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 / Second Quarter 2002 / Issue 27(originally published by Booz & Company)


Yellow-Light Leadership: How the World’s Best Companies Manage Uncertainty

Although the red-light/green-light models differ in most respects, they nonetheless are both personality based: In each, charismatic leaders are said to set goals and then use behavioral tools to align their followers with organizational values and strategic direction. Almost all of the individuals cited above consider themselves the antithesis of managers. They are proud to be focused on the big picture and comfortable leaving managerial details to subordinates. Of course, this characteristic is a double-edged sword: With one side it may empower followers, but with the other it may undercut discipline. Depending on the personal interests of the leader, it may lead to the development of an effective, self-managing organization (Herb Kelleher’s Southwest Airlines Company), or a lack of accountability (Bob Allen’s AT&T Corporation).

Until recently, most academics and practitioners found the green-light/red-light formulation compelling. First, it conforms to an archetypal (albeit politically incorrect) belief that the person found at the top of any group has leadership running in his veins (genetically, leaders are alpha males). Second, it follows the conventional wisdom that leadership style is contingent on circumstances (in good times, leaders employ green-light behavior and, in bad times, red). Third, by framing the world in terms of either/or, it simplifies the decisions leaders must make (apply steady pressure to the organizational accelerator when the light is green; slam on the brakes when it is red). Thus this dual-mode model of leadership is neat and clear-cut, and the logic is simple. The problem is that it doesn’t square with the practices of leaders we’re observing during this protracted recession or what we’ve observed during past downturns.

Few leaders of the companies we are studying characterize the current operating environment as “good times” (9.1 percent), and, even immediately after September 11, fewer than half (43.3 percent) spoke in crisis terms. (Before September 11, only 18.2 percent were talking crisis.) Instead, most leaders in our study tell us their companies are in a yellow-light phase, the prime characteristic of which is uncertainty. Both in our survey and in personal interviews, leaders repeatedly say they are unsure about the nature and duration of current economic trends, unclear about the extent to which their company’s internal weaknesses are contributing to their declining revenues, and uncertain whether the current economic storm is of a passing nature (and thus to be ridden out) or is a lasting change in weather patterns requiring new strategies, capabilities, and behaviors.

Analysis Replaces Charisma
Leaders tell us that yellow-light conditions present a harder test for them than do red-light situations. When the light is yellow, leaders have to make judgment calls — and that can be challenging, as any driver who has been trapped in the middle of a busy intersection will attest. Moreover, in times of economic uncertainty, conditions are akin to a European traffic signal, with a flashing yellow before and after every green and red light. So the leadership challenge is to read flashing economic signals to understand whether they presage recovery or harder times ahead.

When the yellow light is flashing, leaders tell us they face the widest range of strategic alternatives and have the most true decision-making power. (It may appear that leaders have more options when the light is green, but try making that argument to anyone who has attempted to make a fundamental change when the going is good.) And, although followers are more open to change when their backs are against the wall, leaders typically have few viable alternatives open to them during a crisis. In short, when the yellow light is flashing, leaders have as blank a strategic slate as they ever face, and the scope of their decision-making authority is as broad as it ever is. Times of uncertainty may be a harder test for a leader, but they are also a tremendous opportunity for those who make the right choices.

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  1. Bruce A. Pasternack, “Leadership: Dreamers with Deadlines,” s+b, Fourth Quarter 2001 Click here.
  2. Gary Hamel, “What CEOs Can Learn from America,” Fortune, November 12, 2001 Click here.
  3. Jerry Useem, “What It Takes,” Fortune, November 12, 2001 Click here.
  4. James O’Toole, Leadership A to Z: A Guide for the Appropriately Ambitious (Jossey-Bass Inc., 1999)
  5. Alec Levenson, Leveraging Adversity for Strategic Advantage, Working Paper, March 2002, Center for Effective Organizations, Marshall School of Business, University of Southern California
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