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This paper explores the influence of top management characteristics on the process of making Strategic Decisions (SDs). Empirical testing is based on a sample of 70 SDs in industrial enterprises, using a combination of interviews, questionnaires and archival data. The results suggest that (a) the characteristics of both the top management team (TMT) and the CEO influenced the strategic decision-making process, but the former had more influence, and(b) the TMT and CEO influenced different dimensions of the process. The single most important factor was the TMT’s “aggressiveness” (decision to beat the competition, attitude to innovation, risk propensity). Results lend support to the “upper echelons” perspective, but suggest that in studying strategic decision-making processes both CEO and TMT characteristics should be considered. Such an approach should provide a more reliable view of strategic processes and the evolving dynamics.
Citation preview
Centre for Marketing
TOP MANAGEMENT CHARACTERISTICS ANDSTRATEGIC DECISION PROCESSES
Vassilis PapadakisPatrick Barwise
Centre for Marketing Working PaperNo. 96-101
March 1996
Vassilis Papadakis is an EC Post Doctoral Fellow at London Business School. Patrick Barwise isProfessor of Management and Marketing, and Director of the Centre for Marketing, at LondonBusiness School. An earlier version of this paper was presented at the British Academy ofManagement Conference, Sheffield, 11-13 September, 1995. This paper received valuablesupport from an E.U. Post Doctoral Fellowship.
London Business School, Regent's Park, London NW1 4SA, U.K.Tel: +44 (0)171 262-5050 Fax: +44 (0)171 724-1145
[email protected] http://www.lbs.ac.uk
Copyright © London Business School 1996.
�
Top Management Characteristics and
Strategic Decision Processes
ABSTRACT
This paper explores the influence of top management characteristics on the process of
making Strategic Decisions (SDs). Empirical testing is based on a sample of 70 SDs in
industrial enterprises, using a combination of interviews, questionnaires and archival data. The
results suggest that (a) the characteristics of both the top management team (TMT) and the
CEO influenced the strategic decision-making process, but the former had more influence, and
(b) the TMT and CEO influenced different dimensions of the process. The single most
important factor was the TMT’s “aggressiveness” (decision to beat the competition, attitude to
innovation, risk propensity). Results lend support to the “upper echelons” perspective, but
suggest that in studying strategic decision-making processes both CEO and TMT
characteristics should be considered. Such an approach should provide a more reliable view of
strategic processes and the evolving dynamics.
1
1. INTRODUCTION
Two important themes of strategy research over the last ten years have been (a) the role of
top management (Bantel 1993; Hambrick and Mason 1984; Lewin and Stephens 1994) and
(b) the process of making strategic decisions (Hart and Banbury 1994; Lu and Heard 1995;
Rajagopalan et al. 1993). Since Hambrick and Mason’s (1984) influential paper on “upper
echelons”, much emphasis has been placed on the role and significance of top management (i.e.
the CEO and/or top management team). This research stream has mainly focused on the
influence of top management on: (i) corporate strategies (Miller and Toulouse 1986;
Finkelstein and Hambrick 1990), (ii) innovation (Bantel and Jackson 1989), (iii) performance
(Haleblian and Finkelstein 1993; Norburn and Birley 1988; Eisenhardt and Schoonhoven 1990;
Smith et al. 1994), (iv) organisational structure (Miller and Droge 1986), and (v) planning
formality (Bantel 1993).
There has been little empirical work on the link between these two themes, ie top
management (TM) and the process of making SDs. As Rajagopalan et al. (1993, pp 364) stress
in a recent review: "research relating organisational factors such as .... top management team
(TMT) characteristics to strategic decision processes is limited". Others have argued along
similar lines (Bantel 1993; Huff and Reger 1987; Lewin and Stephens 1994; Smith et al. 1994).
Moreover, as we discuss shortly, the few studies which have been done on the links between
TM characteristics and SDM processes have produced mixed results. The influence of TM
therefore remains unclear. If upper echelons theory is to advance our knowledge of the role of
the CEO and the TMT we need a better understanding of their impact (if any) on SDM
processes and the underlying characteristics which are important (Smith et al. 1994).
The study reported here aims to clarify some important aspects of this influence. The main
question it explores is: “Does the CEO and/or the TMT influence the making of actual SDs,
and if so is it the CEO or the TMT which has most influence on the process?”. A secondary
2
question is: “Are there specific aspects of the process which are influenced by the CEO, the
TMT or both?”. To answer these questions the study focuses on selected characteristics of the
TMT (competitive aggressiveness, education) and the CEO (risk propensity, need for
achievement, education, tenure) as well as certain process characteristics (comprehensiveness,
formalisation, communication, politicisation).
The rest of this paper is organised as follows. In Section 2 we review the literature and
develop hypotheses. Section 3 describes our methods. Section 4 gives our results. Section 5
discusses the results and Section 6 explores their implications and limitations, and possible
directions for future research.
2. BACKGROUND AND HYPOTHESES
Three main perspectives attempt to explain organisational processes and outcomes:
"environmental determinism", "firm characteristics and resource availability", and "strategic
choice".
According to “environmental determinism”, SDs and processes are adaptations to external
opportunities, threats, constraints and other features of the environment. The role of TM is to
facilitate this adaptation (Lieberson and O'Connor 1972; Hannan and Freeman 1977).
The "firm characteristics and resource availability " perspective emphasises factors
internal to the firm such as its size, ownership, performance, and system resources. It is related
to the "inertial" perspective (Romanelli & Tushman 1986), according to which existing
organisational arrangements, structures, processes, and resources constrain SDs. Since
virtually all strategic initiatives require resources, a "resource perspective" may be added to
the determinants of SD processes (Pfeffer and Salancik 1978).
The "strategic choice" perspective emphasises the role of decision makers. It stresses that
strategic choices have an endogenous behavioural component and partly reflect the
3
idiosyncrasies of decision makers (Child 1972; Cyert and March 1963). A number of studies
extend this argument further, contending that the role of "upper echelons" or "top managers"
or "strategic leadership" is important enough to determine strategy content, process and
performance (Hambrick and Mason 1984; Miller and Toulouse 1986).
This latter perspective has attracted much theoretical and empirical attention. There is a
wealth of empirical research examining the relationship between TM and corporate
performance, innovation etc. (Bantel and Jackson 1989; Haleblian and Finkelstein 1993;
Norburn and Birley 1988; Eisenhardt and Schoonhoven 1990; Smith et al. 1994). Despite this,
there is, as already noted, very little positive evidence on TM influence on the process of
making SDs (Rajagopalan et al. 1993). On the contrary there is some evidence supporting the
opposite view. For example, Lyles and Mitroff (1980:117) reported that: "It is still not clear
what influence managerial characteristics have on the organisational problem-formulation
process. The results of the study indicate that these characteristics were not significant. This
might indicate that the problem-formulation process is at an organisational rather than an
individual level, in which case individual managers might not have a strong influence on the
process.....”.
The view that TM characteristics have little influence on decision-processes has been
supported by a number of researchers such as Lieberson and O'Connor (1972), Hannan and
Freeman (1977). Stein, in studying the SDM process, went so far as to conclude that
"leadership does not constitute a meaningful contextual domain influencing strategic
procedures" (Stein 1980: 332). This is a significant issue that needs to be resolved empirically.
The proponents of the strategic choice line of thought argue that TM influences performance,
strategy, innovation etc. by having a decisive impact on the process of making SDs. But if
empirically, there is no such impact, one is entitled to question the validity and relevance of
research on TM.
4
This paper sets out to investigate this issue. Despite the dearth of quantitative research on
the TM-SDM process relationship we do have foundations on which to build. The work of
Hambrick and Mason (1984), Miller et al. (1982) and Miller and Droge (1986) as well as many
others has shown how organisational strategies, structures etc. can be influenced by the
personalities of leaders. The popular press is replete with articles showing how leaders and
their teams have successfully turned their companies around. In the case of entrepreneurial
start-ups and small organisations, research has shown how CEOs are dominant in setting
direction (Miller and Droge 1986; Eisenhardt and Schoonhoven 1990).
Various TM characteristics have been proposed as important. These include both
personality and demographic characteristics of the CEO and of the TMT (Lewin and Stephens
1994; Miller and Toulouse 1986; Nahavandi and Malekzadeh 1993). Some researchers favour
demographic characteristics because of their objectivity and because they seem likely to
influence intervening processes (Finkelstein and Hambrick 1990; Hambrick and Mason 1984;
Hitt and Tyler 1991; Smith et al. 1994). Others argue that demographic characteristics, despite
their objectivity and measurability, are unlikely to influence SD processes (eg Haley and
Stumpf 1989; Miller et al. 1982). These authors view personality dimensions as better
predictors of decision-making behaviour, with some empirical support (eg Miller and Droge
1986). Our study included both personality and demographic characteristics, as we now
discuss.
Personality and Demographic Characteristics of the CEO
The most widely used CEO characteristics in the literature include: need for achievement
(nAch), risk propensity, tenure, and education.
i. Need for Achievement (nAch): nAch has been shown to have broad consequences for
behaviour (Miller and Droge 1986). CEOs with high nAch are dominated by a desire to
5
influence and control the context in which they operate. It has been argued that they exert this
influence through formal strategic planning, analytic rational decision making, and systems for
measurement, control and co-ordination (Miller and Toulouse 1986; Miller and Droge
1986).This would also tend to favour more formalised decision-making (Lewin and Stephens
1994), organisational specialisation, and formal co-ordination devices (Lawrence and Lorsch
1967; Miller and Toulouse 1986). CEOs with high nAch may also tend to centralise authority
into the hands of themselves or the TMT (Miller and Droge 1986). By emphasising formal
analysis, they may discourage politically driven decision-making.
The previous discussion suggests the following hypotheses:
H 1a to H 1c : The CEO's need for achievement will be positively related to (a) rationality
and negatively related to (b) hierarchical decentralisation and lateral communication, and (c)
politicisation.
ii. Risk Propensity: Risk propensity describes an individual’s attitude toward risk. It is
considered to be an important characteristic in predicting organisational processes and
outcomes (Gupta 1984; Nahavandi and Malekzadeh 1993). Taylor and Dunnette (1974)
reported that high risk propensity was typical of people who made rapid decisions. Extending
this to organisational decision-making we may hypothesise that risk taking CEOs may
influence the process in the direction of faster, less rational decisions, be reluctant to delegate
decision-making authority and generally operate more by intuition than by rational analysis.
There is however, an opposite argument which posits that risk takers do not necessarily rely
on limited evidence. Taylor and Dunnette’s (1974) risk takers extracted as much value as
possible from their search for information. Lewin and Stephens (1994) argue that CEOs with
low risk propensity will tend to implement centralised organisation designs characterised by
high control intensity and direct supervision in order to minimise uncertainty. This suggests
6
that risk prone CEOs will follow decentralised configurations in decision-making and less rule
formalization.
Due to the inconclusiveness of the available research, the following hypotheses are only
tentative.
H 2a to H 2d: The CEO’s risk propensity will be negatively related to (a) rationality, (b)
rule formalisation and (c) politicisation. They will be positively related to (d) decentralisation
and lateral communication.
iii. Tenure (in the CEO position): Tenure has been reported to influence organisational
processes and outcomes (Finkelstein and Hambrick 1990). Based on the “socialisation”
argument of Thompson (1967) and Tushman and Romanelli ( 1985), we can argue that the
longer executives stay with a company the more likely they are to be inculcated in its culture.
This longevity fosters a shared understanding, a reliance on 'true and tried' decision practices
(Cyert and March 1963; Katz 1982), a higher commitment to the status quo and a reluctance
to change (Staw and Ross 1980).
The CEO's tenure may influence the communication patterns, favouring standardised ways
of communication (Katz 1982; Smith et al. 1994; Wiersema and Bantel 1992). Over time,
TMT members become adept at getting, sharing and discussing information (Zenger and
Lawrence 1989). Moreover, based on the theory of CEO discretion (Finkelstein and Hambrick
1990; Haleblian and Finkelstein 1993), we may hypothesise that through the years she/he will
try to form a TMT of her/his choice thus minimising political debates.
The danger of such socialisation is that, at least beyond a certain point, social integration
may lead to “groupthink” (Janis 1972, Tushman and Romanelli 1985). Unless the TMT is
extremely efficient, management tenure may be related to more biased, less rational and less
formalised SDM processes and restricted information processing (Bantel 1993; Katz 1982;
7
Schwenk 1993). Indeed, tenure has been assumed to limit the perspectives of executives. As
Hambrick and Mason (1984: 200) contend: “executives who have spent their entire careers in
one organisation can be assumed to have relatively limited perspectives. In extreme cases
where the entire top management team has risen solely through the organisation, it is likely
that it will have a very restricted knowledge base from which to conduct its limited search".
Miller (1991) found that firms with long-tenured CEOs were less likely to have produced
strategies and structures which successfully matched changed/new environmental requirements.
It is also possible that through the years the dominant coalition enlarges and incorporates more
decision makers from various functions, thus resulting in greater hierarchical decentralisation
and lateral communication, at least among departmental heads.
Conversely, Fredrickson and Iaquinto’s (1989) study of two industries, supported the
opposite line of argument. They found that change in executive team tenure as well as the level
of TMT's continuity were positively related to change in comprehensiveness in SDM. These
results seriously questioned the applicability of various theories of organisational socialisation
(Thompson 1967) and group decision-making (Janis 1972) in the context of SDM, suggesting
that these theories have to be refined and reconceptualised before they can be applied at the
strategic apex.
The above discussion suggests the following hypotheses:
H 3a to H 3c: The CEO's tenure will be positively related to (a) rationality and (b)
hierarchical decentralisation and lateral communication. It will be negatively related to (c)
politicisation.
iv. CEO Education Level: Although education level has been explored in the past as a
possible influence on organisational performance, innovation, and receptivity to new ideas
(Keller and Holland 1978; Hambrick and Mason 1984; Bantel and Jackson 1989), only a
8
handful of studies have examined its impact on SDM processes (Bantel 1993; Hitt and Tyler
1991).
Hambrick and Mason (1984) argued that the main impact of a well-educated CEO may be
indirect, by encouraging the appointment of educated managers in other senior positions 1.
Education level has been found to be related to the extent of people’s information search
and analysis (Dollinger 1984). A highly-educated CEO is thus likely to demand more detailed
information, leading to more rational-comprehensive SDM (Bantel 1993; O’Reilly 1982). This
suggests that education might also be associated with more financial reporting, more co-
ordination devices, and perhaps more participation. Extending this argument, one might expect
well educated CEOs to be more powerful, thus minimising political behaviour. However, Nutt
(1986) found that executive education level had only a modest effect on decision-making, by
lowering the perception of risk and enhancing the project adoption rate. Thus, the following
hypotheses should be seen as only tentative:
H 4a to H 4c: CEO level of education will be positively related to (a) rationality, (b) formal
co-ordination devices, and (c) hierarchical decentralisation and lateral communication.
Characteristics of the TMT
Finally, it may be that rather than (or in addition to) the characteristics of the CEO, the
characteristics of the members of the TMT may be an important influence on SDM. We here
focus on two variables: the TMT’s education level and its perceived competitive
aggressiveness.
i. TMT’s Level of Education: The same arguments and hypotheses can be advanced for the
education level of the TMT as for the CEO. If anything, we expect the relationships to be
stronger since a team of well educated managers should be oriented toward organising and 1 Our data support this argument by revealing a statistically significant relationship between the CEO’s
education level and the percentage of university graduates in the TMT (P=0.17 s.s. 0.10
9
rationalising (Hambrick and Mason 1984) and show an inclination toward innovativeness and
strategic change (Wiersema and Bantel 1992).
A well-educated TMT should be a professional team which again should influence the
"administrative complexity and sophistication (thoroughness of formal planning systems,
complexity of structures, co-ordination devices, budgeting detail) of firms" (Hambrick and
Mason 1984: 201). Moreover, well-educated managers have been conjectured to show higher
levels of knowledge and ability to perform better, thus contributing to more rational
approaches to decision-making and more creative solutions to complex problems (Bantel and
Jackson 1989).
Finally, a TMT consisting of well-educated managers may be efficient enough to reach an
objectively better solution, thus minimising political processes. This argument has recently
received empirical support from Michel and Hambrick (1992), who found that TMT
homogeneity (eg in education) was related to consensus in the making of strategy.
H 5a to H 5c: The TMT’s education level will be positively related to (a) rationality (b)
hierarchical decentralisation and lateral communication, and negatively related to (c)
politicisation.
ii. Aggressiveness of the TMT: For commercial firms operating in competitive product
markets, all SDs are ultimately aimed at providing long-term competitive advantage (Porter
1985). In broad terms, we would therefore expect the TMT’s competitive aggressiveness - the
extent to which it aims to beat the competition - to influence the energy, thoroughness and
other characteristics of SDM.
Specifically, following Stein (1980), we hypothesise that an aggressive TMT will be more
rational in the sense of doing fuller and more explicit analysis of alternative courses of action.
Such analysis is likely to involve the use of specialist information from middle managers and
10
technical staff at lower levels and across functions. This implies a need for hierarchical
decentralisation and lateral communication, and for some type of formal structure to aid
decision-making. We also expect a TMT which is focused on beating the competition to seek
to avoid political infighting. Formally, this gives us the following hypotheses:
H 6a to H 6d: TMT aggressiveness will be positively related to (a) rationality, (b)
hierarchical decentralisation and lateral communication and (c) a formal decision process. It
will be negatively related to (d) politicisation.
Is it the CEO or the TMT that really matters?
The above arguments suggest that both the CEO and the TMT may influence SDM. But
which really matters? We have little empirical evidence. Gupta (1988) suggested that a
stronger relationship with strategy will be found if TMTs, rather than individual managers or
CEOs, are analysed. Other findings similarly suggest that TMT characteristics may outweigh
CEO characteristics in predicting organisational processes, innovativeness, performance etc.
(eg Bantel and Jackson 1989; Murray 1989).
Control Variables
Furthermore theory suggests that the influence of CEO or TMT characteristics on SDM is
likely to be contingent on a number of situational factors (Nahavandi and Malekzadeh 1993).
For instance, we might expect the intensity of our hypothesised relationships, i.e. the degree to
which the CEO or the TMT is able to affect decision processes, to be contingent on the CEO’s
power and his/her discretion-latitude to influence the destiny of the organisation (Hambrick
1989; Lewin and Stephens 1994). Latitude is seen as a function of both internal and external
contextual factors such as environmental hostility, industry competitiveness, firm size etc.
(Lewin and Stephens 1994; Miller and Toulouse 1986; Damanpour 1992).
11
Two variables related to the managerial discretion of the CEO are frequently used: the
hostility of the environment and the size of the firm. Hostile environments limit managerial
discretion. Conversely a favourable environment provides the firm with slack (Cyert and March
1963) allowing more latitude to manoeuvre (Lewin and Stephens 1994).
The size of the firm is negatively related to the CEO’s and any other individual’s ability to
influence decision-making. The larger the organisation the larger the inertia which tends to
reduce managers ability to effect change (Hambrick and Finkelstein 1987; Nahavandi and
Malekzadeh 1993). In smaller firms, the power of the CEO is greater because there are fewer
managers (and it becomes easier to control information and decision-making and to directly
influence subordinates through face to face contact) and in some cases the CEO has a share of
the ownership. TM characteristics may matter less in large organisations due to the more
decentralised and formal nature of decision-making (Kets de Vries and Miller 1986; Nahavandi
and Malekzadeh 1993). Overall, we would expect a negative relationship between size and the
leader's degree of discretion.
Fredrickson and Iaquinto (1989) reported that larger size is associated with more
comprehensive SDM. Child (1972) also suggested that size affects the framework of
organisational decision-making. Overall, it is argued that there is an inverse relationship
between size and the impact of the CEO on the organisation. However, it is worth mentioning
that Dean and Sharfman (1993) as well as the Bradford studies (eg Hickson et al. 1986) found
no differences in SDM processes which could be attributed to size.
Finally, whether a company is an independent business or part of a broader group of
companies may have an impact on the ability of the TM to influence the process of making
SDs.
In summary, the influence of the characteristics of the TM on SDM processes may depend
on contextual factors such environment, firm size, and whether the company is independent or
12
an SBU. These control variables are included in our analysis.
Figure 1 presents an integrative model of the CEO and TMT influence on the SDM process
based on the above discussion. It argues that both the CEO and the TMT affect the process. It
also takes into account the possible impact of corporate environment, size and corporate
control type as factors limiting TM discretion on SDs.
Insert Figure 1 about here
3. METHODS
Data
Unit of analysis: The study focuses on individual SDs as the unit of analysis. Most SDs
involve the allocation of resources: both existing resources (which have an opportunity cost)
and incremental resources (which involve capital investment). To keep the unit of analysis clear
and reasonably comparable across cases, we have limited our sample to strategic investment
decisions (SIDs), i.e. SDs which involve significant capital investment and therefore require
some degree of explicit appraisal and authorisation (Marsh et al. 1988).
Data Collection: The study can be characterised as “multi-method, in-depth field research”
(Snow and Thomas 1994). The data were collected as follows: (i) initial CEO interview, (ii)
semi-structured interviews with key participants, (iii) completion of two questionnaires: one
general for the CEO and one decision-specific for the key participants, and (iv) supplementary
data from archival sources (eg internal documents, reports, minutes of meetings).
The research covers 70 SIDs in 38 manufacturing firms in Greece. The SIDs were identified
at the initial CEO interview. The CEO was asked to complete the first, general, questionnaire
providing information about the company, its environment, and its organisation. He (all the
CEOs were men), was then asked to name the two most important investment decisions which
had taken place in the last 2-3 years. In our attempt to minimise distortion and memory failure
13
problems, we asked for recent decisions. The vast majority of the decisions were taken less
than 6 months prior to our interview.
He was asked to give a brief description of each decision and the process followed in
making it, and to name all the key participants as well as the manager with the most intimate
knowledge of the process, eg the project champion (This methodology follows that of
Hickson et al. 1986). In most cases, we had access to the paper trail documenting the decision
and its process, before interviewing the designated manager: investment decisions tend to be
better documented than other SDs (Marsh et al. 1988). This aided our understanding and
helped us in checking managers for possible memory failure and ex-post rationalisation (Huber
and Power 1985).
Semi-structured interviews were conducted with the most knowledgeable manager (Huber
and Power 1985). We followed a "funnel sequence" whereby the interview started with a semi-
structured discussion using open-ended questions (Bouchard 1976). Interviewees were then
handed the second decision-specific questionnaire designed to measure the dimensions of the
SDM process. Their responses were checked against the initial CEO interview and the paper
trail. If the answers differed from what these other sources suggested, we were able to
question the manager’s recollections. A thorough discussion followed and the manager usually
justified his/her point of view.
Where interviewees felt they had insufficient information (eg a production manager could
not reliably recall aspects of the financial evaluation or the marketing issues), we conducted
further interviews with the relevant informants (eg finance or marketing director) to clarify
these specific points. Their responses on these specific points were used as better
approximating reality. These incidents were rare because we selected people who had actively
participated in the process and had a thorough understanding of what actually happened. Six
decisions out of the 70 used this hybrid multiple-informant approach.
14
Sample: The sampling frame comprised all manufacturing enterprises in Greece with more
than 300 employees, drawn from three industrial sectors (food, chemicals and textiles), a total
population of 89 companies of which 38 participated in the survey. In most cases, two SIDs
were studied in each firm, resulting in a sample of 70 SIDs. The response rate achieved
(approximately 43%) is extremely high considering the intrusive nature of the research and the
fact that top management was asked to devote several hours of its time. Comparison between
respondent and non-respondent firms on the basis of three objective measures (number of
employees, total assets, and return on assets), verified the representativeness of the final
sample.
Reliability and Validity: A study based on participant recall, though the dominant method
of studying SDM processes, has inherent limitations (Bouchard 1976; Huber and Power 1985;
Kumar et al. 1993). A number of procedures have been suggested to help reduce their impact,
including the use of multiple informants (Kumar et al. 1993). Despite this, even these
methodologies do not guarantee objectivity. The nature of our research (in-depth study of two
SIDs in each company, a separate CEO interview, use of archival data), the idiosyncrasies of
our sample (i.e. medium-sized enterprises, existence of few key-informants in each SD), as well
as the enormous amount of effort to obtain even a single informant to discuss in depth often
delicate matters, like SDs, precluded us from using more than one informant per SID and
aggregating their responses.
Nevertheless, we followed several tactics in our attempt to alleviate possible biases
(Bourgeois and Eisenhardt 1988; Huber and Power 1985; Kumar et al. 1993), First, archival
records documenting the process and its characteristics were collected prior to our main
interview. Second, particular caution was exercised to minimise distortion and memory failure
problems. This was attempted by selecting recently taken decisions (Mintzberg et al. 1976), by
interviewing only major participants (Kumar et al. 1993), by adopting a "funnel sequence"
15
method in conducting interviews (Bouchard 1976), by cross-checking interview data against
other managers recollections (eg CEOs) and other sources, and by using additional informants
in cases of incomplete information. Finally, the willingness and sincerity with which top
managers participated in the research and the interest they showed during the interviewing
process, provide a sufficient reason to believe in the face validity of their responses.
Measurement of TM Characteristics
CEO Personality characteristics: Two CEO personality characteristics were measured:
nAch, and risk propensity. To measure nAch we used Steers and Braunstein's (1976)
instrument, which has been shown to exhibit acceptable levels of discriminant, predictive, and
convergent validity, as well as reasonably high levels of test-retest reliability and internal
consistency. Six seven-point Likert-type scales were used with options ranging from (1) never
to (7) always. The response format reflects an active attitude towards decision-making and
personal goal setting. The scale provided an Alpha coefficient of 0.70, comparable to that in
other studies (eg Steers and Braunstein 1976; Begley and Boyd 1986).
Risk propensity was measured with fifteen five-point scales employing a disagreement/
agreement format. They were drawn from the Jackson's Personality Inventory (1977) and from
Eysenck and Eysenck (1965). Particular care was exercised to select items approximating the
reality of business situations and represent what Jackson et al. (1972) call 'monetary risk'. The
Alpha reliability coefficient for the resulting construct is 0.73, marginally lower than reported
by Jackson (1977) and Begley and Boyd (1986).
CEO Demographic Characteristics: We used two CEO demographic measures: (i)
“Tenure”, defined as length of service in the same position (in years) and (ii) level of
education (on a five-point scale).
TMT Characteristics: Two measures were used. The first, measures the degree of
16
aggressiveness of what Hage and Dewar (1973) call the 'behavioural elite group' (i.e. the CEO
and all those participating in major decisions). It draws from Khandwalla (1977), and Stein
(1980) and is measured by three items expressing dimensions of the TMT’s attitude towards
risk and achievement. The first item measures the degree of 'beat-the-competition’ attitude, the
second TMT’s risk propensity (i.e. attitude towards risky projects), and the third the top team's
attitude to innovation. When factor analysed the three items provided one factor explaining
62% of total variance. The combination of these three items is explained as TMT’s
aggressiveness towards competitors, innovation, and risky projects. The reliability of the
resulting three-item scale (Alpha=.70), is satisfactory (Van De Ven and Ferry 1979).
The second variable attempts to capture the level of education of what Hage and Dewar
(1973) name as formal elite. It is an objective variable measuring the percentage of managers,
down to the level of departmental heads, who are university graduates.
Measurement of Process Characteristics
Many SDM studies describe the process as a sequence of steps, phases or routes (eg
Fredrickson 1984; Mintzberg et al. 1976). Others focus on sets of decision characteristics or
aspects instead of a sequence of phases (eg Hickson et al. 1986; Lyles 1987; Stein 1980). It is
widely recognised that SDM is far from being a clear sequence of activities. Thus, instead of
using sequential, step-by-step models to describe decision-making, it may be better to identify
different dimensions of the process and to attach variables to them. A meaningful but
parsimonious categorisation of possible process dimensions was derived from the relevant
literature as follows:
• comprehensiveness/rationality: (Dean and Sharfman 1993; Lyles and Mitroff 1980).
Elements of rationality can be traced in many other studies eg degree of inquiry (Lyles
1987), or scrutiny (Cray et al. 1988),
17
• political/dynamics: This can be found as: politicality (Lyles 1987; Hickson et al. 1986),
and negotiation/ bargaining (Cray et al. 1988; Hickson et al. 1986),
• centralisation (Cray et al. 1988; Lyles 1987),
• formalization/standardisation of the process (eg Stein 1980),
• dynamic factors-disruption-impedance (Cray et al. 1988; Mintzberg et al. 1976),
• The following six process characteristics were measured: comprehensiveness/rationality,
existence of a set of formalised rules guiding the process, existence of formal co-ordination
devices, hierarchical decentralisation, lateral communication, and politicisation. These are
indicated in the Appendix along with their measurement details. Their Alpha coefficients are
presented in Table 1.
Ample theoretical support can be found for these dimensions (eg Camillus 1982; Cray et al.
1988). For example, the framework adopted is similar to that of Cray et al. (1988). Their
scrutiny dimension is captured by the comprehensiveness/ rationality and financial reporting
dimensions; the interaction dimension is captured by the politicisation and problem-solving
dissension dimensions; the centrality dimension is similar to our hierarchical decentralisation
and lateral communication dimensions.
Measurement of Control Variables
To measure environmental hostility we used Khandwalla's (1977) three five-point scales: the
degree of environmental riskiness, stressfulness and dominance over the company. The
resulting Alpha coefficient is satisfactory (.69). Size was measured by the log of full-time
employees (eg Fredrickson 1984). Finally control type was measured by a dummy variable
recording whether the company was an SBU or an independent company.
4. RESULTS
18
Table 1 presents the means, standard deviations and reliabilities for all variables assessed in
this study. A quick look at only the correlations between CEO and SDM process
characteristics reveals that only 4 out of the 24 relationships were statistically significant at a
level of 5% or less. This indicates virtually no relationship between the two groups of
variables. Closer inspection shows only one of the 12 relationships with CEO personality
measures (risk propensity with lateral communication) was significant. For the two CEO
demographic measures (tenure and education) the only significant correlations were that:
• both measures were significantly related to the existence of formal co-ordination devices,
• tenure was highly significantly related to hierarchical decentralisation.
Insert Table 1 about here
Conversely, for TMT characteristics seven out of the twelve possible relationships were
statistically significant at a 5% level. This is perhaps the most noteworthy finding in Table 1,
indicating the importance of the TMT as a whole, as opposed to the CEO, in the SDM
process.
To test this initial conclusion further, we ran a number of hierarchical regression models
treating the nine process characteristics as dependent variables and TM characteristics as
independent variables (Table 2). Hierarchical regression allows for an assessment of the
incremental increase in the explained variance of a dependent variable that is explained by the
successive addition of sets of independent variables where the variance explained by previously
entered variables is partialled out (Cohen and Cohen 1983). Independent variables were
introduced in four blocks. First, the control variables were introduced. The CEO personality
and demographic characteristics followed in steps 2 and 3 respectively. Finally in step 4 the
TMT characteristics were introduced. Model F-tests of significance (Cohen and Cohen 1983)
were used to assess the changes in R2 resulting from the addition of each new set of predictors.
19
A significant change in R2 for step 2 (CEO personality characteristics) for example, would
indicate that these characteristics significantly influence the specific process dimension. A
significant change in R2 for step 3 (CEO demographic characteristics) would demonstrate the
separate influence of these additional CEO characteristics on the specific process dimension, ie
that CEO demography adds significantly to the explained variance after the control and
personality characteristics are entered.
Insert Table 2 about here
5. DISCUSSION OF RESULTS
CEO and TMT Variables
The results in table 2 suggest that both the CEO and the TMT bear on the process of
making SDs. Interestingly they seem to influence different dimensions of the process: CEO
characteristics are significantly and positively related to the existence of formal co-ordination
devices and to the degree of hierarchical decentralisation. TMT characteristics relate more to
comprehensiveness/ rationality, rule formalisation, hierarchical decentralisation, and lateral
communication. As in previous studies the characteristics of the TMT had more overall
influence on the SDM process than did those of the CEO (despite the fact that we measured
only two of the former versus four of the latter).
Based on the full model, a number of relationships raise some issues that bear further
discussion. The CEO’s need for achievement provides one significant relationship. This
supports the view that achievers may centralise decision-making and resort in less hierarchical
decentralisation. The characteristic of risk propensity has little influence on the SDM
processes. It only provides one significant relationship with rule formalization. This verifies our
hypothesis that risk prone CEOs resort in less formalization in making SDs. All other potential
20
relationships are insignificant.
CEO’s tenure appears as the most influential CEO characteristic. First, it is strongly related
to the existence of more formal co-ordination devices. This is in line with what Katz (1982)
argues about the relationship of tenure with standardised ways of communication. Secondly, it
is positively related to hierarchical decentralisation and lateral communication. This is in line
with the argument that CEO's tenure has a positive impact on communication patterns (Smith
et al. 1994). Finally, results also indicate that tenure is positively related to comprehensiveness
in SD-making. This result supports the view that tenure may result in a common vocabulary
among managers, in greater levels of social integration and in better norms in getting and
sharing information. Finally, the CEO’s level of education provides only one strong positive
relationship with formal co-ordination devices. This is in line previous argumentation (e.g.
Hambrick and Mason 1984).
The TMT's level of education results in some interesting relationships. First, the percentage
of university graduates in TM appears to be related to rationality and rule formalization (eg
Hambrick and Mason 1984; Wiersema and Bantel 1992; Bantel and Jackson 1989). Second,
TMT's education level is positively related to more politicisation during SDM process. This is
contrary to our hypothesis. A plausible explanation could be offered if we consider that the
existence of many well educated executives may represent multiple sources of power and
expertise. Thus, we might expect well educated individuals to heavily bear on the process of
SDM in an attempt to skew the process in their preferred direction, thus causing politicisation.
Finally, TMT’s competitive aggressiveness appears to be the single most powerful predictor
of SDM processes. As hypothesised, competitive aggressiveness of the TMT is positively
related to rationality, rule formalization, as well as hierarchical decentralisation and lateral
communication. This is interesting since, to the best of our knowledge, such a characteristic of
the TMT has not been used by relevant research examining the significant attributes of the
21
TMT.
Control Variables
Size, is found to be insignificant in almost all regression models except rationality. This lack
of significance may be due to the fact that our sample is rather homogeneous in terms of size.
The emerged positive relationship with rationality is in line with conventional wisdom that
larger companies tend to have more rationalistic decision-making (eg Mintzberg 1976).
It is somewhat surprising, however, to find that environmental hostility as a control variable
had little influence on the process of making SDs. Only one weak positive correlation was
established with hierarchical decentralisation. This, at first appears counterintuitive since a
consequence of environments perceived as extremely hostile may be a tighter centralisation in
decision-making and a restrained flow of information between various layers, thus leading to
hierarchical centralisation (Child 1972).
Our explanation is that the relationship between hostility and decentralisation is curvilinear.
Thus, under environments which are characterised as moderately hostile we may observe
decentralisation. The descriptive statistics of the variable environmental hostility indicate a
mean of 2.9 which implies rather moderately hostile environments, on the average (Table 1).
Under such environmental situations (volatile, uncertain but not very hostile), authority has to
be delegated to people close to markets and technological developments i.e. decision making is
decentralised. These people are sources of vital information, and a centralised decision-making
structure would deprive top management of extremely useful data.
Also very significant is the impact of control type on several aspects of strategic DMPs.
Indeed, SBUs had more comprehensiveness/rationality, rule formalisation and co-ordination
devices. On the other hand they experience more politicisation in their decision-making
processes. These results are in line with the view that as strategic decisions in SBUs are usually
22
subject to review or influence by outsiders they will take pains to demonstrate that they act
rationally and to justify their major decisions both inside and outside the company (Dean and
Sharfman 1993; Romanelli and Tushman 1986). The positive statistically significant association
between politicisation and SBUs may be attributed to the fact that numerous parties, not only
from inside but also from he outside of the company, may intervene and try to skew the output
of the decision process in their preferred direction. Such an activity may raise politicisation.
6. IMPLICATIONS-LIMITATIONS-FUTURE RESEARCH
This paper examines the extent to which certain characteristics of the CEO and the TMT
are related to specific strategic decision-making behaviour. According to Gupta (1984), the
crucial question is not whether managers matter but how much they matter. The results of this
study support the view that both CEOs and TMTs influence the process of making SDs.
Focusing on just CEOs we have found that it is not their personality but their demographic
characteristics (tenure and education) which matter more. For example, both education and
tenure favour the formation of co-ordination devices, while tenure also influences
decentralisation and communication patterns.
Personality characteristics were rather weak predictors of SDM processes. Our most
significant finding was that risk prone CEOs tended to abandon rule formalization during the
SDM process. But why is there so little relationship between CEO personality characteristics
and SDM processes? A number of previous studies reviewed in the literature section, led us to
predict relationships. The psychological variables used are ones that recur in the literature. Our
results do not support these studies. One possible explanation is that our sample is comprised
of rather mature, medium-sized and larger firms, and that in this context the personality
characteristics of the CEO may not affect the SDM process.
Interestingly TMT characteristics were much better predictors of SDM behaviour. Given
23
that the data were collected from companies operating in Greece, this result is rather
surprising. Conventional wisdom as well as recent empirical evidence (eg Bourantas et al.
1990; Koufopoulos and Morgan 1994), holds that the management style of Greek companies
tends to be rather centralised, dominated by one individual. The lack of CEO dominance over
decision-making in our results may be because our sample was of medium-sized and larger
organisations, where we can assume that CEOs and other influential actors have less freedom.
In larger organisations power and influence may escape from the hands of a single
organisational actor and may be shared by the whole TMT.
Another possible explanation is that Greek companies have been put under intense
competitive pressure during the last decade. Thus, in order to survive and achieve long term
viability, they were forced to introduce changes including a more team-based style of decision
making.
On the other hand, the strong relationships between TMT characteristics and SD processes
suggest various explanations. First, results strongly support the “upper echelons” perspective
(Hambrick and Mason 1984; Hambrick 1988), proposing that the characteristics of the elite
inner circle are more important than those of the CEO or any other individual manager in
predicting SDM processes. Indeed, our data suggest that even in countries like Greece, where
one expects to find dominant individuals, and in medium-sized rather than very large
companies, it is the TMT that matters more. Similar conclusions were reached in the US
context by Gupta (1988); Bantel and Jackson (1989) and Murray (1989).
But still the CEO does have an impact on significant aspects of the process (i.e.
decentralisation, co-ordination). This may carry important implications for future research
since so far work in the area has been divided into two groups: one studying CEOs and another
studying TMTs. We believe that future research on TM should adopt a more balanced
approach studying both TMT characteristics and CEO characteristics. Our results suggest that
24
when studied together they provide a more reliable view of how SDM processes evolve within
the company.
In addition, the results of this study question a part of the literature (eg Lieberson and
O'Connor 1972; Hannan and Freeman 1977; Lyles and Mitroff 1980; Stein 1980), which
contends that leadership variables have little role in explaining actual decision behaviour. In
particular, the aggressiveness of the TMT, its level of education as well as CEO tenure and
level of education were each significantly correlated with specific process characteristics.
Finally, several limitations of the study warrant discussion. First is its cross-sectional,
retrospective nature. Second, the companies in our sample represent approximately 40% of the
population of medium-sized and larger industrial enterprises in the food, textiles and chemical
sectors in Greece. Thus, results are representative of these specific types of company and are
not necessarily generalisable in other sectors and countries. In smaller or significantly larger
enterprises we might expect different results.
Despite these limitations, some implications for practice are offered. CEOs wishing to
influence SDs cannot rely solely on their hierarchical position, since the data suggest that
SDM is more a team effort than a one man show. A possible implication is that CEOs should
mainly focus on building a strong aggressive TMT.
A potential strong point of the research relates to the fact that it corroborates relevant
research while bringing new empirical evidence from a context outside the USA, UK and
Canada. Since the vast majority of published research in strategic decision-making has taken
place in these countries, it seems important that the paper provides quantitative evidence from
another EU country.
Concluding this paper we would like to point out some avenues for future research. First,
taking into account the lack of large-scale empirical research examining strategic leadership
and SDM processes, further examination of these relationships offers a potentially fruitful
25
direction for future research. Second, it should also be noted that this paper has focused on
only a few personality and demographic characteristics. The use of a different set of TM
characteristics (eg functional specialisation, heterogeneity etc.) to verify our results merits
further work.
26
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Figure 1: An Integrative Model of TM Influence on the SDM Process
TMTCHARACTERISTICS
• Education• Competitive
Aggressiveness
CEOCHARACTERISTICS
Personality• Need for Achievement• Risk Propensity
Demographics• Tenure• Education
ENVIRONMENT
• Hostility
OTHERCONTROLLING
FACTORS
• Size• Ownership
SD PROCESSCHARACTERISTICS
• Comprehensiveness/Rationality• Formalisation• Co-ordination Devices• Hierarchical Decenralisation• Lateral Communication• Politicisation
33
Table 1 : Means, Standard Deviations, Reliabilities and Intercorrelations for Variables Assessed in this Study
VARIABLES MEAN STD ALPHA No ofItems
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1. Rationality/Comprehensiveness 3.25 .73 .94 5 1.00
2. Set of Formalised Rules a 0.0 1.0 .89 7 31 1.00
3. Formal Co-ordination Devices a 0.0 1.0 .88 3 28 00 1.00
4. Hierarchical Decentralisation 2.77 .54 .93 5 42 00 36 1.00
5. Lateral Communication 2.23 .56 .87 5 62 .28 .44 .54 1.00
6. Politicisation 2.97 1.34 .77 4 31 -09 22 14 07 1.00
7. CEO’s Need for Achievement 2.15 .63 .70 6 -02 14 09 -12 00 -06 1.00
8. CEO’s Risk Propensity 3.14 .56 .73 15 14 -16 09 06 23 -12 -01 1.00
9. CEO’s Tenure 8.74 7.65 N/A N/A 11 -10 22 36 19 07 14 02 1.00
10. CEO’s Education 3.36 .89 N/A N/A 11 -04 24 -15 10 -07 05 17 -35 1.00
11. TMT’s Education 85 16.7 N/A N/A 39 19 04 00 22 21 -43 19 -14 17 1.00
12. TMT’s Competitive Aggressiveness 3.35 1.18 .70 3 39 26 18 20 62 -09 12 44 11 16 21 1.00
13. Size 2.76 2.74 N/A N/A 09 04 -08 -10 -15 25 11 -21 02 -04 05 -34 1.00
14. Environmental Hostility 2.94 .74 .69 5 -28 -28 02 05 -31 -09 02 -09 -10 07 -46 -42 00 1.00
15. SBU vs Independent Company .47 .50 N/A N/A 33 42 21 -08 15 22 20 22 -20 07 27 17 -10 -36 1.00
Note : Decimals of Correlation Coefficients were omitted For Coefficients greater than r > 0.198 p < 0.05 For Coefficients greater than r > 0.275 p < 0.01 For Coefficients greater than r > 0.35 p < 0.001
a Variables are factors (principal components) incorporated in the analysis
34
35
Table 2. Hierarchical Regression Results a VARIABLES : MODEL 1 : MODEL 2 : MODEL 3 : MODEL 4 : MODEL 5 : MODEL 6 :
COMPREHENSI-VENESS/
RATIONALITY
FORMALISEDRULES
CO-ORDINATIONDEVICES
HIERARCHICALDECENTRALISATION
LATERALCOMMUNICATION
POLITICISATION
1st step:Control VariablesÄR2 .154 * .207 *** .055 .018 .125 * .126 *R2 .154 * .207 *** .055 .018 .125 * .126 *2nd Step:CEO’s PersonalityCharacteristicsÄR2 .017 .066 + .004 .013 .029 .037R2 .171 .273 .059 .031 .154 .163
3rd Step: CEO’sDemographicCharacteristicsÄR2 .057 .003 .195 *** .154 ** .051 .027R2 .228 .276 .253 .185 .205 .190
4th Step: TMTCharacteristicsÄR2 .164 *** .111 ** .015 .062 + .228 *** .042R2 .392 .387 .269 .247 .432 .232
FULL MODELCONTROL VARIABLES
• Size .258 * .130 .012 .035 .073 .258 +
• Environmental Hostility .158 .057 .21 .259 + .024 .121
• Controlled vsIndependent
.347 ** .420 ** .358 * .107 .124 .33 *
CEO’S PERSONALITYCHARACTERISTIC
• Need for Achievement -.109 .055 -.097 -.255 + -.127 -.107
• Risk Propensity -.138 -.405 *** -.106 -.075 -.086 -.171
CEO’SDEMOGRAPHICCHARACTERISTICS
• Tenure in the position .214 + -.091 .427 ** .385 ** .192 + .174
• Education .067 -.126 .352 ** -.06 .071 -.035
TMT’sCHARACTERISTICS
• Education .256 + .120 -.020 -.019 .038 .260 +
• CompetitiveAggressiveness
.47 *** .429 ** .170 .342 * .646 *** .023
R2 .392 .387 .269 .247 .432 .232
Adjusted R2 .300 .295 .159 .134 .347 .11
F 4.30 *** 4.20 ** 2.45 * 2.18 * 5.08 *** 1.94 +
• p < .10 * p < .05 ** p < .01 *** p < .001
a Values Shown in the Regression Models are the Standardised Regression Coefficients. N=70
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Appendix
Operationalization and Reliability of Strategic Decision Process Characteristics
SD MAKING PROCESSDIMENSIONS
OPERATIONALIZATION
1. RATIONALITY /COMPREHENSIVENESS
This construct is based on Fredrickson’s (1984) Rationality/comprehensiveness dimension. Fivestages in the SD process are measured (i.e. the situation diagnosis, alternative generation,alternative evaluation, making of the final decision and decision integration). For each of thesestages Fredrickson’s eight rationality elements are measured on five-point Likert-type scales (i.e.extend of scheduled meetings, assignment of primary responsibility, information seekingactivities, systematic use of external sources, employees involved, use of specialised consultants,years of historical data review, and functional expertise of people involved). The rationalityelements for each stage are summed to create five additive variables, each representing therationality/comprehensiveness dimension of the respective stage. Summation of these fivevariables results in an overall measure of rationality-comprehensiveness of the process.
2. FORMALISEDRULES
This construct is one of the three factors extracted from a factor analysis investigation involvingseventeen items measuring the degree of formalization/standardisation of the process. Thisspecific factor variable incorporates seven items and measures the degree of rule formalizationduring the making of the SD. Sample items include: The degree to which there exists a writtenprocedure guiding the process, (2) existence of a formal procedure to identify alternative ways ofaction, (3) formal screening procedures, (4) formal documents guiding the final decision, (5)predetermined criteria for SD evaluation. The measurement scale ranges from ‘1’ absolutelyfalse to ‘7’ absolutely true.
3. CO-ORDINATIONDEVICES
This factor variable measures the existence of a number of co-ordination devices during thedecision. Such devices may include ‘1’ specially formed task forces ‘2’ specially formedinterdepartmental committees, ‘3’ specially formed liaison devices.
4. HIERARCHICALDECENTRALISATION
This additive variable measures the extent of vertical decentralisation of the decision-makingduring all the phases of the process. It is based on the total amount of participation of varioushierarchical levels and departments in each of the previously mentioned five phases of theprocess. The five hierarchical levels include owner-main shareholder, CEO, first level directors,middle management and lower management. Responses are taken on a five-point Likert-typescale, anchored with ‘1’ no involvement at this stage to ‘5’ active involvement and influence. Byadding all hierarchical layers for every stage in the process, five additive variables were obtained,each measuring the hierarchical decentralisation in the respective stage. Summing all fivevariables resulted in an overall measure of hierarchical decentralisation.
5. LATERALCOMMUNICATION
Lateral communication was measured in a similar way to hierarchical decentralisation, exceptfrom that it measures the degree of balanced participation of all major departments in theadopted five stages of the process. The major departments include: finance-accounting,production, marketing-sales, personnel, and purchasing department.
6.POLITICISATIO
N
This variable results from the addition of four seven-point Likert-type scales measuring theextent of coalition formation, the degree of negotiation taken place among major participants, thedegree of external resistance encountered and finally the degree of process interruptionsexperienced. Scales range from ‘1’ absolutely false to ‘7’ absolutely true.
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