The Link Between Leadership, Strategic Management and Firm Performance: a Critical Literature Review

Abstract

This paper reviews two main concepts: leadership and strategic management. It outlines the concepts of strategy and strategic management and what they entail in the context of dynamic operating business environment and their impact on firm performance. It also looks at the role of leaders in organizational strategy formulation, execution or implementation and evaluation. Existing conceptual and empirical contributions indicate that the two concepts are closely related and influence the performance of organizations. Development in modern strategic management started over five decades ago with the seminal work of Chandler (1962) on the relationship between strategy and structure. Leadership on the other hand, was first documented by Bernard (1926) and further expounded by Tannenbaum (1957) and has since advanced to the levels where transformational leadership is the buzzword. According to O'Relly et al (2005) leadership has been a central, and sometimes a controversial, topic in the study of organizations. As environmental turbulence increases, strategic Issues that challenge the way organizations plan and implement their strategies emerge with greater frequency. It also brings into question responsibilities as well as the balance of power and decision - making between those who manage and those who govern. O'Reagan and Ghobadian (2004) assert that the quality of leadership and strategy is widely viewed as instrumental in maintaining and improving competitive performance. Indeed, the literature suggests IV that the formulation and deployment of strategic actions by effective leaders result in strategic competitiveness and above average returns. Developments of the last few years that highlight corporate and executive misconduct along with the unprecedented challenge faced by companies seeking to survive and prosper in a dynamic, constantly changing global business environment highlight the critical need for solid leadership more than ever before (Pearce and Robinson, 2007). Empirical research supports the propositions that leadership and strategy are positively related. More recent studies conclude that strategic leadership is a requirement of strategic success (Northouse, 2007). The relationship between strategy and performance is also well documented by the research. The growing importance of leadership and strategy in corporate performance creates a circular relationship between the three variables that requires more study. The circularity suggests that that there is no beginning or end to the relationship and the interplay between these variables is complex and dynamic. The focus in 1970s was in strategic planning, then strategic management in 1980s and transformational versus transactional leadership. This was subsequently followed by strategic leadership with more emphasis on effective boards and executive coaching for the chief executives and the top teams in the late 1990s and early 2000s. This is likely to continue for some time before other leadership aspects applicable in turbulent business environments take their rightful place as Perott (2008) asserts that organizations face a challenging future where managers will need to work smarter to achieve growth and profit targets. Senior managers and boards perceive the market place as becoming more complex and challenging by the day. This will call for a proper mix of leadership styles and strategic management tactics and techniques in the context of various operating environments.