Is your company underperforming? Use the full CEO playbook
There are many things new CEOs can do to try to right a foundering ship, but what should take priority?
– Congratulations! You have just been named the CEO of XYZ Inc. Unfortunately, the company you’re inheriting isn’t doing so well. It’s bloated, it’s lagging behind competitors, and the culture has ossified. There are many things you could do to try to right this foundering ship: a management reshuffle, cost-cutting, a business unit launch or sale. But what should take priority? How many initiatives can you undertake without creating chaos? And how quickly do you have to act?
This month’s Super Bowl, where the New England Patriots came back in a thrilling win after trailing the Atlanta Falcons for most of the game, brought to my mind some important parallels with the corporate world. The new CEOs I advise who take over underperforming companies often worry about being overly aggressive. Obviously the status quo isn’t working, but they figure a struggling company can only handle so much change at once. So they start tentatively, maybe launching a strategic review or bolstering the management team, but leave the big moves for year two or three. In short, they shy away from staging the big rally that could turn the whole game around.
My experience and that of my colleagues has long suggested this isn’t the wisest path, but until recently we only had anecdotal evidence. So we launched an extensive study of new CEOs’ strategic moves to put an empirical foundation under our advice. We discovered that fortune favors the bold – and this adage is particularly true if your company is lagging behind the field.
The data shows that new CEOs of corporate laggards who make four or more strategic moves in the first two years deliver, on average, 3.6% higher returns to shareholders than peer companies do. Their less bold counterparts who make fewer moves get ahead by only 0.4%.
What is it about action on multiple fronts at once that makes such a huge difference on results?
One reason is that corporations tend to be resistant to change. If you only change one thing, the organization will find a way of absorbing that shift without substantially changing its overall habits. It’s like trying to become healthy: you can start going to the gym, but unless you also improve your diet and get adequate sleep, your next check-up may not show a significant improvement.
When a new leader comes in and initiates a series of major strategic moves, that sends the message of serious intent not just to improve but to transform. That, in turn, unlocks institutional energy – it’s a new day and everyone needs to rise to the challenge.
One way to think about the issues when inheriting an underperforming company is to ask: what would happen if the business was acquired by a competitor? Chances are the buyer would have a 100-day plan for creating substantial value from the deal and wouldn’t shy away from tackling multiple problems at once.
One client I worked with who took over an industrial multinational in need of a shake-up told his management team to imagine being acquired by a private equity firm. What would they do? “I’m going to make sure that we do it ourselves,” he told them. So he launched a strategic review and an organizational redesign, took the company out of some regions, sold some businesses, and reshuffled management. This series of moves freed up a lot of cash, which he used to make a few big acquisitions. He did all this within the first two years of his tenure. He knew he would be pushing the organization’s capacity to cope, and was gratified to see many executives embrace the transformation. The share price went up significantly, neither private equity nor activist investors came calling, and the company is now a stand-out performer in its industry.
While I now feel more confident in advising new CEOs to act aggressively and quickly when entering a troubled organization, it’s critical to fit your actions to the context. There is no single chief-executive playbook. If you simply do what other incoming CEOs did successfully but in different situations, the results can be disastrous.
Our research shows, for example, that an organizational redesign (such as moving from a business unit structure to a matrix organization) tends to be beneficial at well-performing companies, but such a complex undertaking is more likely to cause chaos when new CEOs launch them at poorly performing ones. In contrast, a strategic review is much more beneficial in organizations that are having trouble (delivering a 4.3% performance boost), as is reshuffling management (an 0.8% increase). But the best results happen when new CEOs take several of these actions quickly.
So now that you have celebrated your new appointment, take a deep breath and get ready to act. Maybe watch a replay of the recent Super Bowl for inspiration. The worst thing you can do is sit on your hands.
You can read more about our research on how new CEOs can make the biggest impact here.
Michael Birshan is a partner in McKinsey’s London office.
Originally published on LinkedIn.