Have you ever promoted a top performer in your business, only to watch them struggle in their new role? If so, you’re not alone. This is a classic example of the Peter Principle—a quiet but powerful force that can undermine even the best-run small businesses.
The Peter Principle, coined by Dr Laurence J. Peter in 1969, is the idea that people in organisations are often promoted based on how well they perform in their current job, rather than whether they’re suited for the next one. The result? Eventually, they land in a position they simply can’t handle. For Australian business owners, this isn’t just a theory—it’s a real-world challenge that can sap productivity, lower morale, and stall your growth.
Let’s break down how the Peter Principle shows up in business, how to spot the warning signs, and, most importantly, what you can do to avoid falling into this trap and set your team up for long-term success.
What Does the Peter Principle Look Like in Real Life?
The Peter Principle isn’t just a management theory—it’s something I’ve seen play out time and again with clients and in businesses of all sizes. Here are a few high-profile examples that might ring a bell:
- Steve Ballmer at Microsoft: Ballmer was a superstar sales executive, but when he became CEO, he struggled to guide Microsoft through the mobile revolution. The company missed key trends, and competitors like Apple and Google surged ahead. Ballmer’s story is a classic case of being promoted based on past success, not future capability.
- Kodak’s Downfall: Many of Kodak’s leaders were long-time company men who excelled in their traditional roles. But when digital photography came along, they failed to adapt—and the company paid the price. Solid performance in one area doesn’t always translate to future-ready leadership.
- Matt Millen at the Detroit Lions: Millen was a champion on the football field, but his lack of management experience led to some of the worst seasons in the team’s history. Skill in one arena doesn’t guarantee success in another.
You don’t need to look to multinationals or sports teams to see the Peter Principle in action. In small businesses, it often looks like this: your best technician becomes the team leader and suddenly struggles with people management, or your star salesperson is promoted to sales manager and can’t coach others to succeed. The impact is felt quickly—productivity drops, morale dips, and the business owner ends up firefighting instead of focusing on growth.
Spotting the Peter Principle Before It Hurts Your Business
So how do you know if the Peter Principle is creeping into your business? Here are some warning signs to watch for:
- A newly promoted leader who was once confident now seems hesitant or avoids making decisions.
- Team morale and productivity take a noticeable dip after a promotion.
- Someone who used to thrive now appears overwhelmed or disengaged.
- You notice more mistakes, missed deadlines, or unresolved conflicts in the team.
If any of these sound familiar, don’t panic. The good news is, there are practical steps you can take to address the issue—and even better, to prevent it from happening in the first place.
Strategies to Beat the Peter Principle
Having worked with many Australian SMEs (and as I discuss in $20K to 2 Million in 2 Years), I know that avoiding the Peter Principle is less about luck and more about being intentional with your people strategy. Here are some proven tactics:
- Train Before You Promote
Before you promote someone, ask yourself: do they have the skills they’ll need to succeed in the new role? Leadership isn’t just about technical expertise—it’s about communication, delegation, and decision-making.
Big companies like Google invest heavily in leadership development, but you don’t need a huge budget to get results. Start with mentoring, job shadowing, or even short training sessions before someone steps into a new position. This small investment can pay big dividends down the track.
- Reward Without Promoting
Not everyone wants—or is suited—to be a manager, and that’s perfectly okay. Companies like IBM have created technical career tracks, allowing top specialists to progress and be rewarded without having to manage people. In a small business, this could mean recognising your experts with pay rises, bonuses, or special projects, rather than pushing them into a role they don’t want.
- Make Promotions Strategic, Not Automatic
It’s tempting to promote your star performers, but performance in one role doesn’t guarantee success in another. Use more than just performance reviews—leverage tools like DISC or StrengthsFinder to assess leadership potential and team fit. These assessments can give you insight into how someone communicates, handles pressure, and works with others.
If you’re on a tight budget, consider free or low-cost alternatives like 16Personalities, or run internal peer reviews and structured self-assessments. Sometimes, the people who work alongside a candidate every day have the clearest view of their leadership potential.
- Consider Lateral Moves
Sometimes, the best move isn’t up—it’s sideways. At Amazon, employees are encouraged to explore different departments to find their best fit. In your business, this could mean giving someone the chance to work in a different area, learn new skills, or take on a special project. Lateral moves build a more flexible, well-rounded team and help employees discover where they truly shine.
- Build Around Their Strengths
If you’ve already promoted someone and they’re struggling, don’t rush to demote them. Instead, surround them with a complementary team. Think of Steve Jobs and Tim Cook at Apple—Jobs was the visionary, Cook the operational genius. Together, they made Apple a powerhouse.
In your business, this might mean pairing a new manager with a mentor, or giving them support in areas where they’re less confident. With the right support, many leaders can grow into their roles.
Practical Tips for Business Owners
Here are five things you can start doing today to ensure your team is set up for success:
Run regular skills assessments: Don’t wait for annual reviews. Check in with your team quarterly to spot issues early.
- Create clear promotion criteria: Base promotions on potential and readiness, not just current performance.
- Talk to your team: Find out what their goals are and what they want to achieve.
- Offer non-managerial growth paths: Not everyone needs to be a manager to grow and add value.
- Be flexible: If a promotion isn’t working out, have the courage to pivot—whether that means extra training, a lateral move, or reshaping the role.
Final Thoughts: The Peter Principle Doesn’t Have to Hold You Back
Promoting someone who isn’t ready can set your business back, but with a bit of planning and the right support, you can avoid the Peter Principle altogether. When you train intentionally, assess holistically, and reward people for what they do best, you create a workplace where everyone can grow in the right direction.
As I’ve seen with many clients (and share in $20K to 2 Million in 2 Years), getting promotions right isn’t just about filling roles—it’s about building a team that’s capable, motivated, and ready to take your business to the next level.
Promote wisely, invest in your people, and watch your business thrive as you grow.
