Have you ever promoted a top performer in your business, only to watch them struggle in their new role? You’re not alone. This is a classic case of what’s known as the Peter Principle—a phenomenon that quietly undermines many small businesses across Australia.
The Peter Principle, first described by Dr Laurence J. Peter back in 1969, is the idea that people in organisations are often promoted until they reach a level where they’re no longer competent. It’s not that they weren’t brilliant in their previous role—it’s just that the next step up often requires a completely different set of skills.
For small business owners, this isn’t just a management theory. It’s a real challenge that can affect your operations, your team culture, and ultimately your bottom line. Let’s unpack how the Peter Principle plays out in Australian SMEs, and more importantly, how you can avoid its pitfalls and build a stronger, more resilient business.
Understanding the Peter Principle in Your Business
Promotions are usually a reward for great performance. And while it’s crucial to recognise and reward your high achievers, it doesn’t always mean they’re ready for the next big challenge. Leadership roles call for skills like communication, delegation, and decision-making—not just technical know-how or past results. That’s the heart of the Peter Principle: promoting someone before they’re truly prepared for what comes next.
This doesn’t mean you should stop promoting from within. Far from it. Internal promotions are one of the best ways to retain talent and reward loyalty.
What Does the Peter Principle Look Like in Real Life?
You don’t have to look far to see the Peter Principle in action. Here are a few scenarios that might sound familiar:
The Star Barista Who Became Café Manager
Your best barista is promoted to manager. Suddenly, they’re juggling rosters, supplier negotiations, and tricky staff conflicts. Within months, staff turnover rises and customer reviews dip. The owner mistook operational excellence for managerial readiness.
The Loyal Store Supervisor Sent Interstate
A retail business promotes a long-time supervisor to run a new interstate branch. While they know the products and regulars inside out, they struggle with strategic planning and adapting to a new market. The branch flounders and closes within a year.
The Tradie Turned Site Supervisor
A builder promotes their most efficient tradie to lead-site supervisor. While brilliant on the tools, they’re not equipped for managing timelines, subcontractors, or budgets. The result? Delays, team conflicts, and costly mistakes.
These stories are all too common. The ripple effects of promoting someone without preparing them for the new demands of leadership can be felt across the entire business.
The Ripple Effect: Why Getting Promotions Wrong Hurts Small Business
In a small business, even one poorly placed leader can cause headaches for everyone:
- Customer experience suffers: Teams led by underprepared managers become slower to respond, less coordinated, and less enthusiastic. Clients notice, and if your manager can’t negotiate with suppliers or plan stock properly, your bottom line takes a hit.
- Team frustration grows: Staff who once worked well together start feeling unsupported or frustrated. Morale drops, and your best people may start looking elsewhere.
- You work harder, not smarter: As the business owner, you end up cleaning up after ineffective leaders, leaving you with less time for growth and strategy.
Small businesses simply can’t afford to get promotions wrong. The Peter Principle isn’t just a theory—it’s a real risk that can quietly erode your culture, performance, and profitability if you’re not intentional about how you promote and support your people.
Smarter Strategies to Tackle the Peter Principle
The good news? You can sidestep the Peter Principle with a few practical, affordable strategies. Here’s what works for the businesses I coach—and what I recommend in my book.
- Tap into Peer Feedback
Sometimes, the people working alongside an employee every day have the clearest view of their leadership potential (or challenges). Try implementing anonymous peer reviews to get a more rounded picture of someone’s readiness for a step up. You might uncover hidden strengths—or spot warning signs—a manager might miss.
- Introduce Leadership Shadowing
Before making any promotion official, let your candidate “shadow” someone already in the role. This gives them a genuine taste of what’s involved and helps both of you decide if it’s the right fit before making any big changes.
- Create a Coaching Culture
Promotions shouldn’t be a case of sink or swim. Pair new leaders with mentors or external coaches who can support them as they transition into their new responsibilities. Ongoing guidance can make all the difference. In my own work, I’ve seen how even a few months of coaching can transform a new leader’s impact.
- Use Role Fit Assessments
Go beyond the basics like DISC and StrengthsFinder. Tools like Harrison Assessments or CliftonStrengths for Managers can give you deeper insights into whether someone is ready for leadership. If those are outside your budget, even a structured in-house checklist based on key behaviours can help you assess fit.
- Trial Promotions
Why not offer interim leadership opportunities before making a formal promotion? Ask an employee to lead a short-term project or supervise a shift. It’s a real-world test with much lower stakes, and it gives you both a chance to see how they handle the responsibili
Keeping Leadership Development Affordable
Let’s be honest—small businesses don’t always have the budget for fancy assessment tools. Here are some budget-friendly alternatives:
- DIY Assessments: Create your own evaluation forms based on what matters most in your business—like communication, conflict resolution, or initiative.
- Free Personality Tests: Tools such as 16Personalities or VIA Strengths offer free reports that, while not as detailed, still provide useful insights.
- Government Training Grants: Check if your state offers small business upskilling programs. QLD and NSW, for example, often have schemes to help with leadership development.
- Group Workshops: Join forces with other small businesses to bring in a coach or trainer and split the costs.
Final Thoughts: Get Promotions Right the First Time
Promoting from within is a brilliant way to reward your team, retain talent, and build your business. But if you don’t approach promotions strategically, you risk losing the momentum you’ve worked so hard to build.
The Peter Principle isn’t a life sentence—it’s a warning. With the right mindset, tools, and planning, you can sidestep it entirely and set your people (and your business) up for lasting success.
If you want to make sure your team is ready to grow with your business, let’s chat. Reach out to Excelerated Business Solutions and let’s put a strategy in place that sets everyone up for success.
Promote wisely, invest in your people, and watch your business thrive—even as you grow.
FAQs About the Peter Principle
How do I know if someone is ready for promotion?
Look beyond performance. Assess leadership skills, emotional intelligence, and communication. Use trials or shadowing to validate their readiness.
Are personality tests like DISC useful for promotions?
Yes, they offer insight—but combine them with practical evaluations and feedback from peers and mentors.
What’s a good low-cost way to assess promotion readiness?
Trial leadership assignments, anonymous peer feedback, and structured performance conversations are budget-friendly and effective.
Should I demote someone who struggles after a promotion?
If demotion is needed, handle it with care and dignity. Where possible, reposition them in a role that matches their strengths.
How can I build leadership capacity in a small team?
Invest in coaching, encourage mentoring, and provide regular leadership challenges like managing a project or mentoring a junior team member.
