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Chapter 12: Strategic Leadership (SL)

Overview: Strategic leadership & top-level managers importance Top management teams and effects on firm

performance Managerial succession process Value of strategic leadership in determining firm’s

strategic direction Importance of strategic leaders in managing firm’s

resources Organizational culture and actions to sustain it Ethical practices: establishment and emphasis Importance and use of organizational controls

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Strategic Leadership and the Strategic Management Process

Leaders make a major difference in how well a firm performs

Effective strategic leadership is the foundation for successfully using the strategic management process

Strategic leaders facilitate the development of appropriate strategic actions and determine how to implement them

These actions are the path to strategic competitiveness and above-average returns

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Strategic Leadership and Style

Strategic leadership: the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary

Multifunctional task that involves Managing through others Managing an entire enterprise rather than a functional subunit Coping with change Attracting and managing human (includes intellectual) capital Being able to meaningfully influence others

Who are strategic leaders? Any individual who is responsible for the performance of human

capital and/or a part of the firm

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The Role of Top-Level Managers

Top level managers play a critical role in strategy formulation and implementation Their strategic decisions influence how an organization is

designed and how goals are achieved Having a top management team with superior managerial

skills is critical (and can be a source of CA and AAR) Managers use their discretion when making strategic

decisions and this discretion influences firm performance Top managers also develop structure, culture, reward

systems, and policies/SOPs Primary factors that determine amount of manager’s

decision-making discretion External environmental sources Organization’s characteristics Manager’s characteristics

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Factors Affecting

Managerial Discretion

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The Role of Top-Level Managers

Top Management Teams (TMT) In most firms there is a team of strategic leaders called

the top management team

A team is needed to deal with the complexity of challenges and the need for substantial amounts of information and knowledge to make strategic decisions

TMT composed of key individuals who are responsible for selecting and implementing firm’s strategies

Usually includes officers of the corporation (VP and above) and members of BOD

TMTs affect firm performance and strategic change

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The Role of Top-Level Managers

TMTs, Firm Performance & Strategic Change Top managers need to operate the internal organization and deal with

the external environment and stakeholders groups A heterogeneous TMT can facilitate this

Managerial group of individuals with different functional backgrounds, experiences, and education

Heterogeneous TMTs Introduce a variety of perspectives and can lead to better decisions Have a greater propensity for strong competitive action Tends to "think outside of the box," leading to more creative

decision making, innovation, and strategic change Offers various areas of expertise to identify environmental

opportunities, threats, or the need for change Promotes debate

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The Role of Top-Level Managers

The CEO & TMT Power TMT characteristics can give the CEO’s team power relative to the

board of directors and can influence the amount of strategic leadership the board provides

Can affect the amount of discretion the CEO has Powerful CEOs can appoint board members CEO Duality – CEO serves as CEO and BOD

Lead to greater CEO power Longer tenure can also lead to greater CEO power The relative degrees of power held by the board and TMT should be

appropriate for the organization TMT characteristics must fit strategy and strategy implementation

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Managerial Succession

The choice of executives is a critical decision with important implications for the firm’s performance

Organizations select managers and strategic leaders from two types of managerial labor markets Internal Managerial Labor Market – opportunities for managerial

positions to be filled from within the firm External Managerial Labor Market – opportunities for managerial

positions to be filled by candidates from outside of the firm

Impacts company performance and the ability to embrace change in today's competitive landscape

Succession, top management team composition and strategy are related

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Effects of CEO Succession and Top Management Team Composition on Strategy

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Managerial Succession

Benefits of Internal Managerial Labor Market Leads to continuity and continued commitment to firm’s vision,

mission, and strategies Insiders are familiar with company products, markets,

technologies, and operating procedures Reduces turnover of existing personnel many of whom possess

valuable firm-specific knowledge Favored when the firm is performing well

Benefits of External Managerial Labor Market Long tenure with the same firm is thought to reduce innovation

Outsiders bring diverse knowledge bases and social networks, which offer the potential for synergy and new competitive advantage

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Exercise of Effective Strategic Leadership: Key Strategic Leadership Actions

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Key Strategic Leadership Actions

Determining Strategic Direction Involves specifying the image and character the firm

seeks to develop over time Framed within the context of the conditions in which the

company operates Opportunities and threats over next 3-5 years

Includes a core ideology and an envisioned future Think mission and vision

Should serve to motivate, “push”, and guide the organization

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Key Strategic Leadership Actions

Effectively Managing the Firm’s Resource Portfolio Includes financial, human, social and organizational capital Exploiting and maintaining core competencies

Related to firm’s functional skills (i.e., manufacturing, finance, marketing and R&D)

Must match and support strategy and strategy implementation

Developing Human and Social Capital Human Capital: Knowledge and skills of a firm’s entire workforce

Human Resource Management: Training and Development Competencies can reside in people Skills and abilities should match strategy

Social Capital: Relationships inside and outside the firm that help it accomplish tasks and create value for customers and shareholders

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Key Strategic Leadership Actions

Sustaining an Effective Organizational Culture Organizational culture: consists of a complex set of

ideologies, symbols, and core values shared throughout the firm and influence the way business is conducted

Helps to regulate and control employees’ behavior Must match strategy and culture Changing the organizational culture and restructuring

More difficult to change culture than maintain it Shaping and reinforcing a new culture requires

Effective communication and problem solving Selecting the right people Engaging in effective performance appraisals Using appropriate reward systems

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Key Strategic Leadership Actions

Emphasizing Ethical Practices Should be part of culture Controls ethical behavior Includes actions such as…

Establish and communicate ethics-related goals Revise, update and disseminate code of conduct Develop and implement methods & procedures to use in

achieving firm’s ethical standards Create/use specific reward systems that recognize acts of

courage Create a working environment where all are treated with

dignity

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Key Strategic Leadership Actions

Establishing Balanced Organizational Controls Controls: Formal, information-based procedures used by

managers to maintain or alter patterns in organizational activities Financial Controls

Focus on short-term financial outcomes Strategic Controls

Focus on the content of strategic actions The Balanced Scorecard

Framework that allows strategic leaders to verify that they have established both financial and strategic controls to assess firm performance

Underlying premise is that firms jeopardize their future performance possibilities when financial controls are emphasized at the expense of strategic controls

Four perspectives: Financial, customer, internal business process, and

learning and growth

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Strategic Controls and Financial Controls in a Balanced Scorecard Framework