Typically, firms consider leadership development (i.e., training focused on skills required for success in leadership roles) and succession planning (i.e., the creation and implementation of long-term plans that address changes in top leadership roles) as two distinct organizational initiatives. In recent years, however, scholars and practitioners have called for a new, more comprehensive approach that considers the organization as a system. Rather than considering succession planning and leadership development as distinctly different initiatives, organizations should work to create internal leadership pipelines that span entry-level employees to executives. To leverage potential advantages associated with instituting comprehensive leadership pipelines and to address practical concerns associated with risk and talent management, we propose the introduction of incremental investment in organization-wide leadership development programs via distinct, evaluative stages – a real options reasoning (ROR) approach to leadership. We argue that blending ROR with skills-based leadership models diversifies risk associated with investments in talent management and increases the ability for targeted, purposeful investment in potential organizational leaders.
Organizational leadership development
Organizational leaders must frequently decide whether to “make or buy” human capital (Barney, 1991) when evaluating whether to recruit external candidates who already possess the requisite skills or to provide internal training for skills that employees lack (Cappelli, 2008). Internal hires offer several benefits as they are generally more likely to be committed and perceived as a better fit while being less costly (Bidwell, 2011). Also, as leaders determine the focus of employees' attention (Barnett, 2008), hiring external leaders will alter attention patterns (Ocasio, 1997) and create different mindsets (Hambrick & Mason, 1984) while internal succession offers more consistency. For these reasons, in some circumstances, hiring from within an organization can be more advantageous. In addition to being a necessity for effective succession planning (i.e., a process through which key personnel are replaced in a controlled way that allows the operations of the business to continue uninterrupted; Martin, Martin, & Mabbett, 2002; Lewis & Heckman, 2006), implementing programs or policies that lead to the development of a high-quality internal talent pool are beneficial for the organization in a variety of ways, including decreased turnover and increased engagement and job satisfaction (Chen et al., 2004). However, in order to create a stronger, larger internal labor pool, the following HR-specific questions must be addressed: (1) What skill sets should be developed and when should they be developed to optimally grow the internal labor market throughout the organization? and (2) How can organizations effectively utilize their training efforts to select employees who will be successful in future roles? Drawing from established leadership and development theory and empirical cross-disciplinary research helps address these key questions. The process of succession planning is time intensive and requires a great deal of long-term planning (Kesner & Sebora, 1994; Rothwell, 2010), and there is some debate regarding how far into the managerial hierarchy organizations should dive to find what have been deemed high-potential employees. From a strategic perspective, it may be less risky and more efficient to create a plan for advancement with employees who have already substantially advanced through the company given that fewer contingencies stand between their current role and replacing a key employee. It is for this reason that succession planning has traditionally begun with middle managers (Conger & Fulmer, 2003). However, more comprehensive views highlight the importance of considering how the various organizational systems interact (Kast & Rosenzweig, 1974) and support extending succession planning beyond its traditional scope to create a coherent process throughout the levels of the organization. For instance, policies that strengthen the internal labor market, including the expansion of training programs and alterations in reward systems to award skill or knowledge acquisition (Church, Rotolo, Ginther, & Levine, 2015; Leskiw & Singh, 2007) prior to middle management are essential in developing the skills employees need for executive roles (Ferratt, Agarwal, Brown, & Moore, 2005; Foong-ming, 2008).