2008 International Workshop on Education Technology and Training & 2008 International Workshop on Geoscience and Remote Sensing
Effects of Top Management Teams on Strategic Adaptation in New Ventures
Yingyu Deng
Management Engineering Department,
Harbin Institute of Technology Shenzhen Graduate School, Shenzhen, Guangdong, 518055, China
gdyy1@126.com, wangsusheng@gmail.com
Abstract
Strategic adaptation is important for new venture
success in terms of growth and survival. Top management
teams are key inputs into strategy and determine the
ability of organizations to compete effectively. We need a
better understanding on characteristics of top
management team and how it relates to strategic
adaptation in new ventures. In this article, we identified
four characteristics of top management teams to generate
adaptation between new venture’s strategy and its
environment: prior experience, cognitive diversity,
constructive confrontation norms and external attention.
1. Introduction
The competitive environment in which new ventures
operate is perceived as dynamic, volatile. New ventures
have faced rapid and discontinuous change in demand,
service provision and technology over the last decade.
These conditions place strategic demands upon top
management teams (TMTs) to bolster firm performance
through experiment and continuous renewal and
reorientation of products, markets and services. However,
top teams operate in the face of complexity, uncertainty
and inadequate or obsolete information. As such, they
must develop strategic adaptability in terms of diverse
perspectives from which to sense market signals and the
ability to act collectively. To do so, they need a better
understanding on characteristics of TMT and how it
relates to TMT strategic adaptability. When TMT develop
and implement strategy, managers can reduce their
uncertainty by gathering this information from as many
sources as practical (Dewar and Dutton, 1986). TMT
members can learn from and modify the examples of
others and look for answers or even know what questions
to ask; the information simply may not exist. Hence, the
between the TMT and the requirements of its strategy
should affect performance (Chaganti and Sambharya,
1987; Gupta, 1984; McGrath et al., 1996; Szilagyi and
Schweiger, 1984). In highly novel ventures, the most
978-0-7695-3563-0/08 $25.00 © 2008 IEEE
DOI 10.1109/ETTandGRS.2008.374
successful TMTs will be adept at creating information and
enacting their environments. In less novel ventures, the
most successful TMT will be adept at gathering
information and learning from their environments. These
tasks are appreciably different and suggest the need for
different capabilities.
Over the past two decades, upper-echelon researchers
have extended Hambrick and Mason’s seminal (1984)
work on how TMT demographic characteristics can be
used to explain corporate strategy. A key assumption of
this research program is that demographic characteristics
are useful indicators of individual experiences, skills,
values, cognitive styles, and information sources (Jackson,
1992; Jehn, Northcraft, and Neale, 1999). Much of this
research explored how TMT demographic diversity or
‘heterogeneity,’ terms we use interchangeably, influences
strategic innovation (Finkelstein and Hambrick, 1996;
Williams and O’Reilly, 1998). While evidence of
relationships between TMT composition and firm
performance are becoming increasingly robust, it is still
not clear to managers how the composition of their top
team impacts upon their strategic capacity and their ability
to influence firm performance. This is because the
strategic capabilities of a top management team are not
only determined by its composition, but also by other
factors of TMT. We need a better understanding on
characteristics of TMT and how it relates to TMT
strategic adaptability. To study these issues, we identified
four characteristics of TMTs to generate adaptation
between new venture’s strategy and its environment: prior
experience, cognitive diversity, constructive confrontation
norms and external attention.
2. Strateg ic adaptation for new ventures
trategic
Following Venkatraman (1990), strategic adaptation is
the alignment, or configuration, of strategy and the
organizational contingencies facing the firm. Resources
have frequently been characterized as organizational
contingencies and Venkatraman (1990) notes that the
importance of fit to strategy is related to the efficient
alignment of resources to environmental contingencies
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and higher performance will result when this fit is
achieved. This basis for superior performance is dynamic
since adaptation can change and be lost if organizational
or environmental contingencies change and render the
strategy unsuitable (Zajac et al., 2000). The strategic
adaptation paradigm asserts the necessity of maintaining a
close and consistent linkage between the firm’s strategy
and the context within which it is implemented
(Venkatraman, 1989). The core proposition is that
matching the strategy with the environment leads to
superior performance (Lukas et al., 2001). The concept of
adaptation has played a key role in the development of
strategic management and organization theory fields
(Zajac, Kraatz, and Bresser, 2000), and has also served as
the theoretical foundation in a number of strategy studies
(e.g., Hambrick, MacMillan, and Day, 1982; Olson,
Walker, and Ruekert, 1995; Vorhies and Morgan, 2003).
Strategic adaptation links to advantage and enhancing
performance (Zajac et al., 2000; Kraatz and Zajac, 2001)
and high performance depends on realizing advantageous
postures by deploying strategic resources through strategy
(Luo et al., 2005).
For new ventures, the need to adapt strategy is high in
start-up situations because initial decision-making may
miss important problems or opportunities. Poor market
conditions, high resource requirements, and operating
challenges may have been missed or misunderstood.
Indeed, rapid changes in new markets frequently present
surprise setbacks in start-ups (Smith & Smith, 2000). And
opportunities to build better products / services or bigger
or better companies emerge out of marketing problems or
surprise technological breakthroughs. Thus, the fast
moving unresolved markets that entrepreneurs face and
their inability to get “hard” information to guide foresight
require strategy adaptation for survival and success.
Moreover, studies on decision making have repeatedly
demonstrated that entrepreneurs make extensive use of
simplifying heuristics and thus often exhibit cognitive
biases. Earlier, the potential impact of cognitive biases in
the decision to become an entrepreneur was discussed. It
was suggested that susceptibility to several such biases,
included among such errors might be several discussed
previously (e.g., the optimistic bias, Shepperd et al., 1996;
the planning fallacy, and the affect infusion, Forgas, 1995).
might affect new venture’s decision-making. These may
prove especially deadly to new ventures, which generally
lack the resources of more mature organizations.
Susceptibility to such biases may also play a role in
shaping entrepreneurs’ success. Strategic adaptation is
conducting trials or tests to discover something that is not
known and lead to cope with cognitive biases which
entrepreneurs are susceptible to such biases. Consequently,
strategic adaptation is useful for entrepreneurs because it
reveals information about potential markets where no
established markets exist, and it reveals customer
reactions to disruptive product, service, and business
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model introductions in existing markets (Bhide, 2000: 60).
These activities are the entrepreneurial work of business,
and they involve decisions about the basic
“entrepreneurial problem” in a setting with high
uncertainty, urgency, resource scarcity, and surprise
(Miles and Snow, 1978). When coupled with monitoring,
the process provides information for adaptation thereby
reducing uncertainty. Strategic adaptation also conserves
resources by reducing losses through minimal incremental
investments (Hisrich, 1990). In sum, strategic adaptation
is useful for information gathering, correct cognitive
biases, resource conservation, and opportunity taking.
Therefore, strategic adaptation is important for new
venture success in terms of growth and survival. Better
performing new ventures have greater strategic adaptation
between their strategic resources and environment.
3. The effects of top management teams on
venturess
strategic adaptation in new venture
3.1. Prior experience and strategic adaptation in
new ventures
Previous research indicates that prior start-up
experience contributes to the liability of newness and
provides tacit knowledge that facilitates decision-making
about entrepreneur ial opportunities under uncertainty and
time pressure (Johannisson, Landström, & Rosenberg,
1998; Sarasvathy, 2001). Hart (1996) and Hart, Stevenson
and Dial (1995) posit that prior experience is an important
asset in specifying the new venture’s need for resources,
finding those resources, selecting partners, and structuring
more flexible contracts with resource providers but even
more valuable in identifying the intangible needs of the
ventures. Prior experiences that yield useful information
for entrepreneurs are work experience, education, and
maturation (Bird, 1989). In terms of work experience,
relevant industry technical, product, process and market
experience has improved firm level competitive advantage
and venture growth (Box, Watts, & Hisrich , 1994).
Herron (1994) found that 15% of new venture
performance variance was accounted for in terms of the
entrepreneur’s technical industry experience. As discussed
earlier, general management experience and new venture
management experience have predicted new venture
performance in multiple studies (Chandler, 1996). In
Kolb’s learning theory, human experience is the basis for
cognition, reflection and subsequent actions. There is a
range of experience, which could result in tacit knowledge
(e.g., prior start-up experience, experience as an employee
in related and incubator firms. Thus, Prior experience may
view and interpret the environment faced by new ventures
differently and led to different capabilities of strategic
adaptation. There are two fundamental reasons why prior
experience may view and interpret the environment faced
by them differently. First, entrepreneur’s prior experience
will influence attention to the task environment (Dess and
Beard, 1984) and lead to different strategic reaction.
Second, managers’ interpretations or perceptions of their
organizations’ external environment are influenced by
their own backgrounds and experiences (Aldrich and
Pfeffer, 1976; Daft and Weick, 1984; Dutton and Jackson,
1987). Consequently, due to both substantive differences
in the attentions and perceptions about that task
environment, new ventures would not act uniformly to
environmental change in a given industry. For example,
Hatten and Schendel (1978) found that different
organizations competed differently within the same
industry based on their unique perception of environment
and Kim and Lim (1988) found that different firms in the
same industry faced different environmental constraints
and contingencies. When top management with a great
deal of prior experience can attend to more aspects and
consider each aspect more fully during interpretation
efforts than those with little. We expected that the greater
the top management team’s prior experience with a high
capability for information processing, the greater the
intensity of strategic adaptation in new ventures.
3.2. Cognitive diversity and strategic adaptation
in new ventures
Researchers have held for some time that a team’s
cognitive capability is related to its cognitive diversity.
Diversity provides an assorted stock of capabilities upon
which a team can draw when making complex decisions
(Hoffman, 159; Hoffman & Harburg, & Maier,1962;
Hoffman & Maier,1961; Wanous & Youtz,1986). Bantel
and Jackson (1989) found that diverse teams were more
innovative than less diverse teams since diversity
increases the team’s cognitive resources, and they argued
that “when solving complex non-routine problems groups
are more effective when composed of individuals having a
variety of skills, knowledge, abilities and
perspectives”(1989:109). The evidences supports this
argument. Bantel and Jackson (1989) and Murray (1989)
each found that top management teams with diverse
capabilities made more innovative higher-quality
decisions than teams with less diverse capabilities.
The managerial cognition literature suggests that
complex strategic schemas will foster strategic
adaptability through broad scanning, speedy diagnosis,
and simultaneous consideration of strategic alternatives.
In fast-changing industries, with continuously changing
environmental stimuli, greater cognitive diversity and
complexity allows managers to notice and respond to
more stimuli, reducing the gap between the environment
and their interpretations of it (Bogner and Barr, 2000). As
Weick suggests, ‘organizations with access to more varied
images will engage in sense making that is more adaptive
than will organizations with more limited vocabularies’
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(Weick, 1995: 4). Managers who fail to notice important
environmental changes are unlikely to adjust the firm’s
strategic actions (Lant et al., 1992). Thus, cognitive
diversity enable firms to develop a comprehensive
awareness of new opportunities and hence to develop new
resources and to change their competitive posture quickly
by promoting better inference of continuously shifting
competitor moves. Diversity also promotes strategic
adaptability by preventing firms from getting locked into
cognitive inertia during strategic diagnosis and the
consideration-of-alternatives phase (Dutton et al., 1983;
Lyles and Schwenk, 1992). Complex schemas increase the
diversity of perspectives brought to bear on strategic
questions; this diversity promotes more extensive
discussion of strategic choices (Lant et al., 1992),
reducing the likelihood of cognitive inertia (Hodgkinson,
1997; Reger and Palmer, 1996) and status quo behavior
(Miller and Chen, 1996) that inhibit strategic adaptability.
Complex schemas may thus enable a firm to absorb new,
situation-specific knowledge rapidly. In short, Cognitive
diversity aids in overcoming cognitive inertia by
increasing awareness of new knowledge and the capacity
to absorb it. This accommodation of diverse perspectives
and multiple dominant logics in complex schemas is
likely to lead to strategic flexibility (Bahrami, 1992;
Calori, Baden-Fuller, and Hunt, 2000; Volberda, 1999).
Cognitive diversity will be positively related to strategic
adaptation.
3.3. Constructive confrontation norms and
strategic adaptation in new ventures
In addition to cognitive capability, and of at least equal
importance, is the interaction process teams use to
produce their decisions. Because each strategic decision
represents a unique combination of diverse knowledge
abilities and perspectives described by Bantel and Jackson
(1989), decision quality also “depend heavily upon the
process that the group actually employs”(Steiner,
1972:35). Thus, the research on strategic decision quality
seems to suggest that high quality decisions is best
realized through critical and investigative interaction
processes in which team members identify, extract, and
synthesize their perspectives to produce a decision. The
principle constructive confrontation norms have been
identified in the innovation literature as an important part
of organizational architecture (Burgelman, 2002; Jelinek
& Schoonhoven, 1990). Constructive confrontation refers
to actual conflict behavior and is associated with specific
issues or episodes. Constructive confrontation norms
represent a relatively stable set of norms within groups
that are generally measurable and consistent over time.
The essence of the constructive confrontation norm is the
combination of open expression, disagreement, and the
avoidance of negative affect. According to Burgelman
(1994; 2002) and Tjosvold (1985), constructive
confrontation norms entail more than just encouraging
conflicting opinion in a group setting. They involve other
positive social behavior, including cooperation, personal
acceptance, and merit as the criteria for evaluating
alternatives. When constructive confrontation norms are
present, teams are able to define conflict as a mutual
problem requiring collaborative efforts, rather than as a
problem of competing interests (Deutsch,1973). These
norms may also develop when team members adopt
techniques for verbalizing ideas while Remaining open to
the ideas of others. Amason and Schweiger (1997) argue
that the most effective way to manage conflict in
teams—that is, to encourage idea conflict while
simultaneously minimizing relationship conflict—is to
establish a process of communication about conflict. ‘The
management of conflict during decision-making must be
exercised before decision-making actually begins, through
the establishment of a context that encourages open, frank,
and even critical disagreement but that olds in check the
natural tendency for that disagreement to arouse personal
animosity’ (p. 110). In sum, constructive confrontation
norms are a set of group norms that lead to the behaviors
associated with the effective management of conflict.
Because most decision-making groups are likely to
experience conflict to some degree (Amason, 1996;
Amason & Schweiger, 1994; Burgelman, 2002), they are
likely to benefit from this set of norms. Therefore, we
suggest a positive relationship between strong norms of
constructive confrontation and strategic adaptation in new
ventures.
3.4. External attention and strategic adaptation in
new ventures
Knight and McDaniel (1979) suggested that
information-processing structures influence top
management’s interpretations. The way a top management
team of structured to the process information about
strategic issues limits or enhances recognition of issue
stimuli impedes the search for data, and mutes causal
relationships associated with an issue (Staw et al., 1984).
managerial cognitive characteristics such as high levels of
external attention facilitate a high level of information
processing (Gallbraith, 1973) and foster extensive use of
information (Daft & Lengel, 1986). the influence of
managerial attention on strategic behavior of firms has
long been theoretically recognized and empirically
documented (e.g., D’Aveni & MacMillan, 1990; Kiesler
& Sproull, 1982; Ocasio, 1997; Sproull, 1984; Starbuck &
Milliken, 1988). Ocasio (1997, p. 186). Analytically,
attention is considered as the first step of a tripartite
information processing sequence that involves attention,
interpretation, and action (Abrahamson & Fombrun, 1994;
Daft & Weick, 1984). First, top managers have limited
information-processing capacity, and therefore attend to
only certain facets of the environment while ignoring
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others (Sproull, 1984). Second, environmental
information undergoes interpretation that gives structure
and meaning to the data (Daft & Weick, 1984). Third,
these interpretations influence top managers’ actions (Daft
& Weick, 1984; Dutton & Duncan, 1987; Kiesler &
Sproull, 1982). Attention is therefore considered a crucial
component of managerial behavior, affecting subsequent
interpretation and future action (Kiesler & Sproull, 1982).
Previous research on managerial attention suggests that
attention to the external environment may promote the
development of expansive strategic posture whereas
attention to the internal environment May hinder this
development. In a rapidly changing environment,
attention to the external environment has been associated
with strategic adaptation and innovation while attention to
the internal environment has been associated with
strategic maladaptation and inertia (D’Aveni &
MacMillan, 1990; Geletkanycz & Hambrick, 1997).
D’Aveni and MacMillan (1990), for example, found that
firms led by top management teams that paid more
attention to the external environment were more likely to
adapt to changing circumstances and to survive crisis
situations than firms led by teams that paid more attention
to the internal environment. Moreover, these cognitive
processes of noticing and the ensuing processes of
interpretation can potentially lead to the construction of
new mental models (Barretal., 1992). Therefore, We
expected that a high level of external attention with a high
capability for information processing-would lead to high
level of strategic adaptation in new ventures.
4. Conclusions
For new ventures, the need to adapt strategy is high in
start-up situations because initial decision-making may
miss important problems or opportunities. they involve
decisions about the basic “entrepreneurial problem” in a
setting with high uncertainty, urgency, resource scarcity,
and surprise (Miles and Snow, 1978). Additional,
entrepreneurs make extensive use of simplifying
heuristics and thus often exhibit cognitive biases.
Strategic adaptation is useful for information gathering,
correct cognitive biases, resource conservation, and
opportunity taking. Therefore, strategic adaptation is
important for new venture success in terms of growth and
survival. Because new ventures face what Stinchcombe
(1965) calls “a liability of newness.” We need a better
understanding on characteristics of TMT and how it
relates to TMT strategic adaptability. A strategy can not
be implemented (Menon et al., 1999) and it cannot be
changed to fit new environmental
contingencies—hindering the ability of organizations to
compete effectively for advantage. Better performing new
ventures have greater strategic adaptation between their
strategic resources and environment. Accordingly, TMT
are key inputs into strategy and determine the ability of
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