The Challenge of Leadership Succession in Retail

This year has already seen a reshuffling at the top of several large retailers, including Gap, CVS and Wal-Mart, and more changes are expected. 

As retailers take stock of their performance during the past holiday season and evaluate their needs as they grow both domestically and internationally, they will be taking a close look at the type of leaders they need at the helm in the coming year and beyond. Unfortunately, many retailers do not have strong internal candidates for senior executive roles, so they will be either searching externally for new leaders or placing current employees in challenging stretch roles, neither of which is an optimal approach to succession. 

With strategy changes rampant in the industry, retailers are forced to make significant changes to their leadership teams in order to execute new initiatives. But, many retailers have significant talent gaps when it comes to filling new roles and replacing those that have been forced aside. 

For example, in identifying new merchant leaders, organizations are realizing that the ability of the leader to structure an effective merchandising team that works effectively with its planning, allocation and marketing partners is more important than having the answer to which products will resonate with finicky shoppers. For others, the unrealized promise of e-commerce has retailers searching for the right mix of technology savvy, merchandising, operations and boardroom presence to drive an online strategy.

So where will these leaders come from? For many retailers, the answer is not clear.

Although all industries face similar challenges, we have found that retailers in particular have often insufficiently invested in strong leadership pipelines. As a result, they tend to promote through functional ranks and have an artificially narrow talent profile for top leadership roles.

Retailers can enhance the leadership succession process by focusing on the following:

• Recognize the strategic challenges the organization faces and specifically incorporate the challenges into talent management and succession planning. Building new design centers, developing new formats and expanding overseas may offer the best hope for regaining growth, but they also put strain on the organization and the talent pipeline. 

Whether firms are creating new design heads or new country manger roles where there were none before, the management demands of retailers’ strategies are outpacing their efforts to grow talent.

• Consider both supply and demand in leadership succession decisions. Define the types of roles that will need to be filled and conduct rigorous assessments of the competencies of potential leaders. 

While many retailers undoubtedly use new succession opportunities to elevate “high potential” internal candidates into senior roles, the notion that any high potential can take on any type of leadership role is risky. Executing international expansion requires a very different skill set than managing the strategy processes that led to that expansion, and retailers need to ensure they understand the competencies required for specific types of roles and whether candidates possess those competencies.

• Build a leadership pipeline well in advance of the need to make leadership changes. Retail operates in very rapid cycles and can be highly opportunistic. Many retailers are now changing strategies as a result of performance from the past holiday season. Others have been opportunistic about international growth (e.g., M&A). While the rapid change makes it hard to plan for specific roles, all retailers should be attempting to anticipate the type of leadership roles and capabilities that will be required years in advance. 

The impact of giving sufficient attention to leadership succession is clear. According to Hay Group’s 2010 study on the Best Companies for Leadership, the very best companies for leadership report having a sufficient number of qualified internal candidates to assume leadership roles at all levels by a ratio of nearly 2 to 1. And these companies reap the rewards as well — consistently outperforming the S&P 500 in total shareholder returns over one-, five- and 10-year periods. 

While retailers seek to regain a competitive edge in 2011, those with weak leadership pipelines will find themselves wasting valuable time and effort conducting difficult searches, rather than focusing on executing their business strategies. Those that take steps to enhance their approach to leadership succession will be in a better position to elevate and deploy leaders as needed and succeed in executing new strategies. 

Maryam Morse is national retail reward practice leader, Hay Group, and Ryan Dixon is senior consultant, Hay Group.

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