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Business Horizons (2010) 53, 437444

www.elsevier.com/locate/bushor

EXECUTIVE DIGEST

Strategic leadership for the 21st century


Michael A. Hitt a,*, Katalin Takacs Haynes a, Roy Serpa b

a
Mays Business School, Texas A&M University, 4113 TAMU, College Station, TX 77843-4113, U.S.A.
b
Texas Manufacturing Assistance Center (retired) & Texas A&M University (retired)

1. Assessing the crystal ball examine the predictions made for the 21st century,
(2) identify what has occurred in the first 10 years
We are on the precipice of an epocha distinc- of this new century, and (3) recommend ap-
tive, exciting, and challenging time for orga- proaches to the strategic leadership of organiza-
nizations. My focus is on twenty-first century tions needed for survival and success as the 21st
organizations and the characteristics required century progresses.
for survival and long-term success. To begin,
consider that you are a member of the board of
directors of a major corporation in the year 2. The competitive landscape
2010thirteen years in the future. What do you
projected for the 21st century
believe will be the characteristics of business
organizations in this year? What strategies will
In the late 1990s, several projections were made
they employ? How will they be structured?
regarding the type of environment that executives
How will they manage their human capital?
and organizations could expect in the 21st century.
(Hitt, 1998, p. 218)
For example, Hitt, Keats, and DeMarie (1998)
In the above quote from a presidential address to described characteristics of the new competitive
the Academy of Management, it was projected that landscape, suggesting it would be driven by the
the 21st century would bring significant changes, continuing technological revolution and the increas-
due primarily to the rapid development of new ing globalization of business and economic activity.
technologies and increasing globalization. In fact, In particular, the new, Internet-based technologies
the changes were expected to produce significant being developed at the time were increasingly ac-
turbulence and uncertainty in the context in which cepted and used in the 1990s. The Internet, de-
firms had to operate and compete. This type of scribed as the new information highway, provided
context, in turn, dictates a particular style of information in a manipulable form available to many
leadership at the top of organizations, and the across the world in almost instantaneous fashion.
design and implementation of new strategies to Largely driven by the Internet were the increasing
help organizations cope with rapid changes and rates of technological change and diffusion; the
uncertainty in their industries and general environ- growing emphasis on knowledge intensity (e.g.,
ment. The purpose of this Executive Digest is to (1) emphasizing knowledge for competitive advantage);
and the emergence of positive feedback industries,
where returns accumulate at an increasing rate,
* Corresponding author. building on the new knowledge created (Bettis &
E-mail address: mhitt@mays.tamu.edu (M.A. Hitt). Hitt, 1995). Moreover, the rate and effects of

0007-6813/$ see front matter # 2010 Kelley School of Business, Indiana University. All rights reserved.
doi:10.1016/j.bushor.2010.05.004
438 EXECUTIVE DIGEST

technological changes were heightened by techno- financing. Major industrial firm General Electric
logical convergence. focused more on services in the 1990s, and accord-
Globalization enhanced the development of ingly received a majority of its revenues during the
cross-border relationships and the number of mul- period from servicesas opposed to traditional
tinationalor transnationalfirms, many based in manufacturingbusinesses.
emerging markets, as well as developed markets. The changes explained above, along with increas-
Globalization occurred not only in markets for goods ing globalization, contributed to the development
and services (outputs), but also in the supply chain, of hypercompetitive markets. Firms had begun to
as firms increasingly sourced activities in their value compete in multiple markets: both goods and ser-
chains to companies in other countries. Therefore, vices markets, as well as multiple geographic mar-
globalization resulted in a complex network of re- kets across country boundaries. These actions led to
lationships across country borders, with enhanced more current and potential competitors in any given
interdependencies among organizations in many market, and many of those competitors were more
parts of the worldand, consequently, between resourceful, thereby increasing the challenges for
countries and their economies. These changes alone domestic competitors.
were expected to amplify the challenges experi- Porter first introduced his generic strategies of
enced by top executives of large and small orga- cost leadership and differentiation in the early
nizations, while simultaneously enhancing their 1980s (Porter, 1980, 1985). He argued that firms
opportunities for growth and development. should not attempt to implement both strategies
simultaneously. The conflicting requirements to be a
cost leader and achieve a competitive advantage
3. Characteristics of the new derived from the differentiation of products, could
competitive landscape likely cause companies to become lost in the mid-
dle and be unable to successfully realize either a
The new competitive landscape projected for the cost leadership or a differentiator strategy. Yet, the
21st century included increasing strategic disconti- growing emphasis on price, quality, and satisfaction
nuities and disequilibrium conditions; a blurring of of consumer needs, along with the substantial in-
industry boundaries; hypercompetitive markets; an creases in competitive rivalry (hypercompetition)
extreme emphasis on price, quality, and customer and new technologies as a means of achieving
satisfaction; a growing emphasis on innovation and efficiency while simultaneously differentiating
continuous learning; and, finally, changing employ- products, has led firms to develop an integrated
ee expectations and careers (Hitt et al., 1998). low cost-differentiation strategy (Hitt, Ireland, &
Strategic discontinuities are largely triggered by Hoskisson, 2011).
new and highly valuable technologies that drastical- All of these factors enhanced the importance of
ly reduce the value of current technologies and innovation. For example, the continued develop-
cause major changes in markets, or even create ment of new technologies places pressure on all
new markets while eliminating old ones. Disconti- firms to engage in continuous innovation. In addi-
nuities can also be created by major economic tion, increasing emphasis on knowledge as a major
changes, such as those that occurred in Japan during source of competitive advantage enhances the im-
the late 1980s through the 1990s. New technologies portance of continuous learning. Therefore, firms
and major shifts in economic activity, along with were expected to focus on learning, building knowl-
hypercompetitive markets and blurring of industry edge, managing knowledge flows (e.g., diffusion of
boundaries, created significant challenges for man- new knowledge throughout the organization), and
agers. These challenges required managers to bal- increasing investments to create innovation.
ance the need for stability to conduct planning and The emphasis on knowledge changed the type of
make decisions with the need for flexibility to adapt employees that were highly sought. This presented
to a dynamic environment. challenges for managers because they needed work-
Partly because of changes in markets and tech- ers with specific types of knowledge, in particular
nologies, many firms were beginning to compete people with engineering and technological exper-
across existing industry boundaries. For example, tise. Labor markets became highly competitive in
television, telecommunications, and utility compa- light of the knowledge worker, driving up com-
nies were competing across these three industry pensation and labor costs to attract and keep valu-
boundaries. In this same environment, software able employees. The problems of the dynamic labor
companies were providing financial services, and market and enhanced employee mobility were ex-
auto manufacturers were developing large insur- acerbated by the aging of the workforce in the
ance operations while at the same time offering United States and in many other countries around
EXECUTIVE DIGEST 439

the world. Therefore, some projected that the labor rewarding staff skill development and using that
supply was likely to be inadequate in quantity and talent in the best ways for the organization.
skills (knowledge stocks), adding to the challenges
faced by leaders of major companies. 4.4. Invest in the development of new
technologies

4. Strategic leadership capabilities Effective strategic leaders take the actions neces-
sary to remain at the forefront of new technology,
Hitt et al. (1998) and Ireland and Hitt (1999) de- developing it internally or obtaining it externally.
scribed the capabilities needed for effective strate- They must also exploit the technology to ensure that
gic leadership in the new competitive landscape the firm operates in the most efficient way possible.
expected for the 21st century. They argued that
effective strategic leaders had to: (1) develop and 4.5. Engage in valuable strategies
communicate a vision, (2) build dynamic core com-
petencies, (3) emphasize and effectively use human In the late 1990s, engaging in valuable strategies
capital, (4) invest in the development of new tech- generally implied exploiting new global market op-
nologies, (5) engage in valuable strategies, (6) build portunities, engaging in appropriate cooperative
and maintain an effective organizational culture, strategies, andas noted earlierusing an inte-
(7) develop and implement balanced controls, and grated low cost-differentiation strategy.
(8) engage in ethical pratices.
4.6. Build and maintain an effective
4.1. Develop and communicate a vision organizational culture

First, strategic leadershopefully in concert with Developing and maintaining a healthy organization-
others in the organizationmust develop a vision al culture should be a priority of strategic leaders. A
and communicate that vision broadly, to help guide healthy culture places emphasis on core values of
the formation and implementation of strategies to innovation, learning, and valuing human capital and
achieve that vision. This form of guidance is im- team actions.
portant to establish the direction of the organiza-
tion for its growth, types of products, and market 4.7. Develop and implement balanced
focus, and to achieve the desired targets. Without controls
the guidance provided by a vision, organizations
can become chaotic and are unlikely to be as Control systems help organizations manage finan-
successful. cial capital and govern practices ensuring that po-
tential courses of action are evaluated through a
4.2. Build dynamic core competencies positive moral filter. The right types of controls
can influence and guide actions in appropriate
A core competence is a major capability to perform ways. Effective strategic leaders establish controls
important tasks (e.g., a function) quite well, and that facilitate flexible and innovative employee
makes a valuable contribution to a firms competi- behaviors to help the firm maintain and/or gain a
tive advantage. A dynamic core competence competitive advantage.
implies that the firm continues to develop and
update the competence to be the leader, or at 4.8. Engage in ethical practices
the forefront, in that capability. It also implies that
the firm is prepared to develop a new competence Strategic leaders play a critical role in establishing
to replace an existing one when necessary to ethical practices throughout the organization. Ef-
maintain a competitive advantage, and/or to build fective strategic leaders place a strong emphasis on
a new advantage. honesty, trust, and integrity in the decision-making
process and in the implementation of those deci-
4.3. Emphasize and effectively use human sions. The core values of honesty, trust, and integ-
capital rity serve as moral filters through which potential
courses of actions can be evaluated. These norma-
An emphasis on human capital suggests that strategic tive values must be instilled in managers and em-
leaders attract and retain the absolute best employ- ployees throughout the organization so that they are
ee talent available, and continue to develop employ- clearly understood and observable through their
ee skills and capabilities (e.g., through training), decisions and actions.
440 EXECUTIVE DIGEST

Given the recommendations explained, the established by the U.S. and national governments in
question now becomes: What has happened in other major countries. The problems also suggest a
the first 10 years of the 21st century? What have lack of proper oversight by corporate boards of
organizations experienced, and what has the directors.
environment wrought? What types of strategic The inability to deal with the environmental
leadership were exhibited, and were they effective? turbulence suggests highly ineffective strategic
We examine these issues next. leadership. There are several reasons for such
poor strategic leadership, including emphasis on
short-term returns, to the exclusion of long-term
5. The first decade of the 21st century performance; an inappropriate prominence of
stockholders, almost to the exclusion of other stake-
The first decade of the 21st century has been highly holders; hubris and personal greed driving strategic
turbulent, as predicted. Some of the turbulence has decisions; and unethical, sometimes even illegal,
occurred due to increasing globalization and in- practices. Observers have argued for some time that
creasing technology. Yet, the turbulence has also top executives were too short-term oriented and,
been exacerbated by other factors that had a major yet, partly because of the influence of stockholders
influence on many business activities. For example, and stock values, executives have continued to
there has been substantial political volatility, ex- emphasize short-term returns over longer-term per-
emplified by major terrorist attacks. Perhaps the formance. In fact, the short term has become even
most severe of those attacks occurred on September shorter in recent years. In the 1990s, many sug-
11, 2001. The attacks on the World Trade Center in gested that executives focused too much on annual
New York and the Pentagon in Washington produced returns, to the exclusions of investments that lead
a significant loss of lives, and changed the political to longer-term growth and prosperity for an organi-
and business landscapes for many decades to come. zation. Yet, in the first 10 years of the 21st century,
These acts and this day of infamy produced substan- many executives began making decisions based on
tial turmoil in the financial markets and led to two quarterly returns with the intent of maximizing
major regional wars in Iraq and Afghanistan, one of stock price, primarily to satisfy stockholders and
which continues today. Of course, terrorist acts investors. Part of the reason for this behavior is
and/or attempts have continued throughout the related to the way executives were incentivized
first 10 years of the new century. These acts have and their emphasis on personal gainto enhance
changed the way we do business on a global basis, stock price in order to exercise stock options at a
creating problems with global supply chains, delays premium. Stockholders are clearly important, but
in travel, and interruptions in communications. should they be more important than customers and
We have also experienced two major economic other critical stakeholders that influence the suc-
downturns during the first 10 years of the 21st cess of a firm?
century. The first came early on, and was largely According to Hayward and Hambrick (1997), hubris
the result of overvaluation of new Internet-based is defined as exaggerated pride of self-confidence.
companies. The downturn led to a correction in the When executives exhibit hubris, they are prone to
valuation of these assets. The significant downward take excessive risks (Haynes, Campbell, & Hitt, 2010)
spiral in the stock market valuations and reduction because they believe that they are better equipped
in business activities led to the loss of billions of to overcome specific firm and environmental chal-
dollars by investors and to losses of many jobs. Yet, lenges. Hubristic managers believe that their abili-
we recovered from this economic downturn to reach ties are superior to those of their peers, and that they
new highs in economic growth, which was enjoyed can consequently make more risky strategic and
by many countries across the globe. Unfortunately, financial decisions. It has been shown, however, that
substantial problems emergedespecially in the acquisition decisions (for example) made by manag-
financial services industriesprecipitating a new ers with hubris have not produced higher perfor-
and very serious economic downturn. In fact, some mance or better integration of the companies, but
believe that we were on the verge of potential rather have led to losses in shareholder value due to
economic disaster in the United States. The eco- excessive premiums (Hayward & Hambrick, 1997). In
nomic crisis spread throughout the world, partly practice, the extreme risks and their consequences
because international business leaders and corpo- can also be observed in the strategic actions taken
rations imitated actions of those in the U.S. These and major investments made by top U.S. financial
problems were exacerbated by global economic services firms executives during the first decade of
interdependencies, poor strategic leadership, and the 21st century. Those undue risks led to the demise
lack of adequate oversight by formal institutions of some major companies, such as Lehman Brothers,
EXECUTIVE DIGEST 441

and to bankruptcies and substantial government ments to win overseas contracts in the 1970s. Addi-
loans made to stave off the losses of other financial tionally, it was suggested that the decade of the 1980s
institutions. was representative of ultimate greed, whereby im-
Aside from hubris, people in strategic leadership mediate profits were sought regardless of the effects
positions at many major financial services firms also on society. Ethical problems continued in the 1990s
exhibited greed. According to Haynes et al. (2010), and into the 21st century. In fact, Brief, Dukerich,
greed is defined as the excessive pursuit of material Brown, and Brett (1996) found that 47% of the exec-
wealth. Greed motivated some executives to oppor- utives they interviewed stated a willingness to com-
tunistically pursue strategies that were based on mit fraud by understating write-offs that would
excessive self-interest, rather than increasing firm reduce company profits. More recently, we learned
performance. Although some degree of self-interest that large corporations have allowed the predating of
can be expectedfor example, to motivate individ- stock options to increase the value of compensation
ual managers in using their talents and capabilities paid to their executives. Clearly, the problems that
for the service of the firm and in benefiting society have been experienced over a number of decades
(Smith, 1937)excessive self-interest in the form of represent a failure of strategic leadership.
greed guides actions that benefit only the individual
manager. Self-interest becomes greed as increases
in executive benefits exceed the marginal returns 6. The way forward
provided to shareholders and to society at large.
This assumes that all resources held by a company The strategic leadership of many companies in the
should add more to shareholder value than required. last several decades has failed to achieve the prom-
In the past decade, many managers have exhibited ise of organizations and has, in fact, brought the
greed by using the opportunities their company and U.S. and world economies to the precipice of fail-
the regulatory environment provided to build their ure. However, we believe that the potential for
own personal wealth, rather than to generate re- positive strategic leadership not only exists, but is
turns to stakeholdersincluding shareholdersby indeed the way forward. The recommendations for
building dynamic capabilities. effective strategic leadership presented in the late
A particularly dangerous combination of manage- 1990s, and summarized herein, remain relevant and
rial traits is hubris and greed. Hubris can motivate important. While we will again highlight some of
managers to take excessive risks, but greed comple- those points, we also offer a few new ones to
ments this activity because as the stock price in- communicate the opportunities and potential for
creases, managers receive a substantial boost in effective strategic leadership.
personal compensation. The hefty bonuses awarded Undoubtedly, there is still need for top execu-
to top management in many firms that failed, or were tives to develop, communicate, and work toward a
on the verge, due to the strategic actions taken by vision for the organization. Its importance cannot be
executives also suggest that they were driven by overstated. Doing so helps firms to overcome the
greed. Strategic actions that had a substantial nega- short-term orientation practiced in the past. Addi-
tive effect on the firm, including serious performance tionally, a vision provides direction that can guide
declines and sometimes the companys demise, the strategies designed and implemented, and pro-
are indications of suboptimal decision-making and vides targets for major strategic actions. While
destruction of shareholder value. In the popular pay- many in an organization could help develop a vision
for-performance paradigm of executive compensa- and integrate it, the development of an effective
tion, then, the logical extension of a decrease in vision requires the leadership of those at the top of
performance is a decreasenot an increasein pay. the organization: the strategic leaders.
Going beyond hubris and greed, evidence sug- Also, strategic leaders must have a global mind-
gests that in some of these companies, executives set. This means that the decisions they make and the
acted unethically. For example, it has recently been problems they encounter and attempt to solve must
noted that Lehman Brothers may have managed its be faced with an understanding of how the organi-
accounting reports to hide the firms serious finan- zation fits within a global competitive landscape.
cial problems. Of course, other examples exist This is true even if the firm only competes domesti-
including Bernie Madoffwhere unethical practices cally and/or locally, because all firms are affected
were even more severe and reflect illegal activity. by global events and likely face competitors that are
Interestingly, problems of hubris, greed, and based in other countries; that is, global multina-
ethics have been observed in each of the last several tionals (Javidan, Steers, & Hitt, 2007).
decades. For example, approximately 40 major U.S. The global economy has changed in major and
companies were accused of making improper pay- irrevocable ways. Over the last two decades and
442 EXECUTIVE DIGEST

especially in the last 10 years, several large emerg- to the innovation produced by large resource-rich
ing economy countries have become major actors on firms such as IBM and Apple, new young entrepre-
the worldwide stage. Often, these are referred to as neurial firms such as White Rock Pearl Co.
the BRIC countries: Brazil, Russia, India, and China. (www.whiterockpearl.com) are important for con-
Over the next several decades, these nations tinued economic health and development.
are projected to become even larger contributors Undoubtedly, good strategic leaders manage
to the global economy. For example, China is ex- their resources effectively. For example, they must
pected one day to surpass the United States and build the resource portfolio of a firm; meaning that
Japan as the largest economy in the world; Indias they have to acquire valuable resources and contin-
economy is likely to become one of the largest, too. ue to develop them, as well as delete some less
In fact, predictions suggest that three or perhaps valuable resources over time. They then must inte-
all four of the BRIC countries are likely to be among grate or bundle those resources to create valuable
the top 10 economies in the world by the year 2050 capabilities, some of which become core competen-
(Hitt & He, 2008). Recently, both China and India have cies. Finally, they must develop a strategy to lever-
become major sources of supply for many firms based age and, therefore, exploit those capabilities to
in western countries, whereas Russia and Brazil pro- gain a competitive advantage (Sirmon, Hitt, &
vide access to critically important natural resources Ireland, 2007). Clearly, managing the financial capi-
such as oil and iron. In coming years, these countries tal of an organization is a highly important dimen-
will be a home base for major multinational corpo- sion of a top executives job. Yet, perhaps the most
rations that serve many markets throughout the value can be created through human capital and
world. social capital (Burt, 2010). Consider that the most
Due in part to the new global competitive land- unique resource any organization has is its human
scape and the enhanced competition that most capital. Knowledge is critical for gaining and sus-
companies face, firms must be more innovative taining a competitive advantage, and an organiza-
and entrepreneurial. This means that firms need tions knowledge largely resides in its human capital
to find a way to be alert to and identify opportu- (Hitt, Bierman, Shimizu, & Kochhar, 2001; Hitt,
nities when they exist, or develop opportunities in Bierman, Uhlenbruck, & Shimizu, 2006). In support
new markets by creating novel products or services of this notion, Ed Breen, CEO of Tyco, contends that
that satisfy a need in the consuming public (Alvarez companies beat competitors by out-thinking them.
& Barney, 2007). To do so, strategic leaders must He suggests that ideas are the basis of winning
develop and maintain a culture that fosters and competitive battles because companies compete
encourages innovation, and invest in the develop- with their brains, as well as their brawn. Anne
ment and exploitation of innovation (Pellet, 2008). Mulcahy, former chair of the board of Xerox and
Currently, such cultures exist in firms like IBM and former CEOwho turned around the fortunes of the
Apple. For example, IBM obtained just under 5,000 companyargues that people are the primary fac-
new patents in 2009 alone (LeVine, 2010), surpass- tor in success. She suggests that a primary reason for
ing all other firms in the world. For its part, much of Xeroxs turnaround in performance was the ability
Apples current success can be attributed to the to attract high-quality employees, motivate them,
companys unwavering commitment to innovation and keep them in the fold (Breen, 2007).
and to commercializing that innovation to satisfy Social capital is also highly critical to the success
customer needs. Apples success was the reason of all organizations. This means that relationships
Steven Jobs was selected as the CEO of the decade with customers, suppliers, other partners, and
in the first 10 years of the 21st century (Lashinsky, stakeholders in general are vital. In fact, a portion
2009). of any executives human capital is also her social
We also understand that new economic growth is capital. Social capital not only provides access to
largely spurred by innovation, and especially en- markets, but also access to important complemen-
trepreneurial behavior and the creation of new tary resources. For example, it supplies information
firms. A recent study sponsored by the Kauffman about markets, such as customer needs and desires.
Foundation showed that a primary driver of eco- Too, it may provide access to new technology, new
nomic growth is entrepreneurship. For example, knowledge that can be used in creating new tech-
young high growth firmsreferred to as gazelles nology, and other types of innovations. It can facili-
comprise less than 1% of all companies, but generate tate access to key suppliers and/or governmental
approximately 10% of all new jobs each year. These units that regulate or oversee these markets. There-
firms add about 88% of new jobs each year, whereas fore, an effective strategic leader must capably
the average firm in the economy adds only 2% to 3% manage the human capital and social capital of
(Weitekamp & Pruitt, 2010). Therefore, in addition the organization. Finally, execution is absolutely
EXECUTIVE DIGEST 443

critical to the success of an organization and, there- the right ways, there is hope for effective strategic
fore, to effective strategic leadership. In other leadership. Sharon Allen (2008), Chair of the Board
words, effective strategic leaders get things done of Directors for Deloitte LLP, summarizes it well: I
and they get them done correctly. like to think of ethical principles as carved in stone.
Compliance requirements can change. Ethics en-
dure.
Effective strategic leaders have to operate under
7. The future conditions of uncertainty. As such, they must view a
volatile environment as presenting opportunities
The past is but the beginning of a beginning.
and employ an entrepreneurial mindset that allows
H.G. Wells (Peter, 1979, p. 123)
them to identify and exploit those opportunities in
While many mistakes have been made and strategic contexts with significant ambiguity (McGrath &
leadership has failed in numerous organizations, the MacMillan, 2000). To do this in such a turbulent
future still provides opportunity. In the face of environment over the coming decades will require
continued environmental volatility, strategic lead- that strategic leaders exhibit the characteristics
ers must be strategically flexible. Paul Nutt (2002), described herein. If not, Hamel (2007) argues stra-
who has studied executive decisions over many tegic leaders that manage in ways indicative of the
years, suggests that more than 50% of corporate past several years will produce failure, perhaps for
decisions fail. To avoid such failure and to benefit the whole organization. In fact, Hamel suggests that
from the opportunities available, strategic leaders others who are exercising more effective strategic
must carefully manage resources and build effective leadership and thus are more innovative will take
human and social capital to create a nimble organi- the markets, the best employees, and even the
zation that is able to shift strategic actions quickly assets of the firms with poor strategic leaders. Thus,
to stay ahead of competitors. Such flexibility is effective strategic leaders should manage in the
required to be proactive, rather than reactive to way Andy Grove, former CEO of Intel, recom-
others competitive actions. mended. Based on his experiences at Intel and
In addition, it is absolutely crucial that strategic the ways he built the firm into a highly successful
leaders engage in ethical practices. Arthur Levitt organization, Grove (1996) suggested that only the
(2004), former chair of the U.S. Securities and paranoid survive. These leaders get the rightor
Exchange Commission, which has broad powers of properthings done, and they get them done cor-
oversight in regulating and governing corporate rectly and swiftly.
activity, suggested the following:
These huge paydays bolster a system in which
executives have incentives to manage the num-
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