Upper Echelons and Their Impact on Internationalisation Processes

Index

1. Introduction

2. Upper Echelons and Their Impact on Internationalisation Processes
2.1 Starting Point: The Upper Echelons Theory
2.2 Dimensions of the Construct
2.3 Finding Evidence in Economic Practice: The Case of Kodak
2.4 Consequences of the Construct

3. Conclusion

4. References

1. Introduction

In times of globalisation, there are serious challenges for companies and its upper echelons in order to keep pace with the competitors. Firms have to be internationally oriented and to expand their operations beyond their national borders which goes along with an increasing degree of environmental uncertainty as well as a lack of knowledge about local conditions and the foreign (political, legal, tax) system. TheUppsala Stage Model(Johanson & Vahlne, 1977) describes this phenomenon of firm internationalisation as an incremental process in which the firm successively gains experiential knowledge.

In order to reduce the degree of uncertainty or the lack of knowledge and to be successful in foreign countries, firms can increase the internationalisation-level of their top management teams. It is obvious that top executives with various backgrounds have different (industry or foreign) experiences and therefore will have a higher information-processing capacity and are able to build a broader base of knowledge. This improves the quality of the top management team’s decision-making and enables them to deal with a higher complexity of firm operations (Finkelstein & Hambrick, 1996). The underlyingUpper Echelons Theory(Hambrick & Mason, 1984) emphasizes the influence of managerial background characteristics or prior experience on strategic choices and organizational outcomes which has in the end an impact on the firm performance level.

This essay argues that top management team internationalisation is an important factor of firm’s internationalisation success. CombiningUpper Echelons Theoryand theUppsalaStage Modelto a causal model as well as giving a link toBorn Global Theory(Madsen & Servais, 1997; Oviatt & McDougall, 2005), the international backgrounds or experiences of top executives can be expected to have a considerable influence on the top management team’s decision making process concerning the internationalisation strategy and thereby the companies’ degree of internationalisation and subsequently the firm performance level.

The international backgrounds and the international experiences help the top management team members on the one hand to better understand and on the other hand to successfully deal with the challenges of firm internationalisation processes. Due to the fact that this ability of the top executives is an almost unobservable characteristic and therefore difficult to measure directly, I will illustrate this concept with an inductive case.

2. Upper Echelons and Their Impact on Internationalisation Processes

2.1 Starting Point: The Upper Echelons Theory

As one basic assumption the Upper Echelons Theory (Hambrick & Mason, 1984) acknowledges the influence of managerial background characteristics or prior experience on strategic choices and organizational outcomes which has in the end an impact on the firm performance level. The theoretical foundation of theUpper Echelons Theorylies in theBehavioural Theory of the Firm(Cyert & March, 1963), which states that managerial choices are mostly not made on a rational basis, because humans are (to a large extent) influenced by their natural cognitive limitations. Behavioural aspects such as bounded rationality (see Simon, 1955), selective perceptions or various aspiration levels influence the strategic choices made by top management team members and, in turn, company performance. Unlike theBehavioural Theory of the Firm, theUpper Echelons Theoryonly focuses on the upper echelons of organizations (which is the top management team) and the team level analysis.

As managers have only a limited field of vision, they cannot perceive the whole complexity of a specific situation. Due to selective perceptions, the information-processing capacity of a manager is bounded and only certain parts of information can be noticed which are subsequently interpreted, based on a manager’s set of ‘givens’ (Finkelstein & Hambrick, 1996). The interpretation of the objective (external and internal) situation is based on the upper echelons characteristics that can be classified into two different kinds of personality attributes: On the one hand psychological factors, such as values, the cognitive base and other personality factors, and on the other hand observable characteristics, such as age, tenure, education, functional background or experiences (Hambrick & Mason 1984; Carpenter, Geletkanycz & Sanders, 2004). A third dimension, added by recent research, are affects, emotions and moods of the top management team member (Michl et al., 2010).

Due to the fact that the upper echelons cognitive base, values and perception are difficult to measure directly, the observable demographic characteristics of the top management team members are assumed to be proxies for underlying differences in them. (Carpenter, Geletkanycz & Sanders, 2004).

In the case of a high environmental uncertainty, strategic decisions and choices of the top management team are strongly influenced by the top manager’s background characteristics and previous experiences. As a result, the firms’ strategic choices can be explained by the characteristics of the top management team members (Hambrick & Mason, 1984). Also expansions or the internationalisation process in general goes along with a high environmental uncertainty. Therefore, it is assumed that also the decisions in an internationalisation process are influenced by the upper echelons characteristics.

2.2 Dimensions of the Construct

But what are variables which influence the top management team’s decision making process concerning the internationalisation strategy and ultimately the companies’ degree of internationalisation? The above mentioned background characteristics and previous experiences also affect top management team member’s behaviour concerning strategic internationalisation decisions. Of particular interest is the comprehensive knowledge and experience of foreign countries and their markets which helps top managers to better understand the foreign market and make reasonable managerial decisions in international operations. By now, the academic literature ofUpper Echelons Theoryin international contexts mostly focuses on theinternational experiencesof top executives (e.g. Tihanyi et al., 2000; Herrmann & Datta, 2005) while only a few papers argue on thenational diversityin the composition of top management teams (e.g. Heijltjes, Olie & Glunk, 2003) which was rarely examined in the past.

National origins as one driver which influences the decision-making process of top management teams within the internationalisation context, have a considerable influence on team dynamics and interactions in multicultural teams (Hambrick et al. 1998). The national diversity is important for the success of internationalisation strategies because it has a positive influence on the information-processing capacity of the top management team and the quality of their decisions. Different perspectives and different national mentalities enables the top management team on the hand to reduce their individual bias or group think and, on the other hand to make better or proper decisions. This is because national diversity is one of the emerging dimensions of top management team heterogeneity (Sanders & Carpenter, 1998; Finkelstein & Hambrick, 1996).

On an individual level, the nationality of a foreign-born top executive goes along with a comprehensive knowledge about the (foreign) country, its culture and economy, norms, values as well as important market factors or possible barriers. This country- or even region- specific knowledge is essential and irreplaceable to make decisions in international contexts and an advantage in information-processing capacity that must not be underestimated.

International experiences as another driver can be developed during international assignments by the executives. This kind of knowledge is at least as important as the first mentioned driver and increases the companies’ advantages in the internationalisation process due to existing networks (of the top executive) or expertise about a foreign country or region, the top executive was assigned to earlier. Furthermore, it enables the firm to have an in- depth understanding of the culture and the foreign institutions outside the companies own institutional context.

Research (Gunz & Jalland, 1996) in that field showed that a high degree of international experience ensures also a higher international orientation of top managers. Moreover, international experiences in top management teams have a demonstrable positive influence on the corporate performance. This influence increases when the CEOs international experiences are combined with those of other top management team members (Carpenter, Sanders & Gregersen, 2001; Johanson & Vahlne, 1977).

The causal model presented in this essay however will combine both distinct sources of experience and knowledge to a two-dimensional construct:international experiencesof top executives as well as theirnational diversityin the team. Whilenational originsonly include the comprehensive knowledge of one country and its culture, theinternational experiencesgive top executives the ability to make comparisons and to carefully weigh up arguments because of their various cultural impressions. However, international experiences are mostly limited due to a restricted time frame of the executive, living in the foreign country.

They both affect the top management team’s ability to make sound decisions in international contexts and are assumed to have cumulative effects on each other: It largely depends on the other top management team member’s knowledge and experiences with the foreign culture, how and to what degree the national characteristics of a foreign team member influence the team processes. For example, the degree to which top management team members speak the language of another foreign team member or are sensitive with his or her culture may positively influence the team member interactions (Hambrick et al., 1998). The effects of national diversity might be turned to good account or reinforced in combination with a higher level of international experience among the top management team members.

A high degree of international experiences and national diversity of the top management team goes along with a high level of expertise, knowledge and network contacts which are a crucial resource for the decision-making process regarding the expansion to foreign markets. Market entries to foreign countries are complex and take place in a mostly uncertain environment. To moderate this effects, cultural (as well as strategic) knowledge is necessary in order to access as well as assess different alternatives.

According to theBehavioural Theory of the Firm, managers have cognitive limitations and are rationally bounded (Cyert & March, 1963). The international experiences and knowledge might help top executives to deal with the complexity of international processes and the high amount of information coming along. They can revert to their base of (international) knowledge which they experienced earlier in their career and therefore can make sound strategic decision regarding the internationalisation of the firm (Hambrick & Mason, 1984).

Furthermore, the top management teams broader base of valuable international knowledge and their higher information-processing capacity provides the firm with superior knowledge. It enables the top management team to better (and earlier) recognize market potentials in foreign countries and thus potential opportunities for a foreign expansion of the firm as well as a comprehensive evaluation of the alternatives and options available. This will be strengthened through the above mentioned networks and the foreign cultural or regional knowledge.

This approach, combining two variables which influence team’s decision making processes, is also in line with research results that top managers embody a ‘bundle’ of attributes and that the effects of their diverse background characteristics should be studied in interaction, rather than isolated from each other (Carpenter, Geletkanycz & Sanders, 2004, relating to Kor, 2003). However, making reasonable decisions in international contexts is a latent construct because it is not directly measurable.International experiencesand the diversity innational originsof the top management team are indicators of the latent variable in this construct.

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