Top Management Characteristics

Centre for Marketing



TOP MANAGEMENT CHARACTERISTICS AND STRATEGIC DECISION PROCESSES Vassilis Papadakis Patrick Barwise

Centre for Marketing Working Paper No. 96-101 March 1996

Vassilis Papadakis is an EC Post Doctoral Fellow at London Business School. Patrick Barwise is Professor of Management and Marketing, and Director of the Centre for Marketing, at London Business School. An earlier version of this paper was presented at the British Academy of Management Conference, Sheffield, 11-13 September, 1995. This paper received valuable support 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. 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 1

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 2

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. 3

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 4

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 5

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; 6

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 7

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 1

indirect, by encouraging the appointment of educated managers in other senior positions . 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 coordination 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 8

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 9

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). 10

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 11

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 12

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 semistructured 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. 13

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" 14

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 15

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), 16

• 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 17

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. 18

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 19

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 20

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 21

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 22

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 23

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 24

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.

25

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31

ENVIRONMENT • Hostility

CEO CHARACTERISTICS Personality • Need for Achievement • Risk Propensity

SD PROCESS CHARACTERISTICS

Demographics • Tenure • Education

• • • • • •

TMT CHARACTERISTICS •

Comprehensiveness/Rationality Formalisation Co-ordination Devices Hierarchical Decenralisation Lateral Communication Politicisation

Education

• Competitive Aggressiveness

OTHER CONTROLLING FACTORS

• Size • Ownership

Figure 1:

An Integrative Model of TM Influence on the SDM Process

32

Table 1 :

Means, Standard Deviations, Reliabilities and Intercorrelations for Variables Assessed in this Study MEAN

VARIABLES

1. Rationality/Comprehensiveness

STD ALPHA

No of Items

1

2

3

4

5

6

7

8

9

10

11

12

3.25

.73

.94

5

1.00

0.0

1.0

.89

7

31

1.00

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

8. CEO’s Risk Propensity

3.14

.56

.73

15

14

-16

09

06

23

-12

9. CEO’s Tenure

8.74

7.65

N/A

N/A

11

-10

22

36

19

07

14

02

10. CEO’s Education

3.36

.89

N/A

N/A

11

-04

24

-15

10

-07

05

17

-35 1.0 0

11. TMT’s Education

85

16.7

N/A

N/A

39

19

04

00

22

21

-43

19

-14

12. TMT’s Competitive Aggressiveness

3.35

1.18

.70

3

39

26

18

20

62

-09

12

44

11

16

13. Size

2.76

2.74

N/A

N/A

09

04

-08

-10

-15

25

11

-21

02

-04

05

14. Environmental Hostility

2.94

.74

.69

5

-28

-28

02

05

-31

-09

02

-09

-10

07

-46

-42

.47

.50

N/A

N/A

33

42

21

-08

15

22

20

22

-20

07

27

17

2. Set of Formalised Rules

a

3. Formal Co-ordination Devices

15. SBU vs Independent Company

Note :

a

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

33

13

14

15

1.00 -01 1.00 1.00

17 1.0 0 21 1.00 -34 1.00 00 1.00 -10

-36 1.00

34

Table 2. Hierarchical Regression Results a VARIABLES :

1st step: Control Variables ÄR2 R2 2nd Step: CEO’s Personality Characteristics ÄR2 R2

MODEL 2 :

MODEL 3 :

MODEL 4 :

MODEL 5 :

MODEL 6 :

FORMALISED RULES

CO-ORDINATION DEVICES

HIERARCHICAL DECENTRALISATION

LATERAL COMMUNICATION

POLITICISATION

.154 * .154 *

.207 *** .207 ***

.055 .055

.018 .018

.125 * .125 *

.126 * .126 *

.017 .171

.066 + .273

.004 .059

.013 .031

.029 .154

.037 .163

3rd Step: CEO’s Demographic Characteristics ÄR2 R2

.057 .228

.003 .276

.195 *** .253

.154 ** .185

.051 .205

.027 .190

4th Step: TMT Characteristics ÄR2 R2

.164 *** .392

.111 ** .387

.015 .269

.062 + .247

.228 *** .432

.042 .232

FULL MODEL CONTROL VARIABLES • Size

.258 *

.130

.012

.035

.073

.258 +

• Environmental Hostility

.158

.057

.21

.259 +

.024

.121

• Controlled vs Independent

.347 **

.420 **

.358 *

.107

.124

.33 *

CEO’S PERSONALITY CHARACTERISTIC • Need for Achievement

-.109

• Risk Propensity

-.138

CEO’S DEMOGRAPHIC CHARACTERISTICS • Tenure in the position

-.097

-.255 +

-.127

-.107

-.405 ***

-.106

-.075

-.086

-.171

.214 +

-.091

.427 **

.385 **

.192 +

.174

• Education

.067

-.126

.352 **

-.06

.071

-.035

TMT’s CHARACTERISTICS • Education

.256 +

.120

-.020

-.019

.038

.260 +

.47 ***

.429 **

.170

.342 *

.646 ***

.023

R2

.392

.387

.269

.247

.432

.232

Adjusted R2

.300

.295

.159

.134

.347

.11

4.20 **

2.45 *

2.18 *

5.08 ***

• Competitive Aggressiveness

4.30 ***

F • p < .10 a

MODEL 1 : COMPREHENSIVENESS/ RATIONALITY

* p < .05

** p < .01

.055

*** p < .001

Values Shown in the Regression Models are the Standardised Regression Coefficients. N=70

35

1.94 +

Appendix Operationalization and Reliability of Strategic Decision Process Characteristics SD MAKING PROCESS DIMENSIONS 1. RATIONALITY / COMPREHENSIVENES S

OPERATIONALIZATION

2.

FORMALISED RULES

This construct is one of the three factors extracted from a factor analysis investigation involving seventeen items measuring the degree of formalization/standardisation of the process. This specific factor variable incorporates seven items and measures the degree of rule formalization during the making of the SD. Sample items include: The degree to which there exists a written procedure guiding the process, (2) existence of a formal procedure to identify alternative ways of action, (3) formal screening procedures, (4) formal documents guiding the final decision, (5) predetermined criteria for SD evaluation. The measurement scale ranges from ‘1’ absolutely false to ‘7’ absolutely true.

3.

COORDINATION DEVICES

This factor variable measures the existence of a number of co-ordination devices during the decision. Such devices may include ‘1’ specially formed task forces ‘2’ specially formed interdepartmental committees, ‘3’ specially formed liaison devices.

4.

HIERARCHICAL This additive variable measures the extent of vertical decentralisation of the decision-making DECENTRALISATION during all the phases of the process. It is based on the total amount of participation of various

This construct is based on Fredrickson’s (1984) Rationality/comprehensiveness dimension. Five stages 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 these stages Fredrickson’s eight rationality elements are measured on five-point Likert-type scales (i.e. extend of scheduled meetings, assignment of primary responsibility, information seeking activities, systematic use of external sources, employees involved, use of specialised consultants, years of historical data review, and functional expertise of people involved). The rationality elements for each stage are summed to create five additive variables, each representing the rationality/comprehensiveness dimension of the respective stage. Summation of these five variables results in an overall measure of rationality-comprehensiveness of the process.

hierarchical levels and departments in each of the previously mentioned five phases of the process. 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-type scale, anchored with ‘1’ no involvement at this stage to ‘5’ active involvement and influence. By adding 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 five variables resulted in an overall measure of hierarchical decentralisation. 5.

LATERAL COMMUNICATION

6. POLITICISATIO N

Lateral communication was measured in a similar way to hierarchical decentralisation, except from that it measures the degree of balanced participation of all major departments in the adopted five stages of the process. The major departments include: finance-accounting, production, marketing-sales, personnel, and purchasing department. This variable results from the addition of four seven-point Likert-type scales measuring the extent of coalition formation, the degree of negotiation taken place among major participants, the degree of external resistance encountered and finally the degree of process interruptions experienced. Scales range from ‘1’ absolutely false to ‘7’ absolutely true.

36

37