©2004 by South-Western/Thomson Learning 1

Strategic LeadershipStrategic Leadership

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 2Chapter 2

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Chapter 2Chapter 2Strategic LeadershipStrategic Leadership

Chapter 1Chapter 1Introduction toIntroduction to

Strategic ManagementStrategic Management

StrategicThinking

The Strategic Management ProcessThe Strategic Management Process

Chapter 4Chapter 4The InternalThe InternalOrganizationOrganization

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9International StrategyInternational Strategy

Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

Chapter 11Chapter 11Corporate GovernanceCorporate Governance

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

Chapter 10Chapter 10Cooperative StrategyCooperative Strategy

Chapter 12Chapter 12Strategic EntrepreneurshipStrategic Entrepreneurship

StrategicAnalysis

CreatingCompetitiveAdvantage

MonitoringAnd CreatingEntrepreneurialOpportunities

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SuccessfulSuccessfulStrategic ActionsStrategic Actions

Strategic Leadership and the Strategic Leadership and the Strategic Management ProcessStrategic Management Process

Effective StrategicEffective StrategicLeadershipLeadership

Strategic IntentStrategic Intent Strategic MissionStrategic Mission

shapes the formulation ofshapes the formulation of

andandinfluenceinfluence

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Strategic LeadershipStrategic Leadership Strategic leadership involves:Strategic leadership involves:– the ability to anticipate, envision, maintain the ability to anticipate, envision, maintain

flexibility and empower others to create flexibility and empower others to create strategic changestrategic change

Discussion question:Discussion question:– Describe the strategic leadership exhibited by Describe the strategic leadership exhibited by

Gerstner as IBM’s CEO?Gerstner as IBM’s CEO?

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Strategic LeadershipStrategic Leadership Who?:Who?:– CEO (head honcho)CEO (head honcho)– Board of DirectorsBoard of Directors– Top Management TeamTop Management Team– Divisional General ManagersDivisional General Managers– Any individual or group with substantial Any individual or group with substantial

decision-making responsibilities pertaining to decision-making responsibilities pertaining to the formulation and implementation of the formulation and implementation of strategiesstrategies

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Do Strategic Leaders Matter?Do Strategic Leaders Matter? Lieberson and O’Conner:Lieberson and O’Conner:– Leadership explained only between 6.5 and Leadership explained only between 6.5 and

14.5% of the variance in firm performance14.5% of the variance in firm performance

Weiner and Mahoney:Weiner and Mahoney:– Leadership accounted for 44% of the variance Leadership accounted for 44% of the variance

in firm performancein firm performance

The extent of managerial discretion (or The extent of managerial discretion (or latitude of action) explains the difference latitude of action) explains the difference in resultsin results

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Factors Affecting Managerial Factors Affecting Managerial DiscretionDiscretion

External EnvironmentExternal Environment• Rate of market growth (+)Rate of market growth (+)• Number and type of Number and type of

competitors (+)competitors (+)• Nature and degree of Nature and degree of

political/legal constraints (-)political/legal constraints (-)• Degree to which products Degree to which products

can be differentiated (+)can be differentiated (+)

External EnvironmentExternal Environment

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Ratings of Managerial Discretion Ratings of Managerial Discretion Industries with Highest DiscretionIndustries with Highest Discretion– Computer and software wholesalingComputer and software wholesaling– Computer communication equipmentComputer communication equipment– Electromedical apparatusElectromedical apparatus– Computer storage devicesComputer storage devices– Perfume, cosmetic, toilet preparationsPerfume, cosmetic, toilet preparations

Source: Source:

Finkelstein and Hambrick (1996), Strategic Leadership: Top Finkelstein and Hambrick (1996), Strategic Leadership: Top Executives and Their Effects on OrganizationsExecutives and Their Effects on Organizations

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Ratings of Managerial Discretion Ratings of Managerial Discretion Industries with Lowest DiscretionIndustries with Lowest Discretion– Natural gas transmissionNatural gas transmission– Blast furnices/steel millsBlast furnices/steel mills– Electric servicesElectric services– Petroleum/natural gas productionPetroleum/natural gas production– Gold and silver oresGold and silver ores

Source: Source:

Finkelstein and Hambrick (1996), Strategic Leadership: Top Finkelstein and Hambrick (1996), Strategic Leadership: Top Executives and Their Effects on OrganizationsExecutives and Their Effects on Organizations

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Factors Affecting Managerial Factors Affecting Managerial DiscretionDiscretion

Characteristics of theCharacteristics of theOrganizationOrganization

Characteristics of the Characteristics of the OrganizationOrganization• Size (-)Size (-)• Age (-)Age (-)• Strong Culture (-)Strong Culture (-)• Availability of resources Availability of resources

(+)(+)• Powerful inside forces (i.e. Powerful inside forces (i.e.

Patterns of interaction Patterns of interaction among employees) (-)among employees) (-)

External EnvironmentExternal Environment

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Factors Affecting Managerial Factors Affecting Managerial DiscretionDiscretion

External EnvironmentExternal Environment

Characteristics of theCharacteristics of theOrganizationOrganization

ManagerialManagerialDiscretionDiscretion

Characteristics of the Characteristics of the ManagerManager• Tolerance for ambiguity Tolerance for ambiguity

(+)(+)• Commitment to the firm Commitment to the firm

and its desired strategic and its desired strategic outcomes (-)outcomes (-)

• Interpersonal skills (+)Interpersonal skills (+)• Aspiration level (+)Aspiration level (+)• Degree of self-confidence Degree of self-confidence

(+)(+)

Characteristics of theCharacteristics of theManagerManager

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Top Management TeamsTop Management TeamsComposition matters!Composition matters!Heterogeneity: functional background, Heterogeneity: functional background,

experience, and educationexperience, and educationHeterogeneous top management Heterogeneous top management

teams are associated positively with teams are associated positively with innovation and strategic change innovation and strategic change

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Top Management TeamsTop Management TeamsA heterogeneous top management A heterogeneous top management

team with varied expertise and team with varied expertise and knowledge can draw on multiple knowledge can draw on multiple perspectives when evaluating perspectives when evaluating alternative strategies and building alternative strategies and building consensusconsensus

BUT……..BUT……..

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Top Management TeamsTop Management TeamsThe more heterogeneous and larger The more heterogeneous and larger

the top management team is, the more the top management team is, the more difficult it is for the team to effectively difficult it is for the team to effectively implementimplement strategies strategies

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Top Management TeamsTop Management TeamsWhat about tenure on the team and in What about tenure on the team and in

the firm?the firm?– Long tenure restricts the breadth of an Long tenure restricts the breadth of an

executive’s knowledge base => develop fewer executive’s knowledge base => develop fewer alternatives in strategic decision-makingalternatives in strategic decision-making

BUT…BUT…– Long tenured managers may be able to exercise Long tenured managers may be able to exercise

more effective strategic controlsmore effective strategic controls

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CEO and Top Management Team CEO and Top Management Team PowerPower Board of directors is an important Board of directors is an important

governance mechanism for monitoring a governance mechanism for monitoring a firm’s strategic directionfirm’s strategic direction

Higher performance is normally expected Higher performance is normally expected when the board is more directly involved in when the board is more directly involved in shaping a firm’s strategic directionshaping a firm’s strategic direction

Chief executive officers can gain so much Chief executive officers can gain so much power that they are virtually independent of power that they are virtually independent of oversight by the board of directorsoversight by the board of directors

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CEO and Top Management Team CEO and Top Management Team PowerPower A CEO has more power when the CEO:A CEO has more power when the CEO:– is also chairman of the board of directors is also chairman of the board of directors

(known as CEO duality)(known as CEO duality)– has long top management team, firm and/or has long top management team, firm and/or

industry tenureindustry tenure– appoints the outside directorsappoints the outside directors– appoints top executives to the boardappoints top executives to the board

The most effective forms of governance The most effective forms of governance share power and influence among the CEO share power and influence among the CEO and board of directorsand board of directors

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Managerial Labor MarketManagerial Labor Market The internal labor market is comprised of The internal labor market is comprised of

the career path alternatives available to a the career path alternatives available to a firm’s managersfirm’s managers

The external labor market includes the The external labor market includes the collection of career opportunities for collection of career opportunities for managers outside their firmmanagers outside their firm

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Managerial Labor MarketsManagerial Labor Markets Selecting internal candidates for Selecting internal candidates for

management positions reflects a desire:management positions reflects a desire:

– to build on valuable firm-specific knowledgeto build on valuable firm-specific knowledge

– for continuity and commitment to status quofor continuity and commitment to status quo

Selecting an outsider often:Selecting an outsider often:

– brings fresh insights and may energize the firm brings fresh insights and may energize the firm

with innovative new ideaswith innovative new ideas

– indicates a need for changeindicates a need for change

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Managerial Labor MarketsManagerial Labor Markets

StrategicStrategicchangechange

StableStablestrategystrategy

Stable strategyStable strategywith innovationwith innovation

Managerial Labor Market:Managerial Labor Market:CEO SuccessionCEO Succession

Internal CEOInternal CEOsuccessionsuccession

External CEOExternal CEOsuccessionsuccession

Top ManagementTop ManagementTeam CompositionTeam Composition

HeterogeneousHeterogeneous

HomogeneousHomogeneous

Ambiguous:Ambiguous:possible change inpossible change intop managementtop managementteam and strategyteam and strategy

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Exercise of Effective Strategic Exercise of Effective Strategic LeadershipLeadership

EstablishingEstablishingbalancedbalancedorganizationalorganizationalcontrolscontrols

EmphasizingEmphasizingethicalethicalpracticepractice

DevelopingDevelopinghumanhumancapitalcapital

Exploiting andExploiting andmaintainingmaintainingcorecorecompetenciescompetencies

SustainingSustainingan effectivean effectiveorganizationalorganizationalcultureculture

DeterminingDeterminingstrategicstrategicdirectiondirection

Effective StrategicEffective StrategicLeadershipLeadership

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Determining Strategic DirectionDetermining Strategic Direction

It is important not to lose sight of the It is important not to lose sight of the strengths of the organization when strengths of the organization when making changes required by a new making changes required by a new strategic directionstrategic direction– i.e. never forget your firm’s current and i.e. never forget your firm’s current and

core competenciescore competencies

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Exploiting and Maintaining Core Exploiting and Maintaining Core CompetenciesCompetencies Strategic leaders must verify that the Strategic leaders must verify that the

firm’s competencies are emphasized in firm’s competencies are emphasized in strategy implementation effortsstrategy implementation efforts

Core competencies cannot be developed Core competencies cannot be developed or exploited effectively without developing or exploited effectively without developing the capabilities of human capitalthe capabilities of human capital

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Developing Human CapitalDeveloping Human Capital Human capital refers to the knowledge Human capital refers to the knowledge

and skills of the firm’s entire workforceand skills of the firm’s entire workforce

Employees are viewed as a capital Employees are viewed as a capital resource that requires investment (e.g. resource that requires investment (e.g. effective training and development effective training and development programs)programs)

The ability to manage human capital may The ability to manage human capital may be the most critical of the strategic be the most critical of the strategic leader’s skillsleader’s skills

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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational Culture Can organizational culture be influenced Can organizational culture be influenced

by strategic leaders?by strategic leaders?– Gerstner would say……..Gerstner would say……..

How?How?– Gerstner would say……..Gerstner would say……..

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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational Culture An appropriate organizational culture An appropriate organizational culture

encourages the development of a firm’s encourages the development of a firm’s entrepreneurial orientation:entrepreneurial orientation:– Autonomy (reduce organizational constraints, Autonomy (reduce organizational constraints,

increase self-directedness)increase self-directedness)– Innovativeness (tendency to support new Innovativeness (tendency to support new

ideas)ideas)– Risk-Taking (willingness to accept risk)Risk-Taking (willingness to accept risk)– Proactiveness (be a market leader)Proactiveness (be a market leader)– Competitive Aggressiveness (propensity to Competitive Aggressiveness (propensity to

take action to outperform rivals)take action to outperform rivals)

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Emphasizing Ethical PracticesEmphasizing Ethical Practices To properly influence employee judgment To properly influence employee judgment

and behavior, ethical practices must and behavior, ethical practices must shape the firm’s decision-making process shape the firm’s decision-making process and be an integral part of an and be an integral part of an organization’s cultureorganization’s culture

Leaders set the tone for creating an Leaders set the tone for creating an environment of mutual respect, honesty environment of mutual respect, honesty and ethical practices among employeesand ethical practices among employees

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Establishing Balanced Establishing Balanced Organizational ControlsOrganizational Controls Organizational controls provide the Organizational controls provide the

parameters within which strategies are to be parameters within which strategies are to be implemented and corrective actions takenimplemented and corrective actions taken

Financial controls are often emphasized in Financial controls are often emphasized in large corporations and focus on short-term large corporations and focus on short-term financial outcomesfinancial outcomes

Strategic control focuses on the content of Strategic control focuses on the content of strategic actions, rather than their outcomesstrategic actions, rather than their outcomes

Strike a balance between strategic and Strike a balance between strategic and financial controls. Why?financial controls. Why?