Top Management Team Dynamics as a Microfoundation of Adaptive
Capability?
This paper examines the effects of subsidiary TMT composition as a microfoundation
of firm strategic adaptive capability and performance in a transition economy. Using a unique
survey dataset of 107 MNC subsidiary firms in China, the paper investigates a path between
TMT functional diversity and firm performance through increased adaptive capability.
Unexpectedly, the results show that a functionally-diversity has no positive effect, however
when functionally-diverse TMTs engage in debate, there is a significant positive impact on
adaptive capability, and through this, performance. Our findings suggest that, as long as
TMTs engage in debate, the benefits of functional diversity outweigh the potential costs of
conflict and information-withholding leading to a positive and significant impact on adaptive
capability. Conversely, without debate, the negative impact of functional diversity
overshadows the benefits, and diversity does not contribute to adaptive capability or
performance.
Track: Strategy
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Top Management Team Dynamics as a Microfoundation of Adaptive Capability?
The capacity to transform internal organizational resources in response to
environmental changes is consistently linked to sustained competitive advantage and
therefore fundamental to management research (Hoopes & Madsen, 2008; Teece, Pisano, &
Shuen, 1997). To face this challenge firms must develop dynamic capabilities to reconfigure
and adapt their existing resources (Teece & Pisano, 1998; Teece et al., 1997). Adaptive
capability, a core dynamic managerial capability, reflects an organization’s capacity to
reconfigure resources and adapt processes in an efficient and effective response to a changing
environment (Gibson & Birkinshaw, 2004). It comprises the capacity to search for new
opportunities, process relevant external and internal information and swiftly adapt
organizational structure and processes (Oktemgil & Greenley, 1997; Staber & Sydow, 2002).
Despite the recognised potential for adaptive capability to facilitate organizational success,
most research in this area has not responded to recent calls to empirically investigate the
mechanisms and circumstances conducive to its development (Zhou & Li, 2010). This
parallels a significant research gap relating to the foundations of capabilities more generally
(Felin, Foss, Heimeriks, & Madsen, 2012), which the current paper attempts to address by
investigating microfoundations of adaptive capability (Felin & Foss, 2009).
Across the strategy, organisational behaviour and human resource management
literature, there is increased interest in the microfoundations of firm-level constructs in
general (Felin & Foss, 2005; Felin & Hesterly, 2007). This is often articulated as the drive to
better understand the individual and unit level constructs (Felin & Hesterly, 2007) and
organizational processes and interactions (Teece, 2007), that comprise and cause higher-level
strategic elements, such as capabilities (Abell, Felin, & Foss, 2008; Foss, 2011).
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A promising, yet underexplored, perspective on the micro-foundations of capability
development is derived from upper echelons theory, which suggests that top management
team (TMT) characteristics influence, not only the overall strategic direction of organisations,
but also decisions about the allocation of resources towards strategy implementation (Augier
& Teece, 2009; Hambrick, 2007; Hambrick & Mason, 1984). TMTs make decisions based
on member expertise and knowledge, and consistent with their experience-based perspectives
(Hambrick & Mason, 1984). As these factors are strongly influenced by member’s job-related
or demographic background (Smith, Smith, Olian, & Sims, 1994), it has been argued that
TMT composition is likely to directly affect decision-making and the development of
organizational capabilities (Buyl, Boone, & Matthyssens, 2011). Based on upper echelons
theory, we suggest that TMT diversity potentially plays a significant role in the development
of adaptive capability (Barney, 1991; Carpenter, Sanders, & Gregersen, 2001; Hitt, Bierman,
Shimizu, & Kochhar, 2000). Building on past work demonstrating the leveraging role of team
dynamics in realizing the benefit of diversity (Auh & Menguc, 2006; van Knippenberg, De
Dreu, & Homan, 2004), we further introduce debate processes as a moderator of functional
diversity’s influence. Therefore, an important second aim of this study is to investigate the
moderating effects of debate, defined as the questioning or challenging of others assumptions
and direct and open presentation of rival hypotheses or recommendations (Simons, Pelled, &
Smith, 1999), as a boundary condition that determines when diversity facilitates the
development of adaptive capability. We predict and investigate a mediated path between
TMT functional diversity, adaptive capability and firm performance, and specify debate as an
important boundary condition of this pathway.
This article is structured as follows: First, we describe the theoretical foundations
underpinning the influence of TMT diversity and debate as a micro-level basis for dynamic
capabilities, and adaptive capability in particular. We then develop our research model and
3
justify component hypotheses. Following this, we present our methodology and results and a
discussion of our findings incorporating theoretical and practical implications.
Theoretical Background
The resource-based view links heterogeneous firm resources and capabilities to
sustainable differences in firm performance (Sirmon & Hitt, 2003). Valuable, non-imitable,
rare and appropriable resources that are accumulated, combined and exploited create value
and confer competitive advantage. Capabilities are organisational processes that allow
resources to be deployed (Helfat & Winter, 2011) and dynamic capabilities, a special type of
capability, allow firms ‘to integrate, build, and reconfigure internal and external
competencies to address rapidly changing environments’ (Teece & Pisano, 1997, p. 516).
Dynamic capabilities, then, are higher-level processes of significant scale and scope
embedded in firms (Eisenhardt & Martin, 2000). Processes allowing acquisitions, alliances
and new product development are examples of dynamic capabilities, which allow firms to
alter the ways in which they earn their living (Helfat & Winter, 2011). Such major strategic
moves involve the reconfiguration and manipulation of the firm’s resources into new valuecreating activities. These strategic decision-making processes have been labeled managerial
adaptive capability, since they focus on managers’ resource reallocation decisions (Adner &
Helfat, 2003; Kor & Mesko, 2013; Ma, Yao, & Xi, 2009). Building adaptive capability
requires internal efforts and draws on internal firm-specific resources rather than market
acquisitions. This makes it unique and largely inimitable and therefore a potential source of
sustainable competitive advantage (Griffith & Harvey, 2001).
Dynamic capabilities are the focus of much previous theoretical and conceptual
discussion, but few empirical analyses have investigated the factors inside organizations that
lead to the development of dynamic capabilities (Macher & Mowery, 2009). In particular,
little research has detailed how individual and team characteristics affect the ability to
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develop or leverage dynamic capabilities (Adner and Helfat, 2006; MacCormack and Iansiti,
2009), despite growing interest in how this may occur and the potential contribution of
managerial skills and experience (Ambrosini and Bowman, 2009; Augier and Teece, 2009;
Rothaermel and Hess, 2007). A promising approach to integrating research on the impact of
managerial attributes and the development of dynamic managerial capabilities lies in the
study of capability microfoundation (Felin & Foss, 2006).
A microfoundations approach conceives capabilities as collective constructs, the
explanation of whose development requires consideration of lower-level factors.
Microfoundations of organizational capabilities therefore encompass their constituent
components, such as individuals and processes, and the interactions. In particular, the role of
individuals is crucial to understanding capabilities and their development (Felin and Hesterly,
2007). Substantial previous research has highlighted the importance of individuals to
organizational performance (Felin & Hesterly, 2007) and provides consistently support for
the important role of managerial cognition in individual, TMT and firm behavior (Gavetti,
2005; Naranjo-Gil, Hartmann, & Maas, 2008; Tripsas & Gavetti, 2000). Dynamic capabilities
generally, and adaptive capability specifically, are impacted by the firm’s environmental
turbulence, instability and uncertainty (Baum & Wally, 2003; Teece & Pisano, 1997), which
produce deficits in the information needed by managers to identify and understand cause-and
effect relationships (Carpenter & Fredrickson, 2001). In this context, individuals differing
perspectives, beliefs and interests affect their decision-related choices as does their human
capital (knowledge, skills and cognitive capacity) (Felin et al., 2012). The demographic and
occupational profiles of TMTs, particularly the extent to which these profiles reflect a
diversity of backgrounds and experiences, are therefore potentially related to capability
development and subsequent performance outcomes (Certo, Lester, Dalton, & Dalton, 2006;
Hambrick, Cho, & Chen, 1996).
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Upper echelons research and reviews of team diversity have differentiated between
two analytical perspectives, both of which have been applied to top management teams (van
Knippenberg et al., 2004; Williams & O'Reilly, 1998). The information/decision-making
perspective on diversity, argues that teams with representatives from different categorical
backgrounds potentially have access to a broader range of relevant knowledge than more
homogeneous groups (Williams & O'Reilly, 1998). Diverse teams are therefore better
positioned to analyse the implications of environmental changes as well as develop more
innovative responses, consequent to the integration of disparate knowledge (Ancona &
Caldwell, 1992b; Bantel & Jackson, 1989; DeDreu & West, 2001).
The alternative, social identity, perspective on diversity holds that differences and
similarities between team members provides a basis for the process of categorising
individuals into subgroups, represented on the basis of prototypical attributes that typify one
subgroup and differentiate it from others (Ashforth & Mael, 1989; Tajfel & Turner, 1986)
(Lau & Bruton, 2011). Building on the similarity-attraction paradigm and theory of
intergroup bias, the social identity perspective argues that members within a subgroup are
likely to share positive relationships characterised by trust and knowledge sharing, while
interaction across subgroups is typified by conflict and hostility (Tajfel, 1982; Williams &
O'Reilly, 1998). While TMT diversity might enhance capacity to sense opportunities because
of increased access to knowledge (Certo et al., 2006), it has been argued that the direct effect
of TMT diversity may be mixed because of the potential for costs associated with conflict
and associated tendency to withhold information (Williams & O'Reilly, 1998). This situation,
in which diversity may potentially generate positive, negative and no effect has been termed a
‘dilemmatic structure’ (Gebert, Boerner, & Kearney, 2006). This ‘dilemmatic structure’
suggests the benefit of examining moderating variables that enhance the likelihood of
information sharing and utilisation and minimise the negative impact of diversity. The
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categorisation elaboration model of diversity (van Knippenberg et al., 2004), which integrates
both information/decision-making and social identity perspectives, suggests that the positive
effects of diversity are contingent on team processes that engender knowledge elaboration
and integration.
The following section builds on the categorisation elaboration model of diversity to
argue a positive effect of TMT functional diversity, defined as variety in functional
composition (Harrison & Klein, 2007), on adaptive capability, and, through this,
performance. We argue a moderating role for debate, defined as open discussion of
differences related to the team’s work (Simons et al., 1999), in the path between diversity and
adaptive capability, and build our rationale for a moderated mediated model.
Model Development and Hypotheses
The information/decision-making perspective suggests that TMT functional diversity
provides access to increased breadth of knowledge and skills, and a wider external network
on which team members can draw (Williams & O'Reilly, 1998) as well as cross-fertilisation
and the generation of novel connections (Fay, Borrill, Amir, Haward, & West, 2006; Jehn,
Northcraft, & Neale, 1999). These knowledge-related advantages facilitate the development
of a thorough understanding and assessment of environmental pressure and market
opportunity for change, as well as the development of more informed and innovative
responses to market opportunities or challenges (Caligiuri, Lazarova, & Zehetbauer, 2004;
Punnett & Clemens, 1999).
Upper echelons research has consistently posited a connection between TMT
compositional diversity, including functional diversity, and the adoption of a more ‘broaderminded’ approach to opportunities and complex problems (Dahlin, Weingart, & Hinds, 2005;
Gong, 2006), based on the collective resources of TMT members (Carpenter, Geletkanycz, &
Sanders, 2004), and consequent development of a more comprehensive portfolio of responses
7
to environmental pressures (Punnett & Clemens, 1999). By enabling a deep understanding of
customers, competitors and technology, a functionally-diverse TMTs wide-ranging
information sources allow it to assess its position, determine appropriate strategies and
initiate quick responses (Qian, Cao, & Takeuchi, 2013).
As well as their own knowledge assets, functionally-diverse TMTs have access to
more extensive external network ties (Ancona & Caldwell, 1992a; Lee & Park, 2006). These
ties represent a rich source of information, which further increases the depth and breadth of
knowledge available to inform decisions and facilitate the development and evaluation of
alternative solutions (Finkelstein & Hambrick, 1996; Naranjo-Gil et al., 2008). This capacity
to identify and acquire external knowledge and to analyse and interpret externally-sourced
information from a diversity of perspectives (Dahlin et al., 2005), provides greater
opportunity to identify pressures towards change in the external environment, as well as
opportunities (Murray, 1989). When environmental conditions change rapidly, their external
information network allows diverse TMTs to recognise these changes quickly and make
speedy, well-informed decisions regarding appropriate responses. While TMT functional
diversity has not been empirically linked to adaptive capability, a number of studies directly
or indirectly link TMT composition to organisational change (Bantel & Jackson, 1989;
Boeker, 1997).
In summary, findings of extant studies support a connection between TMT functional
heterogeneity and adaptive capability and lead to the following propositions:
Hypothesis 1: Top management team functional diversity is positively related to
adaptive capability.
Despite these advantages, the benefits that accompany functional diversity are
predicted to occur with significant costs. Social categorization and social identification theory,
along with the similarity-attraction paradigm, point to an increase in friction, information8
withholding conflict when in-group diversity increases. This effect can suppress the
knowledge-related effects that we have argued are likely to enhance adaptive capability
(Pietro, Shyavitz, Smith, & Auerbach, 2000). The inclusion of moderator variables in the
categorisation-elaboration model (CEM) of diversity effects suggests that elaborative
processes may enhance the knowledge-related benefits of diversity and lessen some of the
negative impact of social categorisation in diverse teams (van Knippenberg et al., 2004).
Functional diversity leads to the availability of different perspectives, however, it is
only when team processes facilitate the expression and critical consideration of these
perspectives, that the group is able to generate innovative solutions (van Knippenberg et al.,
2004). Debate processes have been found to result in the consideration of more alternatives
and the more careful consideration of alternatives, to foster a deeper understanding of task
issues and to facilitate exchange of information that enhances problem solving, decision
making and the generation of ideas (Eisenhardt, Kahwajy, & Bourgeois, 1997; Okhuysen &
Eisenhardt, 2002; Pelled, Eisenhardt, & Xin, 1999). In addition, there is evidence that debate
of member perspectives and the consequent development of alternative problem solutions
prevents premature consensus by limiting the development of confirmatory informationseeking biases (Schweiger, Sandberg, & Rechner, 1989). Debate about assumptions, data
and recommendations and prevents uncritical acceptance of what initially appears obvious to
members (Schweiger et al., 1989) and also leads to the development of enhanced
understanding and clarity regarding causal connections and successful actions (Jehn, 1995,
1997). Such processes increase understanding of others’ positions and have been found to
reduce the likelihood that group members’ existing preferences, such as those deriving from
stereotypes, will bias the information they choose to retrieve, present, utilise and absorb
(Huber & Lewis, 2010).
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Based on these arguments, we posit that the effect of TMT functional diversity on
adaptive capability will be positive as debate increases. The rationale for this positive
interaction between TMT diversity and debate rests on our argument that greater debate can
diminish the costs while heightening the benefits associated with diversity. It does this by
facilitating the expression and critical consideration of disparate perspectives and also
limiting the likelihood of information-withholding and bias in decision-making. This also
implies that TMT diversity on its own is less likely to exert a positive effect on adaptive
capability. In the absence of debate, due to the opposing benefits and costs associated with
diversity, we expect the relationship between TMT diversity and adaptive capability to be
inconclusive. Only when debate suppresses the costs and strengthens the benefits associated
with diversity will a positive relationship emerge. Accordingly, we propose the following
contingency hypothesis:
Hypothesis 2: TMT debate will moderate the relationship between functional diversity
and adaptive capability. This relationship will be such that greater debate will be
associated with a stronger positive relationship between diversity and adaptive
capability.
The ability to effectively adapt to external changes is argued to allow organisations
obtain competitive advantage through a series of short-term gains (D'Aveni, 1994). While
there is potential for some organisations to achieve competitive advantage by developing
certain firm-specific competencies, the dynamism that typifies contemporary markets means
that such advantage is often short lived and continuing on the same path of development may
not provide further gains (Leonard-Barton, 1992). Environments characterised by changes in
demand and technological shifts require the capacity to continuously reshape, and respond
faster and more creatively to external challenges (Lavie, 2006). An organisation that is able to
understand and predict environmental changes, make well-informed and timely decision, and
10
rapidly implement changes to its processes and structure has the potential to gain and regain
competitive advantage (Li, Chen, Liu, & Peng, 2012).
The capacity to adapt their original strategies and patterns of activity allows
organisations to grasp opportunities more quickly than competitor firms and overcome
obstacles and avoid threats (Newey & Zahra, 2009).While other researchers, such as McKee,
Varadarajan, and Pride (1989) have suggested that adaptability requires resource utilization
and potentially leading to some loss of internal efficiency, the capacity to pursue market
opportunity and respond more quickly than competitors has been linked to enhanced firm
performance (Oktemgil & Greenley, 1997; Tuominen, Rajala, & Möller, 2004; Wang &
Ahmed, 2007)
Hypothesis 3: Adaptive capability is positively related to performance.
We have argued a path from TMT functional diversity to adaptive capability,
moderated by debate, and from adaptive capability to performance. In combination, this
suggests a moderated mediated path from TMT diversity to performance:
Hypothesis 4: Debate will moderate the relationship between TMT functional
diversity and performance. This relationship will be such that the positive
relationship between TMT functional diversity and performance through adaptive
capability will be stronger at higher levels of debate.
METHODOLOGY
Sample and data collection
Data was collected from organisations that were multinational subsidiaries in
Shandong, China in 2010. This sample allowed us to access subsidiary TMTs, which have
been relatively neglected in studies of top management and which are faced with multiple
demands of parent and host country in a relatively dynamic environment (Gong, 2006). We
first sent letters to the CEOs of these subsidiaries, explaining the study’s purpose and inviting
11
participation. Of the 250 subsidiaries invited to participate we received completed
questionnaires from 107, representing a 43% response rate. The data was collected through
two questionnaires, one to collect dependent variable data and one to collect independent
variable data, administered on-site due to advantages documented over mail surveys in China
(Hoskisson, Eden, Lau, & Wright, 2000). Site visits ensured that we gained access to the right
respondents, in this case the subsidiary Chief Executive Officer (CEO) and Chief Financial
Officer (CFO).
Language is a significant concern when using constructs developed in one country to
collect data in another country (Tsui, Nifadkar, & Ou, 2007). All items were translated from
English into the language of participants in China, using the application mode of translation
(Van de Vijver & Leung, 1997). With this method, it is assumed that the construct
operationalization is appropriate for the national group under investigation and that a
straightforward translation will suffice to derive a valid measure. The questionnaires were
initially developed in English and then translated into Chinese by two management
academics competent in both English and Chinese. The questionnaire was then backtranslated to English and reviewed by two different academics who focused on detecting
discrepancies between the translations and attempting to identify potential areas of
misunderstanding. Several of our variables, including team diversity, dynamism, munificence
and comparative performance had been utilised in previous organizational research in China
indicating that the measures used had cross-cultural validity (Atuahene-Gima & Li, 2004;
Auh & Menguc, 2006).
Two questionnaires were used to collect data. One questionnaire collected data on the
independent variables and the other questionnaire collected data on the dependent variable,
organizational performance. This approach lessened the risk of bias associated with collecting
data on independent and dependent variables from the same source (Podsakoff, MacKenzie,
12
Lee, & Podsakoff, 2003). In common with previous research, we sourced predictor variable
data from the CEO (Barringer & Bluedorn, 1999; Simsek, 2007). Prior research has found
that CEOs provide data that is as reliable and valid as those from objective data sources
(Heavey, Simsek, Roche, & Kelly, 2009). Our performance data was sourced from a separate
survey sent to the CFO in each firm.
Our sample of firms reported a mean annual turnover of 255 RMB/million ranging
from 1 RMB/million to 6480 RMB/million, and employed as average of 8,300 employees.
All subsidiaries were located in Shandong. Parent companies were globally dispersed with
55% located in the Asia Pacific region. The remaining parent organisations were located in
U.S., Europe, Canada and India. Subsidiaries were established in China between 1996 and
2006, with approximately 70% commencing operations since 2000. Eighty-six percent of
subsidiaries were involved in manufacturing with the other subsidiaries involved in assembly,
logistics, sales and R&D. The majority (95%) of our STMTs had less than six members with
a mean size of 4 members. The mean age of members was 44 years and the average time
working as part of the subsidiary TMT was just over 7 years.
Measurement:
Predictor Variables. Functional Diversity: TMT functional diversity was measured
using Blau’s (1977) index of heterogeneity: (1-ΣPi2), where Pi is the proportion of top
managers in ith category. Blau’s (1977) index has widespread usage as a measure of group
diversity, including functional and national diversity (Harrison & Klein, 2007). A higher
score on Blau’s index indicates greater functional diversity. Teams reported nine distinct
functional backgrounds with marketing the most frequent. Debate: Debate was measured
using a scale from Simons et al (1999). A sample item from this scale is ‘To what extent did
the group constructively challenge the suggestions and proposals of members?” The alpha
coefficient for this measure was .92. Adaptive Capability: This study uses the four item scale
13
developed by Zhou and Li (2010) based on the conceptual work of Chakravarthy (1982),
Lavie (2006), and Mckee et al. (1989). The first item focuses on organisational capacity to
undertake appropriate actions in response to environmental shifts, a key characteristic of
adaptive capability (Chakravarthy,1982; Mckee et al.,1989). The second item gauges the
organisation’s capacity to maintain their competitive advantages in the face of significant
industry changes by reconfiguring their existing capabilities (Lavie, 2006). The final two
items assess adaptive capability in terms of the organisation’s capacity to effectively deal
with challenges arising within the Chinese market, such as its entry into the World Trade
Organization. This measure has been verified by Zhou and Li (2010). A sample scale item is
“Our existing competencies can withstand changes in the industry”. The alpha coefficient for
this measure was .92.
Dependent Variable. Performance: Performance was measured using a scale
developed to capture a firm’s relative performance (Tan & Litschert, 1994). The items asked
the Chief Financial Officer to gauge their performance relative to close competitors. A 5point Likert scale was employed to assess performance, with each scale division representing
a 20% increment in comparative advantage. Following Tan and Litschert (1994), we chose
this comparative approach because comparative performance data is provided to firms in
China on an annual basis by the Chinese government. This approach to has been used to
effectively capture performance in western (Pertusa-Ortega, Molina-Azorín, & ClaverCortés, 2009; Smith, Guthrie, & Chen, 1989) and eastern contexts. We used an additive
approach to create a 15-point performance measure, combining all three items. Control
variables: Firm size was controlled for by including the square root of the number of
employees (Powell & Stark, 2005). Past performance has been found to impact future
organisational performance (Guthrie & Datta, 2008), and was controlled for by including a
measure of comparative subsidiary performance in 2007 (Tan & Litschert, 1994). TMT
14
national diversity was measured using Blau’s (1977) index of heterogeneity: (1-ΣPi2), where
Pi is the proportion of top managers in ith category. We also controlled for competitor
environmental volatility, as this has been shown to effect subsidiary performance, using a 3item measure developed from existing scales (Calantone, Garcia, & Dröge, 2003; McCarthy,
Lawrence, Wixted, & Gordon, 2010). A sample item from this scale is “In our industry,
competition changes in major and unpredictable ways as opposed to slowly evolving”. The
alpha coefficient for this measure was .86. Finally, we controlled for environmental
munificence by asking CEO to assess the extent to which firms in their industry experienced
profitability.
Analysis and Results
This study employed ordinary least squares (OLS) multiple regression analysis and
partial least squares (PLS) structural equation modelling (SEM) to analyse data. PLS SEM is
a second generation modelling technique is increasingly utilised in organisational studies
research (Chen, Lam, & Zhong, 2007), and was used to evaluate our full model. We used
SmartPLS version 2.0 software to undertake this analysis (Ringle, Wende, & Will, 2005).
Many published studies in management research utilise PLS including, for example, research
in group dynamics (Peng & Luo, 2000; Shanxing, Kai, & Jianjun, 2008); strategic
management (Julie Juan, 2005), and innovation (Peng, 2001). Of particular relevance for this
study, PLS SEM can be used effectively in the initial stages of theory development and
provides an overall indication of the predictive utility of models under investigation (Chen et
al., 2007).
Table 1 shows the means, standards deviations for each variable, and correlations
among variables. Prior to investigating our hypotheses, we generated factor loadings to
investigate the validity of our measures. Table 2 provides the factor coefficients for each of
the study constructs.
15
Insert Table 1 and 2 about Here
Inspection of the data in Table 2 reveals that all coefficients are greater than .7. All
scale items display the highest coefficients with their parent scale. This support claims of
discriminant validity as it indicates conceptual homogeneity within scales and heterogeneity
between scales (Thompson, 1997).
Ordinary Least Squares regression analysis was employed to investigate our
hypotheses as summarised in Table 3. The regression analysis revealed a significant positive
path coefficient for the impact of functional diversity on adaptive capability (β=.09, t=1.19,
p=.24) providing no support for hypothesis 1.
Insert Table 3 about Here
To test hypotheses 2, a standardised cross-product interaction construct was computed
and included in the model (Allison, 1977). The analysis revealed a significant path coefficient
for the interaction variable regressed on adaptive capability (β=.16, t=2.03, p=.04). The
results show that debate moderated the impact of TMT functional diversity on adaptive
capability as predicted.
In order to explore the nature of the moderating effect further, we used simple slopes
computations and graphed the interactions using high (1SD above the mean) and low (1SD
below the mean) levels of the moderator. These analyses revealed that functional diversity
was significantly and positively associated with adaptive capability when debate was high
(simple slope=.99, t=2.43, p=.02) and was negatively, but not significantly, related to
performance when debate was at a low level (simple slope=-.27, t=-.59, p=.55), as depicted in
Figure 1. These results provide support for hypothesis 2 by indicating that functional
diversity is linked to adaptive capability when debate is high and not related to adaptive
16
capability when debate is at a low level. Analysis showed a path coefficient for adaptive
capability regressed on performance that was also significant (β=.34, t=2.98, p=.00)
indicating support for hypothesis 3. No evidence was found for a direct relationship between
functional diversity and performance (β=.06, t=0.64, p=.52).
Hypothesis 4 posited that the indirect effect of TMT functional diversity on
performance via adaptive capability depends on TMT debate. To test moderated mediation,
the data was investigated to assess whether the strength of the mediation via adaptive
capability differs across levels of the moderator, debate (Preacher, Rucker, & Hayes, 2007).
We generated a bootstrap-based bias corrected confidence interval for the specific indirect
effect at high (1 SD above the mean) and low (1 SD below the mean) levels of debate. For
low levels of debate, the conditional indirect effect of functional diversity on performance
through adaptive capability was not significant (effect = -.16 [95% CI -.87 - .36]). For high
levels of debate, the conditional indirect effect of functional diversity was significant (effect
= .59 [95% CI .18 -.1.64]), supporting our moderated mediation hypothesis.
Insert Figure 1 about Here
We used PLS SEM to assess the utility of our full model. While PLS SEM does not
generate indicators of model fit, the model r-squared statistic indicates the extent to which
hypothesised pathways combine to predict the dependent variable, performance. The rsquared result for the full model, as depicted in Figure 1, was .63, which can be interpreted as
indicating good fit (Chin, 1998).
In order to further investigate the quality of the structural model, we chose to assess
the models capacity to predict adaptive capability and performance. In order to assess
predictive relevance, we used PLS SEM to generate the Stone-Geisser criterion (Q2) with an
omission distance of 7. Analysis resulted in a Stone–Geisser criterion Q2 value of 0.37 for
17
adaptive capability and 0.42 for performance, which is substantially above the threshold
value of zero, and which indicates the model’s predictive relevance (Henseler, Ringle, &
Sinkovics, 2009). This supports our claim that functional diversity has a significant impact on
adaptive capability and performance, and also supports the utility of the pathways that we
have investigated.
Discussion
The premise of the paper is that explanation for the development of capabilities
requires a focus on microfoundations that capture more fully what we know about individual
cognition and integrative processes within organizations. Motivated by this premise, we
developed a model of the impact of TMT functional diversity on adaptive capability, and
through this, organisational performance. In this study we answered the call to discover the
role that expertise plays in capabilities (Holcomb et al.2009) by synthesizing insights from
dynamic capabilities theory and upper echelons framework to reason that the knowledgerelated advantages bestowed through functional diversity would enhance adaptive capability
contingent on debate. Specifically we posited that, while functional diversity potentially
increases TMT access to knowledge, elaborative team processes are required to effectively
utilise these knowledge assets. We considered that the facilitative role of TMT diversity in
enabling greater adaptive capability would be bolstered by debate, which facilitates the
expression and critical consideration of their diverse knowledge.
Due to the cross-sectional nature of this study, support for causality cannot be claimed
except through theoretical arguments (Frazier, Tix, & Barron, 2004). However, given the
theoretical rationale, we interpret the results as providing support for our proposition that
functional diversity’s impact on adaptive capability, and through this performance, is not
significant unless TMTs engage in debate. Our data support debate as a critical boundary
18
condition of the path from TMT diversity to adaptive capability, and through this
performance.
This study makes several significant theoretical contributions. First, by identifying
functional diversity as an important driver of adaptive capability, this study addresses a
significant research gap pertaining to how TMT characteristics potentially contribute to the
development of a core dynamic capability (Lavie, 2006). The integration of upper echelons
and dynamic capability perspectives illustrates how a TMTs attributes affect its internal
resource assortment and reconfiguration. Our findings suggest that, as long as the benefits of
functional diversity (greater capacity to identify pressures towards environmental change,
‘broader-minded’ approach to opportunities and complex problems, greater ability to exploit
existing competencies) outweigh the potential costs of conflict and information-withholding,
functional diversity has a positive and significant impact on adaptive capability. Conversely,
when the negative impact of functional diversity overshadows the benefits, diversity does not
contribute to adaptive capability. These findings are important because they shed light on the
‘murky waters’ surrounding managerial and cognitive contributors to dynamic capability
development (Corbett & Neck, 2010). While considerable progress has been made in
understanding the unique role that dynamic capabilities play in competitive advantage, the
managerial and cognitive microfoundations of these capabilities have remained relatively
underexplored (Helfat 2007).
The second contribution of this study entails the investigation of the contingency
effect of debate on functional diversity. Our results were supportive of the role debate was
predicted to play in explaining the circumstances under which functional diversity generates a
positive impact. We found that, as debate increases, the effects of functional diversity on
adaptive capability were positive and significant. This suggests that TMT functional diversity
drove the development of adaptive capability only under situations where team members
19
engaged in debate. Our simple slope analysis supported this finding; the effect of TMT
functional diversity on adaptive capability increased as debate increased. We interpret this
finding as indicating that when TMTs are functionally-diverse, while they may have
sufficient knowledge assets to engender a more ‘broader-minded’ approach to opportunities
and complex problems, without team dynamics that facilitate elaboration and critical
assessment, these knowledge-related benefits are unlikely to be sufficient to outweigh the
costs associated with dissimilarity. When teams engage in debate, the benefits of diversity are
strengthened and the conflict and tension associated with dissimilarity are minimised. Under
these circumstances, diversity is linked to the development of adaptive capability. Therefore,
to succeed in dynamic environments, organisations should ensure that their TMT membership
is sufficiently diverse and also engages in debate. This leads to the speedy initiation of
actions in response to environmental change.
Our findings have important implications for practitioners. We demonstrate the utility
of adaptive capability for subsidiary firms operating in China, a dynamic market context. As
a subsidiary’s TMT composition and the processes it uses to make decisions are both
associated with adaptive capability, managers should pay attention to ensuring that members
from a range of functional backgrounds are not only represented on the TMT but are
encouraged to challenge other’s perspective and raise arguments against preferred positions.
Interventions such as Devil’s Advocacy and the introduction of openminded norms have been
demonstrated to increase the likelihood of such debate (Eisenhardt, Kahwajy, & Bourgeois,
1998).
As with all research, this study has a number of limitations. The sample size was
relatively small and moderated relationships were investigated, both of which may have
increased the risk that significant relationships were not identified (Ren, Kraut, & Kiesler,
2007). However, our hypotheses were supported, and given that the ability to detect
20
moderating variables is particularly constrained by small sample size (Dahl & Pedersen,
2004), we have additional confidence in the robustness of our findings. Another potential
limitation of our research stemmed from our use of survey questionnaires. Two different
questionnaires were administered separately and to different actors to collect information on
dependent and predictor variables. The data on dependent variables was collected from CFOs
and the data on predictor variables, including moderator variables, was collected from CEOs,
following previous research in strategic management fields which has relied mostly on senior
executives as the most knowledgeable respondents (e.g., Heavey et al., 2009). This approach
to data collection is in alignment with recommendations by Podsakoff et al (2003) and
provides some basis to argue that the risk of common method bias in our data is not
significant. However, we recognise that multiple TMT respondents would have enhanced our
research design and recommend that future studies in this area utilise such an approach.
While our research argued and supported the moderating role of debate, previous
studies have suggested that debate could operate as a mediating variable in teams in which
intergroup bias is low (Noordegraaf, 2011). We did not find evidence of a direct effect
between diversity and debate, however future research on other job-related or biodemographic diversity domains may support a model of sequential mediation between
diversity and performance.
In conclusion, previous research in the area of dynamic capabilities has been largely
conceptual and this study represents one of few to incorporate empirical investigation. In
addition, very few past studies have focused on the microfoundations that lead to the
development of dynamic capability and even fewer have done so using a quantitative
approach. In this study we use unique data from a sample of subsidiaries to investigate the
effect of TMT composition that facilitate the capacity assess environmental events, determine
appropriate strategies and initiate quick responses and subsequently build adaptive capability,
21
a key dynamic capability. This relationship was contingent on team debate, and together team
diversity and debate are the foundation for adaptive capability and through this performance.
Our results also support early arguments that, in dynamic environments, performance
differences may reflect differences in their capabilities in responding quickly to change
(Eisenhardt & Martin, 2000; Helfat et al., 2007; Teece & Pisano, 1997; Zollo & Winter,
2002).
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28
TABLE 1
Variable Means, Standard Deviations and Correlation Coefficients
Mean
SD
1
Munificence
3.21
2
Dynamism
3.31
.98
3
Size
48.26
79.09
4
Past Performance
5
National Diversity
6
Functional Diversity
7
3.6
1
2
3
4
5
6
7
8
9
1.2
.49**
.13
-.08
.71
.35**
.20*
.07
.20
.22
.02
-.02
-.11
.21
.22
-.05
-.04
.02
Debate
3.85
.76
.18
.14
-.05
.37**
-.06
-.13
8
Adaptive Capability
3.71
.90
.62**
.39**
.16
.28**
.02
.06
9
Performance
7.03
1.72
.43**
.23**
.16
.05
-.1
.32**
.12
-.10
.04
.25*
.19
.48**
*p<.05 **p<.01
29
TABLE 2
Latent Variable Factor Loadings
Dynamism
Debate
Adaptive
Comparative
Capability
Performance
Dynamism 1
.88
.09
.13
.13
Dynamism 2
.88
-.09
.12
.16
Dynamism 3
.87
.19
.29
.04
Debate 1
.09
.91
.06
.00
Debate 2
.07
.94
.13
.08
Debate 3
.02
.90
.15
.13
Adaptive Capability 1
.13
.15
.82
.08
Adaptive Capability 2
.12
.11
.88
.09
Adaptive Capability 3
.16
.08
.88
.19
Adaptive Capability 4
.22
.08
.86
.28
Performance 1
.14
.12
.08
.91
Performance 2
.11
.17
.21
.86
Performance 3
.07
-.06
.19
.79
30
TABLE 3
Model of Moderating Role of Debate on the Relationship between TMT Functional
Diversity, Adaptive Capability and Organizational Performance (N = 107)
Dependent Variable
Model 1
Model 2
Model 3
Adaptive
Adaptive
Performance
Capability
Capability
Munificence
.53**
.53**
Dynamism
.12
.14
-.02
Size
.11
.11
.06
Past Performance
.01
-.01
.18
National Diversity
.02
.01
-.11
Functional Diversity
.11
.09
.06
Debate
.16
.12
.05
.16*
-.12
Functional Diversity X Debate
Adaptive Capability
Adjusted R2
R2 ∆
a
.15
.34**
.40
.42
.25
.02*
.06**
Beta weights are shown. *p<.05; **p<.01
31
FIGURE 2
Moderating Effect of Debate on Functional Diversity’s Impact on Adaptive Capability
32
2.5
Adaptive Capability
2
1.5
High Debate
1
Low Debate
0.5
0
Low Diversity
High Diversity
33