05/09/2013 10:51 am ET Updated Jul 09, 2013

About Leadership: The Fundamentals

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Every business has fundamentals underlying it. Businesses operate in a market, which is why they are businesses, and unless the management of the business has a deep understanding of the fundamentals, it is not managing the business; it is simply performing a custodial function.

When I came into BP I learned that virtually the entire senior management of the company had, at some point in their careers, held a leadership role in the supply and trading business. Some people from outside that business area thought of this as a mini-mafia, bringing along their friends. I had no idea really.

Then, when I was responsible for 'Manufacturing, Supply and Distribution' and began to see all of this business from the inside, I realized why these people had moved to the top of the company. It was in supply and trading that you learned, in a deep way, what really moved the markets in which our company operated. It was from here that the company had to deal with OPEC and its members, with our large and small private competitors, and with governments. The supply and trading people learned, sometimes from hard experiences, what were short-term fluctuations and what were long-term trends. In other words, while doing the business of buying and selling oil and oil products, if they were good and smart, they learned how the markets really worked.

John Browne was the first leader of BP in a long time to come from a different route, through exploration and production. But he also was BP's Treasurer at a rather young age, and from that position had other insights as to how currency trading was also a fundamental part of our business. But he also brought another aspect of understanding of fundamentals to the company that had been lacking in the previous generation, namely, that if you are an oil company you better be excellent at finding oil.

Beyond the importance of exploration, while the supply/trading people understood the global forces very well, they did not understand or appreciate the market around massive capital expenditure nearly so well. When a company spends huge sums on new capital investment (and in the case of a large oil company this is more than $1 billion a month) the entire industry of large engineering design and construction contractors is crucial to success. Companies like BP, heavy capital companies, are judged by their return on capital employed. To paraphrase Peter Drucker, those coming up through the trading route had deep insights that helped to build the right things, and to that John added deep insights about how to build the things right.

If a business is to operate at the cutting edge of strategic insight in its markets, the leadership needs to have this sort of deep understanding. Does this imply that a chief executive must come from within the company, or even the same industry? Certainly not. But it does mean that the board, in selecting a chief executive, needs to know just what sort of knowledge and insight that person must have. Personality, management and leadership skills, track record -- all these are important, but without an ability to gain a deep understanding of the context in which a business operates the chance of failure is great.

About Leadership: About Leadership is a series of 52 columns on corporate leadership - essential skills, leading teams, managing your career, the strategic and business practices to make a company and its leader distinctive from competitors. These columns will be of interest to people leading small and medium sized companies today, many of whom have not had much formal training in management skills and techniques; for the many people in big companies who aspire to senior management; and for anyone who thinks: Give me a hint, how can I do this better?