In 1969 Laurence J Peter published The Peter Principle which rather neatly described a phenomenon that blights many businesses.
Someone who is good at their job will be promoted. If they are incompetent at that job, they will remain in that position and not be promoted further. They may then be known as being a terrible in their new position and end up stagnating, having once been known as exemplary in an earlier role.
If they are competent in their new role, they will be promoted again and again until they finally, and somewhat inevitably, reach the point where they are incompetent and they too will stagnate.
The resulting outcome, of course, is that businesses are by and large populated by people who are incompetent at their job and who are also frustrated and stagnant.
Perhaps we all remember that outstanding teacher at school who was promoted to head of year and subsequently floundered as they failed to formulate policy and process. Or perhaps the head of year who rose to deputy head but failed to interact sufficiently with the board of governors, leaving many irritable teachers wishing they were back in the classroom.
This unfortunate state of affairs is oft repeated throughout institutions and is one of the most pervasive and frustrating business phenomena.
However, it can be avoided.
Returning to the education example. There may be plenty of individuals who are amazing teachers, and there may be plenty of individuals who are superb communicators and incredible at formulating policy. Finding a single person blessed with all these skills intrinsically is somewhat more unusual.
One needs to learn new skills and competencies if one is to take on new roles. However, since people are often promoted before they have the requisite skills for their new job since they are rising through the ranks by virtue of skills for a previous role, they are then ill equipped to carry out the next stage effectively.
It stands to reason therefore that equipping people with the right skills before they are promoted would eradicate the Peter Principle and result in the most competent people in the appropriate job. This is the Simon Principle.
Applying the Simon Principle is particularly important for CEOs since this is the individual on whom the success of the business and its workforce depend.
It is quite typical for a CEO who has expanded a small business into a medium sized or even large company, to suffer the Peter Principle.
If one starts with a micro company the skillset required is to be a Jack-of-all-trades. One needs to know some accountancy, sales, tax requirements and one works long hours perhaps managing a staff of fewer than five people. The skills required are hiring the right people on a tight budget and encouraging them to help take the business to the next level.
Once the business grows to a medium sized company, the CEO skillset must change. One needs to hire individuals who know more about the areas in which one is weak. Medium businesses need strong sales and marketing teams, if manufacturing increases so too does the need for a production team, more tech will be required, there may be significant moves to multiple locations.
Here the CEO skills identified by Warren Buffet – resource allocator and managing the senior sales team – are key.
CEOs of medium sized business will need to delegate – a skill that is incredibly difficult for someone who has built their business from scratch and may be extremely reluctant to pass the reins to someone else. Initially the CEO might also need to train their managers to reach their own high standards making the delegation feel counterproductive.
CEOS need to hire top people; those who know more about their job than the CEO. So, the skillset changes from managing a cosy, tight environment to one of motivation, encouragement and ensuring they get the most of out of their management team.
If the business is to expand again, so the CEO’s skillset must advance too. Managing a company of more than 500 people is a world away from running the micro company.
The focus is on hierarchal management and an ability to coach people who in turn need to coach their own teams and so on.
Systems will need to expand to cover multiple locations, jurisdictions, languages, currencies. Any decisions made at this level will be felt by hundreds if not thousands of people. It becomes hard to turn the ship around and mistakes can cost many millions.
The NHS is an extreme yet perfect example. As the UK’s largest employer and the fifth largest in the world with 1.7 million employees the NHS is often criticised for having too many managers, yet how else could such an operation function? The person at the top, those controlling budgets and managing multiple department heads cannot possibly be successful if they have succumbed to the Peter Principle.
To overcome the Peter Principle, the Simon Principle suggests investing 1% for training the CEO and the rest of the senior management team well ahead of expansion, so that the business can grow successfully and without the artificial roadblocks created by a lack of competency.
Throughout subsequent newsletters we will explore how the Simon Principle should be applied if CEOs are to avoid failure as they grow their business. To start we will show how a CEO of a micro-company might equip themselves to grow successfully into a mid-sized business.
In an earlier article we met Bob. Bob was the founder of a successful coffee shop that grew from a single busy outlet to an international enterprise.
We will return to Bob’s early days as the founder of a micro-company. He has two outlets, a staff of 20 and has raised enough funding to expand to six outlets.
He knows he will need a head office in addition to the stores themselves. He has never been excellent at marketing and will need to hire suitable individuals to take on the roles in which he is weakest.
The first step Bob takes is to find a mentor to help show him what needs to be done before he hires his management team. He also attends a management training course which specialises in the recruitment process.
He learns about the importance of creating systems so that every barista and baker in each outlet knows exactly how to create the perfect coffee and bake the signature cake. Yet he has no strengths in systems design and instead hires an excellent person to take on the job.
Bob used to love talking to each of his staff as often as possible but discovers this is not practical now he has 80 employees. Instead he schedules regular meetings with his senior team leaders to find out how the wider workforce is getting on. He expects them to know their teams as well as he knows his own.
Bob’s mentor explained how much time is wasted firefighting when a business expands and revealed how to avoid hitting artificial roadblocks by skilling up before taking on new staff or properties.
Bob is now overseeing six new branches and runs a successful head office with a robust and motivated management team. He now has his eye on taking the business yet further buy learning a new set of skills.
Businesses need not succumb to the Peter Principle where everyone is promoted to their level of incompetence. Instead CEOs should ensure they have the requisite skillset and their business is populated by equivalently adequately trained individuals to push the business to the next level and to remain profitable and sustainable for the long term.