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Chapter 12
Strategic Leadership
CHAPTER OVERVIEW
LEARNING OBJECTIVES
LECTURE NOTES
12-1 STRATEGIC LEADERSHIP AND STYLE
12-2 THE ROLE OF TOP-LEVEL MANAGERS
12-2a Top Management Teams
ANSWERS TO REVIEW QUESTIONS
MINI CASE: The Global Soccer Industry and the Effect of the FIFA Scandal
ADDITIONAL QUESTIONS AND EXERCISES
CHAPTER OVERVIEW
Effective strategic leadership is a prerequisite to using the strategic management process
successfully. Strategic leaders help define the vision and mission of a firm and then set
stretch goals that lead to innovations, breakthrough thinking, competitive advantages, and
above-average returns.
Chapter 12: Strategic Leadership
Chapter 12: Strategic Leadership
imperfectly imitable, and nonsubstitutable, strategic leaders are also a source of
competitive advantage.
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 increase their power.
Effective strategic leadership, as explained in the final sections of the chapter, involves
key leadership actions.
• 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
Chapter 12: Strategic Leadership
human capital as a resource to maximize—not as a cost to minimize. 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, which promotes
cooperation and coordination within and across the firm’s units.
Developing and using balanced organizational controls is the final key leadership action
associated with effective strategic leadership. The balanced scorecard is a tool that
measures the effectiveness of the firm’s strategic and financial controls. An effective
balance between these two controls allows for flexible use of core competencies, but
within the parameters of the firm’s financial position.
LEARNING OBJECTIVES
1. Define strategic leadership and describe top-level managers’ importance.
2. Explain what top management teams are and how they affect firm performance.
Lecture Notes
Chapter Introduction: This chapter deals with the importance of strategic leadership, its
effects on organizational outcomes, and the great challenges faced by strategic leaders.
Effective strategic leaders must be able to use the strategic management process
(illustrated in Figure 12.1) effectively by:
Chapter 12: Strategic Leadership
OPENING CASE
Meg Whitman: A Pioneering Strategic Leader
Meg Whitman has held a number of high-profile positions as a strategic leader. After
rising through the ranks at several firms, she took the helm of the fledgling company
eBay, growing revenues from $4 million to $8 billion and the workforce from 30 to
Teaching Note
Begin the chapter’s discussion by brainstorming what qualities students think a
strategic leader like Meg Whitman might have. What characteristics allow them to
12–1 STRATEGIC LEADERSHIP AND STYLE
Strategic leadership entails 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. In other words,
strategic leadership represents a complex form of leadership in organizations. A manager
with strategic leadership skills exhibits the ability to guide the firm through the
competitive landscape by:
Chapter 12: Strategic Leadership
The strategic leader has several responsibilities, including the following:
• Establishing a context for efficiency
• Attracting and then managing human capital (perhaps the most critical of the strategic
leader’s skills)
Primary responsibility for effective strategic leadership rests at the top of the
organization—in particular with the CEO. Others commonly recognized as strategic
leaders include the following:
• Board of directors
Figure Note
The role of strategic leadership in the strategic management process is illustrated in
Figure 12.1.
FIGURE 12.1
Strategic Leadership and the Strategic Management Process
As illustrated in Figure 12.1, effective strategic leadership:
Which influences the:
• Development of successful strategic actions
Chapter 12: Strategic Leadership
Which lead to:
• Strategic competitiveness
• Above-average returns
Strategic leaders are those at the top of the organization (in particular, the CEO), but other
STRATEGIC FOCUS
Cybersecurity Risk: A Significant and Expanding Challenge for Strategic Leaders
and Their Firms
Cyber risk is often defined as “threat X vulnerability X consequence.” The formula hints
at the exponentially challenging nature of the risks involved in using technological
systems with interconnections, something that virtually every modern business does. The
Teaching Note
Students and their families may have personally experienced data breaches, such as the
cyber-attacks on Marriott Hotels, Home Depot, Target, and Sony PlayStation. Guide
Chapter 12: Strategic Leadership
12–2 THE ROLE OF TOP-LEVEL MANAGERS
Top-level managers represent an important resource for organizations as they attempt to
formulate and implement strategies effectively because of top-level mangers’ roles in
designing the organization and the performance outcomes that result from using that
design. Thus, it is important for organizations to have a top management team with
superior managerial skills.
Three factors can be viewed as determining a strategic leader’s decision discretion:
Figure Note
Figure 12.2 shows three factors that affect/determine managerial discretion.
FIGURE 12.2
Factors Affecting Managerial Discretion
Managerial discretion is a function of three factors: external environment, organizational
characteristics, and an individual manager’s characteristics.
External Environment (especially the competitive environment):
• Industry structure
Organizational Characteristics:
• Size
• Age
Chapter 12: Strategic Leadership
Managers’ (Individual) Characteristics:
• Tolerance for ambiguity
Other critical roles played by top-level managers include:
• Implementing an appropriate organizational structure
Teaching Note
Remind students that for top-level managers to make a difference—or enhance a firm’s
ability to achieve a competitive advantage—they generally must possess superior
12-2a Top Management Teams
The complexity of the challenges faced by the firm and the need for substantial amounts
of information and knowledge require teams of executives to provide the strategic
leadership of most firms. Use of a team to make strategic decisions also helps avoid
managerial hubris.
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Explain what top management teams are and how they affect
firm performance.
Chapter 12: Strategic Leadership
Teaching Note
Strategic actions taken by a firm’s top management team will have an impact—positive
Top Management Teams, Firm Performance, and Strategic Change
The job of top-level executives is complex and requires a broad knowledge of the firm’s
operations, as well as the three key parts of the firm’s external environment—the general,
industry, and competitor environments (see Chapter 2). Thus, firms try to form a top
management team that has the appropriate knowledge and expertise to operate the internal
organization, yet also can deal with all the firm’s stakeholders as well as its competitors.
The net benefit of the actions of heterogeneous teams tends to be positive in terms of
market share and above-average returns. Research suggests that the path of causality goes
something like this: heterogeneity among top management team members → increased
debate → better strategic decisions → increased firm performance.
It is also important that the top management team members function cohesively. In
general, more heterogeneous and larger top management teams find it more difficult to
implement strategies effectively.
Chapter 12: Strategic Leadership
Other factors that are important to top management team effectiveness include:
• Members with substantive expertise in the firm’s core businesses
• Members with a good understanding of international markets
• Characteristics of top management and even CEO personalities
The CEO and Top Management Team Power
Although the composition of a firm’s top management team is important, a team that is
too powerful may negatively affect firm performance. As noted in Chapter 10, the
Teaching Note
Inside directors (part of management) can affect CEO power because they:
• Report to the CEO
However, in some cases, a firm’s CEO and members of the top management team may
“overpower” the firm’s board of directors. This can happen when:
• The CEO appoints members of the board (insiders or sympathetic outsiders)
Teaching Note
A recent investigation of the relationship between CEO duality and firm performance
found that the stock market was indifferent to changes in duality status. Such changes
Chapter 12: Strategic Leadership
Top management team members with longer team and organization tenure have an
increased ability to influence the board of directors. However, long tenure restricts an
Because an unhealthy relationship between the board of directors and the top management
team can potentially have a negative effect on an organization’s strategic competitiveness:
Teaching Note
One solution to this dysfunction is to get members of the firm’s management team to
have a significant ownership interest in the firm. Though this may provide the team
with additional power, a significant level of ownership also should encourage team
members to act more in the interests of shareholders, because they also are
shareholders.
12–3 MANAGERIAL SUCCESSION
Because of the impact that members of a firm’s top management team—especially the
CEO—can have on the organization’s performance, the selection of new top managers
requires effective screening systems.
Organizations can select their strategic leaders from one of two labor markets.
• A desire for continuity and commitment to the firm’s vision, mission, and strategic actions
Because of the perceived value of selecting an insider to succeed a CEO (or other top
management team member), selection of an outsider is unusual. But certain instances do
call for selecting an outsider.
• Executives with overly long tenure with the firm may become stale, which reduces the
number of innovative approaches developed to help the firm cope with changing conditions
Teaching Note
Outsiders are limited in firm-specific knowledge and/or industry experience.
Figure Note
FIGURE 12.3
Effects of CEO Succession and Top Management Team Composition on Strategy
Figure 12.3 illustrates relationships between the source of the CEO successor, top
management team heterogeneity/homogeneity (or team makeup), and firm strategy.
Chapter 12: Strategic Leadership
Teaching Note
Ask students to compare characteristics of successor CEOs in turnaround situations with
key managerial resources presented earlier in this chapter. Key differences that should be
recognized are that in a turnaround situation, industry-specific knowledge is less important
than the ability to radically change the organization, and perhaps its strategy.
To have an adequate number of top managers, firms must take advantage of a highly qualified
12–4 KEY STRATEGIC LEADERSHIP ACTIONS
Figure Note
The characteristics of successor CEOs also can be related to the six critical actions
required for the effective exercise of strategic leadership (highlighted in Figure 12.4).
FIGURE 12.4
Exercise of Effective Strategic Leadership
Figure 12.4 highlights the five most critical actions that strategic leaders must perform.
• Determining strategic direction
Figure 12.4 sets the stage for the balance of Chapter 12.
12-4a Determining Strategic Direction
Determining strategic direction of a firm refers to developing a long-term vision. This
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Discuss the value of strategic leadership in determining the
firm’s strategic direction.
Chapter 12: Strategic Leadership
The ideal long-term vision has two parts—core ideology and envisioned future. Core
ideology motivates employees through the company’s heritage, but the envisioned future
A charismatic CEO may foster stakeholder commitment to a new vision and strategic
direction.
It is important that strategic leaders also recognize that, though gaining employee
commitment to a new vision and strategic direction is important, factors such as the
12-4b Effectively Managing the Firm’s Resource Portfolio
Probably the most important task for strategic leaders is effectively managing the firm’s
portfolio of resources.
Firms may have multiple resources that can be categorized into the following categories:
• Financial capital
Strategic leaders manage the firm’s portfolio of resources by:
• Organizing them into capabilities
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Describe the importance of strategic leaders in managing
the firm’s resources.
Chapter 12: Strategic Leadership
Exploiting and Maintaining Core Competencies
As a reminder, core competencies are those capabilities of the firm around which a
competitive advantage may be built (as defined and discussed in Chapters 1 and 3).
Teaching Note
Before core competencies can serve as building blocks for a firm’s competitive
advantage, they must be distinctive. Remind students that the following conditions
must be satisfied for core competencies to be classified as distinctive:
• Unique to the firm
This means that core competencies must be emphasized as the firm implements strategy.
To ensure that core competencies identified as distinctive (and potential sources of
competitive advantage) remain distinctive for longer periods of time, firms must recognize
the importance of developing their human capital.
Developing Human Capital and Social Capital
Human capital refers to the knowledge and skills of the firm’s workforce. Employees
must be viewed as capital resources and as deserving of investment.
Teaching Note
People and people-related competencies—the workforce and its capabilities (a firm’s
Teaching Note
One significant problem that firms face is inadequate human capital to run an
organization effectively. As a remedy, many firms hire temporary employees, whereas
Chapter 12: Strategic Leadership
Effective training and development programs are important because these efforts:
• Recognize that knowledge has become more integral to gaining and sustaining a
competitive advantage
• Help build knowledge and skills
• Inculcate core values
• Improve strategic managers’ capabilities in the skills that are critical to effective strategic
leadership (e.g., determining the firm’s strategic direction, exploiting and maintaining core
competencies, and developing an organizational culture that supports ethical practices)
When human capital investments are successful, a workforce is capable of learning
continuously. Learning continuously and leveraging the firm’s expanding knowledge base
is linked with strategic success. It is also important to promoting innovation, which is the
foundation of competitive advantage.
Layoffs can result in a significant loss of the knowledge possessed by a firm’s human
Chapter 12: Strategic Leadership
Viewing employees as a resource to be maximized rather than a cost to be minimized
facilitates the successful implementation of a firm’s strategies. The implementation of
such strategies also is more effective when strategic leaders approach layoffs in a manner
that employees believe is fair and equitable.
Social capital involves relationships inside and outside the firm that help the firm
accomplish tasks and create value for customers and shareholders. Social capital is a
12-4c Sustaining an Effective Organizational Culture
Organizational culture represents a set of complex ideologies, symbols, and core values
that is shared throughout an organization and that influences the way that it conducts
business.
Entrepreneurial Mind-Set
An organization’s culture will either encourage or discourage (and, in some cases, even
penalize) employee efforts to tap into entrepreneurial opportunities.
Teaching Note
IBM produced a handbook designed to infuse an entrepreneurial spirit into its culture.
One way that the pursuit of entrepreneurial opportunities might be promoted is to invest in
opportunities as real options. That is, invest in an opportunity to provide the option of
taking advantage of it at some point in the future. Firms might enter strategic alliances for
this reason. For example, they might do so to have the option of acquiring the partner later
or of building a stronger relationship (e.g., developing a joint new venture).
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Explain what a firm does to sustain an effective culture.
Chapter 12: Strategic Leadership
Corporate culture characteristics and managerial actions that encourage an entrepreneurial
mind-set include the following:
• Autonomy—enabling employees to be self-directed in the pursuit of entrepreneurial
opportunities
STRATEGIC FOCUS
Organizational Culture: Is It Really That Important?
As this Strategic Focus points out, organizational culture is indeed very important as it is
the link between an organization’s strategy and goals and employees’ behavior and
performance. It is the responsibility of strategic leaders to establish, guide, and maintain
Teaching Note
Given that nearly all students are or have been employed somewhere, almost all have
experienced organizational culture. Ask students to briefly share their experiences, both
Changing the Organizational Culture and Restructuring
As noted in the text, incremental changes to the organization’s culture typically are used to
improve the effectiveness of strategy implementation.
Chapter 12: Strategic Leadership
A dramatic shift in strategy from the firm’s historical pattern of strategy often means that
Teaching Note
No matter why an organization’s culture must change, the shaping and reinforcing of
the new culture requires:
• Communicating effectively and problem solving
Teaching Note
It is helpful to show students that effective strategic leadership is reinforced by an
appropriate corporate culture. This can be done using video interviews of a CEO that
also profile the firm (e.g., any of the many reports on Herb Kelleher and Southwest
Airlines, when he was CEO there, will work well for this assignment). As they watch
the video, have students write down in separate columns on a piece of paper the clues
they find of two things: leadership approaches taken and corporate culture employed.
Upon debriefing, they will quickly see that these are mutually reinforcing in successful
companies.