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The Role of Managerial Discretion
Business Policy and Strategy
Fall 2014Yuliya Ponomareva, PhD Candidate.
Linnaeus University
2FE017 Yuliya Ponomareva
Short Outline
• The influence of top managers on organizational outcomes
• The main theoretical perspectives
• Defining managerial discretion
• Dimensions of managerial discretion
• Presentation of papers
• “Corporate strategy is the pattern of decisions in a company that determines and reveals its objective purposes or goals …” (Foss, 2003 p. 52)
• Who is responsible for creation and execution of corporate strategy?
- In European context: strategy is jointly created by the board and theTMT
- In Anglo-Saxon context: strategy is created and executed by the TMT
•
Do managers matter?
Google CEO Eric Schmidt (Creative Commons)
Strategic Choice Perspective
• The Central Assumption:
• Managers have a profound influence on organizational
outcomes.
• ”The fundamental attribution error” (Weber et al., 2001)
CEO Decisions that changed the history
of a company• Paper production,
• Rubber production,
• Electricity production,
• Telecommunications cables,
• Consumer electronics,
• Personal computers,
• Electricity generators,
• Robotics,
• Military communications equipment,
• Plastics, aluminium, chemicals
• www.Nokia.com
CEO as the ”Savior”
CEOs as the ”Failure”
matt buchanan/http://www.flickr.com/CC BY-ND 2.0
The Still Man/http://www.thestillman.com/CC 3.0
Strategic choice perspective: Theories I
• Organization Man vs. Economic Man (Simon, 1947)
• Behavioral Theory of a Firm (Cyert and March, 1963):
• How internal organizational factors influence firm’s
strategic decisions (price, resource allocation, output, the
goal).
• - The emphasis on decision-making process.
Strategic choice perspective: Theories II Upper Echelon’s Theory (Hambrick and Mason, 1984)
• Top-Managers are responsible for creation and execution
of firm’s strategy
• Top-Managers are bounded in their rationality:
http://goo.gl/A8ykMA using a Creative Commons licence.
Empirical Evidence:
• Study 1:
• Methodist ministers with experience in successfullyaccoplishing their prior assignments are more likely tosuccessfully accomplish their present assignment in a church. (Smith, Carson, and Alexander, 1984)
• Study 2:
• Prior experience of professional sports coaches may predict their performance with present teams. (Rowe et al., 2005)
• Study 3:
• TMTs composed of members with different length oftenure outperform TMT composed of members withsimilar tenures. (Murray, 1983)
Strategic Choice Perspective Environmental Determinism
Perspective
“Managers Matter”
Behavioral Theory of a Firm
Upper Echelons Theory of a Firm
CEO and TMT characteristics
Environment determination perspective
- Organizational Ecology: organizational inertia
- Institutional theory: Institutional forces
- Contingency theory: Situational influence
•Managers are constrained by the environmental forces,
organizational inertia, and social norms.
Empirical Evidence
• Study 1:
• 6.5% to 14.5% of firm’s performance variation can be
attributed to the function of executives (Lieberson and
O'Connor's, 1972)
• Study 2:
• 5% to 15% of variance in city expenditures are attributed
to the individual roles of mayors (Salancik and Pfeffer's,
1977).
• Study 3:
• 5% of variation in firms’ returns on assets can be attributed
to firm’s executives (Bertrand and Schoar,2003).
Organizational Environmental Adaptability
Strategic choice Environmental Determinism
Hambrick and Finkelstein 1987
Managerial Discretion: 2 central
perspectives
• Strategic perspective: the scope of managerial actions
• Governance perspective: the scope of managerial
objectives
Managerial Discretion: Dimensions
(Hambrick and Finkelstein,1987)
Individual
Organizational
Environmental
Environmental Level of Managerial
Discretion
- Product differentiability
- Market growth
- Industry structure
- Demand instability
- Quazi-legal constraints
- Powerful outside forces
Industry Clasifications
•High Discretion Industries
Computers and Electronics, Cosmetics, Engineering, Toys
•Low discretion Industries
Oil and Gas, Water Supply, Railroads
Hambrick and Abrahamson (1995)
Empirical evidence
• CEO compensation is higher in high-discretion
environments (Finkelstein and Boyd, 1998)
• CEO compensation predicts corporate performance more
in high-discretion environments (Rajagopalan, 1997)
• The higher the level of diversification the higher the level
of variable executive compensation (1987)
Headlines From Wall Street Journal
” Oil and Gas CEO Pay Beats Other Industries” (by D.
Mattioli, 2012).
The influence of culture
Steiman (creative commons)
Guillaume Paumier on Wikimedia Commons under a Creative Commons license
Creative Commons
The ”effect” of the CEO is significantly
higher in the US firms when compared to
German and Japanese CEOs• Potential explanations:
• Formal insitutions:
• - legal tradition, firm ownership structure, board structure
• Informal Insitutions:
• - cultural values: uncertainty avoidance, power distance,
http://geert-hofstede.com/
External governance mechanisms:
• Market for managerial labor
• Financial Audit
• Market for corporate control
Organizational Level: Strategic
determinants
- Inertial forces: size, age, strong culture, capital intensity
- Resource availability
- Powerful inside forces
Organizational Level: Governance
determinants
Internal mechanisms:
• Ownership concentration
• The board of directors
• Executive compensation
Individual Level (Habrick and Finkelstein,
1987)Manager’s Individual Characteristics:
• Aspiration level
• Commitment
• Tolerance for ambiguity
• Cognitive complexity
• Locus of control
• Power base: personal reputation, authority
Empirical Evidence
• Executives with internal locus of control and impression
management tendencies have a positive effect on
managerial discretion. (Carpenter and Golden, 1997)