Introduction
Entrepreneurial orientation (hereafter EO) allows some firms to be ahead of the competition because their behaviors and managerial philosophies are innovative, proactive and risk-taking (Covin & Slevin, Reference Covin and Slevin1989; Miller, Reference Miller1983, Reference Miller2011). However, much is still to be understood about how a firm adopts and enhances an EO. Recent research efforts into EO have begun to focus beyond the extensively studied EO and performance relationship to the predictors and drivers of EO (Miller, Reference Miller2011; Rauch, Wiklund, Lumpkin, & Frese, Reference Rauch, Wiklund, Lumpkin and Frese2009). Given that EO is a firm-level construct that is strictly connected with the strategic management of the firm (Anderson, Kreiser, Kuratko, Hornsby, & Eshima, Reference Anderson, Kreiser, Kuratko, Hornsby and Eshima2015; Richard, Barnett, Dwyer, & Chadwick, Reference Richard, Barnett, Dwyer and Chadwick2004) and concerns the ‘methods, practices, and decision-making styles managers use’ (Lumpkin & Dess, Reference Lumpkin and Dess1996: 136), it is surprising that relatively little attention has been given to the attributes of a firm's top management team (hereafter TMT) and the relationship with an entrepreneurial strategic orientation (Hambrick, Cho, & Ming-Jer, Reference Hambrick, Cho and Chen1996; Hambrick & Mason, Reference Hambrick and Mason1984; Rauch et al., Reference Rauch, Wiklund, Lumpkin and Frese2009; Richard, Wu, & Chadwick, Reference Richard, Wu and Chadwick2009). Furthermore, there is an absence of understanding of how various TMT background characteristics interact to strengthen or weaken the relationship (Richard, Wu, & Chadwick, Reference Richard, Wu and Chadwick2009; Yang & Wang, Reference Yang and Wang2014).
TMT refers to the group of top executives that have ‘a direct influence on the formulation of a firm's strategy’ (Nielsen, Reference Nielsen2010: 305), and usually includes the CEO and his or her direct reports (Finkelstein, Hambrick, & Cannella, Reference Finkelstein, Cannella, Hambrick and Cannella2009; Jeong & Harrison, Reference Jeong and Harrison2017).
This study fills a gap in current knowledge by employing upper echelons theory in evaluating how TMT tenure is related to a firm's level of EO and, furthermore, how TMT industry background heterogeneity might interact with TMT tenure resulting in a change in that relationship. Upper echelons research suggests that TMTs' characteristics, such as tenure and industry background, greatly influence the team's views and evaluations of business situations and strategic choices (Certo, Lester, Dalton, & Dalton, Reference Certo, Lester, Dalton and Dalton2006; Hambrick & Mason, Reference Hambrick and Mason1984; Li, Reference Li2017).
However, the interactive relationship of TMT tenure and industry background heterogeneity with EO is uncertain.
TMT tenure refers to the average number of years that the CEO and top executives from a certain team spent in that firm (Williams, Fadil, & Armstrong, Reference Williams, Fadil and Armstrong2005). According to the upper echelons theory, TMT tenure affects executives' commitment to the status quo, their access to information, the adoption of new strategies, and attitude toward risk (Finkelstein & Hambrick, Reference Finkelstein and Hambrick1990) and, therefore, is likely to be an antecedent of EO (Boling, Pieper, & Covin, Reference Boling, Pieper and Covin2016).
Shorter-tenured teams provide new and fresh views influenced by their external network and previous experiences, resulting in an environment of healthy debate and consideration for more innovative, risky and proactive initiatives (Keck, Reference Keck1997). On the other hand, a short-tenured TMT could result in lower levels of EO, as team members do not know each other and how to work and communicate effectively as a team (Boerner, Linkohr, & Kiefer, Reference Boerner, Linkohr and Kiefer2011; Carpenter, Reference Carpenter2002).
While it is unclear how the relationship of TMT tenure with EO evolves over time, it has been found that as tenure increases, TMTs communicate less with executives outside their company and industry (Zenger & Lawrence, Reference Zenger and Lawrence1989), their knowledge from previous experiences becomes stale and less effective (Hambrick & Fukutomi, Reference Hambrick and Fukutomi1991; Miller, Reference Miller1991) and in general, they become less flexible and receptive to new ideas (Katz, Reference Katz1982; Merton, Reference Merton1968). In addition, team members become more familiar with each other and may begin to break into different social alliances resulting in increased social conflict and decreased task conflict (Xie, Ji, Luan, & Zhao, Reference Xie, Ji, Luan and Zhao2018). While task conflict enables productive debate leading to entrepreneurial action (Boeker, Reference Boeker1997b), social conflict may potentially frustrate the entrepreneurial decision-making of the team (Amason, Reference Amason1996; Jehn, Reference Jehn1995, Reference Jehn1997; Jehn & Mannix, Reference Jehn and Mannix2001). As this condition intensifies, the strength of the relationship of TMT tenure and EO lessens as path dependency and inertia take hold resulting in decisions that do not face the same level of discussion and become less entrepreneurial (Carpenter, Reference Carpenter2002; Carpenter, Geletkanycz, & Sanders, Reference Carpenter, Geletkanycz and Sanders2004; Hambrick, Cho, & Ming-Jer, Reference Hambrick, Cho and Chen1996).
The present research intends to advance this debate and explore if and how TMT tenure affects a firm's EO. Drawing on the upper echelons theory, it is proposed that as TMT tenure increases, entrepreneurial decisions and actions resulting in higher levels of EO will increase and then decrease in an inverted U-shaped manner in which EO is less during low and high levels of TMT tenure and higher during moderate levels of TMT tenure.
Building on previous research showing how CEO and top executives' background affects strategic behaviors and entrepreneurial activity (e.g., Boeker, Reference Boeker1997a, Reference Boeker1997b; Li, Wei, & Lin, Reference Li, Wei and Lin2016; Miller, Burke, & Glick, Reference Miller, Burke and Glick1998; Talke, Salomo, & Kock, Reference Talke, Salomo and Kock2011), we also analyze the moderating effect of industry background heterogeneity on the relationship between TMT tenure and EO. Industry background heterogeneity refers to the diversity of industries in which TMT members were employed and gained work experience prior to joining the current firm.
When the members of the team have heterogeneous backgrounds, such as working in varied industries, they can provide different views of the world and initiate more constructive task-oriented conflicts, which in turn stimulate innovative thinking, problem solving and entrepreneurial activity (Li, Wei, & Lin, Reference Li, Wei and Lin2016; Simons, Pelled, & Smith, Reference Simons, Pelled and Smith1999; Talke, Salomo, & Kock, Reference Talke, Salomo and Kock2011). On the other hand, extreme levels of background heterogeneity can be detrimental, as information overload can result in inconsistent and incoherent decisions (Miller, Burke, & Glick, Reference Miller, Burke and Glick1998), cause social conflicts (Jehn, Reference Jehn1995), reduce strategic consensus, and generate disagreement (Hambrick, Cho, & Chen, Reference Hambrick, Cho and Chen1996). Contrarily, TMTs with homogenous industry backgrounds may be less entrepreneurial due to limited access to external networks and associated information flow (Child, Reference Child1997; Hannan & Freeman, Reference Hannan and Freeman1984).
This study contributes to the literature in several ways. First, we add to the conversation on how TMT's characteristics influence firms' strategic decisions by examining the relationship of TMT tenure with EO. Furthermore, we introduce new insights to the TMT characteristics literature by exploring the interaction effect that TMT Industry Background Heterogeneity has on the TMT tenure and EO relationship. Our results offer guidance for the management and governance of the firm in relation to team structure, as we show that a properly diversified team can promote and sustain EO through the identification of entrepreneurial opportunities and the ability to evaluate and implement them successfully.
Theoretical framework and hypotheses
TMT tenure and EO
EO has been a phenomenon of interest to management scholars for over 30 years (Kreiser, Marino, & Weaver, Reference Kreiser, Marino and Weaver2002). Extensive research of the effect of EO on firm performance has predominantly found a positive relationship (Covin & Slevin, Reference Covin and Slevin1991; Rauch et al., Reference Rauch, Wiklund, Lumpkin and Frese2009) in which entrepreneurially oriented firms innovate more, take on higher levels of risk, and proactively compete in existing and new markets (Bouncken, Plüschke, Pesch, & Kraus, Reference Bouncken, Plüschke, Pesch and Kraus2016; Covin & Slevin, Reference Covin and Slevin1989, Reference Covin and Slevin1991; Miller, Reference Miller1983; Rauch et al., Reference Rauch, Wiklund, Lumpkin and Frese2009).
EO is generally described as a strategic posture of a firm in which decisions and approaches of top managers tend toward organizational-level entrepreneurial endeavors (Covin & Slevin, Reference Covin and Slevin1989; Lumpkin & Dess, Reference Lumpkin and Dess1996). A considerable amount of research has been conducted on the top managers of the firm and, more specifically, on how they influence the strategic orientation of the firm (Boling, Pieper, & Covin, Reference Boling, Pieper and Covin2016; Hambrick, Reference Hambrick2007; Miller, Reference Miller2011; Simsek, Heavey, & Veiga, Reference Simsek, Heavey and Veiga2010; Van Doorn, Heyden, & Volberda, Reference Van Doorn, Heyden and Volberda2017). Many of these studies have employed upper echelons theory when exploring the TMT's influence on the performance and strategic choices of an organization (Carpenter, Reference Carpenter2002; Hambrick, Cho, & Ming-Jer, Reference Hambrick, Cho and Chen1996). The core premise of upper echelons is that the values, experiences, and personalities of top executives influence their interpretations of business situations and strategic decision-making (Hambrick, Reference Hambrick2007; Hambrick & Mason, Reference Hambrick and Mason1984). Therefore, EO is considered grounded in the decision-making styles and philosophies of top executives who are impacted by their background characteristics (Child, Reference Child1972, Reference Child1997; Covin & Slevin, Reference Covin and Slevin1989, Reference Covin and Slevin1991).
TMT tenure is a characteristic that might influence entrepreneurial strategic decisions and thus contribute to a firm's EO (Certo et al., Reference Certo, Lester, Dalton and Dalton2006; Hambrick & Mason, Reference Hambrick and Mason1984; Kauer, zu Waldeck, & Schäffer, Reference Kauer, zu Waldeck and Schäffer2007). Prior research has shown that the relationship of TMT tenure and firm performance may change as the longevity or tenure of the TMT increases (Boerner, Linkohr, & Kiefer, Reference Boerner, Linkohr and Kiefer2011; Carpenter, Reference Carpenter2002). The results have been significant, but somewhat conflicting and inconsistent with the shape of the relationship presenting both negative and inverted-U findings (Boerner, Linkohr, & Kiefer, Reference Boerner, Linkohr and Kiefer2011; Carpenter, Reference Carpenter2002; Pelled, Eisenhardt, & Xin, Reference Pelled, Eisenhardt and Xin1999; Wiersema & Bantel, Reference Wiersema and Bantel1992). Even though the literature on CEO and top executives' backgrounds and EO has been growing, there is an absence in understanding how TMT tenure influences a firm's EO. This would seem a critical consideration given that previous studies have found that the longer an executive's tenure at a firm, the more he or she loses touch with the external environment in which the firm operates and the network from which the executive brought in new ideas and approaches (Boling, Pieper, & Covin, Reference Boling, Pieper and Covin2016; Hambrick & Fukutomi, Reference Hambrick and Fukutomi1991; Miller, Reference Miller1991). Initially, short-tenured teams will need some time to define internal roles, develop cohesion, establish group processes (Keck, Reference Keck1997), and understand how to work together and communicate effectively (Gabarro, Reference Gabarro1987). As the team develops a greater understanding of each member's strengths and communication methods, the team may become stronger and decision-making increasingly innovative, proactive, and risk-taking (Boerner, Linkohr, & Kiefer, Reference Boerner, Linkohr and Kiefer2011; Carpenter, Reference Carpenter2002).
On the contrary, research has shown that longer-tenured TMTs tend to avoid risky strategic decisions (Barker & Mueller, Reference Barker and Mueller2002) and to emphasize stability (Chen, Hsu, & Huang, Reference Chen, Hsu and Huang2010; Kor, Reference Kor2006). The longer the team is together, the more individual team members begin to disassociate with their external networks; they become less flexible and reluctant to innovate and change such that their perspectives become more strongly aligned with the team and the firm (Katz, Reference Katz1982, Merton, Reference Merton1968).
Furthermore, the longer TMT members work together, the more the social dynamics change as members get familiar with each other and may begin to debate issues on a personal rather than a task basis (Katz, Reference Katz1982; Papadakis & Barwise, Reference Papadakis and Barwise2002). Higher levels of interpersonal conflict lead to arguments that divert the discussion from identifying and implementing more risky and innovative opportunities that may benefit the firm to less beneficial personal objectives (Papadakis & Barwise, Reference Papadakis and Barwise2002; Carpenter, Reference Carpenter2002). Even if longer-tenured teams may appear more efficient and faster in making decisions, these decisions tend to be poorer due to increased groupthink resulting from path dependence in which the team holds to the status quo avoiding new innovative and higher risk initiatives, which are critical elements of EO. Thus, EO may decline in firms in which TMT tenure is in the later stage (Carpenter, Reference Carpenter2002).
Taken together, the effect of TMT tenure on EO is increasingly positive in the early stage and tends to become negative as tenure increases. Thus, the following hypothesis is presented:
Hypothesis 1: An inverted U-shaped relationship exists between TMT tenure and EO, with the highest EO occurring at an intermediate level of tenure.
Moderating role of TMT industry background heterogeneity
Executives' mindset and the way they make decisions are greatly affected by their prior industry experience (Nielsen, Reference Nielsen2009). For instance, researchers have found TMT industry heterogeneity related with several firm performance and organizational outcomes, but the findings have been mixed (Certo et al., Reference Certo, Lester, Dalton and Dalton2006; Chen, Kang, & Butler, Reference Chen, Kang and Butler2019; Hambrick & Mason, Reference Hambrick and Mason1984; Heyden, Van Doorn, Reimer, Van Den Bosch, & Volberda, Reference Heyden, Van Doorn, Reimer, Van Den Bosch and Volberda2013) resulting in both positive and negative results (Cai, Liu, & Yu, Reference Cai, Liu and Yu2013).
According to the upper echelons theory, TMT members with heterogeneous backgrounds can be beneficial in terms of providing broader strategic options, but also detrimental when it comes to team cohesion, communication, and effective cooperation (Hambrick, Cho, & Ming-Jer, Reference Hambrick, Cho and Chen1996; Hambrick & Mason, Reference Hambrick and Mason1984). A more heterogeneous team can benefit from a richer variety of technical and managerial skills (Li, Wei, & Lin, Reference Li, Wei and Lin2016; Simons, Pelled, and Smith, Reference Simons, Pelled and Smith1999) and increased information flow through a broader network that enhances the opportunity-seeking actions of the team (Van Doorn & Volberda, Reference Van Doorn and Volberda2009; Williams & O'Reilly, Reference Williams and O'Reilly1998). TMTs with varied background knowledge and perspectives have been found to be more effective when solving complex, non-routine problems typically faced when adopting an EO (Bantel & Jackson, Reference Bantel and Jackson1989).
On the other hand, very heterogeneous teams may experience information overload due to their networks and prospects being too broad and diverse, resulting in inconsistent and incoherent decisions (Miller, Burke, & Glick, Reference Miller, Burke and Glick1998), reduced strategic consensus and disagreement (Hambrick, Cho, & Chen, Reference Hambrick, Cho and Chen1996). Heterogeneous teams may experience more conflict than homogeneous teams because of a greater variety of experiences and backgrounds and thus limit consensus in innovative and entrepreneurial decision making (Eisenhardt, Kahwajy, & Bourgeois, Reference Eisenhardt, Kahwajy and Bourgeois1997). Task and interpersonal conflicts in TMTs are fundamental in defining the quality of group decision-making (Amason, Reference Amason1996; Jehn, Reference Jehn1997; Schweiger, Sandberg, & Ragan, Reference Schweiger, Sandberg and Ragan1986). The knowledge diversity that characterizes heterogeneous teams is considered a trigger of task conflict leading to constructive debate and criticism about how a certain task should be executed (Bouncken, Reference Bouncken2004; Jehn, Reference Jehn1995; Sciascia, Mazzola, & Chirico, Reference Sciascia, Mazzola and Chirico2013).
Although conflict may seem an unwanted dynamic within a team because it is commonly associated with dysfunctional behavior, scholars have generally found that task conflict results in better team decisions (Amason, Reference Amason1996; Certo et al., Reference Certo, Lester, Dalton and Dalton2006; Jehn, Reference Jehn1995, Reference Jehn1997; Jehn & Mannix, Reference Jehn and Mannix2001; Pelled, Eisenhardt, & Xin, Reference Pelled, Eisenhardt and Xin1999). For instance, it has been found that heterogeneous teams with high levels of task conflict lead the highest performing firms, whereas homogeneous teams with less conflict tended to not consider key issues resulting in poorer strategic choices (Eisenhardt, Kahwajy, & Bourgeois, Reference Eisenhardt, Kahwajy and Bourgeois1997). When there is heated discussion as a result of task conflict, strategic options, including entrepreneurial opportunities, are explored more deeply and a stronger consensus gained (Amason, Reference Amason1996; Certo et al., Reference Certo, Lester, Dalton and Dalton2006; Jehn, Reference Jehn1995, Reference Jehn1997). A strong consensus is especially necessary for teams engaged in entrepreneurial initiatives that require resource allocations to more innovative and risky endeavors that are not immediately successful.
Notably, the opposite effect occurs when the conflict is interpersonal. Interpersonal conflict is often dysfunctional and hinders effective decision-making (Amason, Reference Amason1996; Certo et al., Reference Certo, Lester, Dalton and Dalton2006; Jehn, Reference Jehn1995, Reference Jehn1997). Interestingly, studies have also found interpersonal conflict to be more prevalent in TMTs that are too heterogeneous (Amason, Reference Amason1996; Eisenhardt, Kahwajy, & Bourgeois, Reference Eisenhardt, Kahwajy and Bourgeois1997; Schweiger, Sandberg, & Ragan, Reference Schweiger, Sandberg and Ragan1986).
Based on previous literature, it is hypothesized that shorter-tenured teams could benefit from a higher background heterogeneity through broader experiences and networks from which entrepreneurial opportunities can be identified, evaluated and exploited (Heavey, Simsek, Roche, & Kelly, Reference Heavey, Simsek, Roche and Kelly2009; Miller, Reference Miller1983; Wiersema & Bantel, Reference Wiersema and Bantel1992). At the same time, extreme levels of background heterogeneity in a less tenured team could result in lower EO because the diversity is so vast it generates dysfunctional conflict, impedes communication and thwarts joint decision-making (Miller, Burke, & Glick, Reference Miller, Burke and Glick1998).
Conversely, TMTs with less industry background diversity may experience fewer entrepreneurial opportunities and successes due to a more limited network and associated information flow (Child, Reference Child1997; Hannan & Freeman, Reference Hannan and Freeman1984). Shorter-tenured teams with little or no heterogeneity may exhibit lower EO due to potential groupthink and a limited access to a variety of networks and experiences (Hambrick & Mason, Reference Hambrick and Mason1984; Knight et al., Reference Knight, Pearce, Smith, Olian, Sims, Smith and Flood1999; Williams & O'Reilly, Reference Williams and O'Reilly1998). At the same time, more homogeneous teams can experience less social categorization and increase their consideration of more entrepreneurial initiatives because they are more confident in their decisions (Knapp, Dalziel, & Lewis, Reference Knapp, Dalziel and Lewis2011; Nielsen, Reference Nielsen2009).
Building on previous research, the current study proposes that TMTs with shorter tenures and low industry heterogeneity will experience lower EO because of the combination of low information flow and a lack of understanding of the resources and capabilities of the firm (Hambrick & Mason, Reference Hambrick and Mason1984; Knight et al., Reference Knight, Pearce, Smith, Olian, Sims, Smith and Flood1999; Williams & O'Reilly, Reference Williams and O'Reilly1998). As tenure increases, TMTs with lower levels of heterogeneity will experience greater EO as the team develops clear roles and communication channels. On the other hand, TMTs with high levels of industry background heterogeneity will be constrained by social categorization even though the knowledge of the firm increases. Thus, it is proposed that TMTs with high industry background heterogeneity will be highly conflicted and unable to obtain agreement to move forward with innovative, risky and proactive efforts (Miller, Burke, & Glick, Reference Miller, Burke and Glick1998).
The observations presented above suggest that TMTs with moderate levels of industry background heterogeneity will exhibit more innovative, risk-taking and proactive decision-making than TMTs with low and high levels of heterogeneity, which leads to the following hypothesis:
Hypothesis 2: Industry background heterogeneity of the TMT will moderate the inverse-U relationship between TMT tenure and EO such that the inverted-U shape will be more pronounced among firms whose TMTs exhibit lower levels of industry background heterogeneity and less pronounced among firms whose TMTs exhibit higher levels of industry background heterogeneity.
Methods
Data collection
Sample data for the current study were collected from various secondary databases for publicly traded companies listed in U.S. stock exchanges from three diverse industries that were expected to experience varying levels of EO, including air transportation, semiconductors, and pharmaceuticals. Furthermore, only publicly listed firms were included in this study because EO was operationalized using content analysis of annual reports that are readily available for publicly traded firms (Short, Broberg, Cogliser, & Brigham, Reference Short, Broberg, Cogliser and Brigham2010). Moreover, the demographic information of TMT members is more readily available in publicly traded companies versus private firms where information is limited and often inconsistent (Li, Reference Li2017). Additionally, the sample industries rated at mixed levels of managerial discretion (based on the industry growth rate, regulatory environment, product development, and capital intensity) according to Hambrich and Abrahamson's (Reference Hambrick and Abrahamson1995) managerial discretion list (Boling, Pieper, and Covin, Reference Boling, Pieper and Covin2016). Data collected for the year 2009 resulted in 190 observations.
Dependent variable
Entrepreneurial orientation
EO is operationalized consistent with Miller (Reference Miller1983), and Covin and Slevin (Reference Covin and Slevin1991) as a unidimensional construct comprised of the elements innovativeness, risk-taking and proactiveness. The study focuses on the evaluation of the overall EO of the firm and therefore, the EO construct is measured by the additive value of the three components. Moreover, although other conceptualizations have been used in research efforts (e.g., Lumpkin & Dess, Reference Lumpkin and Dess1996), the unidimensional three-component conceptualization has been the most predominant (Covin & Wales, Reference Covin and Wales2012; Rauch et al., Reference Rauch, Wiklund, Lumpkin and Frese2009). Additionally, different conceptualizations of EO using five or more dimensions provide a lower level of abstraction and could lead to different results compared to the original EO construct (George & Marino, Reference George and Marino2011).
EO is measured through content analysis of 10-K annual reports for the year 2009 (Short et al., Reference Short, Broberg, Cogliser and Brigham2010). We relied on 10-K annual reports instead of letters to the shareholders (Short et al., Reference Short, Broberg, Cogliser and Brigham2010) because our sample includes companies outside the Fortune 500 that commonly do not publish letters to the shareholders. A company's 10-K annual report typically includes discussions of past and future strategies and anticipated performance targets (Boling, Pieper, & Covin, Reference Boling, Pieper and Covin2016). The content analysis of corporate texts such as shareholder letters, press releases, 10-Ks and annual reports is increasingly used by organizational scholars because of its numerous benefits, for example its unobtrusive nature (Short et al., Reference Short, Broberg, Cogliser and Brigham2010). Content analysis is a combination qualitative and quantitative method that provides for a rigorous process of gathering data that are otherwise difficult to obtain for management studies. The primary assumption behind the content analysis method is that it recognizes that through the language used one can develop an understanding of the cognitive schemas of management (Duriau, Reger, & Pfarrer, Reference Duriau, Reger and Pfarrer2007).
Consistent with the procedure outlined by Short et al. (Reference Short, Broberg, Cogliser and Brigham2010), the current study uses computer-aided text analysis (CATA) to process annual reports of the sample companies. LIWC 2007, a widely used CATA software package, is used to process the 10-K text files and obtain a count of the words that match the custom dictionary developed and tested by Short et al. (Reference Short, Broberg, Cogliser and Brigham2010) specifically for the purpose of determining EO. The standardized values for all three dimensions of innovativeness, risk-taking and proactiveness were summed to create a measure of the firm's EO score. Higher scores indicate more EO and lower scores a more conservative orientation.
Independent variable
TMT tenure
We measured TMT tenure by dividing the total tenure of the team by the number of members (Carpenter, Geletkanycz, & Sanders, Reference Carpenter, Geletkanycz and Sanders2004).
There has been considerable debate as to the definition of the TMT and yet there does not seem to be any significant agreement among researchers. In this study, we looked at the executive team listed in the firms' annual reports to identify the TMT members of our sample companies, an approach that has been consistently adopted in recent studies (e.g., Li, Reference Li2017; Nielsen and Nielsen, Reference Nielsen and Nielsen2013; Tanikawa and Jung, Reference Tanikawa and Jung2016). We use a sample of publicly traded companies and thus follow the recent trends in data collection and look at the executives listed in the company 10-K to define the TMT (Carpenter, Geletkanycz, & Sanders, Reference Carpenter, Geletkanycz and Sanders2004).
Additionally, we included the CEO in our definition of TMT, as it's been shown that the presence of the CEO can improve the prediction of organizational outcomes (Finkelstein et al., Reference Finkelstein, Cannella, Hambrick and Cannella2009). Moreover, this type of operational definition can be observed in several prominent publications (e.g., Boone, Lokshin, Guenter, & Belderbos, Reference Boone, Lokshin, Guenter and Belderbos2019; Finkelstein & Hambrick, Reference Finkelstein and Hambrick1996; Hambrick, Humphrey, & Gupta, Reference Hambrick, Humphrey and Gupta2015; Henderson & Fredrickson, Reference Henderson and Fredrickson2001).
Moderator variable
TMT industry background heterogeneity
Biographical data for each TMT member was collected from various business databases and publications, as well as company websites and annual reports. TMT industry background data were determined by examining each firm's TMT member's experience and coding the executive's industry background(s) based on a wide range of industry classifications including Academic, Airlines, Automotive, Chemical, Communications, Construction, Consumer, Distribution, Electronics, Financial Services, Food Services, Government, Healthcare, Industrial, Law, Military, Mixed, Retailing, Professional Services, Software, Telecommunications, Transportation, Utilities.
While the coding of data may result in bias due to different rater backgrounds and abilities, especially when multiple raters are employed (Hair, Black, Babin, & Anderson, Reference Hair, Black, Babin and Anderson2010), in this study, the coding of the backgrounds required very little interpretation and was a straight-forward categorization because the biographies of the executives typically included the specific dates of their employment by the company. In addition, there was a single rater enabling consistency of the coding. The codes were used to calculate the level of heterogeneity in industry background for each team using Blau's (Reference Blau1977) index of heterogeneity (Hambrick, Cho, & Ming-Jer, Reference Hambrick, Cho and Chen1996; Naranjo-Gil, Hartmann, & Maas, Reference Naranjo-Gil, Hartmann and Maas2008; Wiersema & Bantel, Reference Wiersema and Bantel1992).
Control variables
Industry
Industry dummy variables are used to control for unobserved effects among the represented industries (Ling & Kellermanns, Reference Ling and Kellermanns2010).
Firm size
Firm size is measured using the natural log of the total number of employees at the time of the study (Casillas, Moreno, & Barbero, Reference Casillas, Moreno and Barbero2010; Covin, Green, & Slevin, Reference Covin, Green and Slevin2006). It has been argued that larger firms have more resource availability to pursue entrepreneurial opportunities (Bantel & Jackson, Reference Bantel and Jackson1989). However, it has also been argued that smaller firms are more agile and can move quicker and more successfully in pursuing entrepreneurial initiatives and are thus more entrepreneurial (Rauch et al., Reference Rauch, Wiklund, Lumpkin and Frese2009). Including firm size as a control variable addresses the divergent views (Harms, Reschke, Kraus, & Fink, Reference Harms, Reschke, Kraus and Fink2010).
Firm age
Firm age is operationalized as the life of the firm based on its recorded establishment date (Casillas, Moreno, & Barbero, Reference Casillas, Moreno and Barbero2010; Covin, Green, & Slevin, Reference Covin, Green and Slevin2006). During the life of an organization, the make-up and level of EO may change (Miller & Friesen, Reference Miller and Friesen1984). Controlling for the age of the firm is necessary to ensure that this study is measuring the effects of the TMT background characteristics and not the effects of age.
TMT average age
TMT average age is included as a control for potential bias due to differences in the interpretation of strategic alternatives presented from internal and external sources (Carpenter, Geletkanycz, & Sanders, Reference Carpenter, Geletkanycz and Sanders2004). According to the upper echelons theory, age can be considered a proxy of psychological factors affecting the executives' strategic choices (Hambrick, Humphrey, & Gupta, Reference Hambrick, Humphrey and Gupta2015), as TMT members of different ages are likely to interpret events based on different cognitive styles (Olson, Parayitam, & Twigg, Reference Olson, Parayitam and Twigg2006).
TMT size
TMT size is operationalized as the total number of team members. Not controlling for size may confound the results, making it difficult to discern whether the results should be attributed to heterogeneity or team size (Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001; Carpenter, Geletkanycz, & Sanders, Reference Carpenter, Geletkanycz and Sanders2004).
Environmental dynamism
Environmental dynamism was operationalized using the elements of industry growth and industry stability. Industry growth was calculated as the median rate of sales growth between t−2 and t. Industry stability, an indicator of unpredictable growth or shrinkage in the industry, was measured as the absolute difference in the industry growth rate from t−2 to t−1 versus t−1 to t. The measures of the two elements were summed for an overall environmental dynamism measure (Hambrick & Cannella, Reference Hambrick and Cannella2004). EO is likely to be greater in dynamic environments (Miles, Covin, & Heeley, Reference Miles, Covin and Heeley2000).
Analytical method
The research question in the current study seeks to understand whether TMT tenure is positively related to the organization's EO. It further explores the moderating influence that TMT industry background heterogeneity might have on the TMT tenure–EO relationship. The analytical model consists of one dependent variable, one independent variable, one moderator, and multiple control variables making regression the most appropriate option for analysis (Hair et al., Reference Hair, Black, Babin and Anderson2010).
Results
The means, standard deviations, and correlations of the model variables are shown in Table 1. Multicollinearity was tested by evaluating the variance inflation factor (VIF) within each model. VIF readings were below the threshold level of ten, indicating multicollinearity is not a problem (Hair et al., Reference Hair, Black, Babin and Anderson2010). Centering was applied to the interaction terms.
Descriptive statistics and correlations
*p < .05; **p < .01.
Hypotheses tests
The hypotheses were tested via multiple regression analyses in three different models. The results are shown in Table 2. Model 1 tests the control variables. Model 2 tests the predictability of the main-effect variable with EO. Model 3 tests the interaction of the predictor variable with TMT industry background heterogeneity. All regression findings shown in the following discussion are from Model 3. Durbin–Wu–Hausman test was conducted to test for possible endogeneity in the current model and based on the findings, endogeneity is not a concern.
Hypothesis testing regression results
†p < .1; *p < .05; **p < .01; ***p < .001.
Standardized Coefficients.
Control variables
Firm size was found to have a negative relationship with EO (β = −.25, p < .01), indicating the larger the company, the less entrepreneurial the firm. The findings are consistent with entrepreneurial researchers that claim smaller is better when it comes to a firm being more entrepreneurial (Rauch et al., Reference Rauch, Wiklund, Lumpkin and Frese2009). Interestingly, the findings of firm age presented a U-shaped curvilinear relationship (β = −.21, p < .1; β of the squared term = .24, p < .05), signifying that early and later stages of the firms in the current sample are more entrepreneurially oriented than middle-aged firms. All other variables, except industry dummy 1, were not significant.
Hypothesis 1
Model 2 tests Hypothesis 1 (H1). H1 hypothesized TMT tenure to have an inverted U-shaped relationship with EO. The coefficient signs (β = .16, p < .05 and the squared term β = −.13, p < .1) indicate an inverted-U relationship in which firms with low TMT tenure have slightly less EO and firms with high TMT tenure will be considerably less entrepreneurially oriented (see Figure 1). The findings of H1 were significant and indicated a curvilinear relationship. While the shape of the curvilinear relationship was not symmetrical, it did present an inverted U-shaped form as hypothesized. Therefore, H1 is supported.
The relationship of TMT tenure with EO.
Hypothesis 2
Next, the moderating effect of TMT background heterogeneity was tested in Model 3, consistent with Baron and Kenny's (Reference Baron and Kenny1986) approach for testing moderation. Hypothesis 2 (H2) proposes a moderating effect of TMT industry background heterogeneity such that with high TMT industry background heterogeneity, the inverted-U shape would be flatter and less positive, while with low heterogeneity, it would become more pronounced and more positive.
The relationships shown in Table 2 confirm a significant interaction of industry background heterogeneity and TMT tenure (β = −.07, ns and β of the squared term = .22, p < .1). The plot in Figure 2 shows that TMTs with short and long tenures and high levels of industry background heterogeneity present an almost flat level of EO, with long-tenured TMTs displaying a slightly higher EO.
The relationship of TMT tenure with EO moderated by TMT industry heterogeneity.
The interaction of a low TMT background heterogeneity with TMT tenure instead resulted in a more U-shaped relationship with EO (Haans, Pieters, & He, Reference Haans, Pieters and He2016). Although the relationship was significant, the shape of the relationship for TMT high background heterogeneity did not match the hypothesized shape and therefore, H2 is only partially supported.
Discussion
Theoretical narrative and implications
In this study, we sought to investigate the curvilinear relationship between TMT tenure and EO, and clarify the moderating effect of TMT background heterogeneity.
According to the upper echelons theory (Hambrick & Mason, Reference Hambrick and Mason1984), top executives' background characteristics shape their cognitive base, which, in turn, influences their strategic management of the firm (Boling et al., Reference Boling, Pieper and Covin2016). Research has shown that tenure is one of the TMT characteristics that affect the most executives' strategic orientation since long-tenured teams tend to adopt persistent and unchanging strategies (Finkelstein & Hambrick, Reference Finkelstein and Hambrick1990), avoid risky strategic decisions (Barker & Mueller, Reference Barker and Mueller2002), and emphasize stability (Kor, Reference Kor2006; Chen, Hsu, & Huang, Reference Chen, Hsu and Huang2010). During the course of their tenure, CEOs and top executives usually experience two main trends (Henderson, Miller, & Hambrick, Reference Henderson, Miller and Hambrick2006), characterized by the initial increase and the following decrease of organizational outcomes like innovation (Wu, Levitas, & Priem, Reference Wu, Levitas and Priem2005), adoption of new strategies and attitude toward risk (Finkelstein & Hambrick, Reference Finkelstein and Hambrick1990), and market expansion (Souder, Simsek, & Johnson, Reference Souder, Simsek and Johnson2012). Because EO has been described as a strategic posture in which a firm ‘engages in product-market innovation, undertakes somewhat risky ventures, and is the first to come up with ‘proactive’ innovations’ (Miller, Reference Miller1983: 771), the curvilinear relationship described by the above-mentioned upward and the downward trend can be predicted also for TMT tenure and EO (Boling et al., Reference Boling, Pieper and Covin2016).
As expected, our study found that TMT tenure is related to EO in an inverse-U shaped relationship. As shown in Figure 1, EO increases slightly in the beginning years of tenure, reaches a turning point at approximately three years of tenure and becomes increasingly negative for longer-tenured TMTs. The result is supported by previous literature. In a study examining a sample of American and European managers from a variety of industries, Gabarro (Reference Gabarro1987) observed that it takes up to six months for new members to acquire a deep knowledge of the organization, understand internal roles and become productive. In addition, several studies found that while teams' cohesion, communication and decision-making mechanisms tend to improve over time (Boerner, Linkohr, & Kiefer, Reference Boerner, Linkohr and Kiefer2011; Carpenter, Reference Carpenter2002; Keck, Reference Keck1997), scanning activities decrease as relationships with external networks deteriorate (Zenger & Lawrence, Reference Zenger and Lawrence1989) and TMTs become prone to avoiding risky strategic decisions (Barker & Mueller, Reference Barker and Mueller2002) and follow more familiar path-dependent patterns (Chen, Hsu, and Huang, Reference Chen, Hsu and Huang2010; Kor Reference Kor2003).
This is an important outcome given that the majority of the research of EO and performance has supported that entrepreneurially oriented firms perform better (Covin & Slevin, Reference Covin and Slevin1991; Rauch et al., Reference Rauch, Wiklund, Lumpkin and Frese2009). Thus, this study provides some guidance on how firms may build or strengthen an EO and thus improve firm performance. In addition, the findings draw attention to the need to manage various executive background characteristics, such as industry background heterogeneity, to offset the negative effects of tenure on EO. Furthermore, the finding from the interaction of TMT tenure and industry background heterogeneity provides CEOs and other governing bodies guidance on building a TMT that would best be able to meet the needs of the organization and maximize its EO potential. TMT industry background heterogeneity was found to moderate the relationship of TMT tenure with EO. As shown in Figure 2, the negative effect of tenure on EO is reduced when there is less industry heterogeneity, where TMTs with long tenure and lower industry background heterogeneity experience higher levels of EO. This finding goes against some of the theoretical discussions indicating that longer-tenured teams have less entrepreneurial members who lose touch with external networks and information sources, as well as experience increasing groupthink. Moreover, low levels of TMT industry background heterogeneity were argued to result in less entrepreneurial opportunities due to lack of diversification (Van Doorn & Volberda, Reference Van Doorn and Volberda2009; Williams & O'Reilly, Reference Williams and O'Reilly1998). A potential driver of the finding is that TMTs with less industry background heterogeneity share the same perception of the competitive environment and are less likely to engage in conflict when it comes to strategic decisions (Chi, Huang, & Lin, Reference Chi, Huang and Lin2009), which in turn increases their consideration and support for entrepreneurial initiatives (Chi, Huang, & Lin, Reference Chi, Huang and Lin2009; Jarzabkowski & Searle, Reference Jarzabkowski and Searle2004). However, the beneficial effect of low industry heterogeneity in longer-tenured teams seems to last only up to a certain point, when it starts declining as the TMT becomes disconnected from the external environment. On the other hand, TMTs with short and long tenures and high levels of industry background heterogeneity present an almost flat level of EO, indicating that high levels of industry background heterogeneity may cancel out the negative influence of longer average TMT tenure.
The implication of our findings is that hiring and other practices directed at managing diversification of the TMT to build or increase an EO is more complicated than it may seem. The TMTs characteristics analyzed in this study are a double-edged sword (Jarzabkowski & Searle, Reference Jarzabkowski and Searle2004) and building and managing a TMT, capable of being entrepreneurial can be extremely complex and difficult.
Many scholars have explored TMT's composition and how TMT characteristics affect different organizational performance. The upper echelons theory has been invoked in many of these studies with the focus of primarily maximizing performance by leveraging those background characteristics separately. While understanding how a particular TMT background demographic, such as tenure, may be a partial driver of EO, it is critical to also investigate how various other background variables interact to strengthen or weaken the relationship with EO. The strategy of lowering the average tenure of the team may be thwarted by increased background heterogeneity of the executives. Each piece of the puzzle must be placed carefully to maximize EO and thus, performance. The findings of this study clearly show how the two selected characteristics interact to change the nature of the team and its ability to influence the EO of the firm. For instance, if a CEO prefers his or her team to stay together for longer tenures, he or she might benefit from mixing in different backgrounds to avoid or at least minimize any reduction in the intended strategic posture.
Limitations and suggestions for future research
There are limitations in this study that should be considered when interpreting the results. First, the generalizability of the study is limited due to only three industries being included. The industries were chosen because they are considered to be more or less entrepreneurial (Hambrick & Abrahamson, Reference Hambrick and Abrahamson1995). In addition, the sample for the current study is U.S.-centric. The relationships may be different in other countries. Future studies should consider a sample across a broader selection of industries and geographic areas.
Second, the content analysis method used to determine EO is a relatively new approach (see Short et al., Reference Short, Broberg, Cogliser and Brigham2010). CATA measurement technique is beneficial because it enables executive attitudes, beliefs, and decision-making to be assessed in an unobtrusive manner (Boling, Pieper, & Covin, Reference Boling, Pieper and Covin2016). Future researchers should consider alternative and potentially corroborating methods for measuring the EO construct using secondary data (see Miller, Reference Miller2011).
Beyond future research to eliminate limitations, researchers should continue to examine the complexities of the TMT background heterogeneities and how they may interact to strengthen or weaken a relationship with EO and firm performance. Better understanding the effects of these relationships and how they change when paired together will aid CEOs and governance boards to build more effective teams. Also, further examination of the inverted-U relationship of TMT tenure to EO is necessary to better understand the timing of the negative nature of the relationship and how to potentially extend the peak to later years. In addition, similar relationships may exist when seeking other strategic orientations. Future researchers should explore how interactions found in the current study may result in a similar change.
Conclusion
This study adds to the EO and upper echelons conversations by answering the question of how TMTs drive the strategic orientation of the firm in different ways.
Our findings show that an inverted U-shaped relationship exists between TMT tenure and EO, with the highest levels of EO reached approximately three years of tenure. We also shed light on the moderating effect of TMT industry background heterogeneity on this relationship. According to our results, a lower heterogeneity can reduce the negative effect of tenure on EO, where TMTs with long tenure and lower industry background heterogeneity experience higher levels of EO. As tenure increases, the beneficial effect of low heterogeneity seems to decrease as the TMT becomes more disconnected from the external environment. On the contrary, higher levels of industry background heterogeneity seem to reduce the negative influence of longer-tenured teams on EO.
While this study includes only one predictor variable of the many elements that influence the EO of the firm, it provides a good start to a fuller understanding of how a firm might develop and sustain such orientation. The findings show that over the tenure of the TMT, the influence on EO changes. In addition, we observed that the TMT industry background heterogeneity would interact with tenure to modify the shape of the relationship. Hence, the results provide some guidance for the management and governance of the firm in relation to team structure. Based on the findings, a properly diversified team will enable the maintenance and enhancement of an EO through the identification of a steady flow of entrepreneurial opportunities, ability to evaluate the opportunities, and skills and knowledge to implement them successfully.
J. Ruben Boling is an Associate Professor of Management and Entrepreneurship and Director of the Center for Entrepreneurship & Innovation in the Mike Cottrell College of Business at the University of North Georgia. Dr. Boling's research and teaching are focused on entrepreneurship and strategic management, primarily in the areas of top management teams, entrepreneurial orientation, and corporate innovation.
Mariangela Vecchiarini is an Assistant Professor of Management and Entrepreneurship in the Mike Cottrell College of Business at the University of North Georgia. She earned her Ph.D. in Entrepreneurship and Innovation from the Italian University Vanvitelli (Naples, Italy). Her research interests include entrepreneurial orientation, innovation, and family business.
