Is business acumen a substitute for leadership?

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At the top of organisations, which are more important - management skills or business skills?

Take the case of hedge fund managers who have been in the news lately. Hedge funds managers are investment experts. They generally represent a small group of very wealthy people and organisations. They follow the financial markets in an endeavour to predict fluctuations and invest accordingly.

First set up as far back as 1949, hedge funds have four principal areas of investment. They short-sell stocks they think will decrease in value; they use computer systems to calculate the relative value of one stock against another and then short the more expensive one and buy the cheaper – so-called "fair value". They also take on bankrupt or merging companies where a profit can be seen. Finally, they trade stocks by taking positions on the direction markets, currencies and commodities are likely to move

As investment funds following these strategies, they have been extremely successful. That is until recently. Their failure to manage financial risk, has seen their performances plummet. In some cases they have closed up shop altogether. For example, Sailfish Capital Partners, a $2 billion fund, closed in January 2008.

But even before the current financial crisis brought on by the sub-prime failures, some fund managers were having difficulty in another area. Many of those who moved away from their original investment strategies into taking a direct role in the management of the organisations they invested in had run into trouble.

Is this a case of not "sticking to the knitting", or a lack of business acumen?

Recent press reports of one such fund manager provides some clues. Edward Lampert, a hedge fund maestro, masterminded the takeover and merger of Sears and Kmart in 2005. It seems that Lampert has found that actually managing an organisation is a bit different to investing in its stock.

Since gaining control of the organisation, Lampert has taken a very hands-on approach to management. And that approach has been based on his own expertise (finance), not the expertise of the business – retailing.

So, for example, the key underpinnings of his strategy have been to raise prices, cut capital spending and slash marketing budgets.

To head up the new organisation, he also appointed as CEO, Aylwin Lewis. Lewis was an expert in the fast food industry, not retail. However, Lampert still maintained his hands on approach to management.

The result? Customer visits and sales are down, and so are profits. Those involved in retail, know that people want an "experience" when they shop. Sure they want the best price, but they also want to be treated as people (customers) first, not numbers on a balance sheet.

Often people buy based on their emotive response to the retail experience and then support their decision with reason and logic, such as price.

Yet Sears are obviously not providing this. As one newspaper report put it, "stores … look shabby next to those of rivals like Target and JC Penny. Dozens of products... were sold out. Much of the commodity merchandise that was in stock was more expensive than nearby competitors."

In other words, people are simply going elsewhere for their shopping experience.

The message here? People who run organisations such as active directors and CEOs, at the very least, need to be expert in the business of the business. This has been supported by two recent studies.

The first, PriceWaterhouseCoopers' annual CEO survey, found that organisations are first and foremost looking for senior executives with hard technical and business experience. People skills, whilst considered relevant, were not as high on their wish list.

However, one needs to be careful to read too much into this finding. For instance, are CEOs aware of the power generated by effective leadership and management or is it just getting harder to find experienced people?

The second is a more robust study of actual behaviour of managers within organisations. The authors tracked over 1,000 managers at all organisational levels. Carried out by Mumford, Campion and Morgeson and reported in The Leadership Quarterly (Vol 18 N0. 2, 2007), they found that in addition to cognitive and interpersonal skills, business skills and in particular strategic skills actually became more important as a manager progressed through the organisation.

Where should the balance be in management development – business or people skills?

My own observations over the last 20 years as a designer of management development initiatives, suggests that there has been a greater emphasis on people skills in training and development than pure business skills (I know my own efforts have often been in this direction).

This seems particularly true at the higher levels of management. Is it our expectation that managers at this level know all there is to know about business, but need to be made aware of the people power they can harness through effective leadership and management?

If we are to look at some of the recent business failures, particularly in the finance industry and at the Mumford et al findings, it would appear that there are two important lessons to learn.

First, organisations need to look for both technical business expertise and good leadership skills when appointing senior managers. And that means that designers and providers of leadership and management development need to focus equally on the development of both strategic business skills and good leadership and management skills if they want their offerings to be effective.

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