Developing leadership after change in management

Explain in detail what you believe are the possible consequences of Sir Terry Leary’s Resignation from Tesco.

“Mr. Leahy stands out from other great CEOs in Europe because he has taken a business that was stalling and made it consistently outperform the entire sector. He’s done that while never being a celebrity. He’s always kept his feet on the ground.”- George Cox, Former CEO and Chairman, Unisys Corporation (UK).

“The first thing you notice is that Terry has a completely different character to anyone else you know. That tells you that people who are successful don’t have the same makeup as everybody else. In Terry’s case, his approach is low key. He is sharp and much focused: he is very close to his people and he doesn’t spread himself too thin. Above all else he’s a very good leader.”- Allen Leighton, Chairman of the Royal Mail Group.

Introduction

Background

Sir Terry Leahy was born on the 28th of February 1956, in Liverpool. He grew up in the Belle Vale district in Liverpool where he studied at St. Edwards College and earned a management science degree (an Upper Second Class honours in Management Sciences) at the University of Manchester’s Institute of Science and Technology in 1977. In his early life, Leahy briefly worked stacking shelves and washing floors in the London branch of Tesco during his school holidays, which could have played an important part in his decision to join Tesco after his graduation. Having lost to another candidate in his first application in Tesco, Leahy applied again and became a marketing executive in 1979.

From the time when he joined Tesco, Leahy was identified as a capable and prospective employee who if developed could benefit the organisation. He was promoted 1981 as a marketing manager and from 1984 to 1986 held the position of marketing director for Tesco Stores Limited. He was later appointed as the commercial director of fresh foods in 1986; in 1992 Leahy was appointed to the board and finally became chief executive (CEO) in 1997 on the retirement of his mentor Lord MacLaurin (then CEO) who sought after appointing a successor to lead Tesco into the international market and increased its market share.

Tesco was a follower of Marks & Spencer and Sainsbury in terms of strategic market decisions but that changed when Leahy decided it is time to stop playing catch-up and start leading the UK grocery market through market knowledge and devising effective strategic plans. This change in focus led to the birth the Tesco Clubcard (loyalty program) and the Tesco Value lines – both of which was a successful strategic plan and has been a key to the success of Tesco in the UK.

During his era, Tesco has tightened its lead as the UK’s largest retailer and has grown considerably locally and internationally with opening of stores in USA and China. In April 2005, Tesco announced a pre tax profit of £2 billion with over £37 billion in revenue. This proved that Tesco under his administration was “too successful” and growing too fast.

Following his appointment to the Tesco board, Leahy has been awarded and recognised locally and internationally. In 2003, he was award Britain’s “Business Leader of the Year” and the Fortune European Businessman of the Year for 2004. In 2005, Management Today recognised him as Britain’s most admired business leader and was finally honoured with a ‘Doctor of Science’ from Cranfield University on the 7th June 2007.

Despite the fact that Tesco’s financial performance under Leahy’s administration had been exceptional, he was criticised on numerous counts, especially for the company’s Human resource policies. The average wages paid by Tesco were among the lowest compared to others (Sainsbury and Marks & Spencer) in the retailing industry in the UK. In addition, the wages were paid on an hourly basis and the time taken off for tea breaks was not included while calculating the total working hours. The company was also criticised for its radical policy on sick leaves, for examples, it refused sick pay to workers on their first three days absent from work. Regardless of the criticism, Tesco claimed that their worker were in support of such scheme because most were tired of covering for those who called sick. Furthermore, the company claims to “have already seen a reduction in the amount of days taken off sick in the stores using the schemes”, which were first introduced in Ireland.

Another radical scheme is to offer more holiday allowance to workers but reduce it every time a worker takes a day off sick. Tesco believes that such scheme would discourage workers from taking more sick leaves, hence improve their performance and contribution to the company. However, many workers union association condemned these schemes, claiming that it does not motivate or improve employee morale.

The company was also criticised for its planned movement into the organic food market. Many organic food watchdogs question whether the supermarkets’ policy of sourcing their organic products from large industrial-style farms, who are only attracted to organics because of higher profit margins rather than ethics, as well as importing from poor countries in Africa who can barely feed themselves such as Zimbabwe, is really true to the original social and environmental aims of the organic movement. Very few of Tesco’s organic products are locally sourced from local farmers.

Tesco’s stance on competition in the UK retail industry is less favourable to its rivals; the company already has 32% of the retail market share and is gunning for more. Many of its competitors have complained that the company does not play fair but instead is aiming to totally get rid of them. The entry of Tesco into the pharmacy and health products markets has severely affected stores like boots and other pharmacy outlets with analyst claiming that some of these stores would have to close down due to fierce competition and jobs would be lost. The company was also accused of practising ‘predatory pricing’, many off-licence and small grocery shops claimed Tesco intentionally reduces some of its products below the production cost and increase others so as to lure more customers. Presently, Tesco has 2482 stores in the UK, approximately five times the number it had 13 years ago. This has led to complaints by small retailers about its impact on local shops and the creation of “Tesco towns” where shoppers have little choice in deciding where to go shopping. Furthermore, there are also accusations that as the leading grocery company, it has too much power over the supply chain and influence prices by driving down prices for the likes of farmers.

Effects

After the exit of Sir Terry Leahy in March 2011 he will be only 55. Philip Clarke who currently is in-charge of Tesco’s international operations in Asia and Europe and oversees group information technology will be taking over.

Shares, Market share and profits

The first effect of Leahy exit was felt few weeks after he announced his resignation with Tesco’s shares falling 9.7p or 2.4% to 397.4p, its lowest close value since October. Many of Tesco’s investors have developed full believe in Leahy during his era and have trusted his strategic plans due to their successful outcomes. This I believe will change after he retires. There is now uncertainties on how Philip Clarke would perform or if he is the best man for the job. According to David McCarthy, an analyst of Evolution Securities, said: “We are not surprised by Phil’s appointment or the restructure, but we are surprised Terry is going early, we had expected an announcement saying he would step down in 2013, not 2011.” This confirms that the news of his early resignation from Tesco came to most as a shock and unexpectedly. He went further saying that: “In losing Terry, Tesco is losing its best player and therefore the team is weakened. The competition will be happy.” This I believe is true because his track record as Tesco’s CEO has been exceptional. For example, when Leahy took over from his mentor, Tesco’s UK market share was just 14.5% but 10 years later the company is well above its rivals (Asda, 16.8%) with 30.6% market share.

If Tesco’s share prices continue to fall, some investors might be forced to sell off their shares which would not be favourable to the company. The possibility of this happening cannot be ruled out because since Leahy took over as CEO, many investors have invested in Tesco because they believe in his strategic plans which have been successful and now that he is leaving scepticism would arise if Philip Clarke is able to deliver as he did.

After Leahy’s exit, Tesco financial performance would be affected in terms of revenue and profits. During his term, Leahy achieved revenue income of over £30 billion and profits of over £1 billion, which most believe was only possible due to his early strategic plans and continuous development. When he leaves, the realisation of such abnormal profits would take time to achieve. Hence, a more realistic revenue and profits target would be set which most believe would be far less than what Leahy achieved during his tenure.

Sir Terry Leahy has done most of the job, as some market analyst would say; therefore, Philip Clarke should have an easy take ahead of him. However, this might be totally wrong because the management of Leahy’s success might be more difficult than him achieving his own. Every new chairman would always want to leave their mark or boast of their accomplishment and if care is not taken, focus might be lost.

Philip Clarke is presently less popular and well known by Tesco’s investors, but given his already long career at Tesco and success in developing the international business, many market analysts consider his appointment as the new CEO to take-over from Leahy to be a good one. Furthermore, many analysts believe his strategic approach as the new CEO would be evolutionary but would not make any radical departures from the current organisational strategy executed by Leahy.

Market analyst forecast that UK like-for-like sales growth is likely to remain downcast in the medium term due to low level of food price inflation rather than due to the leadership change.

According to market analysts, “Trading in international markets is expected to gradually improve as economic recovery slowly comes through. Long-term earnings growth prospects remain good, with international and Tesco Bank likely to be key drivers. Given our expectation that the group will deliver at least low double-digit growth in underlying earnings per share and dividends in each of the next three years, we consider the valuation attractive. The recommendation remains ‘accumulate’.” (Guardian, 2010)

In summary, regardless of the fall in share prices, no severe effect is expected when Leahy resigns as Tesco’s CEO.

Organisational Culture

According to Pettinger, 2007, the culture of an organisation is the basis for its management style, and individual and collective attitudes, values, behaviours and beliefs. It is therefore essential that the ways in which things are required to be done are clearly established, understood, and accepted by all concerned. During Leahy’s regime, he introduced a culture that focussed on raising standards and providing value to its customers. The change of such culture might be disastrous to the business operations of Tesco.

Organisational culture could posses both strong and weak attributes on the organisation itself and these could determine its working relationships with employees or stakeholders, conditions and productivity. For instance, Strong culture is said to exist where staff respond to stimulus because of their alignment to organisational values. In such environments, strong cultures help firms operate like well-oiled machines, cruising along with outstanding execution and perhaps minor tweaking of existing procedures here and there. Conversely, there is weak culture where there is little alignment with organizational values and control must be exercised through extensive procedures and bureaucracy.

Leahy emphasises the importance of vision, value and culture in his 10 business commandment. In his words, “Visions, values and culture are critical to the success of Tesco”. According to Leahy, Tesco’s vision is to create an environment where customers could benefit in order to earn their lifetime loyalty. This is the vision that gave birth to Tesco Clubcard which has proven to be an effective customer loyalty or retention scheme. The continuation of this vision by the future CEO is important and any attempt to quickly introduce a new one might have negative effects on the company.

It is particularly important that culture is designed, shaped and reinforced by those in top and senior positions, Pettinger, 2007. In order to do this, standards of attitudes, values, behaviours and performance much be set by those in charge in an organisation and employees must be required to follow these standards. (Pettinger, 2007, p.342), went further to argue that, if organisation culture is allowed to emerge, the result is that people or employees think, believe, behave and act according to their own priorities and the process of their peers; and this leads to the tendency to pursue their own agenda.

Evidently, according to Pettinger’s argument, Leahy resignation will trigger a change in the organisational culture of Tesco. The new CEO (Philip Clarke) might attempt to introduce his own working culture but it is vital that he understands the existing culture at first before any attempt to change it. This process might be costly and lead to waste of resources because he would prefer to bring in his own team or hire new one rather than working with the old players in the executive level. Also, those who are loyal to Sir Terry Leahy might end up resigning, seek employment elsewhere or go with him, which means that talent would be lost during and after his resignation. A major re-organisation at the top level will see half the board members change their responsibilities to reflect the company’s increasingly international nature. However, some market analysts are worried that this will cause disruption further down the organisation which is not favourable to the whole change process.

Organisational culture is a powerful and effective way of life that organisations adopt in order to run their business, however, according to Pettinger, 2007; culture should be changed and developed. The continuous changes in technology, markets and customers needs means that organisations must be prepared to develop new working culture to meet this. Some leaders or managers who were successful in one organisation might fail in another because of their organisational culture. Therefore, it is very important for new leaders to learn, change or accept an existing culture in the organisation. However, culture change can be long and costly, especially where people resist, Pettinger, 2007, p.359. In any case, it is vital that any culture an organisation adopts must create a strong and positive relationship with its employees because this encourages positive view of the organisation and its works.

Leadership

In the present business environment, the term ‘leadership’ becomes increasingly important to the organisational development and success of organisations (Eisenbach et al. 1999). This is due to the uncertainty of the business environment of all industries which are globally connected. For this reason, many organisations now depend on the skills, knowledge and experiences of their leaders in order to be successful and competitive.

The aptitudes of leadership and management are clearly the most important factors to consider when the organisations are experiencing market downfall (Graetz 2000). In such a situation, the skills and experience of the leader and management would be put to test in devising the best strategy that could be adopted to overcome the troubled times. Besides, where faith exists in the abilities and capabilities of leaders, employees or workers would have high expectations from the leaders and management. Employees will expect to see an effective and reasonable strategy, as well as good communication skills from the leaders during the critical period of the organisation.

According to Adair, 2004, a leader must demonstrate certain attributes in order to effectively exercise his or her leadership functions. These characteristics are:

Group Influence – a leader must be able to generate the willingness to achieve a desired goal or objective.

Command – a leader must be able to make quick and effective decisions whenever a situation demands it and must be able to stand by this decisions

Coolness – a leader must always remain composed under criticism.

Judgment – a leader must possess the ability to utilise available resources and information in a logical and reasonable way to produce effective results.

Responsibility – a leader must exhibit continued effort combined with a degree of reliability in order to complete a task or achieve an objective (Kermally 2005).

Even though leadership trait theories are popular, it is viewed by many academics as a very one-dimensional hypothesis. Some academics argue that theories attribute the success of leadership solely to his or her personality and physical traits or characteristics without regard to the situational context. Hence, the trait approach is considered too simplistic as a justification of the complex leadership phenomenon.

During Leahy’s era, he has exhibited the above attributes and proven to be a true leader. His resignation would mean that his successor must also be able to portray such attributes which some think would bring about unnecessary pressure. In addition, some analyst argue that for Philip Clarke to be successful, he has to prove Leahy is second best and he can do a better job which most believe is a tough job to do. Leahy exit signifies a leadership change and organisational re-structure, his 13 years tenure as CEO would have created a rigid leadership style which most is used to hence might be difficult for existing team to adapt to the new CEO’s (Philip Clarke) leadership style.

Tesco is considered as the most successful retail business in the United Kingdom with a market share of over 30%. The success of Tesco was fast-tracked by the appointment of Terry Leahy as the company’s Chief Executive Officer. Leahy is considered by many as a visionary leader who led the company into a series of organisational changes that aimed for the company to become more customer-focused and to develop the company’s workforce. Leahy believes that the success of a leader depends upon maintaining a happy workforce and earning the support of the workforce. According to him, there are four things that a leader must be able provide his workers and followers in order to satisfy and motivate them. These are:

A job that is interesting to do

A chance to get on in life

To be treated with respect

A boss who helps and cares

After Leahy’s exit, his successor’s principles might be contrary to his, hence a clear organisational vision would not be sent out to the entire Tesco workforce. The ‘fear of the Unknown’ might de-motivate Tesco’s employees and make them less engaged, although, few of these employees are aware of how the new CEO’s leadership style might affect them.

Impacts of Leadership Styles on the Organization

According to Rosen (1989), leadership style refers to the trait pattern exhibited by a leader on the process of decision-making and exercising authority. There are different types of leadership styles, for example, there are autocratic and participative leaderships. Under an autocratic leadership style, the group or organisation is managed under an authoritarian leader who leads by force or with fear. A participative leader in contrast, possesses the same power as the autocratic one; however, he chooses to exercise his power differently during the decision, policy-making and work-role assignment. He is more diplomatic and engaging when making decisions.

Leahy adapted a participative style of leadership in which the employees are given voice in the decision-making process. The CEO also gives emphasis on the importance of appointing many leaders to handle organisational process. The organisational structure therefore became more flat where the roles and responsibilities of everyone are clearly stated. Leahy delegates leadership roles to individuals in the organization in order to ensure that the company, with more than 300,000 employees, operates effectively. The leadership style that is manifested by Terry Leahy and is imitated by the leaders in the company has changed the structure of the company. The company has adapted an organic form of organization. An organic system is characterized by low to moderate use of formal rules and regulations, decentralized and shared decision making, broadly defined job responsibilities, and a flexible authority structure with fewer levels in the hierarchy. An organic structure is more appropriate to those organizations where there is a need to be innovative. The pressure of innovation suggests a structure that can respond to environmental variations rapidly so it is necessarily loosely defined and flexible. The organization tends not to be formalized nor are roles too closely structured (Salaman 2001, p.106). Organic organizations are stratified primarily in terms of expertise, and leadership accrues to those who are the best informed and capable. There is much more commitment to the organization, with the result that formal and informal systems become indistinguishable. A framework of values and beliefs, much like those characterizing a profession, develops that becomes an effective substitute for formal hierarchy (Miner 2002, p. 449). The company has adapted a simpler and flatter organizational structure.

Recommendations

In order to remain successful in today’s highly competitive business environment, many organizations are coming up with strategies to tap the full potential of their human resources. A company’s people can be a source of competitive advantage. This is philosophy behind employee empowerment and participative management. Employees are now seen as partners. Because of this, organizations are giving more power and responsibilities to their people. Employee empowerment and participative management will increase productivity, give rise to better decisions, improve employee morale and job satisfaction, elicit greater commitment among employees, encourage flexibility, make employees adapt to changes faster, improve communication and increase employee trust.

One of the current requirements of leadership in Tesco is the development of participative management skills in leaders. The leaders at Tesco need to possess the necessary skills in order for them to practice participative leadership properly. The skills that the leaders must possess are:

1. Interest and concern

2. Communication

3. Conflict resolution

4. Negotiation

5. Compromise

6. Synergy

7. Flexibility

Participative leadership is a leadership style which involves members of a group, sub-unit or organization identifying essential goals and developing procedures or strategies to reach those goals. Implementing participative management will also help the company to develop people in the organization to become leaders. Through participative management, people in the organization are encouraged to take part in decision-making, express their ideas and to showcase their talents and skills. The discovery of hidden talents and skills will not only help the group, sub-unit or organization reach their goals it will also alert the organization to people within the organization who have the potential to become leaders.

Future Requirements

One famous contemporary writer on leadership is Warren Bennis (1994). He believes that a leader must have a direction, he must earn the trust of his followers, he must kindle hope and optimism, and he must be results-driven. On the other hand, James M. Kouzes and Barry Z. Posner (1987) believes that a leader must seek to challenge and improve the process, inspire a share vision, enable other to act, act as s role-model, and encourage the heart of the followers. The future leader must not only focus of achieving the task. He must also learn to develop his people. He needs to learn the value of motivation. The future leader must know how to motivate using monetary rewards and he must also use psychological and emotional rewards to motivate his people. The future leader must find the balance between task-orientation and relationship-orientation. On the one hand, he needs to lead his people in achieving their shared goals and objectives and on the other hand, he must be able to build strong relationships with the people around him. The importance of emotions must also be recognized.

Proposals for the Development of Leadership

1. On-the-Job Learning

The company must recognize that the primary place for leaders to learn is on the job and on the line. In order to the company to help leaders learn within the organization, educational facilities must be established inside the organization. The company needs to appoint educators that will educate and develop leaders in various countries and places where Tesco is operating. The organization must institute a Corporate Education department that will be under the HRM department. Within the Corporate Education, a Business Leadership Development (BLD) must be established. This group will focus on executive development and overall leadership development, and it will also be responsible for all training specific to leadership. Business Leadership Development should be used to come up with systematic ways to build the capabilities of Tesco’s business leaders. The emphasis of the BLD process must be to provide development opportunities at key transition points in individuals’ careers. To accomplish this goal, a curriculum must be designed and must be operate under the following principles:

Based on real problems and strategic initiatives

Linked to business objectives and company values

Segmented by customer needs

Developing leadership after change in management

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