“Be bold and be right. If you’re not bold, you’re not going to do much of anything. If you’re not right, you’re not going to be here. – What Steve Ballmer told Satya Nadella when he handed over the CEO tenure at Microsoft.
It’s quite reasonable that a newly appointed leader would want to reduce risks by playing it safe. After all, they operate in uncertain and complex environment, where at least half of the business variables cannot be controlled. However research shows that playing it safe isn’t the mind-strategy of top performing leaders.
On contrary.
Top leaders are known for being able to create a bold vision statement at the intersection of market needs, company’s capabilities and it’s passion. Further, top leaders are known for adopting strategies that follows their vision and sustains their performance over a certain period of time.
Analysis of 3925 largest global companies over a fifteen-year span shows that big strategic moves differentiate average company from top-profit generator. CEOs who make these moves earlier in their tenure outperform those who move later. Those who do so multiple times in their tenure avoid an otherwise common decline in performance over time.
Top five Strategy Practices for driving an average performance to top-profit generators:
1. Buying and Selling
The best CEOs execute at least one deal per year on average, increasing marketing cap to more than 30% over a ten year period. This means that best CEO posses great strength in identifying, negotiating and integrating acquisitions. Top CEOs are also always shaping and improving their portfolio, not only by acquisition but also by divestitures.
2. Investing
Top CEO strive for the company’s investments to be big enough to move the needle. Therefore, their capital expenditures to sales ratio (company’s investments in property, plant, equipment, and other capital assets to its total sales) needs to exceed 1.7 times the industry median over ten years.
3. Improving Productivity
The most successful companies reduce administrative, sales, and labor costs more significantly than others. By doing so they achieve 25% more productivity improvement than their industry’s median over a ten-year period.
4. Differentiating
The best CEOs improve their business models and create pricing advantages in ways that are big enough to change a company’s trajectory. As a result, their companies achieve an average gross margin that exceeds the industry’s by 30 %or more over a decade.
5. Allocation
Allocation is a vital enabler of the above four strategic moves. By allocating more than 60% of its capital expenditures among business units over ten years, top CEOs create 50% more value than companies who allocate more slowly. Resource reallocation involves capital, as well as shifting operating expenditure, talent, and management attention to where it does makes the most sense.
The role of a top performing CEO is to determine which big strategic moves make sense for their company. Making big moves is risky, especially in complex and uncertain environments. It’s always easier shrink back and play safe, yet the best CEOs show courage to act in the face of uncertainty and boldly stay the course.
Source: Dewar C, Keller S, Malhotra V (2019) CEO Excellence: The Six Mindsets That Distinguish The Best Leaders From The Rest. Scribner.
Image: Alamy, Paul Bettany for Margin Call, 2011