Flexible Leader Theory & Firm Performance

“Human Capital, Efficiency, and Innovative Adaptation as Strategic Determinants of Firm Performance” by Rubina Mahsud, Gregory E. Prussia, Seattle University, and Gary Yukl, State University of New York at Albany, was published in Online First in Journal of Leadership & Organizational Studies.

Professor Mahsud graciously expounded upon the article in her responses below.

Who is the target audience for this article?

This study has important implications for strategy and human resource management scholars as well as business leaders.  To be an effective manager in this period of intense global competition requires one to think and act in simultaneous modes of efficiency and flexibility for adapting in to new situations and demands.  Managers must understand the importance of being able to use competitive strategies that combine cost efficiency and innovative adaptation.  Human resource management professionals, CEOs, consultants, and business educators should understand how investing in an organization’s human capital can make a significant contribution to this type of strategic ambidexterity.

What inspired you to be interested in this topic?

Leadership, strategy, and organizational performance are closely interlinked subjects, and not enough has been done to integrate them in the past.  Flexible Leadership Theory (FLT) provides some of the necessary integration.  We wanted to test a key premise of the theory with empirical research on reasons why some large firms have much better financial performance than others?

Were there findings that were surprising to you?

We hypothesized that efficiency and innovative adaptation completely mediate the relationship between human capital and firm performance.  Scholars have noted that the strategic value of human capital refers to its potential to improve the efficiency and effectiveness of the firm, exploit market opportunities, and/or neutralize potential threats.  According to the FLT model, an important responsibility of top management is to create conditions such that human capital can facilitate the achievement of both efficiency and innovative adaptation together. Our statistical results showed stronger support for partial mediation instead of complete mediation.  Additional research is needed to determine if the results are influenced by attributions made by the raters of human capital.

How do you see this study influencing future research or practice?

On the practice side, strategic leaders need to recognize the importance of talented and devoted employees to bottom line performance, which involves a substantial shift in beliefs about value management in corporations. Today, value is not only the bottom line but value in employee motivation and developing lasting enthusiasm around what they work on.  The time of Neutron Jack (Jack Walsh famous for throwing out 100,000 employees from GE) is over. It’s time for leadership such as of Nissan (Carlos Ghosn, CEO) and Herb Kelleher of South West Airline that cherishes the contributions and loyalty of their employees. Today’s business managers must compete not only for the loyalty of their customers but also for the hearts and minds of their talented employees.  In successful companies talented and motivated employees at all levels help to find ways to reduce cost (e.g., by improving processes, eliminating waste, improving supply chain management, and improving organizational learning).  Talented employees can also facilitate growth in sales (e.g., improving the quality of existing products/services, by entering new product/service markets, by using joint ventures and strategic alliances, by improving knowledge about external environment.  The future research should determine how managers at all levels enhance these processes.

How does this study fit into your body of work/line of research?

For many years a key topic in the management literature has been to identify the determinants of long-term successful financial performance for business enterprises.  The literature on strategic management has emphasized two performance determinants that are essential to a firm’s competitive advantage and those are: efficiency which is essential for firms seeking a competitive advantage through the use of a low-cost strategy.  Alternatively, innovative adaptation of products and services that continuously attract customers is essential for businesses using a differentiation strategy. More recently, the strategic human resource management literature uncovered the importance of human capital, or employee talent, as an additional factor influencing organizational effectiveness.  The significance of human capital as a determinant of firm performance is gaining recognition in the strategic management literature, and the need for relating employee talent to a firm’s competitive advantage is continuing to develop in the human resource management literature.  Scholars in both fields have begun to recognize that the performance determinants emphasized in each field are inter-related in complex ways to each other and to the long-term financial performance of a company.  Prior empirical research verifies the importance of each performance determinant individually, and recent research has examined the joint effects of efficiency and innovative adaptation (cf. Li & Li, 2008; Uotila, et al., 2009). However, we were aware of no previous research that examined the joint effects of all three performance determinants on the prosperity and sustainability of a firm.  Highly motivated and talented employees can help a company to achieve efficiency and innovative adaptation, but how much human capital can enhance each determinant of firm performance was still unknown. Whether the three determinants have an additive or multiplicative effect on firm performance is another question that remains unanswered.  A theory that highlights these three factors as key predictors of organizational effectiveness is Flexible Leadership Theory.  The purpose of the current study was to use FLT as a basis upon which to examine: (1) how the three performance determinants jointly affect firm performance; and (2) whether efficiency and innovative adaptation mediate the relationship between human capital and firm performance.

Interest in strategic leadership and its impact on firm performance has increased in recent years, but empirical studies provide limited insight about the intermediary effects on firm performance However, most of the studies were too narrowly focused to explain how top executives influence the financial performance of a large corporation.

The Flexible Leadership Theory (FLT) was formulated in response to the need for a more comprehensive theory of strategic leadership that integrates relevant ideas from several distinct literatures such as leadership, strategy, and human resource management.  The theory explains how top executives influence organization-level processes that determine a firm’s financial performance.  The theory is conceptualized at the firm level wherein organizational effectiveness depends on three primary performance determinants; (1) human capital or talent, (2) efficiency and process reliability, and (3) innovative adaptation, or flexibility.  In essence, the theory suggests that the top management in a company can influence these three performance determinants with programs, systems and structures to ensure they are mutually compatible and consistent with the firm’s competitive strategy.  Formal systems and procedures are also important because they tend to add clarity to employees’ roles, leads to employee commitment, and ultimately lead to organizational effectiveness (Terziovski, 2010). FLT thus bridges a gap between leadership, strategy, and human resource management literatures.

What if anything, would you do differently if you could go back and do this study again?

Empirical research is a difficult process as it involves data collection from various sources.  This study is based on a doctoral dissertation, and the scope was necessarily limited to what was feasible for that type of research project.  A larger, more comprehensive study would include multiple measures and sources for collecting data on constructs such as efficiency, innovative adaptation, and human capital.  Measures of leadership actions and decisions by top management would be included, and the sample would be larger, allowing more control for type of organization and industry.