Strategic Leadership and Firm Performance

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Introduction

Achieving and maintaining excellent performance is crucial for companies to succeed in modern times. By improving performance, companies can achieve higher profitability, market share, and competitiveness. Therefore, business management research has focused heavily on performance management over the past decades. Specifically, there have been many research studies that focused on the various factors and company features that contribute to or impair firm performance. Strategic leaders are particularly important actors with respect to firm performance because they are the primary decision-makers in their organizations. The actions taken by strategic leaders can thus help the company to achieve better performance or hinder it if their decisions are wrong.

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Main body

The focus of the present report is on the differences in the effects of strategic leaders on firm performance. Indeed, CEOs, directors and board members of different companies have varying influences on performance. The primary goal of this report is to explain these variations based on individual and other factors. The first section of the paper will explain the background of the inquiry by defining the key terms and establishing relationships between them. Then, the work will comment on the theoretical view of strategic leaders’ impact on firm performance. The subsequent sections will examine individual and other factors that can assist strategic leaders in enhancing firm performance or, on the contrary, constrain them. The final part of the report will provide conclusions based on research findings, which will help to answer the question posed for the assignment.

Strategic Leaders

First of all, it is essential to define the focus of the report by explaining the definition of a strategic leader and their role in businesses. In modern business research, the emphasis on strategy is significant, and the concept of strategic leadership is often taken to mean a specific approach used by leaders to bring their vision to reality (Schoemaker, Krupp and Howland, 2013). However, in the context of this report, strategic leadership refers to the strategy process rather than to a particular management approach. The strategy process encompasses a variety of activities and is ultimately designed to determine the firm’s future direction and set the plan for achieving organizational goals (Rothaermel, 2017). Consequently, strategic leaders are the actors that have a defining influence on the strategy process. These typically include chief executive officers (CEOs), top management teams (TMTs), board members, non-executive directors, and other people who take part in formulating a strategy (Cannella and Monroe, 1998). People in these positions have significant authority within the organization and can thus influence various aspects of its strategy that are related to short- and long-term performance.

Non-Strategic Leaders

Non-strategic leaders, in turn, can occupy a variety of positions in the company. In its broad definition, leadership is “concerned with direction setting, with novelty and is essentially linked to change, movement and persuasion” (Grint, Jones and Holt, 2017). Non-strategic leaders do not engage in the strategy process, but they can have authority over groups of employees and use various techniques to influence them (McCleskey, 2014). For example, non-strategic leaders may include middle management, team leaders or supervisors. People in these positions have limited authority and accountability in the company, and they cannot impact its strategic course. Still, they can be involved in the process of strategy implementation, thus supporting the top management in executing its strategic plans.

Firm Performance

Firm performance is an essential concept in business management since it is directly linked to business success. However, the notion has experienced substantial change over the years before arriving at its modern definition. According to Taouab and Issoe (2019), “in the 50s, firm performance was considered as the equivalent of organizational efficiency, which represents the degree to which an organization, as a social system with some limited resources and means, achieves its goals without an excessive effort from its members. The criteria used for assessing performance are productivity, flexibility, and inter-organizational tensions” (p. 94). Later, however, the concept has transformed, gaining new meanings based on changes in the business environment.

New approaches to defining performance focused on organizational capacities, its adaptability, the level of motivation and satisfaction of employees and on value delivered to stakeholders (Taouab and Issoe, 2019). Despite the wide variety of definitions available, most companies still rely on financial or market indicators to define their level of performance (Selvam et al., 2016). Characteristics such as profitability, market share and market growth are widely used as a means of defining performance today (Inkinen, 2015; Selvam et al., 2016; Taouab and Issoe, 2019). However, depending on the industry and organizational features, companies can also consider performance as defined by other variables, such as customer satisfaction, contribution to the community or society and similar indicators (Selvam et al., 2016). The present review will consider firm performance as defined by the scholarly articles and sources included, but it is anticipated that financial performance will be the focus of the inquiry.

Performance Measurement

Activities related to performance improvement often begin with performance measurement since it assists strategic leaders in defining and evaluating the status quo. Performance measurement is defined as the process of assessing the results of a particular organization, whether in terms of specific activities or in terms of overall outcomes (Harbour, 2009). Performance management is not a new field of study; over the past decades, there have been significant advancements in this field, provided for by the development of technologies and theories that could assist in performance appraisals (Bititci et al., 2015). Performance measurement proved to have a significant influence on firm performance, and thus it is widely applied by companies all around the globe (Bititci et al., 2015; Harbour, 2009). Indeed, the results of performance measurement can be used by companies to identify and address operational gaps, thus contributing to the overall performance of a process or the organization as a whole (Parida et al., 2015). Today, there are various performance measurement systems, and thus the process can be tailored to the organization’s needs (Bititchi et al., 2015; Harbour, 2009). For example, manufacturing companies often use waste as one of their performance indicators, whereas service companies are more likely to focus on customer satisfaction and similar data (Harbour, 2009; Parida et al., 2015). Thus, performance measurement is a necessary process that can be used by any organization to achieve better results.

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Performance Management

Performance management is a more general area of study and practice since it encompasses a multitude of activities related to improving and maintaining excellent performance (Buckingham and Goodall, 2015; Gerrish, 2016). According to Bititchi et al. (2005), performance management stemmed from performance measurement by extending the focus from critical indicators to ways of enhancing and maintaining them on high levels. Therefore, performance management has a direct impact on firm performance. According to Gerrish (2016), the introduction of performance management systems alone has a small positive influence on performance; with the addition of best practices in management to support performance improvement, the results are far more impressive. In the context of performance management, it should also be noted that the activities related to this process occur on various levels of the organization. For instance, the top management is usually responsible for setting performance goals and integrating organization-wide performance management systems, whereas other leaders can support these initiatives through training, organizational learning, monitoring, and other related activities.

Strategic Leaders’ Influence on Firm Performance

The influence of strategic leaders on firm performance is firmly rooted in their position within a company. Being the principal actors in the strategy process, these leaders have the power to make decisions that affect the entire company (Simsek, Heavey and Fox, 2018). For instance, strategic leaders can make decisions related to geographical expansions, which could offer their companies access to new markets and larger profits. Alternatively, they can make poorly-informed decisions pertaining to corporate social responsibility, which would have an adverse effect on the company’s reputation and image (Hassan, Marimuthu & Johl, 2015). Research on the impacts of strategic leaders on firm performance showed that certain authority positions at the helm of the company could contribute to its financial, social and even ethical performance (Hassan, Marimuthu & Johl, 2015; Simsek, Heavey and Fox, 2018; Withers and Fitza, 2017). For this reason, company owners often share governance and strategic decision-making with other actors in hopes of achieving better performance and sustaining competitiveness.

Nevertheless, there has also been a number of scholars who argue that the effects of strategic leaders are limited. One theory that is instrumental in this argument is the upper echelons theory. This theory is rooted in the behavioral theory of the firm, which focuses on the forces, features, and actors affecting decision-making and other critical processes within a company (Todeva, 2007). As explained by Todeva (2007), this view contrasts with the economic theory of the firm, which looks at companies as boxes transforming inputs into outputs (p. 1). Focusing on the dynamics between various bodies in the firm has allowed for the development of the upper echelons theory. This theory posits that “the effects of strategic leaders on organizations can be adequately assessed based on the collective attributes of the entire executive group, rather than based on the characteristics of each top manager separately” (Georgakakis, Greve and Ruigrok, 2017, p. 746). Consequently, this perspective suggests that as an individual, a strategic leader may not have such a powerful effect on firm performance, as discussed in some research studies. In turn, general group dynamics within TMTs and other interactional forces in companies affect their performance. Based on this theory, many research studies attempted to explore the individual and other forces that limit or improve the impact of individual strategic leaders on firm performance.

Individual Leaders’ Contribution

First of all, it is essential to note that the contribution of individual strategic leaders can be influenced by various factors ranging from their characteristics to boardroom dynamics. For example, emotions experienced by strategic leaders while interacting with other directors or making decisions can moderate their influence on firm performance. Jones (2015) found that directors often suffered from imposter syndrome, which causes them to be less confident in voicing their opinions and damages relationships with executives. Additionally, strategic leaders can have fears of underachievement or vulnerability or be afraid of appearing foolish (Jones, 2015). The negative behaviors stemming from these fears can damage decision-making, leading to differences in the way various leaders impact their organizations. Additionally, research by Pettigrew and McNutly (1995) helped to produce a model of director power on the board, which stipulates that directors’ influence depends mostly on three factors: power sources, including position, information and expertise, willingness and ability to utilize these sources and the broader dynamics of the organization. Consequently, personal feelings and the power that directors have in decision-making often shape directors’ contribution to firm performance.

Leader’s Hubris

Research into the influence of strategic leaders on firm performance also focused on the issue of hubris. In particular, scholars argue that hubris has a negative relationship with firm performance, which is supported by academic evidence. For instance, Haynes, Campbell and Hitt (2010) found that CEOs’ hubris was significantly and adversely related to firm performance. A study by Li and Tang (2010) further explained the effect of CEO hubris on firm performance. The researchers showed that CEOs who had higher scores in terms of hubris were more likely to take risks, which were often poorly calculated and affected their companies negatively (Li and Tang, 2010). Hiller and Hambrick (2005) concurred that strategic leaders with higher core self-evaluation are likely to be overconfident and make hasty decisions relying on their positive image of self, regardless of whether a particular choice would be right for their company. Consequently, the impact of directors with high levels of hubris will often be negative, whereas careful directors who have an adequate understanding of their abilities would have a positive effect on their company’s performance.

Limits in Decision-Making

Strategic leaders can also face obstacles in decision-making due to their education and experience. Inadequate knowledge of the company or strategic management, in general, could thus lead to directors having a negative influence on their firms’ performance. Research by Jalbert, Rao and Jalbert (2002) found that CEOs with a college degree had a better impact on company performance than those without a degree. Similarly, King, Srivastav and Williams (2016) showed that CEOs with an MBA degree had a more significant positive effect on firm performance in the banking industry than those without a degree. These findings suggest that educational differences play a role in defining the impact of strategic leaders on firm performance.

Similarly, research suggests that experience in strategic positions may have a moderating effect. Research by Peni (2015) found that experienced CEOs or Board Chairs were more likely to have a positive influence on the company than their inexperienced colleagues. However, a study by Elsaid, Wang and Davidson (2011) highlighted that appointing external CEOs with previous experience in this position had a negative influence on firm performance, whereas new CEOs often managed to improve financial performance. Despite the apparent duality of the effect of leaders’ experience, it is evident that variations in experience could explain differences in strategic leaders’ contribution to firm performance.

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Organisational Factors Influencing Firm Performance

With financial prosperity being among the main motivating factors for people, it is not surprising that research studies considered the relationship between firm performance and strategic leaders’ compensation. In contrast with the traditional understanding of financial motivation, a study by Brick, Palmon and Wald (2006) showed that there was a significant negative relationship between directors’ overcompensation and firm performance. Furthermore, excessive compensation has a negative effect on the social performance of companies. Research by Juan and Lee (2015) found that CEO compensation was negatively associated with firms’ corporate social responsibility, which is among the main determinants of social performance. Therefore, differences in leaders’ compensation could account for some of the variations in their influence on business performance.

Board Composition

Research into firm performance and the factors influencing it has also noted the effects of various board characteristics on performance. For instance, McIntyre, Murphy and Mitchell (2007) found that, on average, medium-sized boards with highly experienced members and moderate levels of diversity in age and tenure were effective at developing firm performance. Boards that did not possess these characteristics, in turn, had a damaging effect on firm performance (McIntyre, Murphy and Mitchell, 2007). Another study by Chiang and Lin (2011) found that the inclusion of independent directors on the board was positively tied to firms’ financial performance. These results show how strategic leaders’ influence on performance can be affected by organizational factors regardless of their characteristics.

Board Dynamics

Board dynamics has also been researched as one of the factors that could influence firm performance, thus accounting for differences in strategic leaders’ effects. Based on management theory, it seems plausible that conflicts and disagreements between board members could result in poor performance due to delays in decision-making or the need to compromise to satisfy all stakeholders. Indeed, research by Kaczmarek, Kimino and Pye (2012) found that task-related faultlines among board members have a significant negative relationship in firm performance. The lack of cohesion within the board could thus impair strategic leaders’ positive influence on firm performance. In addition, a study of board dynamics by Lawal (2012) showed that power dynamics within the board have a substantial impact on performance. For example, CEO duality had a negative influence on firm performance due to various factors, such as compromised integrity of information, hindered performance monitoring, and similar consequences. Therefore, group dynamics affecting the board could also play a role, mediating the effects of individual strategic leaders’ on firm performance.

CEO Succession

Another essential organizational factor that might have an impact on strategic leaders’ role in performance management is succession planning. Succession planning involves developing internal talents to prepare them for a high-level position within the company. Leaders who are recruited internally are believed to have a positive impact on performance because they have extensive knowledge of the company and its products, are familiar with the board, and are more emotionally invested in the company (Garg and Van Weele, 2012). Studies in various industries seem to confirm this theory by highlighting the positive relationship between succession planning practices and firm performance.

In the healthcare sector, Patidar et al. (2016) found a significant positive relationship between succession planning in financial performance. The correlation was particularly strong in competitive markets, which is likely due to the importance of strategic leaders’ knowledge of the company and its industry (Patidar et al., 2016). An earlier study by Zajac (1990) pointed towards the importance of relevant succession planning, meaning that talent development should focus on building skills, knowledge and competencies that would help in decision-making and strategic planning. Appropriate succession planning schemes were positively correlated with improved financial performance (Zajac, 1990). Thus, not only do strategic leaders hired internally have a more significant favorable influence on firm performance than their external counterparts, but the process of their development within the company can also explain differences in performance outcomes.

Managerial Discretion

Lastly, managerial discretion can affect the degree and strength of strategic leaders’ influence on firm performance. From a theoretical viewpoint, higher levels of managerial discretion strengthen the impact of a strategic leader on their company (Wangrow, Schepker and Barker, 2015). As a result, strategic leaders of companies with high managerial discretion can have more significant positive or negative effects on performance than leaders who have less authority.

Empirical research provides support for this view, showing that managerial discretion is positively related to firm performance in competitive markets and has a negative influence in markets with limited competition (Zhao, Chu and Chen, 2010). This is likely because, in highly competitive environments, strategic leaders with more discretion can act quicker and take risks that could have a beneficial impact on performance. In markets with lower levels of competition, increased managerial discretion may lead to strategic leaders’ abusing their power and authority, resulting in performance reduction (Zhao, Chu and Chen, 2010). Hence, the level of managerial discretion should also be taken into account while explaining variations in strategic leaders’ influence.

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Conclusions

Overall, the position of strategic leaders within their companies enables them to influence performance through the strategy process. This enables strategic leaders to impact performance, both positively and negatively, through strategic decision-making. However, the extent to which strategic leaders can affect firm performance is limited by individual and organizational factors. On the one hand, emotions, self-concept, skills, knowledge and experience of strategic leaders can both support and impair their work, leading to positive or negative consequences for performance. On the other hand, board composition and dynamics, leaders’ power, compensation and the relevance of succession can also impact leaders and shape their influence on the company. Developing strategic leaders’ characteristics and roles based on these considerations could help companies to ensure that they can utilize their knowledge and expertise to enhance firm performance.

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