Chapter 2
Strategic Leadership
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
©2004 by South-Western/Thomson Learning
1
The Strategic Management Process
Strategic
Thinking
Chapter 1
Introduction to
Strategic Management
Chapter 2
Strategic Leadership
Strategic
Analysis
Chapter 3
The External
Environment
Chapter 4
The Internal
Organization
Strategic Intent
Strategic Mission
Chapter 5
Business-Level
Strategy
Chapter 6
Competitive Rivalry and
Competitive Dynamics
Chapter 7
Corporate-Level Strategy
Chapter 8
Acquisition and
Restructuring Strategies
Chapter 9
International Strategy
Chapter 10
Cooperative Strategy
Creating
Competitive
Advantage
Monitoring
And Creating
Entrepreneurial
Opportunities
Chapter 11
Corporate Governance
Chapter 12
Strategic Entrepreneurship
2
Strategic Leadership and the
Strategic Management Process
Effective Strategic
Leadership
shapes the formulation of
Strategic Intent
Strategic Mission
and
influence
Successful
Strategic Actions
3
Strategic Leadership

Strategic leadership involves:
– the ability to anticipate, envision, maintain
flexibility and empower others to create
strategic change

Discussion question:
– Describe the strategic leadership exhibited by
Gerstner as IBM’s CEO?
4
Strategic Leadership

Who?:
–
–
–
–
–
CEO (head honcho)
Board of Directors
Top Management Team
Divisional General Managers
Any individual or group with substantial
decision-making responsibilities pertaining to
the formulation and implementation of
strategies
5
Do Strategic Leaders Matter?

Lieberson and O’Conner:
– Leadership explained only between 6.5 and
14.5% of the variance in firm performance

Weiner and Mahoney:
– Leadership accounted for 44% of the variance
in firm performance

The extent of managerial discretion (or
latitude of action) explains the difference
in results
6
Factors Affecting Managerial
Discretion
External Environment
External Environment
• Rate of market growth (+)
• Number and type of
competitors (+)
• Nature and degree of
political/legal constraints (-)
• Degree to which products
can be differentiated (+)
7
Ratings of Managerial Discretion

Industries with Highest Discretion
– Computer and software wholesaling
– Computer communication equipment
– Electromedical apparatus
– Computer storage devices
– Perfume, cosmetic, toilet preparations
Source:
Finkelstein and Hambrick (1996), Strategic Leadership: Top
Executives and Their Effects on Organizations
8
Ratings of Managerial Discretion

Industries with Lowest Discretion
– Natural gas transmission
– Blast furnices/steel mills
– Electric services
– Petroleum/natural gas production
– Gold and silver ores
Source:
Finkelstein and Hambrick (1996), Strategic Leadership: Top
Executives and Their Effects on Organizations
9
Factors Affecting Managerial
Discretion
External Environment
Characteristics of the
Organization
Characteristics of the
Organization
• Size (-)
• Age (-)
• Strong Culture (-)
• Availability of resources
(+)
• Powerful inside forces (i.e.
Patterns of interaction
among employees) (-)
10
Factors Affecting Managerial
Discretion
External Environment
Characteristics of the
Organization
Managerial
Discretion
Characteristics of the
Manager
Characteristics of the
Manager
• Tolerance for ambiguity
(+)
• Commitment to the firm
and its desired strategic
outcomes (-)
• Interpersonal skills (+)
• Aspiration level (+)
• Degree of self-confidence
11
(+)
Top Management Teams
Composition matters!
 Heterogeneity: functional background,
experience, and education
 Heterogeneous top management
teams are associated positively with
innovation and strategic change

12
Top Management Teams
A heterogeneous top management
team with varied expertise and
knowledge can draw on multiple
perspectives when evaluating
alternative strategies and building
consensus
 BUT……..

13
Top Management Teams

The more heterogeneous and larger
the top management team is, the more
difficult it is for the team to effectively
implement strategies
14
Top Management Teams

What about tenure on the team and in
the firm?
– Long tenure restricts the breadth of an
executive’s knowledge base => develop fewer
alternatives in strategic decision-making
BUT…
– Long tenured managers may be able to exercise
more effective strategic controls
15
CEO and Top Management Team
Power

Board of directors is an important
governance mechanism for monitoring a
firm’s strategic direction
 Higher performance is normally expected
when the board is more directly involved in
shaping a firm’s strategic direction
 Chief executive officers can gain so much
power that they are virtually independent of
oversight by the board of directors
16
CEO and Top Management Team
Power

A CEO has more power when the CEO:
– is also chairman of the board of directors
(known as CEO duality)
– has long top management team, firm and/or
industry tenure
– appoints the outside directors
– appoints top executives to the board

The most effective forms of governance
share power and influence among the
CEO and board of directors
17
Managerial Labor Market

The internal labor market is comprised of
the career path alternatives available to a
firm’s managers

The external labor market includes the
collection of career opportunities for
managers outside their firm
18
Managerial Labor Markets

Selecting internal candidates for
management positions reflects a desire:
– to build on valuable firm-specific knowledge
– for continuity and commitment to status quo

Selecting an outsider often:
– brings fresh insights and may energize the firm
with innovative new ideas
– indicates a need for change
19
Managerial Labor Markets
Homogeneous
Top Management
Team Composition
Heterogeneous
Managerial Labor Market:
CEO Succession
Internal CEO
External CEO
succession
succession
Ambiguous:
Stable
possible change in
strategy
top management
team and strategy
Stable strategy
with innovation
Strategic
change
20
Exercise of Effective Strategic
Leadership
Establishing
balanced
organizational
controls
Determining
strategic
direction
Exploiting and
maintaining
core
competencies
Effective Strategic
Leadership
Emphasizing
ethical
practice
Sustaining
an effective
organizational
culture
Developing
human
capital
21
Determining Strategic Direction

It is important not to lose sight of the
strengths of the organization when
making changes required by a new
strategic direction
– i.e. never forget your firm’s current and
core competencies
22
Exploiting and Maintaining Core
Competencies

Strategic leaders must verify that the
firm’s competencies are emphasized in
strategy implementation efforts

Core competencies cannot be developed
or exploited effectively without developing
the capabilities of human capital
23
Developing Human Capital

Human capital refers to the knowledge
and skills of the firm’s entire workforce

Employees are viewed as a capital
resource that requires investment (e.g.
effective training and development
programs)

The ability to manage human capital may
be the most critical of the strategic
leader’s skills
24
Sustaining an Effective
Organizational Culture

Can organizational culture be influenced
by strategic leaders?
– Gerstner would say……..

How?
– Gerstner would say……..
25
Sustaining an Effective
Organizational Culture

An appropriate organizational culture
encourages the development of a firm’s
entrepreneurial orientation:
– Autonomy (reduce organizational constraints,
increase self-directedness)
– Innovativeness (tendency to support new
ideas)
– Risk-Taking (willingness to accept risk)
– Proactiveness (be a market leader)
– Competitive Aggressiveness (propensity to
take action to outperform rivals)
26
Emphasizing Ethical Practices

To properly influence employee judgment
and behavior, ethical practices must
shape the firm’s decision-making process
and be an integral part of an
organization’s culture
 Leaders set the tone for creating an
environment of mutual respect, honesty
and ethical practices among employees
27
Establishing Balanced
Organizational Controls




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
Strike a balance between strategic and
financial controls. Why?
28