Latest research knowledge from the Department of Strategic Management and Globalization, Copenhagen Business School
Does a diverse top management team increase firm performance? New research by SMG Professor Bo Bernhard Nielsen with Sabina Nielsen from INT suggests that the answer is: It depends.
Important strategic decisions in firms are typically made by a select group of upper echelons, often referred to as top executives or the top management team (TMT). The composition of this team of top managers has received a lot of attention in the academic literature as well as in practice as firms and academics ask themselves what the optimal composition of firm upper echelons should look like. Does a homogenous team outperform a more diverse team? If so, why, when and how?
Professor Bo Nielsen explains: “Theory suggests that diversity may result in both positive (cognitive) as well as negative (affective) consequences, however, despite decades of research into this topic, we still do not fully understand when (under what conditions) the benefits of TMT diversity will outweigh the costs. More fundamentally, most research assumes diversity to be uni-dimensional and its effects to be unitary – that is either positive or negative”. Bo Nielsen goes on to explain that this assumption is highly problematic as diversity is a complex multidimensional construct which needs to be unpacked in order for its effects to be adequately understood. Moreover, the context, within which a specific set of decisions are made, is also likely to influence the performance outcomes of TMT diversity.
In the forthcoming article in Strategic Management Journal, Professor Nielsen (with Sabina Nielsen also from CBS) demonstrate that the consequences of TMT diversity depend on the (1) specific attributes of diversity being considered and (2) team, firm, and industry conditions under which strategic decisions take place. In their multilevel study, they provide strong evidence of the multi-dimensional nature of diversity and show that TMT diversity is not unitary (positive or negative); rather the salience of specific diversity attributes vary with different layers of context. Based on a unique sample of Swiss multinationals, they start out by studying the effects of nationality diversity (the heterogeneity in different nationalities present on the top management team) on performance, moderated by team, firm and industry contextual influences. Their findings clearly show that while nationality diversity in general is positively associated with firm performance, it is more so in long-tenured teams of highly internationalized firms operating in munificent industries.
With globalization accelerating and executive search transcending national borders, these findings are important as the number of non-nationals on TMTs of multinational corporations (MNCs) is steadily increasing. The resulting TMT nationality diversity may have important implications as national origin has a profound influence on strategic decision making, team dynamics, and firm performance. “Different nationalities bring different values and cognitions to the decision-making process, which ultimately leads to more creative and better strategic solutions”, says Bo Nielsen. He explains that having grown up, gone to school and been embedded in a particular institutional context has profound implications for how a person understands the environment and ultimately makes decisions. “We bring with us these institutionally imprinted experiences wherever we go and thus top managers are likely to, subconsciously, draw on these deeply embedded experience when making strategic decisions; especially under high complexity, ambiguity and uncertainty. As such, institutionally embedded experiences acquired during an individual’s formative years are far more likely to influence strategy-making than say international experiences acquired during a relatively short period of stay in a foreign country”, says Bo Nielsen, who goes on to emphasize that international experience is a poor substitute for nationality diversity, however, one that is often invoked by CEO’s when asked about the lack of nationality diversity among its upper echelons.
In Denmark, most top management teams are rather homogenous – both in terms of nationalities as well as many of the other dimensions of diversity (e.g., gender, age, industry experience etc.). This is interesting given the relative high level of international dependency of many large Danish firms. In contrast, the degree of nationality diversity on top management teams in Switzerland is significantly higher and successful firms like Nestle has a tradition of having many different nationalities on their top management team. This raises important questions regarding the potential value of nationality (or other types of) diversity for multinational firms. The forthcoming article in Strategic Management Journal helps answer some of these questions.
A key function in strategic decision-making is the ability to estimate the costs of implementing strategic decisions. “However,” SMG Assistant Professor Marcus M. Larsen explains, “many firms find that the implementation of strategic decisions can trigger substantial hidden costs that negatively affect firm performance.” For example, firms often find that the implementation of a diversification strategy requires substantially more coordination than initially expected. Firms may also discover that knowledge transfer in the context of internationalizing business activities is more costly than expected.
In a forthcoming publication in Strategic Management Journal, SMG faculty members Assistant Professor Marcus M. Larsen and Professor Torben Pedersen, together with Assistant Professor Stephan Manning of University of Massachusetts, Boston, investigate why certain costs are hidden in decision making processes and thus not accounted for in initial cost estimations.
They use the growingly important phenomenon of offshoring of administrative and technical services to do this. To reap benefits such as lower labor costs and access to resources in foreign locations, large numbers of firms not only offshore standardized IT and business processes but also more complex, knowledge-intensive activities and product development. However, many firms have begun to realize that managing an increasingly globally dispersed organization is substantially more difficult and costly than initially expected. Decision makers often fail to accurately estimate the costs of offshoring and are therefore surprised by unexpected—or hidden—costs of implementing offshoring decisions abroad.
Using comprehensive data from the internationally acknowledged Offshoring Research Network, the authors find that complexity increases the discrepancy between the estimated and realized costs of implementing offshoring activities in foreign locations. They argue that complexity limits the ability of managers to rationally account for all important decision factors and thus increases the risk that certain performance-detrimental consequences remain hidden in the decision-making process. At the same time, they also argue that this relationship is moderated by the organizational design orientations of firms’ offshoring strategies and by firms’ offshoring experience. With design orientation and experience, firms are more likely to anticipate and align offshoring complexity with corresponding organizational structures and processes.
The article makes a number of important contributions. “In offshoring research,” Marcus M. Larsen says, “the idea of hidden costs is new and has predominantly been treated conceptually and anecdotally to underscore how offshoring might be more challenging than initially expected. With this article, we theoretically and empirically demonstrate why these hidden costs of offshoring emerge, how they may be operationalized, and with which measures firms may take to reduce them.”
More generally, this article makes an important contribution to research that emphasize the inhibiting role of complexity in decision-making processes. It does this by focusing on the role of the organizational context in decision makers’ estimation ability and, in particular, on how organizational complexity undermines decision makers’ ability to account for costs of implementation.
A long-standing discussion in management research concerns the relation between capabilities perspectives on the firm and organizational economics, including transaction cost economics and agency theory. In particular, proponents of capabilities ideas have criticized organizational economics for exaggerating the role of opportunism (and similar constructs), neglecting value creation and downplaying dynamics. Conversely, proponents of organizational economics have criticized the lack of a clear unit of analysis, causal mechanisms and micro-foundations in the capabilities approach.
“While these early debates clarified many things,” says SMG Professor Nicolai J Foss, “the field is increasingly moving towards a more conciliatory stance in which the two perspectives are seen as capable of cross-fertilizing each other. This is going further than merely stressing a relation of complementarity in which capabilities ideas lend themselves to the explanation of organizational heterogeneity while organizational economics provides the understanding of the organization of heterogeneous resources and capabilities. The new view is that, notably, organizational economics has the potential of illuminating capability emergence and therefore organizational heterogeneity.”
With Nicholas Argyres (Washington University), Teppo Felin (Brigham Young University), and Todd Zenger (Washington University) Foss is an editor of the September-October issue of the leading management research journal, Organization Science, titled “Organizational Economics and Capabilities: From Opposition and Complementarity to Real Integration” (http://orgsci.journal.informs.org/content/23/5.toc). This special issue contains a number of articles by leading contributors to the discussion, and mixes theoretical, empirical and modeling approaches, as well as an introduction by the editors that survey the debate and defines a new agenda for research in the field.
“We are pleased that we got so many high-level contributions for this special issue,” says Foss, “and in particular that these contributions truly manage to define a new, creative research frontier where the emphasis is on researching the interplay between theoretical mechanisms identified by the two perspectives.
Knowledge sharing in employee networks is a complex task. From a managerial perspective, the work is not done by just establishing formal network ties. If employees are not adequately motivated or lack the ability to make use of network ties, the investments made in designing knowledge sharing mechanisms and networks may be a waste of resources.
”The purpose of our paper is to address a central dilemma raised in the extant network literature on knowledge sharing, namely that network positions fostered by large and open networks provide knowledge access benefits in terms of access to new and nonredundant while at the same time entailing a knowledge sharing problem, because such networks lack the needed trust and feelings of reciprocity for knowledge sharing to thrive. We argue that while an employee’s network position represents the opportunity to engage in knowledge sharing, the employee needs adequate motivation and ability to seize that opportunity”.
The last 2011 issue of Academy of Management Journal features the article Why a Central Network Position Isn’t Enough: The Role of Motivation and Ability for Knowledge Sharing in Employee Networks, written by three SMG faculty members: Assistant Professor Mia Reinholt, Professor Torben Pedersen and Professor Nicolai J. Foss. The article explores the roles of a number of important factors on knowledge sharing in employee network. This is done by focusing on the relationship between network centrality, autonomous motivation, and ability.
The extant literature on the subject shows contrasting views regarding how specific network characteristics influences knowledge sharing. The authors of this article argue that in order to leverage the full potential of knowledge sharing, management need not only attend to network building activities, but also make sure that the employees possess adequate motivation and ability.
From a theoretical perspective the framework presented in the paper builds on motivation-opportunity-ability theories of behavior. The challenge is to move beyond the dilemma that large, open egocentric networks provide both knowledge sharing opportunities and problems. The core argument is that while an employee’s network position creates the opportunity to engage in knowledge sharing with colleagues, employees need adequate motivation and ability to fully exploit this opportunity. The hypotheses developed through this argument are tested empirically by data collected among 705 employees in a large Danish consultancy firm.
“Our research has important implications for both network research on knowledge sharing and the management of knowledge in organizations. Future research needs to consider important contingency factors such as motivation and ability and provide nuanced analyses of their impact. Our study for instance reveals that it matters how employees are motivated if they are to take full advantage of their network positions. For managers, who wish to stimulate knowledge sharing in their organizations, an important lesson of our study is that it is not enough to focus on and invest in network building devices, which has grown increasingly popular over the last few years. They also need to invest resources into stimulating the right type of motivation and build the ability to engage in knowledge sharing”.
The next issue of the Journal of Management (Vol. 38, Forthcoming), showcases a new research study by three SMG faculty members, Associate Professor Christian Geisler Asmussen and Professors Nicolai J. Foss and Torben Pedersen. In their paper titled “Knowledge Transfer and Accommodation Effects in Multinational Corporations: Evidence from European Subsidiaries”, the authors explore how knowledge possessed by foreign subsidiaries in Multinational Corporations (MNCs) have different sources, and what the implications are for the subsequent transfer to other MNC units.
The article builds on two key ideas. The first one is that there is a meaningful distinction between knowledge in MNC subsidiaries that mainly stems from internal sources and knowledge that mainly stems from external sources, and that these two kinds of knowledge may interact. The second key idea is the distinction between “assimilation” (where recipients incorporate the learned knowledge into their existing knowledge stocks, leaving these largely intact) and “accommodation” (where the acquisition of new knowledge makes the recipients alter some of their existing knowledge structures) effects from cognitive psychology. Christian Geisler Asmussen explains: “Until now it has largely been assumed in the management literature that organizational knowledge is cumulative, implying that more knowledge is always better. We argue that knowledge interacts in a more complex way, and that more knowledge may therefore actually be detrimental, if it makes the composite knowledge stocks of the subsidiary diverge too much from that those of the parent firm.”
Using a unique data set on European subsidiaries of MNCs, including information on stocks and flows of technological knowledge, the findings of the study suggest that subsidiary knowledge stocks that are balanced in terms of their origins tend to be more valuable, congruous, and fungible, and therefore more likely to be transferred to other MNC units. It is shown that a sufficiently high level of internal knowledge increases the likelihood that the marginal benefits of external knowledge will be positive and also the likelihood that they will outweigh the marginal costs of that knowledge. This also implies the existence of a tipping point, that is, a level of internal knowledge in a subsidiary that must be exceeded if the (rest of the) MNC is to benefit from knowledge that originates from that subsidiary’s external environment.
“In the paper we present an empirical estimate of such a tipping point,” elaborates Asmussen. “Surprisingly, the majority of the subsidiaries in our sample have levels of internal knowledge below this tipping point, implying that for these subsidiaries, more external knowledge actually leads to less transfer of knowledge to other MNC units. This suggests that obtaining the right balance in subsidiary knowledge development is a difficult and, perhaps, underestimated task faced by internationalizing firms.”
Much research in strategic management, organization and strategic human resource management assert that human resources are the ultimate foundation of sustained value creation and competitive advantages. In this context, much research has explored the question of how to best realize collaborative activities.
“However,” says SMG Professor Nicolai Foss, “generally the various research streams address either the motivational or the cognitive aspects of collaborative activities (e.g., in teams), and fail to consider the interplay of cognitive and motivational processes.” This is highly problematic, Foss explains, because many converging insights (e.g., in experimental social psychology, experimental and behavioral economics, and evolutionary anthropology) suggest that these processes are highly intertwined. ”This is exactly the point of much of Siegwart Lindenberg’s recent research,” Foss adds, “and we thought it would interesting to apply this research in the context of firm organization.”
The July issue of The Academy of Management Review published the article Managing Joint Production Motivation: The Role of Goal Framing and Governance Mechanisms, by professor Siegwart Lindenberg and professor Nicolai Foss. The article explores the motivational and cognitive microfoundations of organizational performance. The point of departure is the fundamentally collaborative nature of work in organizations and the fact that humans are biologically predisposed, under the right circumstances, to cooperate.
The fundamental question of the article is how to tap into the special kind of motivation where the collaboration of organizational members gives the organization a performance advantage. The authors focus on what they call the “normative goal frame” which entails the adoption of joint goals and the means to reach such goals as the crucial precondition of “joint production motivation.” However, the normative goal frame is in constant danger of being displaced by different kinds of more narrow, short-term and individual goals. Since we are always dealing with multiple goals, it is important which are in the cognitive foreground and which in the background. This insight enables the article to discuss a range of governance instruments necessary to establish and maintain the kind motivation that underlies superior performance.
From a more managerial perspective, the implications of the article concern how the manager stabilizes the normative goal frame of the organization. “We develop a number of implications of potentially high managerial relevance,” says Foss. “However, it is also clear that although the theory is strongly inspired by much solid empirical work, it has not been directly tested. In future work, we want to do empirical work that directly tests our ideas about joint production motivation.”
The role in the innovation process of knowledge sources that are external to the firm has drawn increasing research attention, as witness much work on “absorptive capacity”, “user innovation” and “open innovation.”
“However,” notes Professor Nicolai Foss, SMG, “virtually no-one have examined the role that organizational design plays for knowledge absorption. One would expect that this matters. For example, how much decision power middle managers have may be expected to influence their ability to engage with knowledge sources outside the firm, such as customers, suppliers, universities and so on. It is exactly this organizational design dimension that Keld Laursen, Torben Pedersen and I examine in this recent paper”.
The July/August issue of the highly influential journal Organization Science brings an article by the three CBS professors, Linking Customer Interaction and Innovation: The Mediating Role of New Organizational Practices. The article explores the notion that firms can improve their innovativeness by tapping users and customers for knowledge as it has been suggested in both the innovation and marketing literature. The main contribution to this discussion is to introduce the dimension of firm organization into the user innovation literature.
The article argues that firms that attempt to leverage user and customer knowledge in the context of innovation must design their internal organization appropriate to support this goal. A number of new organizational practices can be used, notably, intensive vertical and lateral communication, rewarding employees for sharing and acquiring
knowledge, and high levels of delegation of decision rights.
From a theoretical perspective, the study develops a model that highlights the role of certain organizational practices as mediators between firm’s interactions with customers and their innovation performance. This model is tested on an empirical data set of 169 Danish firms from a 2001 survey of the 1,000 largest firms in Denmark. A key result is that the link from customer knowledge to innovation is completely mediated by organizational practices. The implication is, that firms can only leverage the full potential of their interaction with customers by taking into account the organizational contexts of these encounters.
“What is really striking in the study,” says, Nicolai Foss, “is that the influence from external knowledge to innovation performance is fully mediated by organizational practices. We hadn’t expected the organizational dimension to be this important. To us, this strongly suggests that firms need to think very consciously about they gear their organization for the absorption and use of externally held knowledge”.
