Executive discretion as a driver of firm competitiveness.

EXECUTIVE SUMMARY

In this paper we revisit with more precision and sophistication the phenomenon of executive discretion. Accordingly, we build and improve on limited theory of executive discretion by developing several propositions that account for organizational, environmental, and situational factors that both constrain and enhance senior manager discretion. Moreover, we discriminate between internal and external discretion and offer theory to predict firm outcomes associated with having varying levels of discretion. Importantly, we link executive discretion to a firm "s overall competitiveness and firm performance. Synthesizing the explanatory and predictive power of theory, this paper informs both scholarly and applied audiences.

INTRODUCTION

Over the last ten years there has been an explosion of empirical research on senior executives, and, in particular, top management teams. Unfortunately, theory building and conceptual research on top management has lagged the surge of empirical work. Furthermore, theoretical inquiry on top management teams (TMTs) tends to explain why the decisions and actions of TMTs should be important. This focus neglects the question of when or under what conditions TMTs would have the capabilities to make and enact their decisions in such a manner as to have a discernible (and positive) impact on organizational outcomes. In most cases, theoretical and empirical studies in this area have relied on the assumption that, not only are TMTs capable of making strategic decisions, but they may implement these strategies freely--an assumption that frequently may not hold in practice. Rather, executives are almost always confronted with constraints, not only with regard to their options in strategy formulation, but also with regard to implementation. Evidence suggests that such constraints limit TMT discretion and their potential for impacting firm outcomes. However, in order to enhance our understanding of the TMT's potential to contribute to firm competitiveness, we need to consider the influence of contextual factors, such as organizational, situational, and environmental variables on TMT discretion, strategic choice, and strategic implementation.

This paper attempts to provide an explication of this phenomenon by examining such variables and their effects on TMT discretion and subsequent decisions and behaviors. Our theory development argues that degree of TMT impact on a firm's competitiveness depends on the limits (or lack thereof) placed on their discretion by internal and external sources. Moreover, our theory building attempts to illustrate that this discretion is often a function of three broad categories: (1) Situational characteristics, (2) organizational characteristics, and (3) environmental characteristics.

To achieve these conceptual objectives, a framework is developed that blends internal, external, and situational discretion to conceptualize TMT effect. Drawing from the literature on leadership (House and Aditya, 1997), this study introduces the concept of TMT effect as a factor that encapsulates the force, influence, and impact executives exert that drive a firm's competitiveness. This framework then builds on prior important, but limited, theoretical studies in order to provide a more thorough and accurate conceptualization of the factors affecting and potentially limiting TMT discretion. Such constraining variables may also limit the TMTs ability to implement strategic decisions that would be in the best interest of organizational performance.

TOP MANAGEMENT TEAMS: FOUNDATIONS OF THE FRAMEWORK

Cyert and March (1963) proposed that firms were as much political and informal as they were economic, rational, or formal. Accordingly, they proposed that to understand the behavior of the firm, a researcher should concentrate on the behavior of the dominant coalition within the organization that commands the resources, information, and position with which to steer the firm. Along these lines, and in keeping with existing literature, we define the TMT as the firm's dominant coalition that is viewed and recognized as those responsible and held accountable for the firm's decisions, behavior, and competitive posture. Further, based on the specified identifying characteristics of a dominant coalition, there is an assumption that the TMT has the freedom and unfettered power to make choices in formulating strategic plans, and the wherewithal to implement those choices. This, by very nature of the definition, implies high levels of discretion with regard to factors internal to the organization.

Theories that have guided previous research on TMTs often assume the role of senior management as that of boundary spanners (e.g., Mintzberg, 1973). That is, TMTs are seen as the primary linkages between the organization and its environment (Pfeffer & Salancik, 1978).

Previous work also converges on the belief that the environment is ambiguous, munificent, and dynamic and that the TMT is responsible for interpreting and interfacing with this complex world in which the organization is embedded. Theorists have also suggested that TMTs often make decisions based on their interpretations of the environment (Mintzberg, Raisininghani, & Theoret, 1976). The latitude of their discretion with regard to this decision-making is determined by the degree of constraint that exists in the environment. As Hrebiniak & Joyce (1985) contend, a less constraining environment provides managers more discretion, which increases their capacity to choose among more options and follow through by implementing those strategic choices. Additionally, a less constraining environment enables firms, and TMTs, more access to external resources. It also diminishes the risks associated with wrong or poor choices and the inability to act in the manner most beneficial to firm welfare.

Despite their contributions, these works are lacking in two noteworthy manners. First, the emphasis on boundary spanning ignores the impact or influence that the TMT has within, not outside, the firm. Secondly, the emphasis on the dyadic relationship between senior management and the environment focuses on the external constraints placed on executive discretion, while failing to consider the issues involved with strategic implementation. Mintzberg et al., (1976) notes that this failure is a common one; research tends to focus on strategic choice while ignoring the pursuant execution of those initial choices. Successful strategic choices are ones that can be successfully implemented. In fact, Pfeffer (1998: 17) asserted that "organizational success comes from successfully implementing strategy, not just from having one."

It becomes evident then that execution of important decisions is essential for a firm's competitiveness. Thus, a sound framework of TMT impact on organizational competitiveness requires the inclusion of both the internal and external factors that constrain (or enhance) the strategic choice options and the ability of the TMT to execute those decisions. In other words, discretion involves more than just the freedom to choose. Rather, discretion involves both the capacity to choose as well as the capacity to enact those choices. Consequently, empirical and theoretical research rooted solely in strategic choice, and not action, is not fully developed and lacks explanatory and predictive potency.

Accordingly, when conducting TMT research it is necessary to account for and determine the TMT effect. We borrow from House and Aditya's (1997) discussion of leader effect, to similarly define TMT effect as the amount of influence and impact that a TMT can exert on their respective firms in relation to its competitors and the environment. The TMT effect should be highest when there is an intersection between strategic choice and strategic implementation. More explicitly, the TMT will have the greatest impact on the competitiveness of the firm when both external and internal discretion are high for both decision making and pursuant action. All else being equal, firms with high thresholds of TMT effect enjoy a managerial advantage in that executives can make choices and implement decisions more readily and more effectively than those of firms with lower levels of TMT effect. Table 1 summarizes the foundation of this framework.

FRAMEWORK & PROPOSITIONS

In an effort to better predict the TMT effect, this study presents a series of propositions based on the nine variables that, from the authors' point of view, offer the most potent explanatory power. Some of these variables have been presented in previous literature as descriptive traits or characteristics, however, it is suggested here that they also impact a TMT's level of external or internal discretion. Hence, they are instrumental in determining the TMT effect on firm competitiveness. We begin by addressing situational factors or variables--an area largely unexplored in TMT research in general, and in TMT discretion research, in particular. We follow with a discussion of the impact of organizational variables and finally, environmental variables. Table 2 summarizes these variables.

Temporal Impact

The temporal aspect (or tenure stage) of TMTs is crucial which at times can serve as an important managerial lever and at others serve to negate the influence of the TMT. The temporal aspect also is relevant because of its impact on both environmental and organizational variables. One particular manifestation of this is the honeymoon effect, which organizational scholars such as Hambrick and Fukutomi (1991) have noted, and which is common in mainstream political thought. Simply, there appears to be a linear relationship between time in position and expectations leveled by external and internal constituencies. During the initial tenure of either a CEO or TMT there is a period where experimentation is allowed, mistakes are forgiven, and expectations are kept at reasonable levels (Conley, 2001). However, as time progresses internal and external stakeholders become less forgiving as the TMT is expected to "know better." Consequently, as the tenure of a TMT substantially accrues, increased constraints from both the internal and external forces will be applied. Therefore, we conclude:

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