There's one common trait in many business failures

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Almost every week we seem to hear of a beloved brand — once seen as formidable — that's facing bankruptcy. Recent examples include a bunch of retailers such as Toys R Us, Bon-Ton, and Sears, but no industry is immune.

Businesses often fail. In fact, 86 percent of companies that were on the Fortune 500 in 1955 no longer exist. More importantly, the pace of failure is accelerating. A study conducted by Olin Business School at Washington University in St. Louis projected that 40 percent of the current Fortune 500 companies will face extinction in 10 years.

As companies try to fight the sweeping tide toward failure, it's important to understand why they are failing. Are they choosing the wrong business strategies? Or are they choosing the right strategies, but have the wrong leaders in place to execute?

It's a tough question to answer because most companies aren't actually thinking about their leadership strategy at all. When we talk to senior executives, they're often not sure what we mean by leadership strategy. In short, having such a strategy means having a supply of capable leaders to meet both your short- and long-term business needs. A business strategy simply cannot succeed without an integrated, future-focused leadership plan to execute it.

There are four steps to creating an effective strategy:

  1. Clearly articulate your organization's business drivers, and define what success looks like, both for the organization and its leaders.
  2. Determine how your current leaders stack up against your future requirements, both in terms of the quality and quantity of your current leadership pool. This analysis should lead to clearly identifiable skills gaps, and reveal what actions will be required to close them.
  3. Begin accelerated development programs to build your current leaders' skills to meet future job needs. When necessary to fill a clear gap, recruit outside talent with skills matching your needs.
  4. Using analytics, capture data that enables you to evaluate the success of your initiatives and their return on investment.
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While it may sound simple, the process can require a considerable investment of time and resources. And the formation of a leadership strategy must be done jointly as an integrated part of your organization's strategic planning, not as a separate process.

Recently, DDI, The Conference Board, and EY completed the Global Leadership Forecast 2018, a massive study that answered some important questions on leadership, including those about strategy.

We examined whether most organizations had a leadership strategy, and what the differences were between effective and ineffective approaches. And most importantly if a leadership strategy is worth it. Supported by CNBC, the study involved over 28,000 leaders and human resources executives around the world.

Surprisingly, we found that more than two-thirds of organizations are flying blind without an effective leadership strategy in place. Furthermore, 31 percent of HR respondents said there was a weak or nonexistent connection between leadership talent planning, and their organization's strategic planning process. Among those organizations that did create a leadership strategy to align with their business approach, it was often done after business planning, not in conjunction.

We also found a big difference between organizations that had effective leadership strategies and those that didn't. For example, organizations with an effective plan are twice as likely to clearly define the skills their leaders need for success. They are also 4.3 times more likely to use analytics to forecast future leadership needs. They have far better talent management systems in place, and are three times more likely to have a succession management system. Most importantly, organizations with effective leadership strategies are four times more likely to gather business impact measures on their initiatives.

The ultimate question, of course, is whether it's worth it. Overwhelmingly, the data says it is. Companies with an effective leadership strategy have leaders who are considerably more effective in dealing with nine key business challenges (see graphic below).

About 56 percent of companies with an effective leadership approach have high leadership quality, compared to only 20 percent of companies with less effective strategies. And, they are more likely to quickly fill open positions with internal candidates. The cost of even a small number of critical leadership positions remaining open far exceeds the cost of developing a leadership strategy.

To kick-start developing or refining your own leadership strategy, we recommend the following:

  1. Ensure a seamless connection between your leadership strategy and business planning processes.
  2. Become highly proficient in using workforce planning models and technology to get a better understanding on your leadership supply compared to future demand.
  3. Paint a clear picture of what will be required for leadership success in your organization, which is likely to vary from position to position. Regularly update this picture as it is likely to change over time.
  4. Integrate and target your talent management initiatives around positions where you have a critical shortage.
  5. And, most importantly, don't even think of beginning the process unless you are serious about constantly measuring impact.

While a leadership strategy will not guarantee your future success, it certainly serves as a sound insurance policy.

Richard Wellins, Ph.D., is a senior research associate at global leadership company DDI. Adam Canwell is a partner, People Advisory Services, at Ernst & Young and a global leader of EY's leadership offering in Melbourne, Australia.