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Chapter 11
Strategic Leadership: Creating a Learning Organization
and an Ethical Organization...................................................... 348 (11-2)
Leadership: Three Interdependent Activities.......................................... 350 (11-4)
Setting a Direction........................................................................................................... 351 (11-5)
Designing the Organization............................................................................................. 351 (11-6)
Nurturing a Culture Committed to Excellence and Ethical Behavior............................. 352 (11-7)
Getting Things Done: Overcoming Barriers and Using Power............. 355 (11-9)
Overcoming Barriers to Change...................................................................................... 355 (11-9)
Using Power Effectively................................................................................................... 356 (11-10)
Emotional Intelligence: A Key Leadership Trait..................................... 358 (11-11)
Self-Awareness................................................................................................................. 359 (11-11)
Self-Regulation................................................................................................................. 360 (11-11)
Motivation........................................................................................................................ 360 (11-11)
Empathy........................................................................................................................... 361 (11-11)
Social Skill....................................................................................................................... 361 (11-11)
Emotional Intelligence: Some Potential Drawbacks and Cautionary Notes................... 361 (11-12)
Creating a Learning Organization...........................................................362 (11-13)
Inspiring and Motivating People with a Mission or Purpose.......................................... 363 (11-13)
Developing Leaders 363 (11-14)
Empowering Employees at All Levels.............................................................................. 364 (11-14)
Accumulating and Sharing Internal Knowledge.............................................................. 365 (11-15)
Gathering and Integrating External Information............................................................ 366 (11-16)
Challenging the Status Quo and Enabling Creativity...................................................... 366 (11-17)
Creating an Ethical Organization.............................................................368 (11-18)
Individual Ethics versus Organizational Ethics............................................................... 368 (11-19)
Integrity-Based versus Compliance-Based Approaches to Organizational Ethics.......... 369 (11-20)
Role Models..................................................................................................................... 371 (11-21)
Corporate Credos and Codes of Conduct........................................................................ 372 (11-21)
Reward and Evaluation Systems...................................................................................... 372 (11-21)
Policies and Procedures.................................................................................................. 373 (11-22)
Issue for Debate..........................................................................................373 (11-22)
Reflecting on Career Implications............................................................375 (11-24)
Summary.....................................................................................................375 (11-26)
Chapter 11
Strategic Leadership:
Creating a Learning Organization and an Ethical Organization
Summary/Objectives
Strong and effective leadership is a key organizational success factor. Strategic leadership
is needed to successfully formulate and implement strategies. In today’s economy, leaders have
two additional roles as well—to create learning organizations and to create an ethical climate.
This chapter is organized into four sections.
1. The first section describes three key leadership activities—setting a direction,
designing the organization, and nurturing a culture of excellence and ethical
practices.
2. The second section addresses two practices and capabilities that enable executives
to be more effective leaders—overcoming barriers to change, and the effective
use of power.
3. The third section addresses the critical role of emotional intelligence (EI) in
effective strategic leadership. EI refers to an individual’s capacity for recognizing
one’s emotions and those of others. We also address some potential drawbacks of
EI.
4. The fourth section addresses the importance of leader’s developing competency
companions and their role in creating a learning organization. Emphasize the
importance of motivating and harnessing individual and collective talents by
accumulating and sharing information, and empowering and motivating
employees at all levels to use new knowledge.
5. The final section discusses the challenge to leaders to inspire and maintain an
ethical organization. Point out the positive benefits of good ethical leadership and
the disadvantages for companies that face ethical crises. Four topics are addressed
—role models; corporate credos and codes of conduct; rewards and evaluation
systems; and, policies and procedures.
Lecture/Discussion Outline
In LEARNING FROM MISTAKES, we open the chapter with the example of
Stroh’s Brewing, a once successful brewing firm that failed due to ineffective leadership and
failed decision making.
Discussion Question 1: Why were the acquisitions so debilitating for Stroh’s?
The acquisitions hurt Stroh’s in three fundamental ways. First, they caused the firm to lose focus
on its core markets. Management attention was focused on undertaking and integrating the
acquired firms rather than meeting the tastes and needs of its core mid-western, blue-collar
Discussion Question 2: What would have been the likely outcome for Stroh’s if it hadn’t
purchased other brands?
The firm likely would have still struggled. From an external perspective, the beer industry was
nationalizing, with Anheuser Busch and Miller emerging as the strongest national players.
However, the problems were not just driven by external factors. Peter Stroh was not an effective
leader for the firm. He was not effective in any of the three key leadership activities discussed in
the chapter. He failed to set a clear direction for the firm. He neither positioned the firm to be a
strong niche player in its core market nor set a clear path to being a strong national player.
This chapter provides insights into how organizations can more effectively manage
change and cope with increased environmental complexity and uncertainty. First, it defines
leadership and introduces three important leadership activities. Second, it discusses three
I. Leadership: Three Interdependent Activities
In this section, a definition of leadership is presented. Leadership is not custodial
management. Rather, it is proactive, goal-oriented, and focused on the creation and
implementation of a creative vision. Defined succinctly: Leadership is the process of
Leaders must be concerned with both “doing the right thing” and “doing things right.”
Discussion Question 3: What are some examples of leaders who have had a
transformative effect on their company? What made their activities transformative?
Discussion Question 4: What challenges do leaders face when trying to balance the task
of simultaneously doing the right things and doing things right?
Leaders recognize three interdependent activities that must be continually reassessed for
organizations to succeed:
1. Determining a direction
2. Designing the organization
The SUPPLEMENT below offers insights from Charlie Hazzard, a former senior executive at
Extra Example: An Executive View of the Three Leadership Activities
Charlie Hazzard was Executive Vice President of Administration for OxyChem (the chemical operations of
Occidental Petroleum—“Oxy” on the NYSE) and is currently Clinical Professor and Executive in Residence for the
Jindahl School of Management at the University of Texas Dallas.
1. One of the key roles of a leader is to set the direction for an organization. In your experience, what do effective
leaders do to formulate and communicate a vision or direction for the firm?
When Lou Gerstner took over IBM in 1993, it was facing bankruptcy. At his first press conference, he was asked
what the vision was that he wanted to communicate. Gerstner’s answer has since become a classic: “The last thing
this company needs is a vision.”
Facing two consecutive years of multi-billion dollar losses, Gerstner needed a sense of urgency throughout the
organization about what it takes to make money in the current markets IBM served. Ultimately, he sorted out the
answers as to how IBM could make money by rearranging the priorities of his senior executives and asking IBM’s
customers what they needed that IBM could provide.
The customer answers saved IBM. They told Gerstner and his senior executives what they needed and what they
thought IBM could do.
Gerstner inspired his organization by discovering what IBM needed to do (and not do) to make money. Leaders set
the agenda for change and growth.
2. Leaders must also design an organization to achieve their desired direction. This can include responsibility
structures, reward systems, budgeting and control systems, and systems to integrate activities across organizational
units. What have you found to be the key elements in designing an effective organization?
Agility has many definitions, but my first thought about it involves communication and teamwork. I think of
Southwest Airlines where “blame” for late arrivals or delayed departures gets translated into teamwork to improve
processes so the incident or issue doesn’t happen again.
Doz & Kosonen referred to the term “Strategic Agility” when they defined strategically agile companies as those
that not only learn to make fast turns and transform themselves without losing momentum, but their CEOs and top
teams also have higher ambitions: to make their companies able to take advantage of change and disruption.
Some elements of agility that can be turned into policies:
- Reward inventive accountability.
- Manage from the future. (What’s your goal? What does it take to get there?)
- Insist on uncompromising straight talk.
- Infuse an intricate understanding of what drives business success.
- Encourage an informal organization that supports principles like that.
3. Most successful organizations have a culture that is committed to excellence and ethical behaviors. How can
leaders help build, support, and reinforce such a culture in their organizations?
“Attitude” permeates an organization and it starts at the top. If the top leader’s attitude reflects in ethical business
policies and practices, he reinforces the appropriate organizational behavior.
Borrowing from John Maxwell, successful leaders:
- Walk slowly through the halls—Interface with the people who support you.
- See everyone as a “10” (see them as who they can become)—People rise to a leader’s expectations if they like the
leader.
- Develop each team member as a person (cherish the “B” performer and help him or her develop). Those 80
percent in the middle are the backbone of any organization.
- Model the behavior you desire—Leaders need to “BE” what they want to “SEE.”
Source: Interview with Charlie Hazzard conducted by Gerry McNamara.
Discussion Question 5: Do unsuccessful leaders fall short more often in one of these
activities than others? Why?
Discussion Question 6: What are some other qualities that a strong leader needs to
exhibit?
A. Setting a Direction
The leader is closely involved with the vision, mission, and goals of the organization. To
establish a direction, the leader must have a holistic perspective that takes into account all of the
Discussion Question 7: How have leaders you have worked for helped set the direction
of the organization?
Discussion Question 8: What are some examples of leaders who have used direction
setting to lead and/or transform their organizations?
The SUPPLEMENT below points out that leaders can signal the purpose of the firm
through their own actions.
Extra Example: Broad Air’s CEO Signals the Firm’s Purpose with a Warm Office
Broad Air, a Chinese manufacturer of central air conditioning systems, has a broader purpose than simply generating
economic value. Broad Air’s CEO, Zhang Yue, talks boldly of the firm’s concern for larger environmental issues.
Mr. Yue stated, “I have completely shifted the focus of this business towards the direction of reducing emissions.
I’ve taken on the challenge of climate change.”
These values are evident in the firm’s product line, which centers on absorption chillers, a more efficient technology
for air conditioning than conventional air conditioners. The firm has also developed systems that use natural gas and
waste heat for power, avoiding electric systems that might rely on coal-fired electric plants for power. Broad’s air
conditioners cost more up front but are cheaper to run over the long run since they are use half the energy of a
conventional air conditioner. The firm is active in developing energy efficient building designs even though their
implementation reduces the demand for Broad’s air conditioners. With the firm’s commitment to sustainability and
energy efficiency, it was one of ten companies awarded a BusinessWeek Greener China Business Award in 2009.
But Mr. Yue also walks the talk in his own action. For example, he doesn’t find it at all ironic that the CEO of an air
conditioning firm keeps his office thermostat set to a balmy 81 degrees in the summer. Doing so signals to the rest of
the firm that everyone in the firm has a part in saving energy and green initiatives.
Sources: Winston, A. 2014. The Big Pivot. Harvard Business Review Press. Boston, MA: 201; theclimategroup.com.
Discussion Question 9: Do Mr. Yue’s values help or hinder the strategic success of Broad
Air?
STRATEGY SPOTLIGHT 11.1 describes how Alan Mulally’s strong leadership of Ford
resulted in a dramatic turnaround for the automaker.
Discussion Question 10: Why was Alan Mulally so successful?
B. Designing the Organization
Leaders must be actively involved in shaping the organization by building structures,
teams, systems, and organizational processes that facilitate implementation of their strategic
vision.
Failure to provide leadership in shaping and maintaining organizational design can result
in numerous problems, including
1. Inadequate understanding of responsibility and accountability among managers
2. Reward systems that fail to motivate individuals toward common objectives.
4. Inappropriate or insufficient mechanisms to integrate and coordinate activities
Discussion Question 11: Have you ever worked for an organization with accountability
and control problems such as these? What was the leader’s role in causing the problems?
What could the leader have done to prevent the problems?
The SUPPLEMENT below discusses Lou Gestner’s insights on the importance of
rewards and incentives in designing an effective organization.
Extra Example: Lou Gerstner on the Mismatch between Values and Incentives
Lou Gerstner, former CEO of IBM, thinks values are an important element of designing an effective organization,
but he argues that firms need to build incentives to support those values.
Gerstner’s view: “I think values are really, really important, but I also think too many values are just words… When
you go inside those companies, you often see the words don’t translate into practices. When I first arrived at IBM,
one of my first questions was ‘Do we have teamwork?,’ because the new strategy crucially depended on our ability
to provide an integrated approach to our customers. ‘Oh yes, Lou, we have teamwork,’ I was told… I responded.
‘How do we pay people?’ ‘Oh, we pay on individual performance.’ The rewards system is a powerful driver of
behavior and therefore culture. Teamwork is hard to cultivate in a world where employees are paid solely on their
individual performance.”
“If the practices and processes inside a company don’t drive the execution of values, the people don’t get it.”
Sources: Davis, I. 2014. Lou Gerstner on Corporate Reinvention and Values. mckinsey.com. September: np.
C. Nurturing a Culture Committed to Excellence and Ethical Behavior
Leaders play a key role in developing and sustaining—as well as changing, when
The SUPPLEMENT below emphasizes why it is important for organizational leaders to
Extra Example: Reinforcing Values at Northwestern Mutual Life
James D. Ericson, CEO of Northwestern Mutual Life, is a leader who manages his company’s values. However,
those values may be very different from other companies in the same industry. Here are Ericson’s comments about
the values of education, communication, and thriftiness:
“Most companies reward agents by whisking them away to far-flung resorts. To say we don’t is an
understatement. For more than a hundred years, we’ve held our annual meeting each summer in Milwaukee.
Agents bring their families...and even pay their own way. That’s right...I said they pay their own way to
Milwaukee, Wisconsin! More than 9,000 agents and family members attended the meeting last July. They
enjoyed a number of social events...but education was the main focus of the meeting...as it always is.”
“We call it unique...and it is. But our industry colleagues probably just call us cheap. I remember talking to a
woman at an industry meeting. She was telling me where her company takes their agents...at company expense.
Spain, Italy, the Bahamas. An acquaintance of mine overheard and said, ‘Jim, tell her where you take
Northwestern agents.’ So I said, ‘The Milwaukee Zoo’ because that’s where we hold our opening party. As she
stood there speechless I added, ‘but we only make them pay for half of their food and drink.’ I don’t think I
made a convert to our values and traditions.”
Source: Ericson, J. D. 1993. Speech at Corporate Communications Seminar reported in Fortune Magazine, March
13.
Discussion Question 12: Why is it important for the leader to communicate a consistent
perspective about a company’s values (stated at the end of the first paragraph)?
Discussion Question 13: What are some of the benefits of a leader using humor to make
a point?
At times, executives must make difficult decisions in order to strengthen the culture of
Extra Example: The Founder Takes a Strong Action: Firing a Huge Client!
Fearful that his creative talent would bolt because the main contact for a huge client was abusive, Kim McConnell,
founder of agricultural marketing communications firm AdFarm made a courageous decision—he fired the client!
Morale improved immediately. “Very quickly the revenue from this very sizable account was made up,” he says. “I
guess it put pressure on our people to go and find the revenue we lost from this client.”
Source: Harnish, V. 2010. Stop doing these five business killers now. Fortune. December 6: 71.
Discussion Question 14: Do you know of any other courageous decisions that a leader
has taken to strengthen (or maintain) his/her firm’s culture? (You might use this to
introduce Strategy Spotlight 11.2—how the founder of Infosys instilled a strong culture by
refusing to pay a bribe.)
Managers and top executives are responsible for strengthening and modeling ethical
behavior throughout an organization as well. To do so, they must consistently demonstrate that
STRATEGY SPOTLIGHT 11.2 discusses how the chairman of Infosys creates an ethical
culture by “walking the talk.”
Michael Williams, a former top executive at Biggby Coffee, offers further insight on the
II. Getting Things Done: Overcoming Barriers and Using Power
Leaders must perform a variety of tasks, and the success of their organizations often
depends on how well they meet challenges and deliver on promises. In this section, we focus on
A. Overcoming Barriers to Change
Effective leaders must recognize that to bring about meaningful change in their
organizations, they must overcome barriers (or resistance) to change. There are several types of
resistance to change. Among these are:
Many people having “vested interests in the status quo”
“Systemic” barriers (such as a bureaucratic structure involving many rules and
“Behavioral” barriers (which is the tendency of managers to look at issues strictly from
“Political” barriers (which refer to conflicts arising from power relationships and self-
“Personal time constraints” (which simply means that managers may be so absorbed with
STRATEGY SPOTLIGHT 11.3 discusses the challenges Mary Barra faces as she works
to change the culture and values at General Motors.
The following SUPPLEMENT builds off a quote in the text where Lou Gestner, the former CEO
of IBM, discusses systemic barriers to change.
Extra Example: Effective Leaders Overcome Barriers to Change
Lou Gerstner, former CEO of IBM, has strong views on why successful companies often fail. He argues that “Too
many companies build up an internal commitment to their existing businesses.” He goes on to comment that
“enduring companies we see are not really companies that have lasted 100 years. They’ve changed 25 times or 5
times or 4 times over that 100 years.”
His prescription for this is for strong leaders to inoculate their firms against complacency and continuously push
their firms forward. He concludes, “The leadership that really counts is the leadership that keeps a company
changing in an incremental, continuous fashion. It’s constantly focusing on the outside, on what’s going on in the
marketplace, what’s changing there, noticing what competitors are doing.”
Sources: Davis, I. 2014. Lou Gerstner on Corporate Reinvention and Values. mckinsey.com. September: np.
