Analysis of IT news

Saturday, March 29, 2008

Vision vs. Operations

There are two types of CEOs. The entrepreneurs who run the companies they founded and the professional CEOs who go from one company to another.

The conventional business wisdom is that the former type is good only for the short term as entrepreneurs seldom have what it takes to manage a larger company. But this wisdom is heavily influenced by Venture Capitalists and Wall Street, which means it is biased. The picture is neither black or white. Some entrepreneurs do not scale. But others do.

Famous examples of entrepreneurs who can scale are Steve Jobs or Bill Gates. Apple has indeed been much more successful when run by Jobs than any of the professional CEOs it had between 1985 to 1997. And Bill Gates has successfully led Microsoft to a multi-billion empire.

Granted, these might be exceptions. But "amateur" CEOs enjoy some advantages over their professional counterparts.

For a start, professional CEOs strongest point is operations, NOT vision. They know what to do in an established market when rules are well known but in new markets, as it is often the case in high tech, professional CEOs struggle much more. A perfect illustration is John Sculley, who replaced Steve Jobs at the helm of Apple after a power struggle. In his memoirs he wrote: "Apple was supposed to become a wonderful consumer products company. This was a lunatic plan. High tech could not be designed and sold as a consumer product." In retrospect that statement looks pathetic. But Sculley's behavior is symptomatic of a lot of professional CEOs: he looked at what the market was at the time (that is, machines quite cumbersome to use, not ready for the general public), not what it could become. Entrepreneur CEOs know the industry they're in, are much more likely to make bold moves and have a vision that will help the company strive in high-changing markets. Obviously it doesn't work everytime (everyone can come up with a vision, but not everyone can come up with) but professional CEOs almost by definition don't know how to cope with emerging markets and aren't likely to predict where the market is heading.

The second advantage about entrepreneur CEOs is that they genuinely care about their company's success. If some professional CEOs do care, a lot don't and only focus on their stock options so focus on the short term stock price - and one of the first things they negotiate after their salary is their golden parachutes. A typical example would be Al "chainsaw" Dunlap. Once a Wall Street darling for his effective (albeit brutal) turnaround methods, his fame turned into infamy while he was the CEO of Sunbeam as his heavy practice of channel stuffing (selling next year's products at a discount to make today's numbers) blew up in his face.

Given this, why do VCs and Wall Street keep preferring professional CEOs and don't give more chances to entrepreneur CEOs? Partly because entrepreneurs sometimes really do not know how to handle a large company. But also because they don't share the same values as their corporate masters. VCs initially provide funds to entrepreneurs so they can grow a promising startup. During the honeymoon both agree that the entrepreneur should have free reign. But after a while the VCs grow impatient and want to see a return on their investment (it's all about the yearly return). In particular these days VCs don't have the patience to finance the next Google, they want to finance the next YouTube. Get in, get acquired as soon as possible at a premium and cash out.

Some entrepreneurs might be interesting in selling out, but for most of them money is not their main drive. For them their company is an end in itself and not a mean as it is for VCs. Entrepreneurs sure don't mind an IPO, but they hate the pressure from Wall Street and are sometimes (often?) irreverent to shareholders or VCs. In the 80's, Steve Jobs was seen as a loose cannon by investors. No wonder the board sided with Sculley instead of Jobs.

So what often happens is that, after a while, the VCs oust the founder and replace him/her with a professional CEO. Professional CEOs are polished, and have values on par with investors. They play by Wall Street rules. And they acknowledge the importance of quarterly results.

The only problem is that high tech markets move very quickly. And unless they are in high tech themselves, professional CEOs can have a hard time understanding how the market evolves.

Actually, the market doesn't need to be high-tech to prove challenging. Consider Starbucks. Entrepreneur Howard Schultz turned a small Seattle coffee shop chain he acquired in 1987 into an empire, and more importantly was able to change America's perception of coffee from a commodity into an experience. In 2000 Schultz stepped down as CEO. And while his successors worked hard to increasing the top and bottom line, it ended up being at the expense of the brand. Selling other items such as sandwiches or even teddy bears sure brought in more money, but it diluted the Starbucks brand. In 2008, after Starbucks experienced a decline in sales for the first time, Schultz came back as CEO of the company and decided to focus again on coffee. Time will tell if his bold move will be good for the future of the company, but his predecessors showed the limits of doing business by the book.

It doesn't mean that professional CEOs are useless. Lou Gerstner is credited for turning around IBM. But IBM is a large firm operating mostly on established markets. When it comes to a company that needs to reinvent itself like Apple, professional CEOs haven't done so well.

There are also companies that try to combine both types. Consider Google. Its two original founders, Sergey Brin and Larry Page, were teamed up with Eric Schmidt who became the CEO. The same scenario happened when Meg Whitman was appointed CEO of eBay. And while Jeff Bezos stayed as CEO of, he brought in an operational expert when the company was losing too much money. Obviously there needs to be some chemistry between the professional CEO and the founder(s). But the result can be worth its while.


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