Chapter 12: Strategic Leadership 389Top Management Teams, Firm Performance, and Strategic Change
The job of top-level managers is complex and requires a broad knowledge of the firm’s
internal organization (see Chapter 3) as well as the three key parts of its external
environment—the general, industry, and competitor environments (see Chapter 2).
Therefore, firms try to form a top management team with the knowledge and expertise
needed to operate the internal organization and who can deal with the firm’s stakehold-
ers as well as its competitors.^27 Firms also need to structure the top management team
in a way to best utilize the members’ expertise (e.g., create structural interdependence
to make the best decisions).^28 To have these characteristics normally requires a hetero-
geneous top management team. A heterogeneous top management team is composed
of individuals with different functional backgrounds, experience, and education.
Increasingly, having international experience is a critical aspect of the heterogeneity that
is desirable in top management teams, given the globalized nature of the markets in
which most firms now compete.^29
Research evidence indicates that members of a heterogeneous top management team
benefit from discussing their different perspectives.^30 In many cases, these discussions,
and the debates they often engender, increase the quality of the team’s decisions, espe-
cially when a synthesis emerges within the team after evaluating different perspectives.^31
In effect, top management team members learn from each other and thereby develop a
better decision.^32 In turn, higher-quality decisions lead to stronger firm performance.^33
In addition to their heterogeneity, the effectiveness of top management teams is also
influenced by the value gained when members of these teams work together cohesively.
In general, the more heterogeneous and larger the top management team, the more dif-
ficult it is for the team to cohesively implement strategies effectively.^34 Noteworthy is
the finding that communication difficulties among top-level managers with different
backgrounds and cognitive skills can negatively affect strategy implementation efforts.^35
As a result, a group of top executives with diverse backgrounds may inhibit the process
of decision making if it is not effectively managed. In these cases, top management teams
may fail to comprehensively examine threats and opportunities, leading to suboptimal
decisions. Thus, the CEO must attempt to achieve behavioral integration among the team
members.^36
Having members with substantive expertise in the firm’s core businesses is also
important to a top management team’s effectiveness.^37 In a high-technology industry,
for example, it may be critical for a firm’s top management team members to have R&D
expertise, particularly when growth strategies are being implemented. However, their
eventual effect on decisions depends not only on their expertise and the way the team
is managed but also on the context in which they make the decisions (the governance
structure, incentive compensation, etc.).^38
The characteristics of top management teams, and even the personalities of the CEO
and other team members, are related to innovation and strategic change.^39 For example,
more heterogeneous top management teams are positively associated with innovation
and strategic change, perhaps in part because heterogeneity may influence the team, or
at least some of its members, to think more creatively when making decisions and taking
actions.^40
Therefore, firms that could benefit by changing their strategies are more likely to
make those changes if they have top management teams with diverse backgrounds and
expertise. In this regard, evidence suggests that when a new CEO is hired from outside
the industry, the probability of strategic change is greater than if the new CEO is from
inside the firm or inside the industry.^41 Although hiring a new CEO from outside the
industry adds diversity to the team, such a change can affect the firm’s relationships
with important stakeholders, especially the customers and employees.^42 Consistent with
A heterogeneous top
management team is
composed of individuals
with different functional
backgrounds, experience,
and education.