12
Strategic Leadership
Studying this chapter should provide
you with the strategic management
knowledge needed to:
Define strategic leadership and
describe top-level managers’
importance.
12-2
Explain what top management
teams are and how they affect
firm performance.
12-3
Describe the managerial
succession process using internal
and external managerial labor
markets.
12-4
Discuss the value of strategic
leadership in determining the
firm’s strategic direction.
12-5
Describe the importance of
strategic leaders in managing the
firm’s resources.
12-6
Explain what must be done for a
firm to sustain an effective culture.
12-7
Describe what strategic leaders
can do to establish and emphasize
ethical practices.
12-8
Discuss the importance and use of
organizational controls.
© RomanOkopny/Getty Images
12-1
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CAN YOU FOLLOW AN ICON AND SUCCEED?
APPLE AND TIM COOK AFTER STEVE JOBS
Bloomberg/Getty Images
Steve Jobs was Apple’s founder and icon CEO. Much of Apple’s phenomenal success, especially
after 2000, was attributed to Steve Job’s “genius” and leadership. Because of this and Tim Cook
having a significantly different style from Jobs, he was given little chance for success. Yet, in
2014, several years after Cook assumed the CEO position, Apple had what Tim Cook referred to
as an unbelievable year. Apple sold 200 million iPhones and had $200 billion in revenue.
Apple’s stock price increased by 65 percent, and the company’s market value reached more
than $700 billion, the largest ever of any U.S. firm. The $700 billion in market value is more
than twice as much as either Microsoft or Exxon Mobil. Cook’s primary experience has been
as manager of operations; he was Apple’s COO prior to assuming the CEO role. And, much of
Apple’s sales are based on products developed and introduced to the market under Job’s leadership. So, the jury is still out on Cook, especially with regard to developing new products and
making them a success in the marketplace. Steve Jobs was a master at this process.
Cook’s style of leadership is much different
from the approach used
by Jobs. Some considered Jobs to be ruthless
and impulsive and almost
maniacal in developing
new products and ensuring a high quality product
desirable in the market.
Cook’s knowledge and
skills do not make him
an expert in product
development, design,
or marketing. So, he
delegates those responsibilities but remains as
the leader and decision
maker. Cook tries to
buffer and maintain
Apple’s corporate culture
developed largely by Jobs.
Thus, the emphasis remains on innovation that is valued in the marketplace. Cook has learned
the importance of hiring other top managers with talent but who also fit into Apple’s culture.
He has made some very good hires, such as Angela Ahrendts who now heads Apple’s very
important retail stores. Cook takes a much less emotional approach than Jobs. Some refer to
it as a “measured emotional approach to leadership.” He empowers his team to manage their
functional areas and emphasizes the need to take a long-run perspective.
Observers have been able to highlight other differences between Cook’s and Job’s strategic
leadership approaches. Cook shares the limelight with his leadership team, whereas Jobs kept
the light on himself. In fact, one analyst suggested that Cook is a good leader who builds an
effective team around him. Cook is leading Apple to be more philanthropic than in the past.
His strategy has entailed a major acquisition (an audio company for $3 billion) and developing
enterprise solutions for corporate IT units, both strategic actions that Jobs eschewed. Apple
has formed an alliance with IBM to develop enterprise applications many of which will be
designed for the iPad, especially the new and larger versions.
Innovations developed during Cook’s leadership include the Apple watch, introduced to
the market in April 2015. Many are waiting to learn its rate of success. Initial reports suggest
that demand is exceeding supply, causing Apple to increase production. In addition, hints
provided by Cook suggest that Apple may be planning to enter the television market. Most
importantly, Cook claims that Apple’s goal is to change the way people work and will target
the development of future products for that purpose.
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384
Sources: T. Loftus, 2015, The morning download: Apple will ‘change the way people work,’ CEO Tim Cook says, CIO Journal,
blogs.wsj.com, January 28: 2015, Apple’s Tim Cook cites record sales and ‘unbelievable’ year, New York Times, www.nytimes.
com, March 10; A. Chang, 2015, Apple CEO Tim Cook is forging an unusual path as a social activist, Los Angeles Times,
www.latimes.com, March 31, A. Lashinsky, 2015, Becoming Tim Cook, Fortune, April 1, 60–72; T. Higgins, 2015, Apple
iPhones sales in China outsell the U.S. for first time, BloombergBusiness, www.bloomberg.com, April 27; J. Lewis, 2015,
Tim Cook: A courageous innovator, Time, April 27, 26; J. D’Onfro, 2015, Tim Cook dropped a major clue about Apple’s next
big product, Yahoo Finance, finance.yahoo.com, April 28.
A
s the Opening Case suggests, strategic leaders’ work is demanding, challenging, and
requires balancing short-term performance outcomes with long-term performance
goals. Regardless of how long (or short) they remain in their positions, strategic leaders
(and most prominently CEOs) affect a firm’s performance.1 Obviously, Steve Jobs was
well known as a highly successful CEO who led Apple to achieve very high performance.
There were questions about whether anyone could follow him as CEO and be successful.
Those questions dogged Tim Cook, who became Apple’s CEO after Jobs passed away. Yet,
three and a half years into his tenure as CEO, Apple had an incredibly successful year and
became the first company to achieve a market value of $700 billion.
A major message in this chapter is that effective strategic leadership is the foundation for successfully using the strategic management process. As implied in Figure 1.1
in Chapter 1 and through the Analysis-Strategy-Performance model, strategic leaders
guide the firm in ways that result in forming a vision and mission. Often, this guidance
involves leaders creating goals that stretch everyone in the organization as a foundation
for enhancing firm performance. A positive outcome of stretch goals is their ability to
provoke breakthrough thinking—thinking that often leads to innovation.2 Additionally,
strategic leaders work with others to verify that the analysis and strategy parts of the
A-S-P model are completed effectively in order to increase the likelihood the firm will
achieve strategic competitiveness and earn above-average returns. We show how effective
strategic leadership makes all of this possible in Figure 12.1.3
To begin this chapter, we define strategic leadership and discuss its importance and
the possibility of strategic leaders as a source of competitive advantage for a firm. These
introductory comments include a brief consideration of different styles strategic leaders
may use. We then examine the role of top-level managers and top management teams and
their effects on innovation, strategic change, and firm performance. Following this discussion is an analysis of managerial succession, particularly in the context of the internal
and external managerial labor markets from which strategic leaders are selected. Closing
the chapter are descriptions of five key leadership actions that contribute to effective strategic leadership: determining strategic direction, effectively managing the firm’s resource
portfolio, sustaining an effective organizational culture, emphasizing ethical practices,
and establishing balanced organizational controls.
Strategic leadership is the
ability to anticipate, envision,
maintain flexibility, and
empower others to create
strategic change as necessary.
Strategic change is change
brought about as a result of
selecting and implementing a
firm’s strategies.
12-1 Strategic Leadership and Style
Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower
others to create strategic change as necessary. Strategic change is change brought about
as a result of selecting and implementing a firm’s strategies. Multifunctional in nature,
strategic leadership involves managing through others, managing an entire organization
rather than a functional subunit, and coping with change that continues to increase in
the global economy. Because of the global economy’s complexity, strategic leaders must
learn how to effectively influence human behavior, often in uncertain environments.4
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Chapter 12: Strategic Leadership
Figure 12.1 Strategic Leadership and the Strategic Management Process
Effective Strategic
Leadership
shapes the
formation of
and
Vision
Mission
influence
Successful
Strategic Actions
Formulation
of Strategies
Implementation
of Strategies
yield
s
s
yield
Strategic
Competitiveness
Above-Average Returns
By word or by personal example, and through their ability to envision the future, effective
strategic leaders meaningfully influence the behaviors, thoughts, and feelings of those
with whom they work.5
The ability to attract and then manage human capital may be the most critical of the
strategic leader’s skills,6 especially because the lack of talented human capital constrains
firm growth. Indeed, in the twenty-first century, intellectual capital that the firm’s human
capital possesses, including the ability to manage knowledge and produce innovations,
affects a strategic leader’s success.7
Effective strategic leaders also create and then support the context or environment
through which stakeholders (such as employees, customers, and suppliers) can perform
at peak efficiency.8 Being able to demonstrate the skills of attracting and managing human
capital and establishing and nurturing an appropriate context for that capital to flourish
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Part 3: Strategic Actions: Strategy Implementation
PATRIK STOLLARZ/Getty Images
is important, especially given that the crux of strategic leadership is the ability to manage
the firm’s operations effectively and sustain high performance over time.9
The primary responsibility for effective strategic leadership rests at the top, in particular with the CEO. Other commonly recognized strategic leaders include members of the
board of directors, the top management team, and divisional general managers. In truth,
any individual with responsibility for the performance of human capital and/or a part of
the firm (e.g., a production unit) is a strategic leader. Regardless of their title and organizational function, strategic leaders have substantial decision-making responsibilities that
cannot be delegated.10 Strategic leadership is a complex but critical form of leadership.
Strategies cannot be formulated and implemented for the purpose of achieving aboveaverage returns without effective strategic leaders.
As a strategic leader, a firm’s CEO is involved with a large number and variety of tasks, all
of which, in some form or fashion, relate to effective use of the strategic management process.11
ThyssenKrupp is the largest steel manufacturer in Germany with a long and successful tenure.
However, ThyssenKrupp began to suffer financial problems, and a new CEO was recruited
to turnaround the firm’s performance. Accepting responsibility for reshaping the firm and
handling the controversies facing it was Dr.-Ing. Heinrich Hiesinger. Formerly affiliated with
another large German firm—Siemens—Hiesinger became chair of the executive board of
ThyssenKrupp in January 2011. Hiesinger faced a number of issues. For example, the firm
reported heavy losses during 2011 and 2012 and another smaller loss in 2013. The resignation,
in March 2013, of ThyssenKrupp’s supervisory chair and various scandals that emerged during
the chair’s service were additional problems requiring Hiesinger’s attention. The range of
issues with which Hiesinger had to deal highlights the complexity of a strategic leader’s work
as well as the influence of that work on a firm’s shape and scope. He obviously dealt with the
problems effectively because the firm returned to profitability in 2014 and continued on a
positive path in 2015.12
A leader’s style and the organizational culture in which it is displayed often affect the
productivity of those being led. ThyssenKrupp’s Heinrich Hiesinger has spoken about
these realities, saying that in the past at the firm he is leading there was an “understanding
of leadership in which ‘old boys’ networks’ and blind loyalty were more important than
business success.”13 Hiesinger worked hard to earn both trust and credibility with the
firm’s stakeholders.
The style of leadership used by those
in top management positions is important.
Likely, the leader’s style will be based, at least
partially, on his or her personal ideology and
experience.14 For example, based on his personal ideology, Tim Cook, CEO of Apple,
initiated more philanthropic activities for the
firm, and he spoke out on important social
issues, such as treating all people equally
regardless of ethnicity, gender, or sexual
orientation. He also delegated responsibility
and authority to other members of the Apple
leadership team and empowered them to act.
In this way, Cook displayed forms of what
are referred to as responsible leadership
(demonstrating concern for the firm’s stakeholders and society at large).15 Although
Heinrich Hiesler, Chairman of the Board for ThyssenKrupp, is addressing
Cook has tried to guard the Apple corporate
the shareholders as a part of his effort to maintain their trust.
culture, he has obviously made changes in
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Chapter 12: Strategic Leadership
the way people are managed and in the broader corporate focus. Thus, his style has been
transformational as well.
Transformational leadership is considered to be one of the most effective strategic
leadership styles. This style entails motivating followers to exceed the expectations others
have of them, to continuously enrich their capabilities, and to place the interests of the
organization above their own.16 Transformational leaders develop and communicate a
vision for the organization and formulate a strategy to achieve that vision. They make
followers aware of the need to achieve valued organizational outcomes and encourage
them to continuously strive for higher levels of achievement.
Transformational leaders have a high degree of integrity and character. Speaking
about character, one CEO said the following:
“Leaders are shaped and defined by character. Leaders inspire and enable others to do
excellent work and realize their potential. As a result, they build successful, enduring
organizations.”17
Additionally, transformational leaders have emotional intelligence. Emotionally intelligent leaders understand themselves well, have strong motivation, are empathetic
with others, and have effective interpersonal skills.18 As a result of these characteristics,
transformational leaders are especially effective in promoting and nurturing innovation in firms.19
12-2 The Role of Top-Level Managers
To exercise the duties of their role, top-level managers make many decisions, such as the
strategic actions and responses that are part of the competitive rivalry with which the
firm is involved at a point in time (see Chapter 5). More broadly, they are involved with
making many decisions associated with first selecting and then implementing the firm’s
strategies.
When making decisions related to using the strategic management process, managers
(certainly top-level ones) often use their discretion (or latitude for action).20 Managerial discretion differs significantly across industries. The primary factors that determine the amount
of decision-making discretion held by a manager (especially a top-level manager) are
1. external environmental sources such as the industry structure, the rate of market
growth in the firm’s primary industry, and the degree to which products can be differentiated
2. characteristics of the organization, including its size, age, resources, and culture
3. characteristics of the manager, including commitment to the firm and its strategic
outcomes, tolerance for ambiguity, skills in working with different people, and aspiration levels (see Figure 12.2)
Because strategic leaders’ decisions are intended to help the firm outperform competitors,
how managers exercise discretion when making decisions is critical to the firm’s success21
and affects or shapes the firm’s culture.
Top-level managers’ roles in verifying that their firm effectively uses the strategic
management process are complex and challenging. Because of this, top management
teams, rather than a single top-level manager, typically make these types of decisions.22
12-2a Top Management Teams
The top management team is composed of the individuals who are responsible for making certain the firm uses the strategic management process, especially for the purpose of
A top management team is
composed of the individuals
who are responsible for
making certain the firm uses
the strategic management
process, especially for the
purpose of selecting and
implementing strategies.
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Part 3: Strategic Actions: Strategy Implementation
Figure 12.2 Factors Affecting Managerial Discretion
External Environment
Characteristics of the
Organization
• Industry structure
• Rate of market growth
• Number and type of
competitors
• Nature and degree of
political/legal
constraints
• Degree to which
products can be
differentiated
•
•
•
•
Size
Age
Culture
Availability of
resources
• Patterns of
interaction among
employees
Managerial
Discretion
Characteristics of
the Manager
• Tolerance for ambiguity
• Commitment to the
firm and its desired
strategic outcomes
• Interpersonal skills
• Aspiration level
• Degree of selfconfidence
Source: Adapted from S. Finkelstein & D C. Hambrick, 1996, Strategic Leadership: Top Executives and Their Effects on
Organizations, St. Paul, MN: West Publishing Company.
selecting and implementing strategies. Typically, the top management team includes the
officers of the corporation, defined by the title of vice president and above or by service
as a member of the board of directors.23 Among other outcomes, the quality of a top
management team’s decisions affects the firm’s ability to innovate and change in ways that
contribute to its efforts to earn above-average returns.24
As previously noted, the complex challenges facing most organizations require
the exercise of strategic leadership by a team of executives rather than by a single
individual. Using a team to make decisions about how the firm will compete also
helps to avoid another potential problem when these decisions are made by the CEO
alone: managerial hubris. Research shows that when CEOs begin to believe glowing
press accounts and to feel that they are unlikely to make errors, the quality of their
decisions suffers.25 Top-level managers need to have self-confidence but must guard
against allowing it to become arrogance and a false belief in their own invincibility.26
To guard against CEO overconfidence and the making of poor decisions, firms often
use a top management team to make decisions required by the strategic management
process.
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Chapter 12: Strategic Leadership
Top Management Teams, Firm Performance, and Strategic Change
The job of top-level managers is complex and requires a broad knowledge of the firm’s
internal organization (see Chapter 3) as well as the three key parts of its external
environment—the general, industry, and competitor environments (see Chapter 2).
Therefore, firms try to form a top management team with the knowledge and expertise
needed to operate the internal organization and who can deal with the firm’s stakeholders as well as its competitors.27 Firms also need to structure the top management team
in a way to best utilize the members’ expertise (e.g., create structural interdependence
to make the best decisions).28 To have these characteristics normally requires a heterogeneous top management team. A heterogeneous top management team is composed
of individuals with different functional backgrounds, experience, and education.
Increasingly, having international experience is a critical aspect of the heterogeneity that
is desirable in top management teams, given the globalized nature of the markets in
which most firms now compete.29
Research evidence indicates that members of a heterogeneous top management team
benefit from discussing their different perspectives.30 In many cases, these discussions,
and the debates they often engender, increase the quality of the team’s decisions, especially when a synthesis emerges within the team after evaluating different perspectives.31
In effect, top management team members learn from each other and thereby develop a
better decision.32 In turn, higher-quality decisions lead to stronger firm performance.33
In addition to their heterogeneity, the effectiveness of top management teams is also
influenced by the value gained when members of these teams work together cohesively.
In general, the more heterogeneous and larger the top management team, the more difficult it is for the team to cohesively implement strategies effectively.34 Noteworthy is
the finding that communication difficulties among top-level managers with different
backgrounds and cognitive skills can negatively affect strategy implementation efforts.35
As a result, a group of top executives with diverse backgrounds may inhibit the process
of decision making if it is not effectively managed. In these cases, top management teams
may fail to comprehensively examine threats and opportunities, leading to suboptimal
decisions. Thus, the CEO must attempt to achieve behavioral integration among the team
members.36
Having members with substantive expertise in the firm’s core businesses is also
important to a top management team’s effectiveness.37 In a high-technology industry,
for example, it may be critical for a firm’s top management team members to have R&D
expertise, particularly when growth strategies are being implemented. However, their
eventual effect on decisions depends not only on their expertise and the way the team
is managed but also on the context in which they make the decisions (the governance
structure, incentive compensation, etc.).38
The characteristics of top management teams, and even the personalities of the CEO
and other team members, are related to innovation and strategic change.39 For example,
more heterogeneous top management teams are positively associated with innovation
and strategic change, perhaps in part because heterogeneity may influence the team, or
at least some of its members, to think more creatively when making decisions and taking
actions.40
Therefore, firms that could benefit by changing their strategies are more likely to
make those changes if they have top management teams with diverse backgrounds and
expertise. In this regard, evidence suggests that when a new CEO is hired from outside
the industry, the probability of strategic change is greater than if the new CEO is from
inside the firm or inside the industry.41 Although hiring a new CEO from outside the
industry adds diversity to the team, such a change can affect the firm’s relationships
with important stakeholders, especially the customers and employees.42 Consistent with
A heterogeneous top
management team is
composed of individuals
with different functional
backgrounds, experience,
and education.
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Part 3: Strategic Actions: Strategy Implementation
earlier comments, we highlight here the value of transformational leadership to strategic
change as the CEO helps the firm match environmental opportunities with its strengths,
as indicated by its capabilities and core competencies, as a foundation for selecting and/
or implementing new strategies.43
The CEO and Top Management Team Power
We noted in Chapter 10 that the board of directors is an important governance mechanism
for monitoring a firm’s strategic direction and for representing stakeholders’ interests,
especially shareholders. In fact, higher performance normally is achieved when the board
of directors is more directly involved in helping to shape the firm’s strategic direction.44
Boards of directors, however, may find it difficult to direct the decisions and resulting
actions of powerful CEOs and top management teams.45 Often, a powerful CEO appoints a
number of sympathetic outside members to the board or may have inside board members
who are also on the top management team and report to her or him.46 In either case, the CEO
may significantly influence actions such as appointments to the board. Thus, the amount of
discretion a CEO has in making decisions is related to the board of directors and the decision
latitude it provides to the CEO and the remainder of the top management team.47
CEOs and top management team members can also achieve power in other ways.
For example, a CEO who also holds the position of chair of the board usually has more
power than the CEO who does not.48 Some analysts and corporate “watchdogs” criticize
the practice of CEO duality (when the positions of CEO and the chair of the board are
held by the same person) because it can lead to poor performance and slow responses to
change, partly because the board often reduces its efforts to monitor the CEO and other
top management team members when CEO duality exists.49
Although it varies across industries, CEO duality occurs most commonly in larger
firms. Increased shareholder activism has brought CEO duality under scrutiny and
attack in both U.S. and European firms. In this regard, we noted in Chapter 10 that
a number of analysts, regulators, and corporate directors believe that an independent
board leadership structure without CEO duality has a net positive effect on the board’s
efforts to monitor top-level managers’ decisions and actions, particularly with respect to
financial performance. However, CEO duality’s actual effects on firm performance (and
particularly financial performance) remain inconclusive.50 Moreover, recent evidence
suggests that, at least in a sample of firms in European countries, CEO duality can have
a positive effect on performance when a firm encounters a crisis.51 Yet, recent evidence
suggests that some firms have begun to separate the CEO and board chair positions.
Some of the separations occur because of poor performance but not all. In other cases,
the separation is created to allow an experienced board chair to mentor a new CEO (new
CEO serves as an apprentice for a period of time).52 Thus, it seems that nuances or situational conditions must be considered when analyzing the outcomes of CEO duality on
firm performance. For example, power differentials can occur among top management
team members when a family holds an important ownership position even in large public firms. Typically, top managers who are also members of the family may have a special
form of power which can cause conflict unless the power can be balanced across the top
management team.53
Top management team members and CEOs who have long tenure—on the team
and in the organization—have a greater influence on board decisions. In general, long
tenure may constrain the breadth of an executive’s knowledge base. Some evidence
suggests that with the limited perspectives associated with a restricted knowledge base,
long-tenured top executives typically develop fewer alternatives to evaluate when making strategic decisions.54 However, long-tenured managers also may be able to exercise more effective strategic control, thereby obviating the need for board members’
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Chapter 12: Strategic Leadership
involvement because effective strategic control generally leads to higher performance.55
Intriguingly, it may be that “the liabilities of short tenure … appear to exceed the advantages, while the advantages of long tenure—firm-specific human and social capital,
knowledge, and power—seem to outweigh the disadvantages of rigidity and maintaining the status quo.”56 Overall then, the relationship between CEO tenure and firm performance is complex and nuanced,57 indicating that a board of directors should develop
an effective working relationship with the top management team as part of its efforts to
enhance firm performance.
Another nuance or situational condition to consider is the case in which a CEO acts
as a steward of the firm’s assets. In this instance, holding the dual roles of CEO and board
chair facilitates the making of decisions and the taking of actions that benefit stakeholders. The logic here is that the CEO, desiring to be the best possible steward of the firm’s
assets, gains efficiency through CEO duality.58 Additionally, because of this person’s positive orientation and actions, extra governance and the coordination costs resulting from
an independent board leadership structure become unnecessary.59
In summary, the relative degrees of power held by the board and top management
team members should be examined in light of an individual firm’s situation. For example, the abundance of resources in a firm’s external environment and the volatility of
that environment may affect the ideal balance of power between the board and the top
management team. Moreover, a volatile and uncertain environment may create a situation where a powerful CEO is needed to move quickly. In such an instance, a diverse top
management team may create less cohesion among team members, perhaps stalling or
even preventing appropriate decisions from being made in a timely manner. In the final
analysis, an effective working relationship between the board and the CEO and other top
management team members is the foundation through which decisions are made that
have the highest probability of best serving stakeholders’ interests.60
12-3 Managerial Succession
© Corepics VOF/Shutterstock.com
The choice of top-level managers—particularly CEOs—is a critical decision with important implications for the firm’s performance.61 As discussed in Chapter 10, selecting the
CEO is one of the boards of directors’ most important responsibilities as it seeks to represent the best interests of a firm’s stakeholders. Many companies use leadership screening
systems to identify individuals with strategic
leadership potential as well as to determine
the criteria individuals should satisfy to be a
candidate for the CEO position.
The most effective of these screening systems assesses people within the firm and gains
valuable information about the capabilities of
other companies’ strategic leaders.62 Based on
the results of these assessments, training and
development programs are provided to various individuals in an attempt to preselect and
shape the skills of people with strategic leadership potential.
A number of firms have high-quality
leadership programs in place, including
Procter & Gamble (P&G), GE, IBM, and
Dow Chemical. For example, P&G is thought
Managers participating in a leadership training program.
to have talent throughout the organization
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Part 3: Strategic Actions: Strategy Implementation
An internal managerial
labor market consists of
a firm’s opportunities for
managerial positions and the
qualified employees within
that firm.
An external managerial
labor market is the
collection of managerial
career opportunities and the
qualified people who are
external to the organization in
which the opportunities exist.
who are trained to accept the next level of leadership responsibility when the time
comes. Managing talent on a global basis, P&G seeks to consistently provide leaders at
all levels in the firm with meaningful work and significant responsibilities as a means
of simultaneously challenging and developing them. The value created by GE’s leadership training programs is suggested by the fact that many companies recruit leadership
talent from this firm.63
In spite of the value high-quality leadership training programs can create, there are
many companies that have not established training and succession plans for their toplevel managers or for others holding key leadership positions (e.g., department heads,
sections heads). With respect to family-owned firms operating in the United States, a
recent survey found that only 41 percent of those surveyed have established leadership
contingency plans while 49 percent indicated that they “review succession plans (only)
when a change in management requires it.”64 The results are similar for family firms on
a global basis as a broader survey of family firms in Asia, Europe, and Latin America
found that only the most successful companies have a clear understanding of the party
responsible for managing the CEO succession process. In 44 percent of the firms surveyed, the board of directors had that responsibility.65 On a global scale, recent evidence
suggests that “only 45 percent of executives from 34 countries around the world say their
companies have a process for conducting CEO succession planning.”66 Unfortunately, the
need for continuity in the use of a firm’s strategic management process is difficult to attain
without an effective succession plan and process in place.
Organizations select managers and strategic leaders from two types of managerial
labor markets—internal and external.67 An internal managerial labor market consists of
a firm’s opportunities for managerial positions and the qualified employees within that
firm. An external managerial labor market is the collection of managerial career
opportunities and the qualified people who are external to the organization in which the
opportunities exist.
Employees commonly prefer that the internal managerial labor market be used for
selection purposes, particularly when the firm is choosing members for its top management team and a new CEO. Evidence suggests that these preferences are often fulfilled.
For example, about 66 percent of new CEOs selected in Fortune 500 companies were
promoted from within. And, the new CEOs chosen had worked at the firm and average of
12.8 years.68 In the replacement for Steve Jobs at Apple, Tim Cook represents an internal
promotion, as discussed in the Opening Case.
With respect to the CEO position, several benefits are thought to accrue to a firm
using the internal labor market to select a new CEO, one of which is the continuing
commitment to the existing vision, mission, and strategies for the firm. Also, because
of their experience with the firm and the industry in which it competes, inside CEOs
are familiar with company products, markets, technologies, and operating procedures.
Another benefit is that choosing a new CEO from within usually results in lower
turnover among existing personnel, many of whom possess valuable firm-specific
knowledge and skills. In summary, CEOs selected from inside the firm tend to benefit
from their
1. clear understanding of the firm’s personnel and their capabilities
2. appreciation of the company’s culture and its associated core values
3. deep knowledge of the firm’s core competencies as well as abilities to develop new
ones as appropriate
4. “feel” for what will and will not “work” in the firm69
In spite of the understandable and legitimate reasons to select CEOs from inside
the firm, boards of directors sometimes prefer to choose a new CEO from the external
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Chapter 12: Strategic Leadership
managerial labor market. Conditions suggesting a potentially appropriate preference to
hire from outside include
1.
2.
3.
4.
the firm’s need to enhance its ability to innovate
the firm’s need to reverse its recent poor performance
the fact that the industry in which the firm competes is experiencing rapid growth
the need for strategic change70
Overall, the decision to use either the internal or the external managerial labor market to select a firm’s new CEO is one that should be based on expectations; in other
words, what does the board of directors want the new CEO and top management team
to accomplish? We address this issue in Figure 12.3 by showing how the composition of
the top management team and the CEO succession source (managerial labor market)
interact to affect strategy. For example, when the top management team is homogeneous (its members have similar functional experiences and educational backgrounds)
and a new CEO is selected from inside the firm, the firm’s current strategy is unlikely
to change. If the firm is performing well, absolutely and relative to peers, continuing
to implement the current strategy may be precisely what the board of directors wants to
happen. Alternatively, when a new CEO is selected from outside the firm and the top
management team is heterogeneous, the probability is high that strategy will change. This,
of course, would be a board’s preference when the firm’s performance is declining, both
in absolute terms and relative to rivals. When the new CEO is from inside the firm and a
heterogeneous top management team is in place, the strategy may not change, but innovation is likely to continue. An external CEO succession with a homogeneous team creates a more ambiguous situation. Furthermore, outside CEOs who lead moderate change
often achieve increases in performance, but high strategic change by outsiders frequently
leads to declines in performance.71 In summary, a firm’s board of directors should use the
insights shown in Figure 12.3 to inform its decision about which of the two managerial
labor markets to use when selecting a new CEO.
An interim CEO is commonly appointed when a firm lacks a succession plan or when an
emergency occurs requiring an immediate appointment of a new CEO. Companies throughout the world use this approach.72 Interim CEOs are almost always from inside the firm.
Figure 12.3 Effects of CEO Succession and Top Management Team Composition on Strategy
Managerial Labor Market:
CEO Succession
Top
Management
Team
Composition
Homogeneous
Heterogeneous
Internal CEO
succession
External CEO
succession
Stable
strategy
Ambiguous:
possible change in
top management
team and strategy
Stable strategy
with innovation
Strategic
change
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Part 3: Strategic Actions: Strategy Implementation
Helga Esteb/Shutterstock.com
Their familiarity with the company’s operations supports their efforts to “maintain
order” for a period of time. Indeed, a primary advantage of appointing an interim
CEO is that doing so can generate the
amount of time the board of directors
requires to conduct a thorough search to
find the best candidate from the external
and internal markets.
Not all changes in CEOs are successful. For example, some Japanese firms have
experimented with foreign CEOs. The
intent is to encourage strategic changes,
but foreign-born CEOs must have the
capability to gain acceptance from other
managers and employees in the firm, or
their changes are unlikely to be implemented effectively. Thus, most Japanese
firms that hire foreign CEOs search for
one who has work experience in Japan so
that he or she understands the culture and
the typical styles used in Japanese firms.73
Additionally, firms have learned that it is
generally important to retain target company executives after the firm is acquired.
Without them, integration of the newly
acquired firm into the acquiring firm is
Sir Howard Stringer, the first foreign CEO of Sony in Japan.
commonly more difficult. Moreover, the
executives often have valuable knowledge
and capabilities that are lost to the acquirer
if they depart. Thus, turnover among these executives makes the acquisition less valuable to the acquiring firm.74
Changes in top management positions other than the CEO are also important. These
changes often occur because a promising manager is recruited for a better position at
another company, as Apple did with Angela Ahrendt who was recruited to manage its
retail operations. She received a highly attractive compensation package to join the Apple
top management team, as explained in the Opening Case. Adding high performing managers in key positions can help the firm build its capabilities, as Apple has done with
Ahrendt. Yet, some managers are asked to depart because of the poor performance of
the operations that they oversee.75 In fact, this was the case for Ahrendt’s predecessor
who managed Apple’s retail operations. Interestingly, performance was not an issue when
Google changed its chief financial officer (CFO) in 2015. Patrick Pichette, Google’s CFO at
the time, announced he was retiring after seven years. He wanted to spend more time with
his family and achieve more balance between his work and family. He was encouraged to
retire by his wife and travel more with her. His replacement was Ruth Porat, who held the
CFO position at Morgan Stanley when she accepted the CFO position at Google.76
As we have discussed, managerial succession in the CEO position is an important
organizational event. In the Strategic Focus, we further describe the importance of a
selection in choosing Mary Barra as CEO of GM. Although an insider, she has made
several changes to increase efficiency (e.g., reducing the number of lead engineers
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Chapter 12: Strategic Leadership
Strategic Focus
Trial by Fire: CEO Succession at General Motors
Regardless, Barra paid blue collar workers a larger bonus
in 2015 than required by the union contract showing her
commitment to GM employees. She also announced plans
to distribute about $5 billion in dividends to shareholders by
the end of 2016. She also hopes to bolster GM’s stock price
by buying back about $5 billion in stock in the same time
period. Thus, Mary Barra made history being named as CEO of
GM. She came up through the ranks and knew the firm but
still faced substantial challenges during her first year in the
position. She has weathered the trial by fire and has a vision
for the future.
JEWEL SAMAD/AFP/Getty Images
Late in 2013, Dan Akerson, the CEO of General Motors (GM)
during a time of intense scrutiny and criticism of the firm,
announced that he was accelerating his retirement. He had
planned to retire at the end of 2014, but he learned that his
wife had a severe illness, so he decided to retire early. To succeed Akerson, Mary Barra was chosen. She became the first
woman CEO of a major automaker in the world. Her selection
to become the new CEO for GM was a major celebration for
breaking the “glass ceiling” in a formerly male-dominated
industry. Her choice represented an inside succession, as she
had spent her entire career at GM.
Barra had her hands full trying to create change in an
archaic structure and corporate governance system.
For example, for years GM used three lead engineers for every
new product, requiring more time, extra coordination and
often significant inefficiencies. Barra announced changes that
resulted in only one lead engineer for every new vehicle.
As it turned out the inefficient structure was a minor problem
relative to what she soon encountered. She learned about a
substantial problem with an ignition switch on GM vehicles
that evidently caused wrecks, major injuries, and even death.
Worse, the company had known about the problem for years
but took no action to fix the problem or to acknowledge
it. When she learned of the problem, Barra acted swiftly
(although not quick enough for some). GM acknowledged
the problem and made compensation offers to families of
people who were killed in accidents because of the defective
ignition switch. Additionally, GM recalled almost 30 million
vehicles to fix the problem. But, this was a public relations
disaster, and she was called to testify before Congress about
the problem.
Beyond these actions, Barra is trying to change the culture at
the company so that such problems do not occur in the future.
Her “trial by fire” has been recognized by GM’s board of directors
because she earned $16.2 million in 2014, which is 80 percent
more than her predecessor received. Her challenges continue.
Barra is trying to increase capital spending by 20 percent to
improve existing product lines and to continue developing an
enhanced electric vehicle. However, she also has to deal with
declining profits in GM’s European and Latin American markets.
Mary Barra, CEO of General Motors, introduces
the new Chevrolet Volt.
Sources: G. Gardner, 2013, Dan Akerson leaves GM stronger than he found it,
Detroit Free Press, www.freep.com, December 10; J. Jusko, 2014, CEO Mary Barra
is driving culture change at General Motors, IndustryWeek, www.industryweek.
com; 2014, Mary Barra General Motors, European CEO, www.europeanceo.com,
November 27; B. Vlasic, 2015, General Motors chief pledges to move beyond
recalls, New York Times, www.nytimes.com, January 8; C. M. Portillo, 2015, Let’s
take a peek at Mary Barra’s 2015 to-do list at General Motors, bizwomen, www.
bizjournals.com/bizwomen, January 14; B. Vlasic, 2015, Despite recalls, GM pays
workers a big bonus, New York Times, www.nytimes.com, February 4; M. Lewis,
2015, GM’s Barra bets she can deliver where predecessors fell short, New York Times,
www.nytimes.com, March 9; R. Wright, 2015, GM disappoints as Europe and South
America reverse, Financial Times, www.ft.com, April 23; J. D. Stoll, 2015, GM chief
executive Mary Barra earned $16.2 million in 2014, Wall Street Journal, www.wsj.
com, April 24.
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Part 3: Strategic Actions: Strategy Implementation
on a new product from three to one) trying to change the culture. Changing the culture is
very important to avoid future problems similar to the ignition switch malfunction. Barra
is trying to resolve the ignition switch problem and increase the company’s transparency
on such problems. She appears to have been a very good choice as the new CEO of
General Motors. Next, we discuss key actions that effective strategic leaders demonstrate
while helping their firm use the strategic management process.
12-4 Key Strategic Leadership Actions
Certain actions characterize effective strategic leadership; we present the most important
ones in Figure 12.4. Many of the actions interact with each other. For example, managing
the firm’s resources effectively includes developing human capital and contributes to
establishing a strategic direction, fostering an effective culture, exploiting core competencies, using effective and balanced organizational control systems, and establishing ethical
practices. The most effective strategic leaders create viable options in making decisions
regarding each of the key strategic leadership actions.77
12-4a Determining Strategic Direction
Determining strategic
direction involves specifying
the vision and the strategy
or strategies to achieve this
vision over time.
Determining strategic direction involves specifying the vision and the strategy or strategies to achieve this vision over time.78 The strategic direction is framed within the context
of the conditions (i.e., opportunities and threats) that strategic leaders expect their firm
to face in roughly the next three to five years.
The ideal long-term strategic direction has two parts: a core ideology and an envisioned future. The core ideology motivates employees through the company’s heritage
while the envisioned future encourages them to stretch beyond their expectations of
accomplishment and requires significant change and progress to be realized.79 The envisioned future serves as a guide to many aspects of a firm’s strategy implementation process,
including motivation, leadership, employee empowerment, and organizational design.
Figure 12.4 Exercise of Effective Strategic Leadership
Effective Strategic
Leadership
Determining
Strategic Direction
Effectively
Managing the Firm’s
Resource Portfolio
Establishing Balanced
Organizational Controls
Sustaining
an Effective
Organizational Culture
Emphasizing
Ethical Practices
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Chapter 12: Strategic Leadership
The strategic direction could include a host of actions such as entering new international
markets and developing a set of new suppliers to add to the firm’s value chain.80
Sometimes though, the work of strategic leaders does not result in selecting a strategy
that helps a firm reach the vision. This can happen when top management team members
and, certainly, the CEO are too committed to the status quo. While the firm’s strategic direction remains rather stable across time, actions taken to implement strategies to achieve the
vision should be somewhat fluid, largely so the firm can deal with unexpected opportunities and threats that surface in the external environment. An inability to adjust strategies
as appropriate is often caused by an aversion to what decision makers conclude are risky
actions. An aversion to risky actions is common in firms that have performed well in the
past and for CEOs who have been in their jobs for extended periods of time.81 Research
also suggests that some CEOs are erratic or even ambivalent in their choices of strategic
direction, especially when their competitive environment is turbulent and it is difficult to
identify the best strategy.82 Of course, these erratic or ambivalent behaviors are unlikely
to produce high performance and may lead to CEO turnover. Interestingly, research has
found that incentive compensation in the form of stock options encourages talented executives to select the best strategies and thus achieve the highest performance. However, the
same incentives used with less talented executives produce lower performance.83
In contrast to risk-averse CEOs, charismatic ones may foster stakeholders’ commitment to a new vision and strategic direction. Nonetheless, even when being guided by a
charismatic CEO, it is important for the firm not to lose sight of its strengths and weaknesses when making changes required by a new strategic direction. The most effective
charismatic CEO leads a firm in ways that are consistent with its culture and with the
actions permitted by its capabilities and core competencies.84
Finally, being ambicultural can facilitate efforts to determine the firm’s strategic direction and select and use strategies to reach it. Being ambicultural means that strategic
leaders are committed to identifying the best organizational activities to take particularly
when implementing strategies, regardless of their cultural origin.85 Ambicultural actions
help the firm succeed in the short term as a foundation for reaching its vision in the
longer term.86
12-4b Effectively Managing the Firm’s Resource Portfolio
Effectively managing the firm’s portfolio of resources is another critical strategic leadership action. The firm’s resources are categorized as financial capital, human capital, social
capital, and organizational capital (including organizational culture).87
Clearly, financial capital is critical to organizational success; strategic leaders understand this reality.88 However, the most effective strategic leaders recognize the equivalent
importance of managing each remaining type of resource as well as managing the integration of resources (e.g., using financial capital to provide training opportunities to the
firm’s human capital). Most importantly, effective strategic leaders manage the firm’s
resource portfolio by organizing the resources into capabilities, structuring the firm to
facilitate using those capabilities, and choosing strategies through which the capabilities
can be successfully leveraged to create value for customers.89 Exploiting and maintaining
core competencies and developing and retaining the firm’s human and social capital are
actions taken to reach these important objectives.
Exploiting and Maintaining Core Competencies
Examined in Chapters 1 and 3, core competencies are capabilities that serve as a source
of competitive advantage for a firm over its rivals. Typically, core competencies relate to
skills within organizational functions, such as manufacturing, finance, marketing, and
research and development. Strategic leaders must verify that the firm’s core competencies
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are understood when selecting strategies and then emphasized when implementing those
strategies. This suggests, for example, that with respect to their strategies, Apple emphasizes its design competence, while Netflix recognizes and concentrates on its competence
of being able to deliver physical, digital, and original content.90
Core competencies are developed over time as firms learn from the results of the
competitive actions and responses taken during the course of competing with rivals. On
the basis of what they learn, firms continuously reshape their capabilities for the purpose
of verifying that they are, indeed, the path through which core competencies are being
developed and used to establish one or more competitive advantages.
Dan Akerson became CEO of GM in July 2009, a time when the firm required a
transformation in order to survive as the foundation for then being able to compete
successfully against its global rivals. One of the first decisions Akerson made was to allocate resources for the purpose of building new capabilities in technology development
and in marketing, especially in customer service. Akerson helped to turnaround the
company, bringing it out of bankruptcy and trying to enrich its core competencies. Now,
as explained in the Strategic Focus, Mary Barra is changing the culture and trying to
increase the efficiency of GM. In addition, she is trying to gain the trust of human capital (e.g., by paying special bonuses to blue collar workers) thereby building her internal
social capital. Strong human capital and social capital are critical for GM to develop and
maintain strong core competencies.As we discuss next, human capital and social capital
are critical to a firm’s success. This is the case for GM as the firm strives to continuously
improve its performance. One reason for human capital’s importance is that it is the
resource through which core competencies are developed and used.
Developing Human Capital and Social Capital
Human capital refers to
the knowledge and skills of a
firm’s entire workforce. From
the perspective of human
capital, employees are viewed
as a capital resource requiring
continuous investment.
Human capital refers to the knowledge and skills of a firm’s entire workforce. From the
perspective of human capital, employees are viewed as a capital resource requiring continuous investment.91
Bringing talented human capital into the firm and then developing that capital has
the potential to yield positive outcomes. A key reason for this is that individuals’ knowledge and skills are proving to be critical to the success of many global industries (e.g.,
automobile manufacturing) as well as industries within countries (e.g., leather and shoe
manufacturing in Italy). This fact suggests that “as the dynamics of competition accelerate, people are perhaps the only truly sustainable source of competitive advantage.”92
In all types of organizations—large and small, new and established, and so forth—human
capital’s increasing importance suggests a significant role for the firm’s human resource
management function.93 As one of a firm’s support functions on which firms rely to create value (see Chapter 3), human resource management practices facilitate selecting and
especially implementing the firm’s strategies.94
Effective training and development programs increase the probability that some of
the firm’s human capital will become effective strategic leaders. Increasingly, the link
between effective programs and firm success is becoming stronger because the knowledge gained by participating in these programs is integral to forming and then sustaining
a firm’s competitive advantage.95 In addition to building human capital’s knowledge and
skills, these programs inculcate a common set of core values and present a systematic
view of the organization, thus promoting its vision and helping form an effective organizational culture.
Effective training and development programs also contribute positively to the firm’s
efforts to form core competencies.96 Furthermore, the programs help strategic leaders
improve skills that are critical to completing other tasks associated with effective strategic
leadership, such as determining the firm’s strategic direction, exploiting and maintaining
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Chapter 12: Strategic Leadership
the firm’s core competencies, and developing an organizational culture that supports ethical practices. Thus, building human capital is vital to the effective execution of strategic
leadership.
When investments in human capital (such as providing high-quality training and
development programs) are successful, the outcome is a workforce capable of learning
continuously. This is an important outcome in that continuous learning and leveraging
the firm’s expanding knowledge base are linked with strategic success.97
Learning also can preclude errors. Strategic leaders may learn more from failure than
success because they sometimes make the wrong attributions for the successes.98 For
example, the effectiveness of certain approaches and knowledge can be context specific.
Thus, some “best practices” may not work well in all situations. We know that using teams
to make decisions can be effective, but sometimes it is better for leaders to make decisions
alone, especially when the decisions must be made and implemented quickly (e.g., in
crisis situations).99 As such, effective strategic leaders recognize the importance of learning from success and from failure when helping their firm use the strategic management
process. To ensure more effective use of the strategic management process, firms have
begun to create more diversity among top management team leaders.100
When facing challenging conditions, firms may decide to lay off some of their human
capital, a decision that can result in a significant loss of knowledge. Research shows that
moderate-sized layoffs may improve firm performance primarily in the short run, but
large layoffs produce stronger performance downturns in firms because of the loss of
human capital.101 Although it is also not uncommon for restructuring firms to reduce
their investments in training and development programs, restructuring may actually
be an important time to increase investments in these programs. The reason for this is
that restructuring firms have less slack and cannot absorb as many errors; moreover, the
employees who remain after layoffs may find themselves in positions without all the skills
or knowledge they need to create value through their work.
Viewing employees as a resource to be maximized rather than as a cost to be minimized facilitates successful implementation of a firm’s strategies, as does the strategic
leader’s ability to approach layoffs in a manner that employees believe is fair and equitable.
A critical issue for employees is the fairness in the layoffs and how they are treated in their
jobs, especially relative to their peers.102
Social capital involves relationships inside and outside the firm that help in efforts to
accomplish tasks and create value for stakeholders.103 Social capital is a critical asset given
that employees must cooperate with one another and others, including suppliers and
customers, in order to complete their work. In multinational organizations, employees
often must cooperate across country boundaries on activities such as R&D to achieve
performance objectives (e.g., developing new products).104
External social capital is increasingly critical to firm success in that few if any companies possess all of the resources needed to successfully compete against their rivals. Firms
can use cooperative strategies, such as strategic alliances (see Chapter 9), to develop social
capital. Social capital can be built in strategic alliances as firms share complementary
resources. Resource sharing must be effectively managed to ensure that the partner trusts
the firm and is willing to share its resources.105 Social capital created this way yields many
benefits. For example, firms with strong social capital are able to be more ambidextrous;
that is, they can develop or have access to multiple capabilities, providing them with the
flexibility to take advantage of opportunities and to respond to threats.106
Research evidence suggests that the success of many types of firms may partially
depend on social capital. Large multinational firms often must establish alliances in order
to enter new foreign markets; entrepreneurial firms often must establish alliances to gain
access to resources, venture capital, or other types of resources (e.g., special expertise
Social capital involves
relationships inside and
outside the firm that help
in efforts to accomplish
tasks and create value for
stakeholders.
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Strategic Focus
All the Ways You Can Fail!
of risk. Investors at Standard Charter should hope it is true, as
they now need that expertise and a leader who makes good
decisions.
The problems experienced by each of the firms were due
to poor executive decisions. In the case of NBC, top managers
failed to provide appropriate oversight to ensure the credibility of its news. Also, poor personnel decisions were made.
In the case of Nokia, substantial conservatism led to a very
poor product decision. In that case, the company fell from
market leader to no longer being in existence. Finally, Standard
Charter leaders made poor decisions, failing to manage its risks.
Additionally, it made perhaps unethical decisions for which the
firm was fined. Finally, inadequate technologies led to additional failures.
Bobby Bank/Getty Images
NBC News experienced several major problems in 2014. Likely,
the biggest problem was the suspension of popular nightly
news anchor, Brian Williams, for embellishing his role in several
past news stories. When this came to light, concerns about
his credibility and thus NBC News credibility caused the top
executives to take action. In addition, NBC’s former top morning show, the Today Show, fell in the ratings. Because of this,
Jamie Horowitz was hired from ESPN to make major changes.
However, Horowitz and the staff on the show had major
differences of opinion, especially with the manner in which
Horowitz dealt with staff. These high profile clashes led top
executives to let Horowitz go. As a result, Andrew Lack, former
president of NBC News, was hired to replace Patricia Fili-Krushel
as chair of the NBC Universal News Group. Time will tell if Lack
can restore stability, credibility, and high ratings to NBC.
Nokia is an almost textbook case on how to fail. In 2009,
Nokia was the market leader in the global smartphone market, but by 2014 it was not listed as a rival in the market. The
Nokia brand had disappeared. Before the launch of the Apple
iPhone, Nokia had access to the touch screen technology, and
Nokia technology specialists recommended integrating it into
its smartphones. But, the top leadership at Nokia rejected this
idea because Nokia was doing well and using this technology
entailed risk. Of course, rivals Samsung and Apple implemented the technology, and those two firms along with others
took the smartphone market from Nokia. Nokia’s leaders made
absolutely horrible decisions and failed because of it.
The Standard Charter bank’s profits declined in 2014 by
37 percent relative to the profit achieved in 2013. Most people
attribute the bank’s performance problems to its weak capital
position and its major exposures to risk in Asian markets. The
CEO, Peter Sands, was asked to resign. Investors and others had
lost confidence in his ability to manage the bank effectively.
Essentially, he made minor changes (e.g., reducing costs) but
avoided large changes likely needed to turn around the performance of the bank. To replace Sands as CEO, the bank chose
William T. Winters, a former head of JPMorgan Chase’s investment bank. Standard Charter has experienced many problems
in recent years. For example, it has experienced losses on bad
loans in increasing amounts. In 2012, it paid fines of $667
million because of charges that it had transferred billions of
dollars to Iran and other such countries in violation of the OFAC
sanctions. In 2014, it paid $300 million to settle claims that its
computer system failed to identify suspicious transactions with
high-risk clients. Winters is said to be a very savvy manager
Andrew Lack hired to become the chair
of the NBC Universal News Group.
Sources: J. Bean, 2014, Bye Nokia—A failure of management over leadership,
Jonobean, jonobean.com, November 12: P. J. Davies, 2015, How to give Standard
Chartered breathing room it needs, Wall Street Journal, www.wsj.com, February 26;
J. Anderson & C. Bray, 2015, Standard Charter overhauls leadership, New York Times,
www.nytimes.com, February 26; J. Flint, 2015, NBC News bringing in new leadership, after high-profile stumbles, Wall Street Journal, www.wsj.com, March 3; C. Bray,
2015, Standard Charter profit fell 37% in 2014, New York Times,
www.nytimes.com, March 4.
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Chapter 12: Strategic Leadership
that the entrepreneurial firm cannot afford to maintain in-house).107 However, a firm’s
culture affects its ability to retain quality human capital and maintain strong internal
social capital.
As explained in the Strategic Focus, NBC News, Nokia, and Standard Charter all
experienced failures because of poor top managers’ decisions. NBC News made poor
decisions in the way it managed its human capital, and because of this, it lost the confidence of its audience (loss of social capital). Nokia was overly conservative. Its top
executives made monumental mistakes. Standard Charter was losing the confidence of its
investors with very poor decisions (including perhaps some unethical ones).
12-4c Sustaining an Effective Organizational Culture
In Chapter 1, we defined organizational culture as the complex set of ideologies, symbols,
and core values that are shared throughout the firm and that influence how the firm
conducts business. Because organizational culture influences how the firm conducts its
business and helps regulate and control employees’ behavior, it can be a source of competitive advantage.108 Given that each firm’s culture is unique, it is possible that a vibrant
organizational culture is an increasingly important source of differentiation for firms to
emphasize when pursuing strategic competitiveness and above-average returns. Thus,
shaping the context within which the firm formulates and implements its strategies—that
is, shaping the organizational culture—is another key strategic leadership action.109
Entrepreneurial Mind-Set
Especially in large organizations, an organizational culture often encourages (or discourages) strategic leaders and those with whom they work from pursuing (or not pursuing)
entrepreneurial opportunities. (We define and discuss entrepreneurial opportunities in
Chapter 13.) This is the case in both for-profit and not-for-profit organizations.110 This
issue is important because entrepreneurial opportunities are a vital source of growth
and innovation.111 Therefore, a key action for strategic leaders to take is to encourage and
promote innovation by pursuing entrepreneurial opportunities.112
One way to encourage innovation is to invest in opportunities as real options—that
is, invest in an opportunity in order to provide the potential option of taking advantage
of the opportunity at some point in the future.113 For example, a firm might buy a piece of
land to have the option to build on it at some time in the future should the company need
more space and should that location increase in value to the company. Oil companies
acquire land leases with an option to drill for oil. Firms might enter strategic alliances
for similar reasons. In this instance, a firm might form an alliance to have the option of
acquiring the partner later or of building a stronger relationship with it (e.g., developing
a new joint venture).114
In Chapter 13, we describe how firms of all sizes use strategic entrepreneurship
to pursue entrepreneurial opportunities as a means of earning above-average returns.
Companies are more likely to achieve the success they desire by using strategic entrepreneurship when their employees have an entrepreneurial mind-set.115
Five dimensions characterize a firm’s entrepreneurial mind-set: autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness.116 In combination,
these dimensions influence the actions a firm takes to be innovative when using the
strategic management process.
Autonomy, the first of an entrepreneurial orientation’s five dimensions, allows employees to take actions that are free of organizational constraints and encourages them to do so.
The second dimension, innovativeness, “reflects a firm’s tendency to engage in and support
new ideas, novelty, experimentation, and creative processes that may result in new products,
services, or technological processes.”117 Cultures with a tendency toward innovativeness
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encourage employees to think beyond existing knowledge, technologies, and parameters
to find creative ways to add value. Risk taking reflects a willingness by employees and
their firm to accept measured levels of risks when pursuing entrepreneurial opportunities.
The fourth dimension of an entrepreneurial orientation, proactiveness, describes a firm’s
ability to be a market leader rather than a follower. Proactive organizational cultures constantly use processes to anticipate future market needs and to satisfy them before competitors learn how to do so. Finally, competitive aggressiveness is a firm’s propensity to take
actions that allow it to consistently and substantially outperform its rivals.118
Changing the Organizational Culture and Restructuring
Changing a firm’s organizational culture is more difficult than maintaining it; however,
effective strategic leaders recognize when change is needed. Incremental changes to the
firm’s culture typically are used to implement strategies.119 More significant and sometimes even radical changes to organizational culture support selecting strategies that differ from those the firm has implemented historically. Regardless of the reasons for change,
shaping and reinforcing a new culture requires effective communication and problem
solving, along with selecting the right people (those who have the values desired for
the organization), engaging in effective performance appraisals (establishing goals that
support the new core values and measuring individuals’ progress toward reaching them),
and using appropriate reward systems (rewarding the desired behaviors that reflect the
new core values).120
Evidence suggests that cultural changes succeed only when the firm’s CEO, other key
top management team members, and middle-level managers actively support them.121
To effect change, middle-level managers in particular need to be highly disciplined to
energize the culture and foster alignment with the firm’s vision and mission.122 In addition,
managers must be sensitive to the effects of other changes on organizational culture. For
example, downsizings can negatively affect an organization’s culture, especially if they are
not implemented in accordance with the dominant organizational values.123 Mary Barra is
trying to change the General Motors corporate culture as explained in the earlier Strategic
Focus. In so doing, she appears to be sensitive to having the right people in key managerial positions and in supporting the firm’s employees as demonstrated by giving the blue
collar employees bonuses even though the firm had to pay for injuries caused by the ignition switch failure and endure the high costs of a large recall of vehicles to fix the problem.
12-4d Emphasizing Ethical Practices
The effectiveness of processes used to implement the firm’s strategies increases when they
are based on ethical practices. Ethical companies encourage and enable people at all levels
to act ethically when taking actions to implement strategies. In turn, ethical practices and
the judgment on which they are based create “social capital” in the organization, increasing the “goodwill available to individuals and groups” in the organization.124 Alternatively,
when unethical practices evolve in an organization, they may become acceptable to many
managers and employees.125 Once deemed acceptable, individuals are more likely to
engage in unethical practices to meet their goals when current efforts to meet them are
insufficient.126
To properly influence employees’ judgment and behavior, ethical practices must shape
the firm’s decision-making process and be an integral part of organizational culture. In
fact, a values-based culture is the most effective means of ensuring that employees comply
with the firm’s ethical standards. However, developing such a culture requires constant
nurturing and support in corporations located in countries throughout the world.127
As explained in Chapter 10, some strategic leaders and managers may occasionally act opportunistically, making decisions that are in their own best interests.
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Chapter 12: Strategic Leadership
This tends to happen when firms have lax expectations in place for individuals to
follow regarding ethical behavior. In other words, individuals acting opportunistically take advantage of their positions, making decisions that benefit themselves to
the detriment of the firm’s stakeholders.128 Sometimes executives take such actions
due to their own greed and hubris.129 However, when there is evidence of executive
wrongdoing, such as having to restate the financial earnings, stockholders and other
investors often react very negatively. In fact, it is not uncommon for new CEOs to be
hired when wrongdoing comes to light.130
Strategic leaders as well as others in the organization are most likely to integrate ethical values into their decisions when the company has explicit ethics codes, the codes are
integrated into the business through extensive ethics training, and shareholders expect
ethical behavior.131 Thus, establishing and enforcing a meaningful code of ethics is an
important action to take to encourage ethical decision making as a foundation for using
the strategic management process.
Strategic leaders can take several actions to develop and support an ethical organizational culture. Examples of these actions include
1. establishing and communicating specific goals to describe the firm’s ethical standards
(e.g., developing and disseminating a code of conduct)
2. continuously revising and updating the code of conduct, based on inputs from people
throughout the firm and from other stakeholders
3. disseminating the code of conduct to all stakeholders to inform them of the firm’s
ethical standards and practices
4. developing and implementing methods and procedures to use in achieving the firm’s
ethical standards (e.g., using internal auditing practices that are consistent with the
standards)
5. creating and using explicit reward systems that recognize acts of courage (e.g., rewarding those who use proper channels and procedures to report observed wrongdoings)
6. creating a work environment in which all people are treated with dignity132
The effectiveness of these actions increases when they are taken simultaneously and
thereby are mutually supportive. When strategic leaders and others throughout the
firm fail to take actions such as these—perhaps because an ethical culture has not been
created—problems are likely to occur.
12-4e Establishing Balanced Organizational Controls
Organizational controls (discussed in Chapter 11) have long been viewed as an important
part of the strategic management process particularly the parts related to implementation
(see Figure 1.1). Controls are necessary to help ensure that firms achieve their desired
outcomes. Defined as the “formal, information-based … procedures used by managers
to maintain or alter patterns in organizational activities,” controls help strategic leaders
build credibility, demonstrate the value of strategies to the firm’s stakeholders, and promote and support strategic change.133 Most critically, controls provide the parameters
for implementing strategies as well as the corrective actions to be taken when implementation-related adjustments are required. For example, in light of an insider-trading
scandal, KPMG LLP reviewed its training and monitoring programs. The firm’s existing
safeguards “include training for employees, a whistleblower system, and monitoring of
the personal investments of partners and managers.” KPMG also moved to safeguard its
reputation, even though it was not implicated in the scandal.134
In this chapter, we focus on two organizational controls—strategic and financial—
that were introduced in Chapter 11. Strategic leaders are responsible for helping the firm
develop and properly use these two types of controls.
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As we explained in Chapter 11, financial control focuses on short-term financial
outcomes. In contrast, strategic control focuses on the content of strategic actions
rather than their outcomes. Some strategic actions can be correct but still result in
poor financial outcomes because of external conditions, such as an economic recession,
unexpected domestic or foreign government actions, or natural disasters. Therefore,
emphasizing financial controls often produces more short-term and risk-averse decisions because financial outcomes may be caused by events beyond leaders and managers’
direct control. Alternatively, strategic control encourages lower-level managers to make
decisions that incorporate moderate and acceptable levels of risk because leaders and
managers throughout the firm share the responsibility for the outcomes of those decisions and actions resulting from them.
The challenge for strategic leaders is to balance the use of strategic and financial controls for the purpose of supporting efforts to improve the firm’s performance.
The balanced scorecard is a tool strategic leaders use to achieve the sought after balance.
The Balanced Scorecard
The balanced scorecard is a tool firms use to determine if they are achieving an appropriate balance when using strategic and financial controls as a means of positively influencing performance.135 This tool is most appropriate to use when evaluating business-level
strategies; however, it can also be used with the other strategies firms implement
(e.g., corporate, international, and cooperative).
The underlying premise of the balanced scorecard is that firms jeopardize their future
performance when financial controls are emphasized at the expense of strategic controls.136 This occurs because financial controls provide feedback about outcomes achieved
from past actions but do not communicate the drivers of future performance. Thus, an
overemphasis on financial controls may promote behavior that sacrifices the firm’s longterm, value-creating potential for short-term performance gains. In effect, managers can
make self-serving decisions when they focus on the shortterm. Research shows that decisions balancing short-term goals with long-term goals generally lead to higher performance.137 An appropriate balance of strategic controls and financial controls, rather than
an overemphasis on either, allows firms to achieve higher levels of performance.
Four perspectives are integrated to form the balanced scorecard:
■ financial (concerned with growth, profitability, and risk from the shareholders’ perspective)
■ customer (concerned with the amount of value customers perceive was created by the
firm’s products)
■ internal business processes (with a focus on the priorities for various business processes that create customer and shareholder satisfaction)
■ learning and growth (concerned with the firm’s effort to create a climate that supports
change, innovation, and growth)
The balanced scorecard is
a tool firms use to determine
if they are achieving an
appropriate balance when
using strategic and financial
controls as a means of
positively influencing
performance.
Thus, using the balanced scorecard finds the firm seeking to understand how it
responds to shareholders (financial perspective), how customers view it (customer
perspective), what processes to emphasize to successfully use its competitive advantage (internal perspective), and what it can do to improve its performance in order to
grow (learning and growth perspective).138 Generally speaking, firms tend to emphasize strategic controls when assessing their performance relative to the learning and
growth perspective, whereas the tendency is to emphasize financial controls when
assessing performance in terms of the financial perspective.
Firms use different criteria to measure their standing relative to the balanced scorecard’s four perspectives. We show sample criteria in Figure 12.5. The firm should select the
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Chapter 12: Strategic Leadership
Figure 12.5 Strategic Controls and Financial Controls in a Balanced Scorecard Framework
Perspectives
Criteria
Financial
• Cash flow
• Return on equity
• Return on assets
Customer
• Assessment of ability to anticipate customers’ needs
• Effectiveness of customer service practices
• Percentage of repeat business
• Quality of communications with customers
Internal
Business
Processes
• Asset utilization improvements
• Improvements in employee morale
• Changes in turnover rates
Learning
and
Growth
• Improvements in innovation ability
• Number of new products compared to competitors
• Increases in employees’ skills
number of criteria that will allow it to have both a strategic and financial understanding
of its performance without becoming immersed in too many details.139
Strategic leaders play an important role in determining a proper balance between
strategic and financial controls, whether they are in single-business firms or large diversified firms. A proper balance between controls is important, in that “wealth creation
for organizations where strategic leadership is exercised is possible because these leaders make appropriate investments for future viability (through strategic control), while
maintaining an appropriate level of financial stability in the present (through financial
control).”140 In fact, most corporate restructuring is designed to refocus the firm on its
core businesses, thereby allowing top executives to reestablish strategic control of their
separate business units.141
Successfully using strategic control frequently is integrated with appropriate autonomy for the various subunits so that they can gain a competitive advantage in their respective markets.142 Strategic control can be used to promote the sharing of both tangible and
intangible resources among interdependent businesses within a firm’s portfolio. In addition, the autonomy provided allows the flexibility necessary to take advantage of specific
marketplace opportunities. As a result, strategic leadership promotes simultaneous use of
strategic control and autonomy.
As we have explained in this chapter, strategic leaders are critical to a firm’s ability
to successfully use all parts of the strategic management process, including strategic
entrepreneurship, which is the final topic included in the “strategy” part of this text’s
Analysis-Strategy-Performance model. We turn our attention to this topic in Chapter 13.
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SUMMARY
■ Effective strategic leadership is a prerequisite to successfully
using the strategic management process. Strategic leadership
entails the ability to anticipate events, envision possibilities,
maintain flexibility, and empower others to create strategic
change.
■ Top-level managers are an important resource for firms to
develop and exploit competitive advantages. In addition,
when they and their work are valuable, rare, imperfectly
imitable, and nonsubstitutable, strategic leaders are also a
source of competitive advantage.
■ The top management team is composed of key managers who
play a critical role in selecting and implementing the firm’s
strategies. Generally, they are officers of the corporation
and/or members of the board of directors.
■ The top management team’s characteristics, a firm’s strategies,
and the firm’s performance are all interrelated. For example,
a top management team with significant marketing and
research and development (R&D) knowledge positively contributes to the firm’s use of a growth strategy. Overall, having
diverse skills increases the effectiveness of most top management teams.
■ Typically, performance improves when the board of directors
and the CEO are involved in shaping a firm’s strategic direction.
However, when the CEO has a great deal of power, the board
may be less involved in decisions about strategy formulation
and implementation. By appointing people to the board and
simultaneously serving as CEO and chair of the board, CEOs
have increased power.
■ In managerial succession, strategic leaders are selected from
either the internal or the external managerial labor market.
Because of their effect on firm performance, the selection
of strategic leaders has implications for a firm’s effectiveness.
There are a variety of reasons that companies select the firm’s
strategic leaders from either internal or external sources. In
most instances, the internal market is used to select the CEO,
but the number of outsiders chosen is increasing. Outsiders
often are selected to initiate major changes in strategy.
■ Effective strategic leadership has five key leadership actions:
determining the firm’s strategic direction, effectively managing
the firm’s resource portfolio (including exploiting and maintaining core competencies and managing human capital and
social capital), sustaining an effective organizational culture,
emphasizing ethical practices, and establishing balanced
organizational controls.
■ Strategic leaders must develop the firm’s strategic direction,
typically working with the board of directors to do so. The
strategic direction specifies the image and character the firm
wants to develop over time. To form the strategic direction,
strategic leaders evaluate the conditions (e.g., opportunities
and threats in the external environment) they expect their firm
to face over the next three to five years.
■ Strategic leaders must ensure that their firm exploits its core
competencies, which are used to produce and deliver products that create value for customers, when implementing its
strategies. In related diversified and large firms in particular,
core competencies are exploited by sharing them across units
and products.
■ The ability to manage the firm’s resource portfolio and the
processes used to effectively implement its strategy are critical elements of strategic leadership. Managing the resource
portfolio includes integrating resources to create capabilities
and leveraging those capabilities through strategies to build
competitive advantages. Human capital and social capital are
perhaps the most important resources.
■ As a part of managing resources, strategic leaders must
develop a firm’s human capital. Effective strategic leaders
view human capital as a resource to be maximized—not as
a cost to be minimized. Such leaders develop and use programs designed to train current and future strategic leaders
to build the skills needed to nurture the rest of the firm’s
human capital.
■ Effective strategic leaders build and maintain internal and
external social capital. Internal social capital promotes cooperation and coordination within and across units in the firm.
External social capital provides access to resources from external parties that the firm needs to compete effectively.
■ Shaping the firm’s culture is a central task of effective strategic
leadership. An appropriate organizational culture encourages
the development of an entrepreneurial mind-set among
employees and an ability to change the culture as necessary.
■ In ethical organizations, employees are...
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