ram Charan, Stephen Drotter and James Noel write in The Leadership Pipeline: How to Build the Leadership Powered Company (2nd edition) that “succession planning is perpetuating the enterprise by filling the pipeline with high-performing people to ensure that every leadership level has an abundance of these performers to draw from, both now and in the future.” Real-life examples like the one outlined above underscore the wisdom of succession planning. Family business leaders would do well to address succession proactively with a “What if…?” scenario framing technique.

Playing offense

Historically, that which successfully led a company “here” may not propel it to reach “there.” For example, General Electric is the only remaining member of the 30 companies in the original Dow Jones Industrial Average. As prosperous businesses expand, the skills required to lead them evolve. In addition to planning for survival, leaders must plan to succeed. Two corollaries are raised. First, what does the boss delegate? Second, to whom does the boss delegate?

The term “boss” is deliberate. In addition to the CEO, other positions are relevant. Even in flat organizations, there is an optimal team size. James Brickley, Clifford W. Smith Jr. and Jerold Zimmerman, co-authors of Managerial Economics and Organizational Architecture (4th edition), argue that effective team size ranges from five to 24 members, with a sweet spot of six. As workload eclipses bandwidth, both lateral and hierarchical hiring is expected. Brickley et al. continue that CEOs should be guided from inception by three key components of effective organizational design: decision rights, performance management and rewards.

Bruce W. Tuckman and Mary Ann C. Jensen write in the journal Group & Organizational Studies that organizations generally follow a common life cycle: forming, storming, norming, performing and adjourning. Effective succession planning averts adjournment. As business leadership transitions from norming toward performing, clarity is gained on customer purchasing decisions. Scalability is among the strategic challenges, i.e., beating competitors to market domination.

The business model has processes. These processes require technical, behavioral and leadership competencies. If the existing team does not have these skills, the corrective options are training and hiring. Sluggish responses to growing pains may induce (1) voluntary and involuntary turnover, (2) urgently forced fits with existing employees, and (3) settling on “good enough” instead of superior new hires. All three inflict undue strain on the organization. The hiring option—even if for growth—is not as simple as it may seem, as cultural assimilation delays the attainment of effective performance. Collectively, these issues place the business culture at risk. Amid chronic time constraints, the overwhelming majority of small-business leaders address these issues reactively. Shifting to proactive leadership enables the business model to achieve a competitive advantage.

Consider an organization’s customer relationship responsibilities. For a startup or small company, the CEO may double as the chief sales officer. Over time, autonomous sales professionals may be hired. As sales teams grow, managerial and leadership functions evolve. Highly trained professionals are more effective and efficient. Moreover, the company may safely rely on a leveraged managerial ratio. Conversely, less experienced salespeople need more developmental supervision. While great individual contributors may neither aspire to the managerial ranks nor be suited for the responsibilities, the company nonetheless has better options for internal promotion from a highly talented pool of sales professionals than would be the case without such a reservoir of talent. Even in good times, posing “What if…?” questions may reveal issues whose resolution can prevent momentum disruption.

Playing defense

Another way to think about succession planning is risk mitigation. One of the tools I use in my practice is a SWOT, an acronym for Strengths, Weaknesses, Opportunities and Threats. I encourage my clients to apply SWOT analysis to major processes or functions, e.g., marketing, sales, product development, procurement, production, delivery and customer service. In complement, we typically add the support functions of information technology, finance and human resources.

To substantiate the value of this technique, consider the results of a typical SWOT exercise. One of my clients positioned a key individual as a “fellow,” i.e., stature without subordinates. This individual contributor was the “mad scientist” in the product development laboratory who plugged away on ideas that resulted in patented products. The fellow was known for his eccentric behavior. His superior intellect manifested in impatience with employees who could not quickly grasp his creative vision. The CEO’s solution was isolating him as a direct report. This initially brilliant solution worked so well that no one noticed how many years lapsed in that structure. Approaching retirement, the CEO realized that this structure might not work for her successor. Even worse, the fellow might be a flight risk to an unaccommodating successor! Unlike Thomas Edison, the fellow was not rigorous in his documentation. Unprotected intellectual property, i.e., tribal knowledge, resided in his head. The solution delayed succession for a year. Resolution entailed building a robust and scalable process that mirrored the fellow’s intuitive routines. The solution doubled as a documentation mechanism and tribal knowledge transfer medium.

When the SWOT tool reveals weaknesses—defined as business model deficiencies, but within control of the company—effective leaders react quickly to mitigate the risk. “What if…?” scenario analysis is a practical complement to SWOT analysis. Turnover is the wrong time to realize that only one person knows how to execute a mission-critical function.

A tough but beneficial technique

The U.S. Small Business Administration reports that half of small business startups survive at least five years. One-third of them survive at least ten years. Allowing a company that achieved survivor status to languish or fail for insufficient succession planning would be both unfortunate and unnecessary. Consequently, succession planning is worthy of prioritized CEO attention.

In The 5 Levels of Leadership: Proven Steps to Maximize Your Potential, John C. Maxwell states that teams may lose with good players, but they are unlikely to win without good players. One of the ways to institutionalize a winning tradition toward a differentiable legacy is to achieve Maxwell’s leadership levels 4 and 5—people development and pinnacle, respectively. People development is direct leadership. Pinnacle leadership is teaching others to be people developers.

Basic succession planning principles will get leaders off to a solid start. First, document what the business model does. Second, identify responsible parties for those processes. Third, capture the required technical, behavioral and leadership competencies. Fourth, develop or outsource training in support of those competencies. Fifth (and juxtaposed against growth), ask where new employees may be found, i.e., recruitment channels. Sixth, resolve to evaluate and manage performance relative to promotion potential, status quo, development or termination.

Applying the “What if…?” scenario is a tough but beneficial talent pool assessment technique used by effective leaders in anticipation of both capitalizing on opportunities and averting unanticipated disasters.

John A. Lanier is founder and CEO of Middle Market Methods (www.middlemarketmethods.com), a consulting firm serving portfolio companies of middle-market private equity firms.

 

 

 


 

 

 

Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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