Does Leadership Make a Difference?

1 April 2009 Dr Michael Jarrett

The influence of leadership on the success of an organisation is reliant upon several key factors. As London Business School’s Dr Michael Jarrett explains, the role of vigilant management teams is one of the most significant.

The British retail chain Marks & Spencer went through a difficult patch at the end of the 1990s. Its UK profits tumbled from a record high of £1bn in 1997 to £146m four years later. Management was regarded as complacent, costs were high and the share price dropped two-thirds.

The rough waters of the market shocked the company out of its complacency. M&S is a British institution: Margaret Thatcher and John Major – along with a third of the British public – claimed to have bought their underwear from the store. Stuart Rose took the helm in 2004. Even the announcement of his role was met with external turbulence, as he recounted in 2007:

‘I met with non-executive director Kevin Lomax at 10.30 in the morning on 27 May 2004. By 2:00pm, retail investor Philip Green, now Sir Philip, had signaled his intention to launch an £8bn hostile takeover bid. By 6.00pm, the company’s bankers had asked if I could meet with the board the next morning.’

Rose understood that he needed an approach that was outside-in and inside-out. Scanning the external environment, he quickly realised that the competition was fierce, fashions for the company’s target markets were changing, and relying on the iconic M&S brand was not enough. Wal-Mart and ASDA were fiercely attacking the traditional M&S market.

A review of the inside of the organisation helped Rose realise that the company’s drive for consistency had become a ‘core rigidity’ – a cultural blocker. The company had become old fashioned.

M&S was slow, tied up in legacy and poor implementation. It was time to break through these organisational barriers. Rose had to increase the company’s internal capabilities to change, cutting out the inefficiencies.

Rose had a turnaround on his hands, but he failed to fully understand the scope of the problem until he saw the books the weekend he agreed to become CEO. A self-described ‘bricks-and mortar man’, he set out with a back-to-basics strategy agenda with three items: improve the product, improve the stores and improve the service.

He found ways to cut costs and increased sales by getting more customers through the door. On the cost side, the company reengineered the supply chain so that it could compete with the likes of Next. Costs were slashed. Rose fired a legion of consultants involved with ‘strategic projects’. Products were rationalised and prices cut to increase competitiveness. At the time of his arrival, M&S had 16 sub-brands and over 35 weeks-worth of stock, valued at £3bn. Set against only £4bn takings in the first half of the year, the company had a serious problem. Its ‘buy stock six months in advance’ guideline was a legacy of the old days when M&S sold its own quality brand.

Efficiencies and economies had worked well, but the fashion market was moving so quickly that the company bought too much and found itself with mountains of stock that it could not shift. ‘We had no choice but to sell it at a discount rate and take a hit on our margins,’ Rose said. M&S also off-loaded its financial-services business, which had been dogged with poor press and regulatory difficulties. Rose then focused attention on the company’s core products. The entire management team helped launch the changes, from a new floor layout and refurbishment programme to a strong brand and advertising strategy aimed at the traditional M&S market: the middle-aged, middle-income woman. The team also bought in new products to increase the take-up of younger shoppers, including the womenswear brand Per Una.

Rose had to engage the management board, staff and shareholders in his recovery plan. Staving off a hostile bid from arch-rival Sir Philip Green, who put down an £8bn bid for the company, Rose had to spend his first few months gaining commitment to his ideas and creating a sense of belief in his proposals. He managed to secure a stay of execution by promising improvements to the analysts and investors. The company gained £2bn in value, and in January 2007 the share price topped the previous high.

Managing the complex network and dependencies of external and internal dynamics marked the success of M&S’s turnaround. On the first day of 2008, Stuart Rose was knighted for ‘services to the retail industry and to corporate social responsibility’. However, his journey is far from over. Slippage in growth of 2.2% since 2007 over 12 months compared to rivals’ growth of 3.2%, a fall in profits wiping a third off share value and an attack on their market share means there is still more work to be done. Such are the fortunes of change.

Leadership teams matter

The M&S story shows a management team’s ability to turn around a company despite tough conditions. You can affect the odds of change by the way you respond. Without the support and alignment of his team, Rose would not have been successful. So how do teams like Stuart Rose’s do it? There is far more to it than the familiar story of the hero’s journey. He needs all the help he can get.

The environment is a significant determinant in organisational outcomes. However, researchers and academics suggest that it is the leadership group that can act as the final arbiter of environmental variability and performance. The leadership group’s role is to manage the boundary between the external and internal dynamics of the organisational system. They form the guiding coalition that makes strategic and political decisions about the organisation’s policies, direction and structure. Managerial characteristics of tenure, age and their attitude and cognitive response to the organisation’s performance will also impact strategic change.

"The leadership group's role is to manage the boundary between the external and internal dynamics of the organisational system."

Management are the agents that Nobel economist Ronald Coase in 1937 dubbed ‘entrepreneur-coordinators’. They provide routines for management practices and lie at the heart of decision making. Their role as the ‘strategic apex’ provides thought leadership and competence to the rest of the organisation. They influence where the organisation is going, the culture and the conditions that help, as well as the other internal capabilities.

Studies show that the cognitive maps of our leaders – the ways in which they think – act as significant constraints, keeping them from seeing beyond what is in front of their noses. It is illustrated, for instance, by how long it took Polaroid to change direction: it took nearly two decades for the company, once famous for innovation, to shift from film to digital technology. Management believed and clung to the idea that R&D in the existing technology was important even though digital technology was gaining pace.

The leaders’ cognitive and mental frames prevented adaptation until a new CEO stepped in and broke the dominant mental spell. A research which has pricked my interest comes from Stanford’s Kathleen Eisenhardt and Mark Zbaracki.

They undertook a meta-analysis of corporate decision making to determine the basis for their decision outcomes. The pair discovered that most management teams are fundamentally irrational. The study showed that teams made strategic decisions based on insufficient information, or that they were ‘driven by politics’. The third but smaller category was ‘garbage can’ decision making: as the saying goes, garbage in leads to garbage out. Therefore, how top managers perceive and interpret their context has a significant impact on an organisation’s capability and mobilisation for change.

A London Business School survey of 5,000 executives highlighted two things that make a real difference to those companies that were successful in change: how well they scanned the environment and how well they made sense of the data.

Scan your environment

Senior management teams that constantly scan their strategic environment tend to outperform their less vigilant counterparts. This involves using both external data – such as competitive analysis and customer insights – as well as internal and soft data, information they pick up in corporate corridors or through industry networks and grapevines.

The work of scanning should be done by the strategic apex of the organisation: those at the top and who span the boundary between the internal and external worlds.

The detection of new trends and subtleties in the environment is often a stimulus for change. It can help managers anticipate movements, preventing them from being taken off guard by sudden events. It also means that managers plan contingencies as the environment changes rather than waiting until it is too late. It is an early-warning system for potential dangers as well as opportunities.

Tesco, one of the world’s largest retailers, is renowned for constantly keeping watch on its competitors’ prices, strategies and moves. It is constantly aware of its changing environment and primed to respond. Each entry into international markets, such as Poland or the US, is supported by thorough and extensive research of local markets, including researchers actually living with families to understand their markets. Helped by this knowledge, Tesco has made headway in international waters where other retailers, such as Marks & Spencer and Carrefour, have faltered.