While all organizations hire people who they feel match their needs and have the potential to be successful, not all employees are equal. Identifying and cultivating the highest performing employees, especially those with promise for leadership and advancement, is a critical function for organizations to ensure their continued success. The process of identifying and cultivating these employees is the goal of succession planning.

Effective succession planning allows management to ensure its ability to internally source replacements for leaders who retire or otherwise leave the organization. This makes effective succession planning an important strategic activity. One factor that makes it so critical is that not all talent is interchangeable. Rather, what constitutes talent for an organization depends on the demands of an industry, and the specific needs and culture of an organization.

Consequently, organizations that engage in succession planning need to do so thoughtfully. For example, it is easy to assume that the person who should be selected for a promotion is the one who performs best in his or her current position. According to the Peter principle, good employees continue to be promoted until they rise to a position where they lack the needed ability and as a result fail in their new job. Essentially, they are promoted into incompetence. This is a problem both for the otherwise successful employee and for the organization that now has an incompetent leader.