Hambrick and Mason (84) suggests that if the concept of

X Congreso Anual de la Academia de Ciencias Administrativas AC (ACACIA)

Título del Trabajo: Moderating Effect of the Environment over the Relationship between

Top Management Team Strategic Consensus and Firm Performance in Mexican Companies

Tema: Administración Estratégica

Dra. Claudia Ramos Garza

Profesora Asociada

Escuela de Graduados en Administración y Dirección de Empresas (EGADE)

ITESM

Campus Monterrey

Ave. Fundadores y Rufino Tamayo

66269 San Pedro Garza García, N.L. México

Teléfono: (5281) 86256149

Fax: (5281) 86256098 cramos@itesm.mx

San Luís Potosí, S.L.P., México, del 2 al 5 de mayo del 2006

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies

Efecto moderador del Ambiente sobre la relación entre el Consenso Estratégico del Equipo de

Alta Dirección y el Desempeño de Empresas Mexicanas

Resumen

En las últimas dos décadas se ha intensificado el interés en los ejecutivos pertenecientes al equipo de alta dirección (EAD) de una organización. Este interés se acrecentó a partir del trabajo llevado a cabo por Hambrick y Mason

(1984). Esta línea de investigación enfatiza la importancia que tienen los EAD para el éxito de las organizaciones. Este estudio revela un claro reto para los investigadores, si se desea entender mejor las relaciones entre las características de los EAD y el desempeño de la empresa, es necesario tomar en cuenta el ambiente que éstas enfrentan. Con el fin de estudiar inconsistencias presentadas en la literatura, este trabajo propone que la complejidad ambiental modera la relación que existe entre el consenso estratégico del EAD y el desempeño de la empresa.

Los resultados de la hipótesis 1 revelan que efectivamente la complejidad ambiental modera la relación entre consenso estratégico y el desempeño de la empresa, medido éste en términos de ROI (retorno sobre la inversión). La hipótesis 2, contrario a lo que se esperaba, sugiere que bajos niveles de consenso estratégico se asocian con altos niveles de desempeño en ambientes simples más que en ambientes complejos. Asimismo, altos niveles de consenso estratégico se asocian con altos niveles de desempeño en ambientes complejos.

Categoría: Académico

1


Moderating Effect of the Environment over the Relationships between Top Management

Team Strategic Consensus and Firm Performance in Mexican Companies

Abstract

In the last two decades there has been particular interest in members of the top management team (TMT) of an organization. This interest was triggered by the upper echelons theory set forth by Hambrick and Mason (1984). This line of research emphasizes the importance of TMTs for organizational success. This study reveals a clear challenge for researchers, to better understand the relationships between TMT characteristics and firm performance: it is necessary to consider the environment faced by the company. I set out to address the inconsistency of findings in previous TMT studies by proposing that environmental complexity moderate the relationship between TMT strategic consensus and firm performance.

Results with respect to hypothesis 1 revealed that environmental complexity moderates the relationship between TMT strategic consensus and firm performance when measured by ROI (return on investments). Hypothesis 2, contrary to what was expected, suggests that lower levels of TMT strategic consensus are associated with higher levels of performance in simple

(noncomplex) environments more than in complex environments. Furthermore, higher levels of TMT strategic consensus are associated with higher levels of firm performance in complex environments.

Categoría: Académico

2


Introduction, Theory and Proposed Model

Top Management Teams: An Introduction

There has been a long tradition of research on groups and teams at all levels of the organization, in a wide variety of fields. Specifically, in the last two decades there has been particular interest in the members of the top management team (TMT) of an organization and

Latin American countries are not the exception. This interest was triggered by the upper echelons theory set forth by Hambrick and Mason (1984). This line of research emphasizes the importance of top management teams for organizational success in the modern economy.

Teams, formed by managerial elites, are considered as one of the most important topics in this line of research. Mintzberg (1979, p. 24) defined these managerial elites as “those teams formed by top executives who have the overall responsibility for the organization”. Despite this interest on top management teams, some authors (e.g., Pettigrew, 1992) still think that most social science researchers have neglected this line of inquiry. Hambrick and Mason (1984) argued that both strategic choices and organizational performance are associated with characteristics of the upper echelons (top managers) in a firm.

Top management team research has evolved during the years, and three research streams can be identified (e.g., Finkelstein & Hambrick, 1996; Keck, 1997). The streams are the following: (1) TMT composition (i.e., diversity), (2) TMT strategic consensus, and (3) TMT size. The purpose of this study is to further study the TMT strategic consensus research stream. This line of research has studied the relationship between TMT strategic consensus and firm performance. Following Knight et al. (1999, p. 446) strategic consensus is defined as

“the degree to which individual mental models of strategy overlap”. A question that remains unanswered: Does top management team need to have strategic consensus in order for the firm to perform better?

Research has not found a consistent relationship between consensus in TMT and firm performance. While some have found a positive relationship (e.g., Dess, 1987; Iaquinto &

Fredrickson, 1997), others have not reached the same results (e.g., Bourgeois, 1985; Simons,

1995). Perhaps the context in which the team operates is relevant. While consensus might be useful in stable environments this might not be the case for firms that face complex and dynamic environments (Priem, 1990). In today’s world, TMTs need flexibility to cope with the complexity and dynamism of the environment. Tushman, Newman and Romanelli (1986) argued that inaction in the face of environmental shifts is a certain recipe for failure. If firms

3

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies want to be successful, decision makers must not establish a static state of mind but must constantly search for new ways of doing business.

In sum, researchers have found contradictory findings in the relationship between TMT strategic consensus and firm performance. This study suggests that these contradictory findings may be due to the fact that some researchers have neglected the context in which top management teams operate. This study proposes that the environment may be moderating the relationship between TMT strategic consensus and the performance of the firm. The fundamental research question that this study attempts to answer is the following: Does the environment moderate the relationships between TMT strategic consensus and the performance of the firm? To answer this question the use of a contingency approach is proposed, considering the moderating effect of the environment over this relationship. A moderator variable is by nature a contingent variable. The contingency approach suggests that key strategic requirements may vary depending upon environmental conditions (Prescott,

1986). Support can be found for contingency models based on the environment (Shepard and

Hougland, 1978).

Dess and Beard (1984) identified three environmental dimensions that can have an impact on the operations of a company: (1) environmental munificence

that refers to the environment’s capacity to provide resources, which support organizations; (2) environmental complexity

defined by Child (1972, p. 3) as “the heterogeneity and range of environmental activities that are relevant to an organization’s operations”; and (3) environmental dynamism that refers to the rate of change, absence of pattern and unpredictability of the environment.

Environmental dynamism is the dimension most widely studied until now. Rajagopalan,

Rasheed & Datta (1993) urged researchers to investigate other environmental dimensions besides dynamism. The present study will further analyze the relationships between TMT strategic consensus and firm performance considering the complexity of the environment in which TMTs operate. This study will analyze the following. First, the TMT strategic consensus literature is reviewed. The purpose of this is to present the contradictory findings between TMT strategic consensus and the firm’s performance. Also included are the proposed hypotheses.

Second, the proposed model is presented. Third, the description of the methodology used to conduct this research is described. Fourth, the results are examined. Finally, relevant findings and future research directions are discussed.

4


Top Management Team Strategic Consensus

This line of research investigates the relationship between TMT strategic consensus and firm performance (Bourgeois, 1980; Bowman & Ambrosini, 1997; Iaquinto & Fredrickson,

1997; Priem, 1990; Simons, 1995). As mentioned before, Knight, et al. (1999) define consensus as the degree to which individual mental models of strategy overlap. They use the term strategic consensus to represent the shared cognitions among team members. In a similar approach, Bowman and Ambrosini (1997) define consensus as the extent to which managers from a strategic business unit share similar perceptions of strategic priorities. They understand consensus as shared understanding. Bowman and Ambrosini’s focus is on what managers agree about. To Wooldridge and Floyd (1989) strong consensus has to do with having a high-shared understanding. Besides, they argued that commitment is also necessary.

For this study the definition proposed by Knight and colleagues is considered.

Research has not demonstrated a consistent relationship between consensus in TMT and firm performance (Wooldridge & Floyd, 1989). While some authors (e.g., Bowman &

Ambrosini, 1997; Bourgeois, 1980; Dess, 1987; West and Schwenk, 1996) have found a positive relationship between TMT consensus and organizational performance, others have not reached the same results (e.g., Bourgeois, 1985; Simons, 1995).

On one hand, Bourgeois (1980) found that while agreement on goals and means is associated positively with economic performance, agreement on means is significantly more important. Dess (1987) found that consensus on either objectives or methods are positively related to the firm’s performance. Bowman and Ambrosini (1997) examined the link between consensus of managerial perceptions of strategy and performance. They found a relationship between positive strategies and high performance. Iaquinto and Fredrickson (1997) investigated the determinants and consequences of TMT agreement. They found a positive relationship between TMT agreement about the comprehensiveness of the strategic decision process and organizational performance (ROA). Their theoretical basis to explain this relationship is uncertainty reduction theory. According to this view, as individuals gain knowledge about their organizations, the uncertainty is reduced, eliminating some of the potential stress associated with ambiguity, which may increase the effectiveness of managers and in turn firm performance.

On the other hand, other authors have not found this positive relationship. For example,

Bourgeois (1985) found that diversity in opinion (not consensus) within TMT on goals and

5

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies perceived environmental uncertainty was positively related to firm performance. More recently,

Simons (1995) found strong support for the relationship between TMT dissensus (opposite of consensus) and performance in the presence of debate.

So, while some researchers argue for high consensus, others do not. There have been contradictory findings regarding the consensus-performance relationship (Dess, 1987) probably due to the fact that researchers have not considered the effect of different contexts

(Murray, 1989; Pettigrew, 1992; Priem, 1990; Smith et al., 1994) in the adequate level of consensus needed by the TMT to make strategic decisions that lead to superior performance.

In his conceptual paper, Priem (1990) propose the level of environmental dynamism as a moderator of the consensus-performance relationship. Specifically, Priem proposed that heterogeneous teams with low consensus facing high environmental dynamism lead to high performance.

According to Tushman et al. (1986) an adequate fit of external opportunity, company strategy, and internal structure is a hallmark of successful companies. They further point out that the real test of executive leadership is maintaining this alignment in the face of changing competitive conditions. The TMT must recognize external threats and opportunities and take the necessary steps to deal with them rapidly. Inaction in the face of environmental shifts is a certain recipe for failure (Tushman et al., 1986). If they want to be successful, decision makers must not establish a static state of mind but must constantly search for new ways of doing business.

In the same line, Bourgeois and Eisenhardt (1988) argue that attempting to build consensus may be hazardous if the firm is facing a high-velocity, high-tech environment, due to the time lags involved in consensus-building processes. Others (West and Schwenk, 1996) have hypothesized that relationships among top managers’ goals consensus, means consensus, demographic homogeneity and firm performance would be positive and stronger in stable industry environment than in a dynamic one. So there may be an advantage in having lack of consensus in rapid changing environments to avoid problems of routine thinking and groupthink. As mentioned before, there is some empirical evidence (e.g., Bourgeois, 1985;

Simons, 1995) that supports that the lack of consensus can lead to higher firm performance.

In sum, it is concluded that flexibility in complex environments is key to success.

Inaction in the face of environmental changes is a certain recipe for failure (Tushman et al.,

1986). While consensus might be useful in simple environments this might not be the case for

6

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies firms that face complex environments. So in complex environments the strategic consensus needed will be less than the strategic consensus needed in simple (noncomplex) environments. Following Priem’s (1990) conceptual suggestion, about environmental dynamism moderating the consensus-performance relationship this study propose that environment complexity may as well moderate the relationship between TMT strategic consensus and the firm’s performance. Therefore, considering all the information previously mentioned, the following hypotheses are proposed:

H1: Environmental complexity moderates the relationship between

TMT strategic consensus and firm performance.

H2: Top management teams with lower levels of strategic consensus will be associated with higher levels of firm’s performance in complex environments rather than in simple

(noncomplex) environments.

A Proposed Model

The proposed model studies the moderating effect between TMT strategic consensus and firm performance. The model considers environmental complexity as the moderator variable, strategic consensus as the predictor (independent) variable, and firm performance as the criterion (dependent) variable.

First, environmental complexity as a moderator variable will be addressed. Pettigrew

(1992) argues that most prior research has been acontextual. In other words, some researchers have ignored the environment faced by the firm. Others (Haleblian & Finkelstein,

1993; Keck, 1997; Murray, 1989; Priem, 1990; West & Schwenk, 1996) have recognized the importance of the environment in the relationships between TMT strategic consensus and performance. They have conceptually proposed or empirically investigated environmental dynamism, one of the environmental dimensions identified by Dess and Beard (1984).

Rajagopalan et al. (1993) argue that most of the research has concentrated on environmental dynamism and suggests that research should include other dimensions (such as environmental complexity). In this study environmental complexity is used as a moderator variable. As mentioned before, environmental complexity refers to the heterogeneity and range

7

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies of environmental activities that are relevant to an organization’s operations (Child, 1972). It includes the number of elements and their interconnectedness (Dess & Beard, 1984).

According to Schwenk (1984), the degree of environmental complexity in a firm’s operating environment directly impacts the amount and nature of information that has to be processed by decision makers. Daft, Sormunen and Parks (1988) found that in times of sector uncertainty,

CEOs reported greater frequency of scanning and greater use of personal information sources.

This is important because top management teams can be considered as the informationprocessing center of an organization in its relationship with its environment (Thompson, 1967).

Very little research has looked at the environment and no research has considered the moderating effect of environmental complexity on the relationship between TMT’s characteristics and firm performance.

Second, TMT strategic consensus as a predictor variable is included in the model. As mentioned before, TMT strategic consensus is defined as the degree to which individual mental models of strategy overlap (Knight et al., 1999). In this study consensus as shared understanding is considered; my focus is on what managers agree about.

Finally, firm performance will be used as the criterion variable in this study. For the strategy researcher, the option to move away from defining and measuring performance is not a viable one (Venkatraman & Ramanujam, 1986). Firm performance is used in studies of

TMTs because top management decisions are assumed to be of critical impact on firm success (e.g., Simons, Pelled & Smith, 1999; Smith et al., 1994). Efficiency is frequently used as measurement of performance in entrepreneurship research (Murphy, Trailer & Hill, 1996) and widely used for TMTs research. Firm performance will be defined as how well the organization is doing with regard to its efficiency. For efficiency, profit ratios such as ROI (e.g.,

Krishnan et al., 1997; Iaquinto & Fredrickson, 1997; Keck, 1997; Michel & Hambrick, 1992) are frequently used. Profit ratios measure the efficiency with which the company uses its resources

(Hill & Jones, 1998). The more efficient the company is, the greater its profitability will be.

8


Methodology

This section includes a description of the methodology used in this study to test the proposed model. First, a description of the sample of the study is included. Second, a detailed description of the procedure of the study is presented. Finally, a description of the analytic approach used to test the hypotheses is reviewed.

Sample of the Study

The unit of analysis is at the team level. Evidence suggests that certain characteristics, factors, and values shared among the TMT members of an organization are better predictors of organizational outcomes than the CEO considered as the only source of information (Bantel

& Jackson, 1989; Wiersema & Bantel, 1992). The study of an entire team has added advantage because it allows inquiry into the degree of strategic consensus among the team.

The top management teams (TMTs) of companies located in Monterrey, Mexico and its nearby areas were included in the sample. Monterrey is one of Mexico’s major cities and concentrates a large population of manufacturing industries. Companies of several manufacturing industries were included (e.g. plastics, construction, metalmecanic, automobile, capital goods, food, furniture). The CEO was asked to select the members of his/her top management team (e.g., Bantel & Jackson, 1989; Simons et al., 1999; Smith et al., 1994) considering the members responsible for the destiny of the organization and who actively participate in the strategic decision making process of the firm.

Some authors (Bantel & Jackson, 1989; Smith et al., 1994) found that the average TMT is approximately 5 to 6 members. Valid data of a team is considered if complete questionnaires from the CEO and two other team members are received (Iaquinto & Fredrickson, 1997;

Simons et al., 1999; West and Schwenk, 1996). Research using multiple questionnaires rather than archival data typically has low return rate.

Of the 443 companies initially targeted in the study, thirty-three were returned due to several reasons (e.g. wrong address, the company didn’t exist anymore). Due to the emphasis of the study, the TMTs of companies, only medium and large companies were included (315 and 95 respectively). In Mexico, a company is considered medium when it has from 101 to 500 employees and large when it has more than 500 employees.

In total, one hundred and eighteen usable questionnaires were collected. These 118 questionnaires accounted for complete data for 29 TMTs of 29 companies. This represents a response rate of 7.07%, considering that initially questionnaires were sent to a total of 443

9

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies companies and 33 of them were returned. Data on the nonrespondents was limited but based upon the examination of the listing there were no obvious differences in company size of the responding and nonresponding firms. The response rate was 8.42% for large companies (8 out of 95) and 6.66% for medium-sized companies (21 out of 315). Despite the low response rate, there had been other studies of TMTs with similar sample size such as Bowman and

Ambriosini (1997) with 32 TMTs, Dess (1987) with 19 TMTs, Eisenhardt, Kahwajy and

Bourgeois (1997) with 12 TMTs, Hambrick, Seung Cho and Chen (1996) with 32 TMTs, and

O’Reilley and Flatt (1989) with 40 TMTs to mention some of them. In sum, the whole sample considered a total of 29 TMTs (N = 29).

Procedure of the Study

Data collection

The questionnaire was sent to a total of 443 companies located in Monterrey and the nearby areas, which are included in the CAINTRA’s directory. A database was developed and all companies were coded with numbers that ensured respondents’ anonymity. The questionnaires were sent by mail to the CEOs with a cover letter that explained the nature of the study. Some of the companies in the directory included the company’s telephone number and/or CEO’s email. Those companies were called and/or send an email as a follow-up to urge them to participate in the study.

Data was collected using questionnaires that were completed by members of the top management team. Two questionnaires were developed (a long version that was answered by the CEO and a shorter version that was answered by the members of the TMT). The purpose of the questionnaire answered by the CEO was threefold. First, data from the company was included as to describe, in general terms, the sample of the companies included in the study.

Second, the CEO was asked to identify the number of the executives that compose the top management team of the company. Third, collect data to assess the variables included in the study such as strategic orientation (to assess TMT strategic consensus), the level of environmental complexity and the level of firm performance.

The CEO was asked to answer his/her questionnaire and to distribute the shorter versions of the questionnaires to the members of his/her team. The information asked to each

TMT member is its strategic orientation (to assess TMT strategic consensus). The members were asked to send their questionnaires independently and directly to the researcher as to assure their anonymity and confidentiality.

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Translation of the Questionnaires

The study was conducted in Monterrey, Mexico. Following a similar procedure used by

Hiller (1994), originally suggested by Brislin (1980) the questionnaires were translated from

English to Spanish and back to English. This procedure was followed so that all TMT members can complete the questionnaires in their native language. The translation process involved three translators. The process went as follows. First, the questionnaires were translated from

English to Spanish. The translated version of the questionnaire was discussed with an

Associate Professor at TEC with fluency in English with Spanish as its native language. To assure its English fluency, the professor chosen had obtained her Ph.D. from a foreign university (USA). Second, after the initial translation, the backtranslator backtranslated the

Spanish version back to English. The backtranslator had the same characteristics as the

Professor that helped in the translation from English to Spanish (in other words fluent in

Spanish with English as its native language). Third, after the backtranslation was completed the original English version was compared with the backtranslation and noted discrepancies.

Finally, those discrepancies were discussed with the backtranslator. The necessary changes were made and the Spanish version of the questionnaires was ready to be used.

Measurements

For all the variables included in the study (TMT strategic consensus, environmental complexity and firm performance) measurements already used by other authors were used.

Specifically, TMT strategic consensus was measured following Knight et al. (1999), environmental complexity was measured following Papadakis et al. (1998) and Calori, Johnson and Sarnin (1994), and firm performance was measured following Bowman and Ambriosini

(1997).

TMT strategic consensus, as mentioned before, is defined as the degree to which individual mental models of strategy overlap (Knight et al., 1999). Strategic consensus is a measurement of the similarity among TMT members’ interpretations about the firm’s strategic orientation. In essence, the measurement attempts to determine the degree to which the TMT shares a common mental model with regard to the current strategy of the organization. It was measured using forty-eight 5-point-Likert-type scale regarding firm strategy asked to each team member. Following Knight et al. forty-eight questions regarding the firm’s emphasis on costs, prices, risk, innovation, proactiveness, timing and speed of actions were included. To calculate the final variable the following steps were taken (Knight et al., 1999). First, within

11

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies each team, a standard deviation was calculated from the responses for each of the 48 items.

Next, these forty-eight standard deviations were summed within each team. Since the variable was named strategic consensus, which reflects agreement, the direction of the score had to be reversed by multiplying it by (-1). High scores implied consensus while low scores implied lack of consensus. The computation of the final variable is consistent with previous work such as

Bourgeois (1980) and Dess (1987). The reliability was computed for the 48 items using

Cronbach’s alphas (Cronbach, 1951). In order to calculate the reliability of the measurement the response of 118 TMT members of the 29 companies included in the sample was considered. The results obtained indicated an alpha of .8100. According to Hair, Anderson,

Tatham, and Black (1995, p. 641), a commonly used threshold value for acceptable reliability is 0.70.

Environmental complexity, as mentioned before, refers to the heterogeneity and range of environmental activities that are relevant to an organization’s operations (Child, 1972). It includes the number of elements and their interconnectedness (Dess & Beard, 1984). It was measured using four 5-point-Likert-type scale used by Papadakis et al. (1998) originally used by Miller and Friesen (1983) and five 5-point-Likert-type scale used by Calori et al. (1994). The instrument measured significant differences between the products/services offered (Papadakis et al., 1998), in relation to: (1) customer’s buying habits, (2) the nature of the competition, (3) market dynamism and (4) market uncertainty; and it also assess the scope of the company

(Calori et al., 1994), in relation to: (1) the scope of the company (including products, suppliers, clients, and industry segments), and (2) geographic scope of the company. To calculate the final variable (degree of environmental complexity) the following steps were taken. The responses of the 9 items were averaged. This average stands for the degree of environmental complexity faced by the company. To compute the reliability of environmental complexity the response of the CEOs of the 29 companies included in the sample was considered. The reliability for the 9 items using Cronbach’s alphas (Cronbach, 1951) was computed. The result obtained indicated an alpha of .7426. As mentioned before, a commonly used threshold value for acceptable reliability is 0.70 (Hair et al., 1995).

Firm performance, as mentioned before, refers to how well the organization is doing with regard to efficiency. It was assessed using efficiency the return on investment ratio.

Return on investment (ROI) is defined by Smith et al. (1994, p. 427) as net income divided by total stockholder equity. According to them, ROI indicates the percentage of profit from each

12

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies dollar invested and allows investors to compare different investment opportunities or the same investment opportunity over time. According to Iaquinto and Fredrickson (1997), ROI is highly correlated with other performance measurements such as ROA and ROE. Several studies in

TMT literature have used this measurement (Smith et al., 1994).

It is useful to compare a company’s profitability against that of its major competitors in its industry (Hill & Jones, 1998). Such a comparison tells the company where it stands versus its competitors. To overcome the problems of gathering performance data across industry contexts a subjective measurement of firm performance was used. Following Bowman and

Ambrosini (1997), it was measured using a one 5-point-Likert-type scale measuring efficiency.

The CEO was asked to rate their firm’s profitability (ROI) relatively to other firms in their industry. The scale ranged from 1 (strongly disagree) to 5 (strongly agree).

Analytic Approach

This section describes the statistical procedures used to test the hypotheses included in this study. Moderated regression analysis (MRA) has been identified as one of the two basic methods for identifying the presence of moderator variables (Sharma, Durand & Gur-Arie,

1981). The other method identified by Sharma et al. is the subgroup analysis. Moderate regression analysis is differentiated from subgroup analysis because it is an analytic approach which maintains the integrity of a sample yet provides a basis for controlling the effects of a moderator variable.

Moderated regression analysis has been used before to determine the moderating effects of the environment in relationships such as strategy and performance (Prescott, 1986) and decision-making and performance (Goll & Rasheed, 1997). MRA was used to test the hypotheses included in this study.

Hypothesis 1 involves testing for the moderating effect of environmental complexity on the relationship between TMT strategic consensus and firm performance. Firm performance was measured as efficiency utilizing ROI. MRA was used to test this hypothesis. In the first step the dependent variable was regressed on the two independent variables TMT strategic consensus (X1) and environmental complexity (X2). In the second step the product term composed by TMT strategic consensus and environmental complexity (X1X2) was added to the equation. H1 was supported if the interaction effect was significant. In addition, the proportion of variance accounted by X1 and X2, taken together at the second step, was noted by subtracting the obtained

R

2 for the second step from the

R

2 obtained in the first step of the

13


MRA. The increment was tested for significance at a .05 alpha level. A significant increment in

R

2 indicated an interaction between TMT strategic consensus and environmental complexity on firm performance.

Hypothesis 2, proposed that teams with lower levels of TMT strategic consensus will be associated with higher levels of firm’s performance in complex rather than in simple

(noncomplex) environments. So, if indeed there is a significant interaction in H1, it will be analyzed using a median split analysis on environmental complexity and TMT strategic consensus to test H2.

Results

The results of the hypotheses examined in this study will be reported in this section.

First, a description of the measurements used in this study. Specifically, this section provides descriptives on the computation of scales as well as a review of the reliability of the measurements. Second, a description of the results obtained when testing the hypotheses is reviewed.

Test of Hypotheses

Hypothesis 1 stated that environmental complexity moderates the relationship between

TMT strategic consensus and firm performance. The statistical results of the variables included in this section are shown in Table 1. Moderated regression analysis (MRA) was used to test the hypothesis. The result of the MRA reported an R 2 = .345, p = .001. As shown in Table 2, these results indicate that indeed environmental complexity moderates the relationship between TMT strategic consensus and performance. Thus, providing support for H1.

Hypothesis 2 stated that top management teams with lower levels of TMT strategic consensus will be associated with higher levels of firm’s performance in complex environments rather than in simple (noncomplex) environments. To interpret the significant effect found in

H1, a median split analysis on environmental complexity and TMT strategic consensus was performed and the means in each category were graphed (See Table 3).

______________________________

Insert Tables 1, 2 & 3 about here

______________________________

Despite the significant interaction found in H1, the results were contrary to what was expected. This subsequent analysis showed that companies with lower levels of TMT strategic

14

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies consensus are associated with higher levels of firm’s performance in simple noncomplex environments (ROI = 4.33) more than in complex environments (ROI = 3.88). Furthermore, the analysis showed that companies with higher levels of TMT strategic consensus are associated with higher levels of firm’s performance in complex environments (ROI = 4.11) more than in simple noncomplex environments (ROI = 3.67). Thus, the results do not provide support for

H2.

Discussion and Future Research Directions

The results of the tested hypotheses included in this study will be discussed in this section. First, a summary of the relevant findings is included. Second, theoretical and practical implications of the study are discussed. Third, a description of the study limitations is included.

Fourth, directions for future research are described. Finally, the section ends with a summary of the conclusions.

Relevant Study Findings

In the last two decades, there has been particular interest in the members of top management team (TMT) of an organization. This interest was triggered by the upper echelons theory set forth by Hambrick and Mason (1984). This line of research emphasizes the importance of TMTs for organizational success in the modern economy. This study reveals a clear challenge for researchers. If we want to better understand the relationships between TMT strategic consensus and firm performance it is necessary to consider the dimensions of the environment faced by the company. To address inconsistent findings in previous TMT studies, environmental complexity was proposed to moderate the relationship between TMT strategic consensus and firm performance.

The results of H1 indicate that environmental complexity moderates the relationship between TMT strategic consensus and performance (ROI). The results for H2 were contrary to what was expected. Interestingly, the analysis showed that companies with lower levels of strategic consensus are associated with higher levels of firm’s performance in simple noncomplex environments. Furthermore, companies with higher levels of strategic consensus are associated with higher levels of firm’s performance in complex environments.

Results indicate that in low complex environments, companies with low strategic consensus among their TMT members perform better than teams having high strategic consensus. For this, there are some possible explanations. The first explanation can be that in

15

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies low complex environments there is more time and opportunity for TMT members to disagree upon their strategic orientation because they probably have time to discuss different courses of action without jeopardizing their strategic position and consequently their performance.

Another possible explanation can simply be that in low complex environments there is no need to have strategic consensus, that consensus is needed only when the company faces high environmental complexity.

In contrast, in complex environments, where TMT members have time pressure to make decisions, they should probably be better off if they have a clear conceptual mental model of the strategic issues of the company in order to perform well. Since Bourgeois (1980) it has been suggested that agreement on goals and means (which is the rational decision sequence to formulate strategy) was important and was both associated with firm performance. The results suggest that this association is stronger in complex environments where TMT members need to clearly define the actions and strategies needed to survive their environment. Iaquinto and Fredrickson (1997) found a positive relationship between TMT agreement about the comprehensiveness of the strategic decision process and organizational performance. In other words, it appears that order and a clear direction are needed to face complex environments so, a common understanding among team members might be critical for the company’s success.

Discussion of the Theoretical and Practical Implications

The results of this study have implications for both academicians and practitioners. The findings begin to answer meaningful question such as: What level of strategic consensus is needed in order for a firm to perform better?

Implications for Academicians

Most prior research has focused on the direct relation between and team strategic consensus and performance without considering the context in which the relationship takes place. The principal contribution of this study is the inclusion of the moderating effect of the environment on this relationship. Addressing the debate in the literature about prior inconsistent findings of these relationships and the lack of research considering the context in which companies operate, environmental complexity was proposed to moderate the relationship between TMT strategic consensus and firm performance. Given the results of this study, researchers should redefine future studies in such a way that they recognize the importance of the environment faced by top managers. It has been urged by Rajagopalan et al.

16


(1993) to include environmental dimensions such as dynamism, munificence and complexity.

The latter was included in this study.

Addressing several shortcomings of prior research, this study also contributes in several other relevant ways. First, a field study instead of archival data provided richer and more realistic information of the TMT. There has been criticism because many prior studies have used archival data (e.g. Carpenter, 2002; Carpenter & Fredrickson, 2001; Iaquinto &

Fredrickson 1997; Keck, 1997; Keck & Tushman, 1993). For this study, questionnaires were sent to the CEO and members of the TMT of manufacturing companies in an attempt to capture the richness of the information coming directly from the subjects under study.

Second, multiple questionnaires for the team are used. There has been criticism when the CEO is the only source of information. With information of several members of the team a better measurement of the team’s characteristics can be developed. Moreover, the CEO of each company instead of the researcher identified which members compose the TMT. There has been criticism because in many studies researchers determined who the team’s members are. Using this procedure assured that the members included in the team were those with the responsibility for the overall direction of the company and are the ones that indeed are actively involved in the strategic decision making process of the company.

Implications for Managers

Managers should be aware that the degree of environmental complexity faced by the company can determine the adequate degree of strategic consensus that they might seek in order to perform well. Specifically, they should consider the following. Managers should be aware of the importance on having strategic consensus in complex environments. Probably, the complexity faced by the company forces team members to have a shared mental model of the reality they are facing in order to take effective and timely actions that will lead them to perform better. In contrast, perhaps managers in low complex environments need to continuously seek new and more innovative ways of doing business, always seeking to take advantage of opportunities thus the lack of strategic consensus. Alternatively, another possible explanation is that in low complex environments there is no need to have strategic consensus.

Limitations of the Study

As in all studies, this one has to be interpreted bearing in mind some limitations. First, one limitation is the sample size. In all, 118 usable questionnaires that corresponded to a total of 29 top management teams were collected. This represents a response rate of 7.07%. Data

17

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies on the nonrespondents was limited but based upon the examination of the listing it was concluded that there were no obvious differences in company size of the responding and nonresponding firms. The response rate was of 8.42% for large companies and 6.66% for medium-sized companies. Despite the efforts, the response rate among the contacted companies was low. Other studies of TMTs also had low response rates. For example, West and Schwenk (1996) in a similar study where they had an initial mailing list of 600 companies and needed as well three respondents for each company, they had an actual response rate of

10.83%. The sample size of this study necessarily forces the exercise of caution in interpreting the results. Although it is unlikely that sample selection bias drove these results, they should be replicated for more confident generalizations.

Second, the research design is cross sectional. Causal inferences cannot be made.

Regardless of this, the present study does provide insight into the relationship between TMT strategic consensus and firm performance. Furthermore, when simultaneously consensus and performance data is gathered, the time lag between planning and execution is ignored. Current performance may be the result of strategic decisions made in the past. It is suggested that longitudinal research should also be done in addition to cross sectional analysis to further explore the possibility of obtaining different results across time.

Finally, another possible limitation is that for the measurements of environmental complexity and performance, the study relied on a single respondent from each firm, the CEO of the company. However, the CEO, being the ultimate responsible for the company, he/she is the most appropriate person to answer these questions. Furthermore, performance was selfreported. However, it has been found that self-reported performance and actual performance are highly correlated (Bowman & Ambrosini, 1997).

Future Research Directions

This study proposes environmental complexity as the moderator variable between the relationship between TMT strategic consensus and firm performance. Future research should focus on, how and in which circumstances; different top management team members’ characteristics (such as team diversity and size) affect different dimensions of organizational performance of a company considering different environmental dimensions. It has been suggested by some authors (Dess & Beard, 1984; Rajagopalan et al., 1993) the importance of studying diverse environmental dimensions. Future research should include other environmental dimensions such as dynamism, uncertainty and munificence as potential

18

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies moderators of the relationship between TMT characteristic and firm performance. Also, addressing the limitations pointed out earlier is also a worthwhile endeavor for future research.

Longitudinal studies should be done in addition to the cross sectional studies to further explore the possibility of obtaining different results across time. Finally, researchers should try to replicate these results using a bigger sample to see the impact, if any, of TMT size on firm performance. Furthermore, the sample can include other type of businesses besides manufacturing such as the service industry and other company sizes besides large and medium-sized companies such as small companies.

Conclusions

The main purpose of the study is to contribute to the literature of Strategic Management.

Hambrick (1987) argued that assembling a capable top management team (TMT) is a crucial aspect for the field of Strategic Management. Searching for the proper size, blend of backgrounds, knowledge, experience, and level of strategic consensus should help ensure an effective strategy formulation and implementation. Following the strategic choice perspective set forth by Child (1972), this study suggests that top management team strategic consensus plays a significant role in the degree or level of performance of the company when considering the complexity faced by the company. While important to consider other dimensions of TMT members (e.g. diversity, size) as pointed out in future research directions, TMT strategic consensus continues to play an important role in research on top management teams.

This study proposed to analyze the moderating effect of environmental complexity over the relationship between TMT strategic consensus and firm performance. Environmental complexity, one of the three dimensions of the environment identified by Dess and Beard

(1984), was used as the moderator variable. Firm performance using ROI was included as the dependent variable. The results of this study indicate that indeed environmental complexity moderates the relationships between TMT strategic consensus and firm performance in

Mexican companies. The analysis showed that companies with lower levels of strategic consensus are associated with higher levels of firm’s performance in simple noncomplex environments and that companies with higher levels of strategic consensus are associated with higher levels of firm’s performance in complex environments.

Relevant for Latin American countries is to have research on their companies on how business is conducted. This study was made with a sample of Mexican companies. Hopefully these results can help Latina American managers and specifically Mexican managers to better

19

Moderating Effect of the Environment over the Relationship between Top Management Team Strategic Consensus and Firm Performance in Mexican Companies understand top management teams’ dynamics and help answer the following question: In which circumstances does a top management team need to have strategic consensus in order for the firm to perform better?

In sum, top management teams will undoubtedly continue to be a topic of interest for both academicians and practicing managers interested in the field of Strategic Management.

Ultimately, the responsibility for crucial strategic decisions rests with them and so does the future and survival of the company.

20


Table 1. Means, Standard Deviations, Correlations, and Reliabilities a

________________________________________________________________________

Scales Means s.d. 1 2 3

________________________________________________________________________

1. TMT strategic consensus (SC)

2. Environmental complexity (EC)

3. Performance (ROI) d b c

-38.59 6.26 (.81)

3.32 0.62

4.00 1.00

-.124 (.74)

-.075 -.013 -

________________________________________________________________________

(N = 29) a

Coefficient alpha reliabilities estimates are shown on the diagonal; no estimates are given for one-item b measurements. c

Range from 1 to 5 (measurement is the sum of all 48 s.d. multiplied by -1). d

Range from 1 to 5.

Range from 1 to 5.

* p < 0.05, **p < 0.01

Table 2. Test of Hypothesis 1.

H1 (Performance measured by ROI), N = 29

_______________________________________________________________________________________

Variables

Step 1 b SE t. p R

2

_______________________________________________________________________________________

(Constant)

TMT strategic consensus (SC)

3.638 1.515

-.012 .031 -.078

Environmental complexity (EC) -.036 .316 -.022

2.400 .024

-.397

-.114

.694

.910 .006

_______________________________________________________________________________________

Step 2

(Constant) -13.492 4.923

TMT strategic consensus (SC ) -.433 .123 -2.779

Environmental complexity (EC) 5.633 1.597 3.513

-2.741

-3.618

3.527

.011

.001

.002

SC x EC

∆ in R 2

Total R 2

.143 .040 4.744 3.598 .001 .345**

.339

.345**

_______________________________________________________________________________________

* p < .05, ** p < .01

21


Table 3. Test of Hypothesis 2.

Low

Consensus

High

Complexity

Low High

(0,0), N = 6 (0,1), N = 8

ROI = 4.33

(1,0), N = 6

ROI = 3.88

(1,1), N = 9

ROI = 3.67 ROI = 4.11

4.4

4.2

4

3.8

3.6

3.4

3.2

Low Strategic

Consensus

High Strategic

Consensus

Low High

Complexity

22


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