Comparing the Performance of External Successors

When Mattel's directors went shopping for a new CEO, they found their man in processed cheese. When IBM's board needed to replace John Akers, it picked an executive who had worked in financial services and cigarettes. Were these companies going out on a limb by opting for outsiders who knew little about toys or computers? Yes and no, according to a 2001 working paper, “External Successors, Transferable Skills and Firm Performance,” that will be published in a forthcoming issue of Managerial and Decision Economics.

Authors Elizabeth E. Bailey, John C. Hower Professor of Business and Public Policy at the Wharton School, and Constance E. Helfat, associate professor of business administration at Dartmouth's Tuck School of Business, analyze and compare the performance of three groups of externally hired CEOs. One group is composed of executives who came to their new jobs from completely different industries and brought only generic skills, such as the ability to lead. IBM chief Lou Gerstner is such an example. Executives who took the helm already having experience in the same industry and the ability to transfer industry-specific skills to their new roles constitute the second group. Robert Morrison, who moved from Kraft Foods to Quaker Oats, falls into this category.

A third set of executives, including Mattel CEO Robert Eckert, also a Kraft veteran, lies between the first two. These CEOs' portfolios include what Bailey and Helfat call “related-industry” skills. Building on work by Carnegie Mellon professor of business strategy Jeffrey R. Williams, the authors define related industries as sectors that produce different products but share similar challenges and require similar capabilities. For example, slow-cycle industries, such as pharmaceuticals, typically value executives who are skilled at building long-term relationships. Fast-cycle industries, such as semiconductors, put a premium on the ability to speed new products to market. And in standard-cycle industries, which range from fast food to cars, successful executives learn to build brand loyalty and manage economies of scope and scale.

Do new CEOs with only generic or related-industry transferable skills perform as well as external successors with industry-specific experience? In order to answer this question, Bailey and Helfat collected data on the 300-plus CEOs who appeared in Forbes's annual surveys of executive compensation from 1978 through 1987. This process identified 36 external successors, defined as top executives who had been with the firm for no more than two years before becoming CEO.