In October 2016 I started a Master’s Degree program at the Technical University of Munich, which is widely ranked as one of the best universities in the world.
This semester, I’m taking a class about strategies of global organizations.
Basically, it’s supposed to teach us how to think like the CEO of a global company, which I expect a rare few of my fellow students to become (don’t look at me, I wanna do my own thing).
Today, I’d like to start an experiment by sharing what I learned from the first of six chapters of that class. If the feedback is good, I’ll turn this into a series.
Why?
Two reasons:
- Writing everything down in one coherent article might help me process, learn and reflect on the material.
- I want to know what actual CEOs think about this.
Note: The opinions expressed in this article are mine and mine alone, and do not reflect the views of the Technical University of Munich. This is just what I personally learned from the class and its materials.
How did I learn this stuff?
I went through the slides and made one-sentence statements about what each slide tells me in a nutshell. After that, I applied Cal Newport’s Q/E/C system to my notes, pulling out the high-level questions the chapter answers, and then answered those in my own words, using sub-points from the slides as evidence. I did not attend the lecture for this particular chapter (sorry professor!).
As a result, I’ve got five questions (and potential answers) about what CEOs do, how they think and why they decide the way they do.
Let’s go.
Question #1: What is the fundamental task of a CEO?
To understand why and how a CEO does her work, it helps to define what that work looks like on a daily basis. Note we’re talking about the task here. Not mission, or purpose, but task.
When a CEO walks into the building in the morning and sits down at her desk, this is what she (supposedly) does:
A CEO makes timed, strategic decisions in uncertain, complex environments. She must then defend and represent those decisions both inside the company and to the outside world, by trying to get others to believe in them.
In this way, the CEO manages a company’s relationships with its stakeholders, which include its employees, suppliers, customers, shareholders, competitors, as well as the public, the environment and all other entities affected by its actions.
Question #2: What influences a CEO’s decisions?
Okay, so a CEO must make lots of complicated decisions, and they better be convincing and make everybody happy too, phew, that’s a tough job already!
So which factors influence CEO decisions? As it turns out, there are two major forces at play here.
Managerial Awareness (MA)
On an internal, individual level, there’s the Managerial Awareness of the CEO. Think of this as the set of all possible decisions the CEO can see and perceive.
For example, if Elon Musk perceives SpaceX building a rocket that can take us to Mars as within the realm of possibility, he’s aware that he can make the decision to try and build it.
This Managerial Awareness narrows and expands, based on all the individual characteristics of the CEO, such as vision, aspiration level, ambition, her own & others’ past behavior, creativity, commitment, attitude towards risk and change, cognitive ability, and so on.
You can imagine it like a bubble that is either big or small, depending on how many options the CEO perceives.
Zone of Acceptance (ZoA)
On an external level, there’s the Zone of Acceptance. This is the set of decisions that is accepted by all, or at least the majority of stakeholders.
For example, when Coca-Cola decided to launch the New Coke, this decision was initially deemed a good idea, based on marketing research and taste tests, which is why there were no strong, opposing forces inside the company against implementing it. It was accepted by employees, management and investors.
However, the strong negative reaction by the public later revealed a stakeholder that was acutely against the decision: customers — and that’s why the New Coke flopped.
The Zone of Acceptance also changes in size, depending on three factors:
1. The number of stakeholders.
The more stakeholders a CEO has to deal with, the more expectations overlap, reducing the number of decisions accepted by all parties involved.
2. The power of individual stakeholders.
A government or institutional investor wields a lot of influence, as they can singlehandedly make or break CEO decisions, for example by rendering them illegal or draining the company of its capital.
3. The level of trust put into the CEO by the stakeholders
A CEO has the power to expand or narrow the Zone of Acceptance by gaining the trust of stakeholders, for example by making mainly good decisions over a long period of time, which leads to a substantial increase in profits and gives the CEO more leeway.
With all these influences, limits and expectations going on, how can a CEO figure out which of all possible decisions are feasible?
Question #3: How can a CEO determine which options make sense?
Let’s see what happens when Managerial Awareness and the Zone of Acceptance collide.
Managerial Discretion (MD)
If a potential decision is both in the Zone of Acceptance, and within a CEO’s Managerial Awareness, it’s in her Managerial Discretion, which is defined as “the latitude of action available to managers.”
For example, if Tim Cook sees Apple creating a VR headset as a valid and realistic option, and investors, the board, shareholders and customers all want it too, this decision lies very much in his Managerial Discretion — he is free to choose this option.
Think of it as the place where Managerial Awareness and the Zone of Acceptance overlap.
The wider the Zone of Acceptance and Managerial Awareness are, the bigger the overlap, creating more feasible options, and thus increasing the chance that whatever decision the CEO makes will be in that intersection.
Given the definitions of the ZoA and MA, a CEO has two leverage points for expanding them:
1. Increase the level of trust stakeholders put in her, for example by being honest, transparent and building a solid track record.
2. Expand how many options she can see, for example by improving her cognitive abilities and personal skills through reading books, learning to be creative or getting leadership coaching.
Decisions picked from the space of Managerial Discretion have a higher chance of leading to successful outcomes — not because they’re better decisions, but because they won’t be nipped in the bud, costing the company precious time and resources.
The more strategic decisions a company can implement, the more feedback it can collect, iterate and adjust.
Therefore, if CEOs maximize the size of their MD, they maximize their chances of success.
But what does that even mean?
Question #4: Why do CEOs decide the way they do?
Ignoring corrupt CEOs, who just line their own pockets, I think it’s safe to say that CEOs strive to make their companies successful. However, what success looks like is left for the CEO to define herself.
A CEO must define a set of objectives based on stakeholder expectations, then make, defend and implement the decisions she think will lead to those objectives and compare the results against the initial goals to determine success.
Ultimately, success will look different for different companies and within that, vary a lot on each stakeholder’s perspective. But even without a fixed demarcation line of success, we can now say something about what makes CEO decisions good or bad.
Question #5: Why do some decisions fail, while others work out?
We can’t say for sure which decisions are better, just that picking decisions from the Managerial Discretion section is a good idea in general, because they lead to more feedback faster.
Of course a CEO can’t make a decision that’s outside of her Managerial Awareness, for she doesn’t know it exists, even if it might be within the Zone of Acceptance.
However, the one definite mistake a CEO can make is picking decisions that lie within her own Managerial Awareness, but outside the Zone of Acceptance.
If a CEO makes a decision outside of the ZoA, for example because she hasn’t earned enough trust yet, or too many powerful stakeholders object to it, the decision will be impossible to implement.
This explains, in part, why some mergers and company takeovers fail.
For example, when the German stock exchange Deutsche Börse tried to buy the NYSE in 2011, many powerful stakeholders raised concerns, including the US and European governments. While the US eventually agreed, the European Commission blocked the deal in 2012, due to the monopolistic threat the merger posed.
What seemed a realistic decision to them ended up lying outside the Zone of Acceptance of other stakeholders — just like the New Coke.
What does all this mean for CEOs?
I think in the end, all of this leaves us with two valuable lessons for CEOs:
1. Try to maximize trust at every turn.
You never know for sure who’s a stakeholder and who isn’t when you meet them, so it’s probably a good idea to build as much trust as you can with everyone.
2. Never stop learning.
Take every chance you can get to expand your vision and see more options. Read a book a week, write a daily blog, have 1-on-1 conversations with employees, go to seminars or hire a professional executive coach. Whatever form your learning takes, make it an integral part of your life.
Sources
Hambrick, D. C. & Finkelstein, S. 1987. Managerial Discretion: A Bridge between Polar Views of Organizational Outcomes.
Church, A. H., 1997, Managerial self-awareness in high-performing individuals in organizations.