Vignette 6

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Linda Childress is general manager of a large consumer products plant in the

Midwest. She has helped her plant weather many storms. The first was a corporate-

sponsored voluntary early retirement program, which began eight years

ago. In that program Linda lost her most experienced workers, and among its

effects in the plant were costly work redistribution, retraining, retooling, and

automation. The second storm was a forced layoff that occurred five years ago.

It was driven by fierce foreign competition in consumer products manufacture.

The layoff cost Linda fully one-fourth of her most recently hired workers

and many middle managers, professionals, and technical employees. It also

led to a net loss of protected labor groups in the plant’s workforce to a level

well below what had taken the company ten years of ambitious efforts to

achieve. Other consequences were increasingly aggressive union action in the

plant; isolated incidents of violence against management personnel by disgruntled

workers; growing evidence of theft, pilferage, and employee sabotage;

and skyrocketing absenteeism and turnover rates.

The third storm swept the plant on the heels of the layoff. Just three years

ago corporate headquarters announced a company-wide Business Process Reengineering

program. Its aims were to improve product quality and customer

service, build worker involvement and empowerment, reduce scrap rates, and

meet competition from abroad. While the goals were laudable, the program

was greeted with skepticism because it was introduced so soon after the layoff.

Many employees—and supervisors—voiced the opinion that ‘‘corporate headquarters

is using Business Process Reengineering to clean up the mess they

created by chopping heads first and asking questions about work reallocation

later.’’ However, since job security is an issue of paramount importance to

everyone at the plant, the external consultant sent by corporate headquarters

to introduce Business Process Reengineering received grudging cooperation.

But the Business Process Reengineering initiative has created side effects of its

own. One is that executives, middle managers, and supervisors are uncertain

about their roles and the results expected of them. Another is that employees,

pressured to do better work with fewer resources, are complaining bitterly

about compensation or other reward practices that they feel do not reflect

their increased responsibilities, efforts, or productivity. And a fourth storm

is brewing. Corporate executives, it is rumored, are considering moving all

production facilities offshore to take advantage of reduced labor and employee

health-care insurance costs. Many employees are worried that this is really not

a rumor but is, instead, a fact.

Against this backdrop, Linda has noticed that it is becoming more difficult

to find backups for hourly workers and ensure leadership continuity in the

plant’s middle and top management ranks. Although the company has long

conducted an annual ‘‘succession planning and management’’ ritual in which

standardized forms, supplied by corporate headquarters, are sent out to managers

by the plant’s human resources department, Linda cannot remember

when the forms were actually used during a talent search. The major reason,

Linda believes, is that managers and employees have rarely followed through

on the Individual Development Plans (IDPs) established to prepare people for

advancement opportunities.

Defining Succession Planning and Management

As the vignettes above illustrate, organizations need to plan for talent to assume

key leadership positions or backup positions on a temporary or permanent

basis. Real-world cases have figured prominently in the business press in

recent years. (See Exhibits 1-1 and 1-2.)

Among the first writers to recognize that universal organizational need was

Henri Fayol (1841–1925). Fayol’s classic fourteen points of management, first

enunciated early in the twentieth century and still widely regarded today, indicate

that management has a responsibility to ensure the ‘‘stability of tenure of

personnel.’’1 If that need is ignored, Fayol believed, key positions would end

up being filled by ill-prepared people.

Succession planning and management (SP&M) is the process that helps

ensure the stability of the tenure of personnel. It is perhaps best understood

as any effort designed to ensure the continued effective performance of an

organization, division, department, or work group by making provision for the

development, replacement, and strategic application of key people over time.

Succession planning has been defined as:

a means of identifying critical management

positions, starting at the levels of project manager

and supervisor and extending up to the

highest position in the organization. Succession

planning also describes management

positions to provide maximum flexibility in

lateral management moves and to ensure that

as individuals achieve greater seniority, their

management skills will broaden and become

more generalized in relation to total organizational

objectives rather than to purely departmental

objectives.2

Succession planning should not stand alone. It should be paired with succession

management, which assumes a more dynamic business environment.

It recognizes the ramifications of the new employment contract, whereby corporations

no longer (implicitly) assure anyone continued employment, even

if he or she is doing a good job.3

An SP&M program is thus a deliberate and systematic effort by an organization

to ensure leadership continuity in key positions, retain and develop intellectual

and knowledge capital for the future, and encourage individual

advancement. Systematic ‘‘succession planning occurs when an organization

adapts specific procedures to insure the identification, development, and longterm

retention of talented individuals.’’4

Succession planning and management need not be limited solely to man-

Exhibit 1-1. How General Electric Planned the Succession

Good news, bad news.

The idea that the hard-nosed CEO of a major corporation would lose sleep over

giving bad news to two executives takes a bit of swallowing.

It happens to be true. The CEO in question was Jack Welch, boss of General Electric

(GE). The bad news he had to impart was that James McNerney, head of GE’s

aircraft-engine business, and Robert Nardelli, chief of the business making turbines

and generators for electric utilities, would not be succeeding Welch as CEO.

Welch had delivered bad news any number of times before, but the circumstances

here were different. He said: ‘‘I’ve fired people my whole career—for performance.

Here I’ve got three guys who’ve been great.’’

The third guy was Jeffrey R. Immelt, head of GE’s medical-system’s business and the

ultimate winner. Later this year he will become chief executive of the world’s most

valuable company.

The process of choosing Welch’s successor, throughout shrouded in the utmost

secrecy, had taken six years, five months and two days. The story that has now

emerged is curious in many ways. Most significantly, Welch and the board broke

what are considered to be the rules in corporate-succession planning.

No Room for Outsiders

Traditionally, approaches might include naming a chief operating officer or other

heir apparent. An outsider might be considered or some common template used for

measuring candidates.

These possibilities were eschewed and the time factor was remarkable, too. Bestpractice

guidelines for boards suggest use of fewer than 100 director-hours to go

through the succession processes. GE’s board spent thousands of hours over several

years.

Two factors make GE’s approach worthy of further examination. First, many major

U.S. companies have recently failed in their choice of a new CEO, which suggests

something is wrong with the way that the boss is picked. Second, Welch has, in his

20 years at the top, proved himself to be a CEO with a very sure touch.

The succession process began formally in June 1994, when Welch was 59. During

a board management development and compensation committee (MDCC) meeting,

24 candidates were discussed in three groups. ‘‘Obvious field’’ covered the

seven men running GE’s largest businesses. ‘‘Contenders’’ were four executives just

below the top tier, and 13 others admired by Jack Welch were included under

‘‘broader consensus field.’’ This was the list that produced the three ‘‘finalists.’’

(continues)

Exhibit 1-1. (continued)

Welch has said that the process was about ‘‘chemistry, blood, sweat, family, feelings’’

not simply mechanics, and what happened from 1994 onwards backs that

up.

Getting to Know Candidates

Every candidate was tested for his ability to grow and Welch also wanted directors

to get to know the leading candidates. Directors and candidates mixed socially, for

example at the Augusta National Golf Club before the U.S. Masters tournament,

and played golf together at GE’s headquarters in Fairfield, Connecticut. Welch also

encouraged candidates to call directors directly, bypassing him, when they thought

it would be useful.

More formally, regular board events provided the opportunity for hundreds of director-

hours each year devoted to discussing potential successors.

A couple of years after the process began, Welch and the MDCC decided that

committee members needed to know more about leading candidates. The committee

spent a year or so visiting several GE businesses. It was a highly unusual practice

in the corporate world and one smokescreen involved taking in more visits than

were necessary for the succession process.

By December 1997, the field was down to eight. Gradually several men effectively

dropped out of the running. When head of lighting, David Calhoun, left to run the

Employers Reinsurance business within GE Capital, he was correctly viewed as an

ex-candidate. Finally, it was down to three: McNerney, Nardelli and Immelt.

Welch continued to buck convention. At this point he might have brought the top

contenders to jobs at GE headquarters where he and the board could have had

them under intense scrutiny. But what he wanted to avoid was the ‘‘political and

poisonous’’ atmosphere created 20 years earlier when he had been a contender at

HQ himself. Then, as he jockeyed for pole position, he had at lunch to ‘‘sit across

from the guys you were competing with.’’

McNerney, Nardelli and Immelt continued therefore, hundreds of miles apart, to

run their own businesses.

If everyone at GE is to be believed, six years of discussion took place before a name

was put forward as the proposed winner. Director Frank Rhodes, Professor Emeritus

at Cornell University, was the first to break ranks. He opted for Immelt; other directors

agreed and, though the announcement was four months away, it was clear

which way the wind was blowing.

Skeptics Confounded

In late October, GE announced its biggest ever acquisition—Honeywell for $45

billion in stock. This delayed announcement of the succession but the skeptical view

that Welch was reluctant to give up power proved unfounded: Immelt will take over

in December, eight months later than originally scheduled.

Welch flew to Cincinnati and Albany to give McNerney and Nardelli respectively the

bad news. Both men are now CEOs elsewhere. Welch says he will never reveal the

reasons that Immelt emerged triumphant, but his youth—he is 44—his popularity

and the perception that he has the greatest capacity to grow must all have been

factors. Frank Rhodes said that he demonstrated ‘‘the most expansive thinking.’’

If he is to survive and flourish like his predecessor, Immelt will need to continue to

develop that quality.

The General Electric approach to finding Jack Welch’s successor as CEO was thorough

to the point of overkill. On the other hand, we are talking about the world’s

most valuable company. Welch was absolutely determined to succeed, where many

major companies have failed recently, in finding the right man for the job. It will be

fascinating to see whether Jeffrey Immelt fits the bill.

Note: This was a precis of an article by Geoffrey Colvin, entitled ‘‘Changing of the Guard,’’ which was published in Fortune,

January 8, 2001.

Source: ‘‘How General Electric Planned the Succession,’’ Human Resource Management International Digest 9:4 (2001), 6–8.

Used with permission of Human Resource Management International Digest.

agement positions or management employees. Indeed, an effective succession

planning and management effort should also address the needs for critical

backups and individual development in any job category—including key people

in the professional, technical, sales, clerical, and production ranks. The

need to extend the definition of SP&M beyond the management ranks is becoming

more important as organizations take active steps to build highperformance

and high-involvement work environments in which decision

making is decentralized, leadership is diffused throughout an empowered

workforce, and proprietary technical knowledge accumulated from many years

of experience in one corporate culture is key to doing business.

One aim of SP&M is to match the organization’s available (present) talent

to its needed (future) talent. Another is to help the organization meet the

strategic and operational challenges facing it by having the right people at the

right places at the right times to do the right things. In these senses, SP&M

should be regarded as a fundamental tool for organizational learning because

SP&M should ensure that the lessons of organizational experience—what is

sometimes called institutional memory—will be preserved and combined

with reflection on that experience to achieve continuous improvement in work

results (what is sometimes called double loop learning).5 Stated in another

way, SP&M is a way to ensure the continued cultivation of leadership and

intellectual talent, and to manage the critically important knowledge assets of

organizations.

(text continues on page 16)

Exhibit 1-2. The Big Mac Succession

Jim Cantalupo’s sudden death brought out the best in McDonald’s board. At his

first annual meeting as chief executive, Jim Cantalupo faced an angry shareholder

displaying photos of a filthy McDonald’s toilet and demanding action. ‘‘We are

going to take care of it,’’ he pledged. And he did. His strategy of ending the rapid

expansion of the world’s biggest fast-food company and refocusing it on providing

better meals in cleaner restaurants with improved service was starting to produce

encouraging results. Then, on April 19th, he suddenly died. The death of a leader

at such a critical time can ruin a company. But, thanks not least to Mr. Cantalupo,

it will probably not ruin McDonald’s.

Mr. Cantalupo was a McDonald’s veteran. He joined the company in 1974, as an

accountant in its headquarters near Chicago. As head of international operations,

he presided over much of the globalization of the Big Mac: McDonald’s now has

more than 30,000 restaurants in 119 countries. Although promoted to president,

he was passed over for the top job when Jack Greenberg was appointed chief

executive in 1998.

Then McDonald’s began to stumble badly. Service levels came in for increasing

criticism, sales began to fall and the company suffered its first quarterly loss. It also

became embroiled in the debate about obesity and the role of fast food. McDonald’s

was even sued by some parents for making their children fat. (Although this

failed, a future lawsuit may yet succeed.) Mr. Greenberg put a recovery plan into

action and vowed to stay on to execute it, only to be forced out by worried investors.

The board turned to Mr. Cantalupo, who came out of retirement to take over as

chairman and chief executive in January 2003.

Mr. Cantalupo, who was 60, died of a suspected heart attack at a huge convention

in Orlando, Florida, for more than 12,000 employees, suppliers, owners, and operators

of McDonald’s restaurants worldwide. It was the sort of big meet-the-troops

event that the affable Mr. Cantalupo enjoyed.

Those members of the board already in Florida quickly assembled and others joined

by phone. Within six hours, Charlie Bell, a 43-year-old Australian who had been

appointed chief operating officer by Mr. Cantalupo and had been working closely

with him, was made chief executive. Andrew McKenna, 74, the board’s presiding

director and also the boss of Schwarz, which supplies McDonald’s with lots of packaging

materials, was appointed non-executive chairman.

The speech that Mr. Cantalupo was due to give to welcome the delegates was later

given by Mr. Bell, who joined the McDonald’s empire when, aged 15, he got a parttime

job in an outlet in a suburb of Sydney. So he knows how to flip a burger. The

delegates were clearly saddened, but they gave Mr. Bell, the first non-American to

lead the company, a resounding reception. Mr. Cantalupo would have approved.

So did Jeffrey Sonnenfeld, head of the Chief Executive Leadership Institute at Yale

University. ‘‘It was a board operating at its finest,’’ says Mr. Sonnenfeld, author of

‘‘The Hero’s Farewell,’’ a book about the contentious job of selecting a new boss.

Concerning Mr. Cantalupo, the McDonald’s board has twice acted impressively, he

says. First, it acted decisively in reversing course and turning to Mr. Cantalupo when

things went wrong. Second, it acted swiftly to execute a succession plan that Mr.

Cantalupo himself had put into place, even though he was expected to remain in

the job for several more years. Mr. Bell had been widely acknowledged as Mr.

Cantalupo’s heir apparent.

Succession planning can be fraught with difficulty, and is all too often neglected.

Vodafone had no succession strategy in place when, in December 2002, Sir Christopher

Gent, its chief executive, said he would leave. A search for a replacement led to

Arun Sarin, a non-executive director, being given the job. Now Vodafone operates a

succession-planning process in every country where it has a business. But more

formal procedures, though on balance superior, can cause difficulties, especially if

an officially anointed heir starts to get restless (i.e., Prince Charles syndrome). And

it takes a trusting, well-disciplined board to stick to a succession plan, as the General

Electric board did when Jack Welch groomed three potential contenders for his

job.

A sudden death can be the toughest kind of succession to deal with. Some bosses

are said to leave a sealed envelope holding the name of a preferred successor in

the event of a fatality. Yet the succession at McDonald’s, forced on it by tragic

circumstances, contrasts sharply with that now under way at Coca-Cola. Ever since

Roberto Goizueta, Coke’s pioneering boss, died of lung cancer in 1997, the firm

has been beset by troubles. Douglas Ivester was appointed quickly to replace Mr.

Goizueta, but two years later was forced to step down. In February, his successor,

Douglas Daft, suddenly announced that he would retire by the end of this year.

Coke is said to want James Kilts, the boss of Gillette, for the top job—but he may

not want it. Publicly looking outside its ranks for a leader is interpreted by some

analysts as evidence of management weakness within.

McDonald’s could not be accused of that, although Mr. Bell still has to prove his

worth. New menus, featuring smaller portions and such healthier things as salads

and bottled water, are reviving the company’s image. But at the same time the

company cannot afford to drive away its many fans of burgers and fries. Simply

getting them to come back more often could do wonders for McDonald’s profits.

There are valuable lessons to be learned from successful markets, such as Australia

and France—both places where Mr. Bell has worked. But there remains a long way

to go, and things could yet become extremely difficult. Even planning well ahead

and having a chosen successor ready and waiting, though better than not doing so,

is no guarantee that the successor will actually be a success.

Source: ‘‘Business: The Big Mac Succession: Face Value,’’ The Economist 371:8372 (2004), 74. Used with permission of The

Economist.

Distinguishing Succession Planning and Management from

Replacement Planning, Workforce Planning, Talent

Management, and Human Capital Management

Terminology can be confusing. And that fact is as true with succession planning

and management as it is with anything else. So, how can succession planning

and management be distinguished from replacement planning?

Workforce planning? Talent management? Human capital management?

Succession Planning and Management and Replacement Planning

Succession planning and management should not be confused with replacement

planning, though they are compatible and often overlap. The obvious

need for some form of replacement planning is frequently a driving force behind

efforts that eventually turn into SP&M programs—as Vignettes 1 and 2 at

the opening of this chapter dramatically illustrate. That need was only heightened

by the 1996 plane crash of U.S. Secretary of Commerce Ron Brown,

which also claimed the lives of over thirty other top executives.

In its simplest form, replacement planning is a form of risk management.

In that respect it resembles other organizational efforts to manage risk, such

as ensuring that fire sprinkling systems in computer rooms are not positioned

so as to destroy valuable computer equipment in case of fire, or segregating

accounting duties to reduce the chance of embezzlement. The chief aim of

replacement planning is to limit the chance of catastrophe stemming from the

immediate and unplanned loss of key job incumbents—as happened on a

large scale when the Twin Towers of the World Trade Center collapsed and on

an individual level when the CEO of McDonald’s was stricken by a heart attack.

However, SP&M goes beyond simple replacement planning. It is proactive

and attempts to ensure the continuity of leadership by cultivating talent from

within the organization through planned development activities. It should be

regarded as an important tool for implementing strategic plans.

Succession Planning and Management and Workforce Planning

Workforce planning connotes comprehensive planning for the organization’s

entire workforce.6 To some people, succession planning and management

refers to top-of-the-organization-chart planning and development only. However,

in this book, succession planning and management refers more broadly

to planning for the right number and right type of people to meet the organization’s

needs over time.

Succession Planning and Management and Talent Management

‘‘Talent management is the process of recruiting, on-boarding, and developing,

as well as the strategies associated with those activities in organizations.’’7

Like so many HR-related terms, ‘‘the phrase talent management is used

loosely and often interchangeably across a wide array of terms such as succession

planning, human capital management, resource planning, and employee

performance management. Gather any group of HR professionals in a room

and you can be sure to have a plethora of additional terms.’’8 Some organizational

leaders associate talent management with efforts to devote special attention

to managing the best-in-class talent of the organization—the upper 1 to

10 percent. Not limited to top-of-the-house planning, it may refer to investing

money where the returns are likely to be greatest—that is, on high-performing

or high-potential talent at any organizational level. Hence, efforts to develop

talent that is strategically important for the organization’s future means the

strategic development of talent.9