Where is the GREENER GRASS?

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Where is the GREENER GRASS?

By Ed Avis - 01/20/2016

It seems fashionable these days to hire outsiders to fill retail executive positions. Retailers of all sizes have looked beyond their own ranks to find new leaders, from Target hiring a Pepsi executive as its new CEO to PCC Natural Markets naming a Starbucks leader its new boss.

"There is a lot of transition in grocery retailing right now, and I think this environment can bring about more external hires," says Tony Frey, senior vice president of The Carlisle Group, an executive search firm. "And I think a lot of grocery retailers are rethinking how they go to market, and that can cause them to look outside their own leadership pool."

On the other hand, some grocery retailers are known for developing talent from within. J.K. Symancyk started at Meijer as vice president of perishables in 2006, eventually climbing to president seven years later.


"I think a lot of grocery retailers are rethinking how they go to market, and that can cause them to look outside their own leadership pool."

—TONY FREY,
The Carlisle Group


What are the pros and cons of bringing in outside leadership talent versus promoting from within? Each has its advantages and disadvantages, experts say. The shakeup skills of an outsider are sometimes required, while in other cases the steady hand of a familiar insider is preferred.

"Having an internal individual who knows the corporate culture, the players involved, and those internal non-stated drivers within the organization can be a positive," says Robert Perrin, president and CEO of Magellan Associates, a business consulting firm. Yet, "if the organization desires to transform to something different, the knowledge and ties to the legacy organization may, but not in all cases, inhibit change or cause resistance to change."

MOTIVATIONAL ADVANTAGES

One major advantage of promoting executives from within is the motivational factor. When employees see a colleague rise to the top, they realize the same thing could happen to them.


"You can cause a lot of problems if you bring in someone who doesn't understand the lay of the land, the culture, how things are done."

—BOB CARDY,
University of Texas


"If you're in a lower-level position and you understand that your organization has a promote-from-within policy, it gives you a line of progression," says Bob Cardy, professor and chair of the department of management at the University of Texas at San Antonio. "That can be motivating for people who have an eye on that goal. That's a principal upside to having a promote-from-within policy."

Frey adds that the promote-from-within kind of thinking is not only motivational to existing employees, but it helps bring in top new hires. An organization that demonstrates a path to the top is attractive to ambitious job seekers. "When you promote from within, it attracts ‘A' players," Frey says.

Promoting from within works best when the company allows aspiring employees to face challenges and make decisions early on, rather than always awaiting direction from above, experts note.

For example, Hy-Vee, the Iowa-based grocery retailer with 60,000 employees, operates a decentralized management structure that pushes decision-making to the store level, so local managers develop those skills. Hy-Vee's current leader, Randy Edeker, toiled at other positions in the company for 30 years—including part-time staffer, store manager, and VP of marketing—before becoming chairman and CEO in 2012.

Long-term involvement with one company breeds another potential advantage of promoting from within: a deep understanding of the company's culture. That understanding helps on many levels, including, naturally, the ability to get things done from Day 1. A study published in Administrative Science Quarterly in 2012 found that individuals promoted from within performed better early on than outside hires.

"I find that workers promoted into jobs have significantly better performance for the first two years than workers hired into similar jobs and lower rates of voluntary and involuntary exit," wrote Matthew Bidwell, a management professor at the Wharton School of the University of Pennsylvania, in a study he conducted, "Paying More to Get Less: The Effects of External Hiring versus Internal Mobility," which focused on the financial services industry. "My research documents some quite substantial costs to external hires and some substantial benefits to internal mobility."

For example, Bidwell found that external hires need about two years to build the relationships to be effective in their new organizations, something an internally promoted leader presumably would already have. And external hires are usually paid more—an average of 18 to 20 percent more—than those promoted from within.

CARRYING BAGGAGE?

Promoting from within is not without drawbacks. One drawback, ironically, may be the very relationships Bidwell cites as important for success. If an individual promoted from within carries the politics and favoritism from his previous position into the new position, he may create an uncomfortable atmosphere.

"I've seen this happen. People are people, and you associate with some and not others," Cardy notes. "Wherever you work, over time there are factions and politics that develop. If you promote from within, people are going to come with that political baggage. Depending on how serious the politics are, that can be a continuing problem. You've just elevated it."

There's also the possibility that an employee hired from within does not have the scope of experience or vision that an outside candidate would bring. What seems like loyalty from one perspective may be perceived as narrow thinking from another.

"If the individual has only worked for the one organization—which is unlikely these days, but still exists—their opinion could be viewed as myopic," Perrin says.

Another issue with a promoting-from-within strategy is that sometimes the company simply has not prepared any lower-level managers to move into the executive ranks. Assuming that the 20-year veteran who started as a bagger and moved up the ranks to store manager is suddenly ready to join the c-suite is not always realistic.

"I think a lot of times you just assume there's this linear progression, so that the lower level positions prepare you for the upper level position. That's not always the case," Cardy points out. "For example, if someone is a first-line supervisor and does a good job, that doesn't mean they will be a good CEO. They may not be able to make the jump to a very different skill set for the upper-level position. Someone could be good at technical skills at a lower level, but poor at people skills and strategic skills at higher levels."

FRESH IDEAS

When Target hired Brian Cornell as CEO in 2014, the board clearly hoped the seasoned outsider, who most recently had been CEO of PepsiCo Americas Foods, would bring a shot of fresh ideas to the company. "The Board is confident that Brian's diverse and broad experience in retail and consumer products as well as his passion for leading high performing teams will propel Target forward," read a company statement at that time.

Indeed, the reasons companies cite for hiring from the outside often include the desire to bring in new ideas. If a grocery retailer needs a shot of energy to deal with new competition, slumping sales, or other challenges, it stands to reason that an outsider is a tempting choice.

"Hiring from the outside allows a company to recruit certain profiles to complement experience and expertise of current staff," says Joshua Ostrega, chief operating officer of WorkJam, an employee relationship management firm. "Furthermore, it can bring in knowledge acquired at other organizations, along with fresh ideas."


"Hiring from the outside allows a company to recruit certain profiles to complement experience and expertise ofcurrent staff."

—JOSHUA OSTREGA,
WorkJam


That's been the motivation of many grocery retailers struggling in the current environment, Frey says. When an investor group buys a retailer, for example, they want quick results, and they often feel those results are more likely to emerge from a seasoned outside leader who has led turnarounds before.

While Target wasn't exactly in need of a complete turnaround when Cornell came on board, it had lost much of its "Tar-zhay" chic appeal. Among other things, Cornell shed Target's unprofitable Canadian operations, amped up its online business (including a 15 percent discount site-wide on Cyber Monday), and improved its offerings to appeal more to Millennials.

Results have been mixed—growth of 1.9 percent in the third quarter did not impress Wall Street—but Cornell is delivering on the promise of bringing in new ideas.

"When you hire from the outside, you have the opportunity to bring in expertise that you wouldn't necessarily have inside," Cardy says. "You can go out there and find a superstar who is going to be noticed by industry and customers. It can shake up the culture of the place, shift gears on strategy, or whatever. People talk about organizational change and how it's sometimes hard to get people to change—well, hiring someone from the outside can be a punctuation point: the change starts now. New boss, new game in town."

CULTURE CLASH?

However, sometimes bringing in the new boss has unforeseen consequences. When she doesn't know the culture, the history, the reporting relationships, and other key factors, it's easy to make mistakes.

"There's the old saying about the bull in a china shop," Cardy says. "You can cause a lot of problems if you bring in someone who doesn't understand the lay of the land, the culture, how things are done. If you bring in a very bombastic person who can get things done, that may not gel with the culture that's already developed in the organization. That can be a real downside."

Culture can be at the heart of a failure of a new leader, Frey concurs. He says that one of the top reasons outsiders depart quickly is that they did not mesh with the culture at their new organization.

"When people make job changes, they look at the benefits, the title, the compensation, the skill set, and other elements," he says. "But the environment, or culture, is a lot of times secondary. When you see people depart from an organization early, I can almost guarantee one of the top two reasons is culture."

In August, Target made two executive moves. First, the company promoted John Mulligan to vice president/COO. Mulligan began at Target in 1996 as a financial analyst, and climbed the managerial ladder.

The other August move was to hire a new chief financial officer—from the outside. Cathy Smith was executive vice president and CFO of Express Scripts before joining Target, and previously held CFO positions at Walmart, GameStop and other companies.

So Target used both strategies—promoting from within and hiring from the outside—in one month. And Frey would probably say that's a good move.

"I personally think everything is situational," he says. "I don't think there's any one right way to do this. I think a combination of both is healthy."