Michael_A._Hitt,_R._Duane_Ireland,_Robert_E._Hosk

Chapter 12: Strategic Leadership 393

managerial labor market. Conditions suggesting a potentially appropriate preference to

hire from outside include

1. the firm’s need to enhance its ability to innovate
   2. the firm’s need to reverse its recent poor performance
   3. the fact that the industry in which the firm competes is experiencing rapid growth


2. the need for strategic change^70

Overall, the decision to use either the internal or the external managerial labor mar-

ket to select a firm’s new CEO is one that should be based on expectations; in other

words, what does the board of directors want the new CEO and top management team

to accomplish? We address this issue in Figure 12.3 by showing how the composition of

the top management team and the CEO succession source (managerial labor market)

interact to affect strategy. For example, when the top management team is homoge-

neous (its members have similar functional experiences and educational backgrounds)

and a new CEO is selected from inside the firm, the firm’s current strategy is unlikely

to change. If the firm is performing well, absolutely and relative to peers, continuing

to implement the current strategy may be precisely what the board of directors wants to

happen. Alternatively, when a new CEO is selected from outside the firm and the top

management team is heterogeneous, the probability is high that strategy will change. This,

of course, would be a board’s preference when the firm’s performance is declining, both

in absolute terms and relative to rivals. When the new CEO is from inside the firm and a

heterogeneous top management team is in place, the strategy may not change, but inno-

vation is likely to continue. An external CEO succession with a homogeneous team cre-

ates a more ambiguous situation. Furthermore, outside CEOs who lead moderate change

often achieve increases in performance, but high strategic change by outsiders frequently

leads to declines in performance.^71 In summary, a firm’s board of directors should use the

insights shown in Figure 12.3 to inform its decision about which of the two managerial

labor markets to use when selecting a new CEO.

An interim CEO is commonly appointed when a firm lacks a succession plan or when an

emergency occurs requiring an immediate appointment of a new CEO. Companies through-

out the world use this approach.^72 Interim CEOs are almost always from inside the firm.

Figure 12.3 Effects of CEO Succession and Top Management Team Composition on Strategy

Top

Management

Team

Composition

Stable

strategy

Ambiguous:

possible change in

top management

team and strategy

Stable strategy

with innovation

Strategic

change

Homogeneous

Heterogeneous

Internal CEO

succession

External CEO

succession

Managerial Labor Market:

CEO Succession