Strategic Leadership Instructor notes for three topics are included in this chapter: • Detailed notes regarding the issues surrounding hiring CEOs from outside or inside the organization. Examples cited are IBM and Compaq. • The importance of strategic leadership. Examples detailed are K-Mart and Wal-Mart. • The importance of organizational culture in sustaining performance. Examples cited are General Electric and several GE “wanna-be’s,” including details of Allied Signal’s hiring of Larry Bossidy. These notes appear on the notes pages of the related slides.
Managerial Labor Market When should a CEO be hired from than outside, from the inside? (Computer / IT industry) Example 1: IBM “The case for new blood I” During John Akers’ reign, IBM had gone from a workforce of 407,000 in 1986 to 300,000 in 1992. Its stock had dropped from a peak in 1987 of $1757/8 to $25 (split adjusted) in 1993; and a loss of $2.8 billion in 1991 and of $8 billion in 1993. In early 1993 IBM dismissed John Akers. Lou Gerster, a former president of American Express, was recruited to become IBM’s CEO—a successful outsider with strong managerial reputation in the financial industry— not the computer industry. Sixty days after taking the CEO’s reins, Gerster faced his most challenging decision: whether to break up IBM. Fast Forward Gerster instituted radical change: reengineering, downsizing, product to service, and efforts to weld the different pieces of IBM back into a coherent whole. Lou Gerster, who stepped in at IBM, successfully turned the company around. Gerster’s successor inherited a more stable company, with a sound strategic trajectory. Given the strategic position of IBM, who should be the next CEO? An insider groomed by Gerster was chosen: Palmisano.
Managerial Labor Market (cont.) When should a CEO be hired from than outside, from the inside? (Computer / IT industry) Example 2: Compaq “The case for new blood II” In 1991 Eckhard Pfeiffer, an insider, was recruited to take advantage of this opportunity. Before becoming CEO in 1991, Pfeiffer served as Compaq’s Executive Vice President and Chief Operating Officer. Prior to that, he was President of Compaq Europe and International. Before joining Compaq, Pfeiffer spent 20 years with Texas Instruments. Pfeiffer instituted an aggressive strategy for growth: cut-throat pricing to gain share and merger with Digital and Tandem to gain product and service scope. Compaq became the number one PC maker with strong dominance of distributor channels Fast Forward After eight years as the company’s CEO, Pffeifer was ousted by his board of directors. The move came days after the company disclosed that profits would be only half of what Wall Street analysts had been expecting. The board called into question Pffeifer’s strategy to stave off intense competition (particularly from Dell) and poor execution. The two-year-old acquisitions of Digital and Tandem were not yet fully integrated into the Compaq universe. (Continued on the next slide.)
Managerial Labor Market (cont.) When should a CEO be hired from than outside, from the inside? (Computer / IT industry) Given the strategic position of the firm, who should be the next CEO? Wall Street let out a collective gasp: Compaq had been searching for a CEO for months and the best it could do was its own COO Michael Capellas, an insider, to stabilize the ship or groom for a possible sale. Hewlett-Packard buys Compaq Computer. The new company is becoming number one globally in combined Unix and Intel-based servers, PCs, and external storage, and third in services behind IBM and EDS. Six months after completing the merger between Compaq and Hewlett-Packard. Capellas quits his number two post at Hewlett-Packard.
How important is strategic leadership? Example 1: K-Mart What is the market potential for discount retailing 1980s? In 1981, Kmart had sales of $12.5 billion and 2055 stores. It believed that it faced limited growth opportunities and that it must diversify from its core retail platform by investing in alternative retail formulas, while improving its brand image to attract a more upscale clientale, using K-Mart cash to buy retail assets. Strategy: Go on an acquisition binge that would last 10+ years: 1984 Purchase Walden Books & Home Centers of America (Builders Square) 1985 Launch Jaclyn Smith line 1987 Partner with Martha Stewart 1990 Purchase Sports Authority 1994 Purchase Borders Books Results: Overpaid for assets, unknown territory, led to poor management decisions 1984 Sold off all non-core (Kmart-branded) assets (Walden Books, Sports Authority, etc.) to raise cash to restore K-Mart format and stave off bankruptcy. Under-investment in K-Mart franchise eroded strategic position. Fast Forward Bankruptcy protection.
Exercise of Effective Strategic Leadership How important is strategic leadership? Example 2: Wal-Mart What is the market potential for discount retailing 1980s? In 1987, Wal-Mart marked its 25th anniversary. It had sales of $15.9 billion at 1,198 stores and 200,000 employees. But that was not enough. Strategy Continue aggressive growth strategy, expand to capture opportunity, while investing in the “business” to perfect the formula: • Invest in the core business, (i.e. logistics, pricing, marketing, etc.) • Become undisputed price leader, attracting emergent “price sensitive” customer • Capture market share from competitors by attacking their strongholds, (some of their victims include: Jamesway, Hills, Montgomery Wards, Kmart???) Results • Continued growth into their core-market and experimentation with market extensions (Sam’s Club) • International expansion to further fuel growth Fast Forward Wal-Mart became an undisputed champion: • Operates over 2,600 Wal-Mart and 475 Sam’s Club stores (2003 statistics) • 2002 ranked #3 on Fortune’s Most Admired Company (2003 statistics)
Sustaining an Effective Organizational Culture How important is organizational culture to sustained performance? Example: General Electric General Electric: Overview Build pervasive organizational culture based on simple principles: • Comprehensive leadership characteristics embodied in GE Leadership Model • Goal to be #1 & #2 in every market served; if not, then exit that market • Strict rank-ordering of employees, especially senior executives • Practice of “managing-out” bottom 10% of employees each year • Rigorous HR practices, (STAR Model, talent planning, assignment management, coaching, performance management, etc.) • Operational Discipline—Champions of “Six Sigma” approach to process management GE Highlights • Unprecedented growth and financial performance (at least under Welch) • Consistent growth in earnings from 1980-2001 GE Results • Consistent 15% growth of for 15 years straight • World Most Admired Company ranked #1 by Fortune from 1998-2002
Sustaining an Effective Organizational Culture (cont.) How important is organizational culture to sustained performance? Example: General Electric wanna-be’s Wanna-be’s Overview These companies include Allied Signal, Honeywell, and so. An example is Allied Signal’s recruitment of Larry Bossidy. Strategy Emulate the GE model based on a few key principles: • Poach GE talent, (i.e. executive-level managers) • Adapt GE cultural traits, and blend into existing organization • Replicate GE processes, (e.g. talent management, assignment management, Six Sigma, etc.) • Grow via M&A into new product markets in order to expand portfolio and to gain economies of scale to compete with GE (Continued on next slide.)
Sustaining an Effective Organizational Culture (cont.) How important is organizational culture to sustained performance? Example: General Electric wanna-be’s (cont.) Larry Bossidy Story In 1991, Brossidy was recruited to Allied Signal to invigorate GE principles into a “mediocre” performing firm. His strategy was: • Focusing on aggressive, but disciplined growth initiatives • Instituting many GE HR practices: STAR Model, talent planning, performance management, etc. • Instituting Six Sigma-led productivity initiatives Allied Signal Results • Bossidy’s tenured lasted from 1991-1999 • Successful merger with Honeywell in 1999 • 31 consecutive quarters of EPS growth of 13% or more
Strategic Leadership Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 2
Chapter 2 Strategic Leadership Chapter 1 Introduction to Strategic Management Strategic Thinking The Strategic Management Process Chapter 4 The Internal Organization Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 9 International Strategy Chapter 3 The External Environment Chapter 5 Business-Level Strategy Chapter 8 Acquisition and Restructuring Strategies Chapter 11 Corporate Governance Strategic Intent Strategic Mission Chapter 7 Corporate-Level Strategy Chapter 10 Cooperative Strategy Chapter 12 Strategic Entrepreneurship Strategic Analysis Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities
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
Strategic Leadership and the Strategic Management Process shapes the formulation of and influence Successful Strategic Actions Effective Strategic Leadership Strategic Intent Strategic Mission
Strategic Leadership and the Strategic Management Process yields Click Here Return to Discussion Questions Strategic Competitiveness Above-Average Returns Formulation of Strategies Implementation of Strategies Successful Strategic Actions
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
Managerial Labor Markets Managerial Labor Market: CEO Succession Top Management Team Composition Click Here Return to Discussion Questions Strategic change Stable strategy Stable strategy with innovation Internal CEO succession External CEO succession Heterogeneous Homogeneous Ambiguous: possible change in top management team and strategy
Exercise of Effective Strategic Leadership Establishing balanced organizational controls Emphasizing ethical practice Developing human capital Exploiting and maintaining core competencies Sustaining an effective organizational culture Determining strategic direction Effective Strategic Leadership