©2000 South-Western College Publishing Chapter 12 Strategic Leadership Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing 1

The Strategic Management Process Strategy Formulation Chapter 2 The Strategic Management Process External Competitiveness Strategic Inputs Environment Strategic Intent Strategic Mission Chapter 3 Internal Environment Strategy Formulation Strategy Implementation Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11 Business-Level Competitive Corporate-Level Corporate Structure Strategy Dynamics Strategy Governance & Control Strategic Actions Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13 Acquisitions & International Cooperative Strategic Entrepreneurship & Innovation Restructuring Strategy Strategies Leadership Strategic Outcomes Strategic Competitiveness Above Average Feedback Returns 2

Strategic Leadership Strategic Leadership involves: The ability to anticipate, envision, maintain flexibility and empower others to create strategic change Multi-functional work that involves working through others Consideration of the entire enterprise rather than just a sub-unit A managerial frame of reference 7

Strategic Competitiveness Above-Average Returns Strategic Leadership and the Strategic Management Process Effective Strategic Leadership shapes the formulation of and Strategic Intent Strategic Mission influence Successful Strategic Actions Formulation of Strategies Implementation of Strategies Strategic Competitiveness Above-Average Returns 11

Factors Affecting Managerial Discretion External Environment Industry Structure Rate of market growth # and type of competitors Political/Legal constraints Product differentiation Employee interaction Organizational Characteristics Resource availability Size and age Culture Managerial Discretion Interpersonal skills Tolerance for ambiguity Commitment to the firm Aspiration level Self-confidence Characteristics of the Manager 15

Top Management Teams Top management teams are comprised of the key managers who are responsible for formulating and implementing the organization’s strategies A heterogeneous top management team with varied expertise and knowledge can draw on multiple perspectives when evaluating alternative strategies and building consensus A top management team must also be able to function effectively as a team in order to implement strategies. A heterogeneous team makes this more difficult. 18

Strategic Leadership Chief Executive Officers can gain so much power that they are virtually independent of oversight by the Board of Directors This is especially true when the CEO is also Chairman of the Board of Directors CEOs of long tenure can also wield substantial power The most effective forms of governance share power and influence among the CEO and Board of Directors 19

Managerial Labor Markets The internal labor market is comprised of the career path alternatives available to a firm’s managers Selecting internal candidates for management positions helps to build on valuable firm-specific knowledge The external labor market includes the collection of career opportunities for managers outside their firm Selecting an outsider often brings fresh insights and may energize the firm with innovative new ideas 21

Managerial Labor Market: Effects of CEO Succession and Top Management Team Composition on Strategy Managerial Labor Market: CEO Succession Internal CEO Succession External CEO Succession Stable Strategy Homogeneous Top Management Team Composition Heterogeneous 24

Effects of CEO Succession and Top Management Team Composition on Strategy Managerial Labor Market: CEO Succession Internal CEO Succession External CEO Succession Ambiguous: Possible change in Top Management Team and Strategy Stable Strategy Homogeneous Top Management Team Composition Heterogeneous 25

Effects of CEO Succession and Top Management Team Composition on Strategy Managerial Labor Market: CEO Succession Internal CEO Succession External CEO Succession Ambiguous: Possible change in Top Management Team and Strategy Stable Strategy Homogeneous Top Management Team Composition Stable Strategy with Innovation Heterogeneous 26

Effects of CEO Succession and Top Management Team Composition on Strategy Managerial Labor Market: CEO Succession Internal CEO Succession External CEO Succession Ambiguous: Possible change in Top Management Team and Strategy Stable Strategy Homogeneous Top Management Team Composition Stable Strategy with Innovation Strategic Change Heterogeneous 27

Exercise of Effective Leadership Effective Strategic Leadership Determining Strategic Direction Sustaining an Effective Organizational Culture Emphasizing Ethical Practices Establishing Balanced Organizational Controls Exploiting & Maintaining Core Competencies Developing Human Capital 31

Effective Strategic Leadership Determining Strategic Direction Effective Strategic Leadership Determining Strategic Direction Establishing Balanced Organizational Controls Exploiting & Maintaining Core Competencies Developing Human Capital Sustaining an Effective Organizational Culture Emphasizing Ethical Practices Strategic direction means the development of a long-term vision of a firm’s strategic intent. A charismatic leader can help achieve strategic intent. It is important not to lose sight of the strengths of the organization when making changes required by a new strategic direction. Executives must structure the firm effectively to help achieve the vision. 28

Effective Strategic Leadership Exploiting & Maintaining Core Competencies Determining Strategic Direction Establishing Balanced Organizational Controls Exploiting & Maintaining Core Competencies Developing Human Capital Sustaining an Effective Organizational Culture Emphasizing Ethical Practices Core competencies are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals. Strategic leaders must verify that the firm’s competencies are emphasized in strategy implementation efforts. In many large firms, and certainly in related diversified ones, core competencies are exploited effectively when they are developed and applied across different organizational units. Core competencies cannot be developed or exploited effectively without developing the capabilities of human capital. 29

Effective Strategic Leadership Developing Human Capital Determining Strategic Direction Establishing Balanced Organizational Controls Exploiting & Maintaining Core Competencies Developing Human Capital Sustaining an Effective Organizational Culture Emphasizing Ethical Practices Human capital refers to the knowledge and skills of the firm’s entire workforce. Employees are viewed as a capital resource that requires investment. No strategy can be effective unless the firm is able to develop and retain good people to carry it out. The effective development and management of the firm’s human capital may be the primary determinant of a firm’s ability to formulate and implement strategies successfully. 30

Effective Strategic Leadership Sustaining an Effective Organizational Culture Effective Strategic Leadership Determining Strategic Direction Establishing Balanced Organizational Controls Exploiting & Maintaining Core Competencies Developing Human Capital Sustaining an Effective Organizational Culture Emphasizing Ethical Practices An organizational culture consists of a complex set of ideologies, symbols, and core values that is shared throughout the firm and influences the way it conducts business. Shaping the firm’s culture is a central task of effective strategic leadership. An appropriate organizational culture encourages the development of an entrepreneurial orientation among employees and an ability to change the culture as necessary. Reengineering can facilitate this process. 31

Changing Culture and Reengineering The benefits of business reengineering are maximized when employees believe that: Every job in the company is essential and important All employees must create value through their work Constant learning is a vital part of every person’s job Teamwork is essential to implementation success Problems are solved only when teams accept the responsibility for the solution 36

Effective Strategic Leadership Emphasizing Ethical Practices Effective Strategic Leadership Determining Strategic Direction Establishing Balanced Organizational Controls Exploiting & Maintaining Core Competencies Developing Human Capital Sustaining an Effective Organizational Culture Emphasizing Ethical Practices Ethical practices increase the effectiveness of strategy implementation processes. Ethical companies encourage and enable people at all organizational levels to exercise ethical judgment. To properly influence employee judgment and behavior, ethical practices must shape the firm’s decision-making process and be an integral part of an organization’s culture. Leaders set the tone for creating an environment of mutual respect, honesty and ethical practices among employees. 37

Effective Strategic Leadership Establishing Balanced Organizational Controls Determining Strategic Direction Establishing Balanced Organizational Controls Exploiting & Maintaining Core Competencies Developing Human Capital Sustaining an Effective Organizational Culture Emphasizing Ethical Practices Organizational controls provide the parameters within which strategies are to be implemented and corrective actions taken. Financial controls are often emphasized in large corporations and focus on short-term financial outcomes. Strategic control focuses on the content of strategic actions, rather than their outcomes. Successful strategic leaders balance strategic control and financial control (they do not eliminate financial control) with the intent of achieving more positive long-term returns. 38