Beyond Strategy – the role of firm leadership

Leadership has been shown to be a crucial antecedent to the development of a market orientation and knowledge based firm. In fact, without committed and strong leadership in place, no firm can function effectively. This is particularly true for those firms which are attempting to move towards high performance since changes in behavior are predicated upon a clear direction and firm values.

What is leadership and how does it differ to management? There are numerous definitions of leadership. For example:

Leadership and learning are indispensable to each other.” John F. Kennedy

“Leadership is a combination of strategy and character. If you must be without one, be without the strategy.” Gen. H. Norman Schwarzkopf

“Leadership is a function of knowing yourself, having a vision that is well communicated, building trust among colleagues, and taking effective action to realize your own leadership potential.” Warren Bennis

“Leadership is influence – nothing more, nothing less.” John Maxwell, 1998

“Leadership is the art of influencing others to their maximum performance to accomplish any task, objective or project.” Cohen, W.A. ‘The Art of a Leader’ Englewood Cliffs,NJ: Prentice Hall (1990, p. 9)

“Leadership is the art of mobilizing others to want to struggle for shared aspirations.” Kouzes, J.M. & Posner, B.Z. ‘The Leadership Challenge’ San Francisco: Jossey-Bass (1995, p.30)

“Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall.” Stephen R. Covey

“The only definition of a leader is someone who has followers.” The Drucker Foundation, 1996

“Leadership is the ability to step outside the culture to start evolutionary change processes that are more adaptive.” Schein (1992)

What one can see in these many definitions is a focus on influence, followers, trust, and change. Leadership is about motivating others in the firm to move in a cohesive direction. Whilst management is often associated with tasks such as planning and organizing, leadership (although strictly a management function) is often considered something separate and not only the domain of those in positions of hierarchical authority. When it comes to managing a group of independent knowledge workers, the ideas of vision, motivation and influence become increasingly important as traditional management authority does not apply in many circumstances and indeed, knowledge workers may often be resistant to what they perceive as undue authority being placed on their realm of work.

Practice What You Preach

In his book, Practice What You Preach, David Maister (ex Harvard professor and consultant to professional service firms) identified nine key statements that explained the variance in professional service firm performance that were the focus of study. Whilst his work was focused on professional service firms and published in 2003, the outcomes are even more relevant than ever to other industries as those industries become increasingly populated by knowledge workers.

1. Client satisfaction is a top priority at our firm
2. We have no room for those that put their personal agenda ahead of the interests of the client or the firm
3. Those who contribute most to the overall success of the firm are rewarded the most highly
4. Management gets the best work out of everybody
5. Around here you are required, not just encouraged, to learn and develop new skills
6. We invest a significant amount of time in things that will pay off in the future
7. People within our firm always treat others with respect
8. The quality of supervision on client projects is always uniformly high
9. The quality of the professionals in our office is as high as can be expected

What Maister went to lengths to explain was that these statements were not rhetoric. They were defining values and actions within the firm which senior firm members believed and adhered to themselves. Leaders not only espoused these values, they were their values in use and as such they filtered through the entire firm. This is one of the key functions of a leader. They are responsible for setting the tone and climate of the firm. Such a climate and culture is not achieved through superficial statements (such as mission statements) that no one believes in, good leaders live and breathe the values of the firm.

A somewhat cursory reminder of the disconnect in leadership espoused values and values in use can be seen in past scandals involving Big 4 accounting firms and the collapse of prominent firms such as Lehman Brothers and Akai.

If we take a close look at the nine statements, we can see how they link into the key drivers of firm performance: market orientation and knowledge. For example, client satisfaction is a fluid and subjective notion. In many instances, technical excellence is a given and customer satisfaction will hinge upon expectations and issues related to service quality. Prior to, and during any engagement, firms must have the appropriate knowledge of client needs in relation to the current project and external factors such as what competitors may have offered to the client. This type of knowledge and expectation management requires all those involved in the engagement to be explicitly aware of issues that arise and ensure that the necessary information is on hand to be responsive to customer demands. This type of information generation and sharing is the hallmark of a market orientation and requires excellent leadership to ensure everyone understands the need for this approach and their role in achieving customer satisfaction. Such awareness is built through firm wide leadership and leadership that occurs at the group/engagement level. It is not simply the domain of senior leaders.

Let’s take an additional example from the nine statements:

No. 6 – we invest a significant amount of time in things that will pay off in the future.

This is an interesting one because many organizations are known for their short term orientation and lack of planning. However, this is especially crucial given the focus on responsiveness demanded by most customers. Responsiveness not only relates to an employee returning an email with 24 hours, it is a much more complex issue than most firms grasp. Responsiveness is also a firm wide issue that revolves around the firm’s ability to become agile given changes in the business environment. The ability of the firm to collect and absorb knowledge has a significant impact on responsiveness. For instance, if a customer seeks information that will affect the project and value proposition you are working on and the firm has no systems in place to either collect or share this type of information, responsiveness at the individual level will be materially affected because the person serving the customer will not be able to provide the information requested. Not only that, the fact that the firm may have been unaware of such information which pertained to a customer project (or may do in the future) will create some degree of dissatisfaction for the customer. One of the many ways a firm can enhance responsiveness is to develop a strategic planning system that examines future problem areas for customers from a commercial perspective and integrates that knowledge into the firm so it can readily accessed when needed. This type of system may not immediately pay off but such an investment in the future can have a significant impact on firm performance as highlighted in statement six. Again, leadership plays a crucial role here because you are asking people/yourself  to commit time to something that has no immediate return. This can be especially hard for organizations with a strong sales culture that kneel at the altar budgeting and excel spreadsheets.  The business case for such an initiative must be effectively communicated across the firm and the relevant market and knowledge oriented processes must be put in place. This shows why leadership is the dominant antecedent to building a market and knowledge oriented firm, in other words, an execution culture.

The ‘Right’ Leadership Style – moving towards transformational leadership

The previous discussion has alluded to a certain leadership style that is likely to be more effective in the development of a market driven and knowledge based firm. Research suggests that instrumental leadership styles which are task based are negatively correlated with the development of a MO and KO.

A number of research studies show that supportive and participative leadership styles are positively associated with the development and implementation of MO. Since most senior staff can be considered to be much more than mere employees, a leadership style which includes their input into any change process must be superior to a traditional command and control type approach. Supportive and participative leadership styles can be identified by their key components:

• Consults with people before making decisions and taking action
• Faces and shares problems with others
• Asks and listens to people for their ideas and input
• Focuses on relationships and is concerned with the emotions of others
• Treats people equally

In essence, these behavioural aspects of leadership can be discerned by their focus on task or relationships. While issues of task are important, the relational aspect to leadership must take prominence when developing a MO and KO since this type of change initiative addresses the very fabric and culture of the firm. Good leaders and hence good leadership then is a prerequisite to building a highly competitive firm. Unfortunately, in most firms, people are promoted to leadership positions based on their technical acumen and revenue generating capabilities as opposed to their ability to lead. Popular consensus suggests that IQ and technical skills are mere threshold requirements for leadership but it is the softer side of the equation that are necessary for high performing leadership. Much research points to the importance of emotional intelligence (EI) as a key factor in jobs that require high degrees of social interaction and there is little doubt that change initiatives are highly social processes. Factors such as empathy and self awareness are essential elements in leadership effectiveness. The importance of EI factors such as empathy also bring up other important performance issues since empathy is gaining traction as a differentiator in client performance and satisfaction. For example, research conducted by Oxford Brookes University in the UK found that for every one point a company can improve its score on an empathy scale (survey for customers), it improves ROCE by 16 percent! Leaders which are supportive and participative will exhibit high degrees of EI and such skills are absolutely crucial to the development of a culture which leads to higher performance.

Beyond the traditional aspects of supportive and participative leadership, a large body of evidence suggests that transformational leadership has a significant effect on the performance of PSFs, particularly in the ability to develop a high degree of MO and KO. Transformational leadership is most often associated with well know leaders such as Jack Welch of GE. Such leaders are concerned with inspiring people in the firm to change whilst helping them change world views and address problems with innovative solutions. Transformational leadership is associated with four characteristics, known as the 4 I’s:

1. Idealized influence – provides vision and mission, gains trust, role model
2. Inspirational motivation – communicates high expectations
3. Intellectual stimulation – challenge followers to be innovative, solve problems
4. Individualized consideration – personal attention, coaches and gives respect

The effects of transformational leadership on the development of a knowledge based firm have been expounded on in a number of studies. For instance, research from the Journal of Knowledge Management (Crawford, 2005) showed that transformational leadership was positively associated with information acquisition, creation and application. The author also found that a hands off style of leadership was negatively associated with these key knowledge processes. These findings have significant implications for firm competitiveness. Information acquisition, creation and application are to a large extent the hallmarks of a MO which is concerned with information generation, sharing and firm wide responsiveness to that information. Such aspects of a knowledge driven and market focused firm are directly linked with innovation and firm profitability. If leaders which to create a positive strategic change process inside their firms then there is strong support for moving beyond traditional approaches to leadership which are based on transaction and contingent reward. The fact that many studies show intrinsic rewards to be better drivers of knowledge sharing only supports these contentions.

There are additional considerations in the drive to adopt a high performance culture through leadership behaviours that elicit collaboration and wide spread communication. One of these relates to perceptual congruence. This congruence occurs within the firm between staff and outside the firm between firm and client. From an internal perspective, incongruence between seniors, peers and juniors has a negative impact on firm outcomes such as intrinsic job satisfaction and group conflict. For example, if leaders believed they communicated clearly and frequently yet the rest of the firm did not, then this gap will lead to dissatisfaction. Clearly, leaders which are willing to engage in open communication and gather input are more likely to avoid this gap.

This perceptual gap can also appear with customers. Too many leaders believe they know what customers think and that their own evaluation of service quality and delivery is matched by the customer. This is a failing of the individual involved and the overall leadership of the firm. Customer dissatisfaction leads to defection yet it is amazing how many leaders refuse to conduct any type of investigation into what customers think. When a firm’s degree of MO does not coincide with a customer perspective then this reduces the customer’s degree of satisfaction. However, the relationship is more complicated than one might originally envisage, and this is where leadership becomes so critical. Some firms (and individuals) believe they can compensate for some of the firm shortcomings by placing a supreme emphasis on the customer without making concomitant structural changes internally. Hence, an individual person may be extremely diligent in responding to customer needs and trying to keep abreast of changes to the industry without really delivering the value desired. This is due to the fact that a MO requires all three components (client orientation, competitor orientation, and inter-functional coordination) to work together to reduce the potential of incongruence in provider and buyer perceptions. Building a long term collaborative relationship with key customers cannot be done alone, firm wide support eventually becomes necessary and that requires the right kind of leadership to ensure everyone inside the firm understands this and are aligned to the values (which should be linked to customer and people value) the firm lives by.

It must be remembered that a MO is a firm culture that positively influences job satisfaction and firm commitment. It is not a ‘plan’ that is put on the shelf after three months. It is a culture that systemically impacts customer value through a change in internal value creation. These changes will positively affect the individual actions and business development activities of customer facing people.