©2004 by South-Western/Thomson Learning 1 Strategic Leadership Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 2

2 Chapter 2 Chapter 2 Strategic Leadership Strategic Leadership Chapter 1 Chapter 1 Introduction to Introduction to Strategic Management Strategic Management Strategic Thinking The Strategic Management Process Chapter 4 Chapter 4 The Internal The Internal Organization Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 9 Chapter 9 International Strategy International Strategy Chapter 3 Chapter 3 The External The External Environment Chapter 5 Chapter 5 Business-Level Strategy Chapter 8 Chapter 8 Acquisition and Acquisition and Restructuring Strategies Restructuring Strategies Chapter 11 Chapter 11 Corporate Governance Corporate Governance Strategic Intent Strategic Intent Strategic Mission Strategic Mission Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy Chapter 10 Chapter 10 Cooperative Strategy Cooperative Strategy Chapter 12 Chapter 12 Strategic Entrepreneurship Strategic Entrepreneurship Strategic Analysis Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities

3 Successful Strategic Actions Strategic Leadership and the Strategic Management Process Effective Strategic Leadership Strategic Intent Strategic Mission shapes the formulation of and influence

4 Strategic Leadership Strategic leadership involves: Strategic leadership involves: –the ability to anticipate, envision, maintain flexibility and empower others to create strategic change Discussion question: Discussion question: –Describe the strategic leadership exhibited by Gerstner as IBM’s CEO?

5 Strategic Leadership Who?: Who?: –CEO (head honcho) –Board of Directors –Top Management Team –Divisional General Managers –Any individual or group with substantial decision-making responsibilities pertaining to the formulation and implementation of strategies

6 Do Strategic Leaders Matter? Lieberson and O’Conner: Lieberson and O’Conner: –Leadership explained only between 6.5 and 14.5% of the variance in firm performance Weiner and Mahoney: Weiner and Mahoney: –Leadership accounted for 44% of the variance in firm performance The extent of managerial discretion (or latitude of action) explains the difference in results The extent of managerial discretion (or latitude of action) explains the difference in results

7 Factors Affecting Managerial Discretion External Environment Rate of market growth (+)Rate of market growth (+) Number and type of competitors (+)Number and type of competitors (+) Nature and degree of political/legal constraints (-)Nature and degree of political/legal constraints (-) Degree to which products can be differentiated (+)Degree to which products can be differentiated (+) External Environment

8 Ratings of Managerial Discretion Industries with Highest Discretion Industries with Highest Discretion –Computer and software wholesaling –Computer communication equipment –Electromedical apparatus –Computer storage devices –Perfume, cosmetic, toilet preparations Source: Finkelstein and Hambrick (1996), Strategic Leadership: Top Executives and Their Effects on Organizations

9 Ratings of Managerial Discretion Industries with Lowest Discretion Industries with Lowest Discretion –Natural gas transmission –Blast furnices/steel mills –Electric services –Petroleum/natural gas production –Gold and silver ores Source: Finkelstein and Hambrick (1996), Strategic Leadership: Top Executives and Their Effects on Organizations

10 Factors Affecting Managerial Discretion Characteristics of the Organization Characteristics of the Organization Size (-)Size (-) Age (-)Age (-) Strong Culture (-)Strong Culture (-) Availability of resources (+)Availability of resources (+) Powerful inside forces (i.e. Patterns of interaction among employees) (-)Powerful inside forces (i.e. Patterns of interaction among employees) (-) External Environment

11 Factors Affecting Managerial Discretion External Environment Characteristics of the Organization ManagerialDiscretion Characteristics of the Manager Tolerance for ambiguity (+)Tolerance for ambiguity (+) Commitment to the firm and its desired strategic outcomes (-)Commitment to the firm and its desired strategic outcomes (-) Interpersonal skills (+)Interpersonal skills (+) Aspiration level (+)Aspiration level (+) Degree of self-confidence (+)Degree of self-confidence (+) Characteristics of the Manager

12 Top Management Teams Composition matters! Composition matters! Heterogeneity: functional background, experience, and education Heterogeneity: functional background, experience, and education Heterogeneous top management teams are associated positively with innovation and strategic change Heterogeneous top management teams are associated positively with innovation and strategic change

13 Top Management Teams A heterogeneous top management team with varied expertise and knowledge can draw on multiple perspectives when evaluating alternative strategies and building consensus A heterogeneous top management team with varied expertise and knowledge can draw on multiple perspectives when evaluating alternative strategies and building consensus BUT…….. BUT……..

14 Top Management Teams The more heterogeneous and larger the top management team is, the more difficult it is for the team to effectively implement strategies The more heterogeneous and larger the top management team is, the more difficult it is for the team to effectively implement strategies

15 Top Management Teams What about tenure on the team and in the firm? What about tenure on the team and in the firm? –Long tenure restricts the breadth of an executive’s knowledge base => develop fewer alternatives in strategic decision-making BUT… –Long tenured managers may be able to exercise more effective strategic controls

16 CEO and Top Management Team Power Board of directors is an important governance mechanism for monitoring a firm’s strategic direction Board of directors is an important governance mechanism for monitoring a firm’s strategic direction Higher performance is normally expected when the board is more directly involved in shaping a firm’s strategic direction Higher performance is normally expected when the board is more directly involved in shaping a firm’s strategic direction Chief executive officers can gain so much power that they are virtually independent of oversight by the board of directors Chief executive officers can gain so much power that they are virtually independent of oversight by the board of directors

17 CEO and Top Management Team Power A CEO has more power when the CEO: A CEO has more power when the CEO: –is also chairman of the board of directors (known as CEO duality) –has long top management team, firm and/or industry tenure –appoints the outside directors –appoints top executives to the board The most effective forms of governance share power and influence among the CEO and board of directors The most effective forms of governance share power and influence among the CEO and board of directors

18 Managerial Labor Market The internal labor market is comprised of the career path alternatives available to a firm’s managers The internal labor market is comprised of the career path alternatives available to a firm’s managers The external labor market includes the collection of career opportunities for managers outside their firm The external labor market includes the collection of career opportunities for managers outside their firm

19 Managerial Labor Markets Selecting internal candidates for management positions reflects a desire: Selecting internal candidates for management positions reflects a desire: –to build on valuable firm-specific knowledge –for continuity and commitment to status quo Selecting an outsider often: Selecting an outsider often: –brings fresh insights and may energize the firm with innovative new ideas –indicates a need for change

20 Managerial Labor Markets Strategicchange Stablestrategy Stable strategy with innovation Managerial Labor Market: CEO Succession Internal CEO succession External CEO succession Top Management Team Composition HeterogeneousHomogeneous Ambiguous: possible change in top management team and strategy

21 Exercise of Effective Strategic Leadership Establishingbalancedorganizationalcontrols EmphasizingethicalpracticeDevelopinghumancapital Exploiting and maintainingcorecompetencies Sustaining an effective organizationalculture Determiningstrategicdirection Effective Strategic Leadership

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

23 Exploiting and Maintaining Core Competencies Strategic leaders must verify that the firm’s competencies are emphasized in strategy implementation efforts Strategic leaders must verify that the firm’s competencies are emphasized in strategy implementation efforts Core competencies cannot be developed or exploited effectively without developing the capabilities of human capital Core competencies cannot be developed or exploited effectively without developing the capabilities of human capital

24 Developing Human Capital Human capital refers to the knowledge and skills of the firm’s entire workforce Human capital refers to the knowledge and skills of the firm’s entire workforce Employees are viewed as a capital resource that requires investment (e.g. effective training and development programs) Employees are viewed as a capital resource that requires investment (e.g. effective training and development programs) The ability to manage human capital may be the most critical of the strategic leader’s skills The ability to manage human capital may be the most critical of the strategic leader’s skills

25 Sustaining an Effective Organizational Culture Can organizational culture be influenced by strategic leaders? Can organizational culture be influenced by strategic leaders? –Gerstner would say…….. How? How? –Gerstner would say……..

26 Sustaining an Effective Organizational Culture An appropriate organizational culture encourages the development of a firm’s entrepreneurial orientation: An appropriate organizational culture encourages the development of a firm’s entrepreneurial orientation: –Autonomy (reduce organizational constraints, increase self-directedness) –Innovativeness (tendency to support new ideas) –Risk-Taking (willingness to accept risk) –Proactiveness (be a market leader) –Competitive Aggressiveness (propensity to take action to outperform rivals)

27 Emphasizing Ethical Practices To properly influence employee judgment and behavior, ethical practices must shape the firm’s decision-making process and be an integral part of an organization’s culture To properly influence employee judgment and behavior, ethical practices must shape the firm’s decision-making process and be an integral part of an organization’s culture Leaders set the tone for creating an environment of mutual respect, honesty and ethical practices among employees Leaders set the tone for creating an environment of mutual respect, honesty and ethical practices among employees

28 Establishing Balanced Organizational Controls Organizational controls provide the parameters within which strategies are to be implemented and corrective actions taken Organizational controls provide the parameters within which strategies are to be implemented and corrective actions taken Financial controls are often emphasized in large corporations and focus on short-term financial outcomes Financial controls are often emphasized in large corporations and focus on short-term financial outcomes Strategic control focuses on the content of strategic actions, rather than their outcomes Strategic control focuses on the content of strategic actions, rather than their outcomes Strike a balance between strategic and financial controls. Why? Strike a balance between strategic and financial controls. Why?