Generalist CEOs — CEOs who have built their careers in different industries or for different firms — are more likely to spur innovation in their companies than specialist CEOs with technical knowledge who have never left their industries. The major reason is that generalists are not afraid: if they lose their jobs after an ambitious transformative innovation effort fails, their skills and knowledge will easily transfer to another job in another firm or industry. Specialist CEOs must tread more carefully.
Generalist CEOs are CEOs who have worked in different organizational areas, for a number of different firms, in different industries, or even in a conglomerate firm. Former IBM CEO and Chairman Louis Gerstner is a typical example. Before joining IBM, he had been a consultant at McKinsey & Company, had held senior positions at American Express, and had been CEO of RJR Nabisco. His predecessor, John Akers, had been an IBM lifer. Gerstner turned the fast-sinking IBM around by focusing the company on IT services and withdrawing from the desktop PC market.
Statistics on R&D investment, patents and patent citations show that firms with generalist CEOs invest more in R&D than firms with specialist CEOs. More importantly, these firms produce more patents, and the number of citations of the patents in subsequent patents would indicate that these patents are substantially original. Companies with generalist CEOs also hold more diverse portfolios of patents. The evidence from the patents is important as R&D expenditure alone does not necessarily lead directly to innovation. In fact, the effectiveness of the generalists is not in simply stimulating more R&D, but rather in improving the quality and productivity of the R&D function. Gerstner is again an example. Under his leadership, IBM produced a record-setting number of patents, and for many years was in the top 1% in terms of patent citations.
Under generalist CEOs, companies tend to engage in more ‘exploitative’ innovation, which involves improving or refining something that already exists, and also more ‘exploratory’ innovation — that is, engaging in a risky search for radical and transformative innovation. However, the difference between specialist CEOs and generalists is especially pronounced in exploratory innovation.
These conclusions are based on research that 1) used a number of factors to identify the ‘generalist’ CEO — including the enforceability of non-compete clauses in different states that would tend to discourage mobility, and 2) rigorously sought to avoid mistaken causal assumptions, such as assuming generalist CEOs spur innovation when it could be the other way around: innovative companies prefer to hire generalists. The results of the in-depth analysis, however, are unambiguous: even controlling for ‘endogenous’ factors that might lead to bias, generalist CEOs consistently spurred greater, more ground-breaking innovation in their companies.
The core reason that generalists inspire and create greater innovation is their courage to make mistakes; this courage, in turn, is explained by the knowledge that they have skills that can be applied elsewhere. This is a major advantage for generalists. Innovation is risky. Greater R&D expenditure doesn’t necessarily translate into a successful product. CEOs know that plunging into an expensive innovation initiative might lead to great rewards, but can just as easily lead to failure and the loss of the job. The generalist with diverse experience will find another job in other industries. A specialist CEO may have advanced technical skills and competencies, but these technical skills and competencies can’t be transferred to other industries. In short, avoiding mistakes becomes imperative because the specialist CEO cannot afford to be fired.
An additional factor contributing to the innovation success of generalists is that having worked in multiple positions, firms and industries, they have a perspective that allows them to look beyond assumptions and ‘think outside the box’. As a result, the innovation they push is original and impactful.
This research opens an intriguing path to innovation for the company attempting to turnaround or break out of stagnant or even decreasing sales and profits. In today’s knowledge economy, innovation — and especially transformative or ‘disruptive’ innovation that goes beyond refining existing technology — is a key to competitive advantage.
One of the pathways to innovation is to avoid the corporate lifers or even executives from other firms in the same industry, and instead hire someone with a diversity of experience to bring to the company. This diverse or ‘generalist’ background will set the stage for a new culture of out-of-the-box thinking and risk-taking innovation.
The second lesson is the direct relationship between tolerance for mistakes and successful original innovation. The generalist CEOs are not only successful because of the diverse skills and experiences they bring to the firm, but also because their transferable skills allow them to be fearless in taking risks. No company can be truly innovative without instilling a culture of unequivocal tolerance for failure.
Do General Managerial Skills Spur Innovation? Cláudia Custódio, Miguel A. Ferreira & Pedro P Matos. ECGI – Finance Working Paper No. 376; Darden Business School Working Paper No. 2289701 (March 2014).
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