How CEO Values and TMT Diversity Jointly Influence the Corporate Strategy Making Process

There are a number of definitions for the strategy making process. Chakravarthy and Doz (1992) describe it as “how effective strategies are shaped within the firm and then validated and implemented efficiently”. Referring to the diversity of strategy process research, Van de Ven (1992) argues that it can hardly be subsumed under a single paradigm and calls for the use of very explicit process definitions. He suggests three meanings of process: (1) a logic that explains causal relationships between independent and dependent variables, (2) a category of concepts that refers to actions of individuals or groups of individuals, and (3) a sequence of events that describes how things change over time. Pettigrew (1997) builds on this third definition and adds a number of premises to the study of strategy making processes, foremost the importance of temporal and contextual interconnectedness. Following this line of thought, and given that it is shaped by (also changing) people, a strategy making process is not a static ‘thing’ that a corporation has, but rather an eclectic process, which is itself subject to change in the long run. Each corporation will at a given point in time have a strategy process that features certain characteristics. These characteristics then constitute a dynamic organizational capability (Hutzschenreuter and Kleindienst 2006). The fact that they can be knowingly changed makes them an interesting topic of research. In fact, many different such characterizations—which Dess et al. (1997) refer to as “gestalts”—have been proposed. In this paper, we take the strategy making process to include all actions of individuals and groups of individuals that lead a firm to obtain, advance and alter its strategy. We also focus explicitly on the characteristics of strategy making processes. We assess these along the four dimensions mentioned above, which we see situated on two different levels (a classification which we will elaborate upon in the following paragraphs).

The first of these previous strategy making frameworks we briefly want to highlight is proposed by Dess et al. (1997) and builds on four different factors, which they label participative, entrepreneurial, adaptive and simplistic. They focus, however, on the entrepreneurial strategy making mode, i. e. a pro-active, partly risky and innovation-first approach, which they consider to be well suited to addressing the challenges of a fast-paced world. In their opinion, an entrepreneurial firm is the opposite of a conservative one. They do, however, also note that “[…] environmental challenges and organizational complexities […] suggest that simple relationships may be inadequate to explain the relationship between entrepreneurial strategy making and performance” (Dess et al. 1997, p. 678).

Following on from other frameworks (with more dimensions) that they had proposed as early as 1978, Miller and Friesen (1983) define two strategy making dimensions, namely analysis and innovation. The former focuses on the number of factors that are taken into account for decision making, how well different decisions are integrated and the extent to which future contingencies are included. The latter deals with the amount of effort that is directed to the development of new products and/or services and how proactively and flexibly the corporation approaches strategic decisions. Miller and Friesen argue and show that firms must adapt their strategy making to the respective environment (which they again classify according to a number of categories).

In addition to his well-known distinction between planned and emergent strategies, Mintzberg also proposes several modes of strategy making, including the planning, adaptive, entrepreneurial and bargaining modes. These are defined in line with the roles that formal analysis, stakeholder concerns, interactions between multiple decision makers and opportunity/risk taking play in strategy formulation (Mintzberg 1978, 1973, 1983).

Probably one of the most comprehensive characterizations of strategy making to date is, however, the one proposed by Hart (1992), who endeavors to bring structure into the “model proliferation” (Hart 1992) that had resulted from the numerous typologies proposed over the years. He argues that the range of approaches that had emerged was so wide that little cumulative knowledge had in fact resulted. Hart builds on many previously suggested classifications and identifies the relevant and recurring themes as rationality (bounded vs. comprehensive), vision (where and how does it originate?) and involvement (i. e. who plays what role in the process?). Arguing that each of the previously suggested classifications only captures a portion of strategy making, he develops a comprehensive framework built around the role played by top management and other members of the organization in the development of strategy. This framework consists of five pure-type strategy styles—command, symbolic, rational, transactive and generative—each of which describes a mode of strategy making. In a command mode, for instance, the TMT formulates strategy top down, and organizational members implement it. In contrast, a generative mode of strategy making relies on central guidelines and intrapreneurship to produce innovation bottom up. Hart treats these styles as non-rival and contends that an ability to master multiple styles has positive performance implications, whereas single modes of strategy making are really only successful in turbulent environments where the need for fast processes outpaces deep capabilities (Hart and Banbury 1994). Hart’s ideas are also taken up by Andersen (2004, 2009), who go a step further and argue that most strategy making typologies capture (de‑)centralization as a dominant process characteristic.

In order to relate the individual characteristics of strategy making processes to those of leadership and to account for some very recent research trends a slight reconfiguration of the previous strategy making frameworks is wanted. As a starting point, we concur with almost all of the previous research (Hart 1992; Andersen 2004; Floyd and Lane 2000) on the central importance of the respective roles of top management, middle management and operative personnel in strategy making which addresses Hart’s (1992) involvement theme. We label this the (de-)centralization dimension. Decentralization can occur on either a hierarchical, functional or geographic level or, indeed, as a combination of the three. Further components include the level of participation in decisions and decision authority accorded to the respective groups, both of which contribute (albeit in different ways) to decentralized strategy making (Andersen 2004). Decentralization is arguably the highest-order characteristic of strategy making in a firm.

In our opinion, there are three further dimensions which are subordinate to the level of decentralization in strategy making. The first of these, formalization, relates specifically to how well strategy making routines are established and codified and the extent to which medium- to long-term planning is emphasized within the firm (Ansoff 1980; Hart and Banbury 1994; Falshaw et al. 2006). It describes the level of formal analysis that a firm practices in its strategy formulation process. Furthermore, a formal strategy making process is also likely to be a procedure that occurs in regular cycles. This addresses in particular the rationality theme identified both by Hart (1992) and as early as 1963 by Cyert and March.

The second such dimension, namely flexibility, relates to the extent to which processes and the underlying assumptions behind established routines would be challenged should the respective environment change (Sharfman and Dean 1997). It also incorporates how well a corporation is able to accommodate new ideas and approaches (e. g. emergent strategies) from within (Mintzberg 1978, 1994). This dimension thus addresses the top-down vs. bottom-up theme (jointly with decentralization) and ties in with the discussion surrounding the entrepreneurial orientation of firms. The importance of (a lack of) flexibility becomes particularly evident in the analysis of firms which failed in times of major changes in their environments (Doz and Kosonen 2008).

The final dimension is external openness, which itself combines two distinct concepts, namely stakeholder engagement and open strategy. Stakeholder engagement is the extent to which stakeholder interests are considered in the formulation of the strategy (Freeman et al. 2010). Open strategy (Whittington et al. 2011; Matzler et al. 2014) relates to how far external stakeholders (such as universities, customers or NGOs) are given an active role in the strategy making process—a concept with close ties to open innovation practices (Laursen and Salter 2006). While the other three dimensions (decentralization, formalization and flexibility) feature directly in previously suggested frameworks, external openness has so far been more or less neglected. Technological possibilities such as crowdsourcing platforms and online communities have, however, greatly facilitated the adoption of more open approaches in recent years. It therefore comes as no surprise that several experts, including Chesbrough and Appleyard (2007), have pointed to a number of anomalies in the closed-strategy approach and to the inevitability of a paradigm shift towards a more open approach. The recently established academic interest in open strategy seems to prove their point and warrants this additional dimension in our strategy making framework.

These four dimensions are non-rival, non-exclusive and all present simultaneously—albeit to differing extents—in a single corporation. They characterize strategy making for a specific corporation. All in all, we believe that our framework, which both recombines and adds to existing models, provides a comprehensive account of all relevant dimensions of strategy making. Furthermore, because it treats these dimensions separately and does not summarize them in strategy making “characters”, it provides the perfect basis for relating them to leadership characteristics.

The idea behind upper echelon theory can be traced back to both the behavioral theory of the firm (Cyert and March 1963), which argued that managers do not always make rational choices, as well as to the notion that managers possess certain ‘givens’, which affect how they make certain decisions (March and Simon 1958). Hence, managers are fundamentally influenced by natural human limitations, such as bounded rationality, and by their own personal characteristics and cognitive biases. Hambrick and Mason (1984) took this as their starting point and developed a model of how managers’ personal characteristics influence strategic choice. They referred to this model as “upper echelon theory”. In this model, the so-called cognitive base and personal values act like a filter and lead to what Hambrick and Mason refer to as a limited field of vision. In this limited field of vision, managers still only notice what is relevant to them; Hambrick and Mason label this selective perception. Finally, managers interpret the perceived situation based on their respective ‘givens’. The characteristics that guide the selective perception and interpretation of situations can be classified into psychological factors (values, cognitive base) and observable characteristics (age, education, culture of socialization, experience, etc.). Upper echelon theory differs from the general behavioral theory of the firm in its explicit focus on the characteristics of the TMT rather than on those of the individual executive (Tacheva 2007).

For Hambrick and Mason (1984), the TMT is the dominant coalition in an organization, i. e. its most powerful executives. While conceptually correct, this definition cannot be easily applied in practice, and we have therefore chosen to stick to the definition used in more recent reviews (e. g. Nielsen 2010), which describe the TMT as top executives who report directly to the CEO. Research into TMTs accords considerable attention to diversity—not just because of the high diversity in TMTs that has resulted from increased global mobility but also because diversity can have profound organizational outcomes (Tacheva 2007). TMT diversity is most commonly defined as the distribution of personal attributes among the members of the TMT (Nielsen 2010; Jackson et al. 2003).

Multiple constructs can be used in conjunction with diversity, namely separation, variety and disparity. Diversity as separation means differences in opinions or positions and describes distance along a single continuum. Diversity as variety represents differences in knowledge, experience and so forth. Finally, diversity as disparity represents differences in pay or social assets. Like most other studies, we use a ‘diversity as variety’ definition across multiple categories for our study (see the section on methodology for a discussion of the variables used in our survey). We also acknowledge that a large body of literature has emerged (particularly in recent years) which investigates the micro-processes that constitute the actual connection between diversity and organizational outcomes such as intra-team processes. While some of this research argues that the diversity concept is too general to infer meaningful conclusions, it still enjoys wide support from the upper echelon community. However, since a full discussion of all these debates would go beyond the scope of this paper, we will restrict ourselves here to referring the reader to the many excellent existing reviews of this matter (e. g. Nielsen 2010).

Turning our focus explicitly to personal values takes us to a widely-researched field. Personal values have been shown to be important factors in determining (national) culture (Schwartz and Bilsky 1990; Schwartz and Sagiv 1995; Hofstede 1984), organizational culture (Schein 2009) as well as particular fields of strategic action, first and foremost in the stakeholder engagement and corporate social responsibility domains (Agle et al. 1999; Kaldschmidt 2011). Prior studies even show indirect links between values and corporate performance (Berson et al. 2008). A value system is an organization of beliefs relating to a preferred mode of conduct or end-state. Values are enduring, yet not fixed, and therefore different from personal traits (Rokeach 1973). While traits describe how people are, values describe what they deem good, what they see as desirable. Values are what people usually refer to when they justify actions and behaviors. In essence, traits are enduring dispositions, and values are enduring goals. Traits vary in the frequency and intensity of their presence; values vary in the relative importance attributed to them and thus serve as guiding principles (Roccas et al. 2002). Traits are also largely immune to environmental and social influences (e. g. education), while values are not (Olver and Mooradian 2003). According to McCrae and Costa (1996), traits like the five factors (one of the most common personality frameworks) are only the “raw materials” of personality, while values are concrete characteristic adaptations, habits, attitudes, etc. While traits guide an individual’s behavior individually, it is the overall arrangement of their values, i. e. a person’s overall value system, that determines how they interpret certain situations and hence how they choose to act. Values and traits are by no means independent of each other. Indeed, it has been argued that they can develop in parallel, i. e. that people may adjust their value systems to fit their traits, and that value priorities can induce behaviors that are then perceived as traits. Ultimately, we chose to use values in our study because the evidence points towards traits have a stronger influence on behavior over which individuals have little cognitive control, whereas values have more effect on behavior they can voluntarily control (Roccas et al. 2002)—and strategy making processes are closer to the latter than the former.

While numerous theoretical frameworks exist for values (e. g. Hofstede 1984; Rokeach 1973; Inglehart 2004), the most widely used system, particularly in management research, is the Schwartz Value System (Schwartz and Bilsky 1990; Schwartz 1992). This was developed on the basis of the ideas put forward by Rokeach and presented in a seminal article in the anthology Advances in Experimental Social Psychology (Schwartz 1992 ), which has received more than 9000 citations to date. The system has been tested and verified using more than 200 samples from over 60 countries and continues to be widely applied in business and social research, for instance in the biennial European Social Survey (ESS), where it is used to measure the attitudes, beliefs and behavior patterns of diverse populations in more than 30 nations. The Schwartz Value System is based on the notion that values (a) are beliefs, (b) are a motivational construct, (c) transcend specific situations, (d) guide selection or evaluation, and (e) are ordered by relative importance. The framework consists of ten basic values, namely self-direction, stimulation, hedonism, achievement, power, security, conformity, tradition, benevolence and universalism (see Appendix for a more detailed description). These ten values are arranged in a circular manner (see Fig. 1) in recognition of their competing nature. This means that actions that are guided by one value may be in conflict or in accordance with other values. As Fig. 1 shows, the closer the motivational goals of two or more values, the more they correlate empirically and the more closely they are located in the circular representation (Roccas et al. 2002). The ten basic values in the Schwartz Value System can also be grouped into two basic dimensions on orthogonal axes, thereby depicting two fundamental human problems which require resolution (Rohan 2000). The respective values upon which these basic dimensions are built can also be seen in Fig. 1. The first of these two dimensions is openness to change vs. conservation (i. e. enhancement of the status quo by following intellectual and emotional interests vs. preservation of the status quo for various reasons, e. g. tradition). The second dimension is self-transcendence vs. self-enhancement (i. e. concern for the welfare of others and society vs. self-interest) (Lindeman and Verkasalo 2005). This type of focus on higher-order values is useful because it allows us to compare whole values systems in relation to an external variable instead of concentrating on single values at an individual level (Schwartz, 1996 quoted from Kaldschmidt 2011). This recognizes the fact that opposing values are activated in the face of moral decision making, which can lead to ethical dilemmas (Watson et al. 2009). In such cases, a decision will then often be taken based on the importance attributed to any of the relevant competing values (Schwartz 2013). Since such moral decisions clearly feature in everyday managerial work, these values are highly important for understanding the behavior of managers.

Values influence the strategy making process in multiple ways (Hambrick and Brandon 1988). Prominent in upper echelon theory, for instance, is the notion that the personal values held by CEOs will influence their decisions by shaping their interpretations of a situation and acting like a filter for environmental stimuli (Hambrick and Mason 1984). Arguably, decisions on how to structure a corporation’s strategy process are—like other strategic decisions—dependent on situational interpretations. The conscious transfer of values to the organization is a second way in which they can exert an influence. A characteristic of values is that their holders view them as favorable. Executives thus imprint their own values onto their organization by means of their decisions (Berson et al. 2008). Internal processes are one clear manifestation of decisions. In other words, the ethical orientation of an organization, for example, is revealed through the formal and explicit processes it uses in its day-to-day activities (Hood 2003; Carlson and Perrewe 1995). We can also expect values to have an indirect effect through employees, since CEOs are likely to—knowingly or unwittingly—project and communicate their own values onto their employees either directly or by acting as a role-model, thereby encouraging or discouraging particular behaviors and behavioral patterns (Schein 2010). In the strategy making context, a corresponding behavioral pattern would, for instance, be the voicing of individual ideas by employees, which might be welcome to a greater or lesser extent in a corporation. The resulting environment also shapes and constitutes an important part of the respective corporation’s strategy making process (Burgelman 1996).

As mentioned above, we focus in our study on two prime value dimensions from which a number of behavioral tendencies follow. A value system geared towards self-transcendence (as opposed to self-enhancement) means that the well-being of others is given a high priority and drives the importance attached to environmental protection and equality. People with high self-transcendence values tend to be more tolerant and less concerned about social status, control and dominance over others (Roccas 2003). In contrast, the holder of a value system geared towards openness to change (as opposed to conservation) places great importance on independent action and shows little concern for the status quo. Such people are, for example, unlikely to be strong proponents of tradition and/or religion (Kaldschmidt 2011). As we will explain below, these behavioral tendencies also materialize in more specific ways when viewed in the strategy making context.

The first and highest-level dimension of strategy making we would like to relate to values is decentralization, which many previous frameworks identify as one of the most important dimensions of strategy making (Andersen 2004). Decentralized organizational designs by necessity imply more people having stakes in decisions and thus more opinions on the table at any given time. CEOs with a value system geared more towards openness to change are comfortable with letting different opinions surface and are open to allowing people on lower levels to take decisions without having prior knowledge themselves of where these might lead (Sashkin 1988). Such values have also been found to be positively correlated with more risk-seeking personalities (Roccas et al. 2002). Lewin and Stephens (1994), for example, argue that managers who are more risk-averse are more likely to implement more centralized organizational designs, because such setups are characterized by high levels of control and supervision to minimize uncertainty and reduce surprises. We would thus expect to see a positive relationship between openness to change and decentralization. On the other hand, people whose value systems tend more towards self-transcendence (as opposed to self-interest) are less concerned about “making a mark” for themselves, have less need to improve their social status and less desire to influence the context in which they operate (Papadakis 2006). More self-transcendence values also imply that more weight is placed upon equality (Roccas 2003). CEOs with such values seek to design organizations and strategy processes with only minimal power differences and would thus be expected to adopt a very decentralized design in their strategy processes (Lewin and Stephens 1994). Conversely, more pronounced self-enhancement values have been shown to lead to more centralized organizational designs: the more CEOs are driven by self-enhancement and achievement values, the more need they will feel to be personally and directly responsible for success. This is only achievable in more centralized structures (Miller and Droege 1986). These findings have also been partly replicated in recent research (Papadakis 2006). Accordingly, we should expect to see an association between self-transcendence values and decentralization.

Formalization is the dimension that is most closely related to rationality (Hart 1992) and the so-called planning school of strategy making (Ansoff 1965). It implies written rules and procedures (e. g. job descriptions), thorough data collection and in-depth analyses prior to decisions as well as sophisticated control mechanisms (Wally and Baum 1994). These rules and procedures limit the amount of personal power that can be projected onto the organization and how far an organizational design can be adapted to suit one’s own personal needs. If procedures in an organization are more formalized, agendas guided purely by self-interest, be they illegal or not, have less potential to succeed. Similarly, there is less chance of a position of power being abused. Unsurprisingly, research shows that more advanced governance mechanisms reduce the probability of accounting scandals and indeed of fraud in general (Agrawal and Chadha 2005; Farber 2005). Accordingly, we would expect CEOs with more pronounced self-enhancement values (which are augmented by power values) to build less formalized organizations. Vice versa, we would expect CEOs with more pronounced self-transcendence values to implement more formalized strategy making processes in order to ensure that self-interest agendas are kept to a minimum.

If CEOs have a value system that is oriented more towards self-interest, they are also more likely to assume similar value systems in other members of their organization. Guth and MacMillan (1986) investigated the link between self-interest and middle management strategy implementation and found that if a strategic initiative threatens their self-interest agendas of middle management at risk, they are more likely to create substantial obstacles to its implementation. It thus seems reasonable to assume that managers who expect their subordinates to be guided by self-interest agendas will implement formal mechanisms that ensure compliance with top-down agendas. Conversely, Lewin and Stephens (1994) suggest that managers who exhibit a high level of trust in the good of people feel little need to monitor employees and thus tend to implement fewer formal control and governance mechanisms. These arguments lead us to the following hypothesis:

CEOs with stronger openness to change values tend to attribute less importance to the status quo or to established routines and behavioral norms (Schwartz 1992). Hence, they could be expected to depart more frequently from the status quo and encourage more flexible strategy making processes—an expectation that is backed up by some very recent research (Wowak et al. 2016). Likewise, and as outlined above, openness to change values are associated with greater tolerance for risk (Roccas et al. 2002). People with such values have fewer reservations regarding ambiguity. While flexibility in strategy making is not necessarily a high-risk approach, it does require the challenging of previously held assumptions. If the latter relate to the very foundations of the workings of the corporation, it would seem safe to assume that challenging them increases ambiguity.

A flexible strategy making process also facilitates the integration of entrepreneurial, emergent and bottom-up strategic initiatives into overall corporate strategy. Many authors, including Burgelman (1983), have suggested that top-down, induced strategic initiatives produce little variation to the existing course of action and that it is the more bottom-up, autonomous activities that bring about major changes. Since CEOs with more pronounced openness to change values can be expected to be more welcoming of (or even demanding) such changes, it seems likely that they would implement strategy making processes that afford the necessary flexibility. In contrast, we explicitly do not expect a negative association between openness to change and formalization, since the latter does not, in our view, prohibit or prevent the former. Indeed, formalization that is “done well” might even increase information flows and speed up strategic decisions (Baum and Wally 2003) and thus be an additional driver of flexibility.

When a strategy making process is more externally open, stakeholders outside the firm are included in strategy formulation. This is achieved either by considering their interests (stakeholder engagement) (Freeman et al. 2010) and/or by actively engaging them in the process (Matzler et al. 2014). The logic behind externally open strategy making is simple: since there are more people outside a firm than within, the population of non-firm members must by default have more ideas than the firm members. A paradigm shift has taken place in this respect, and while strategy making used to be elitist and secret (Williamson 1970), more and more firms are now stepping beyond open innovation and seeking to harvest the potential of openness in their strategy making endeavors as well (Dobusch et al. 2015). However, more external openness also means that more opinions will be voiced (Whittington et al. 2011), and a firm thus willingly submits itself to these by being more transparent and/or inclusive. This means that it has to consider more alternative options, some of which will undoubtedly deviate from its current course of action. We would expect CEOs with value systems more oriented towards openness to change to foster such strategy making processes, since they are the ones who will recognize the greatest benefit in such alternative options. Hence, we would also expect to see a positive association between CEO values geared towards openness to change and the external openness of strategy making. In fact, similar results have already been reported. Ahn et al. (2013), for example, identified certain CEO traits, like risk-taking and entrepreneurial orientation, that are positively related to open innovation practices. The argument we have previously framed with respect to higher levels of flexibility inducing higher levels of ambiguity (which people with less tolerance for risk try to avoid) can also be transferred to external openness. Here too, more openness should be associated with higher levels of ambiguity (not least because of the potential for information and idea leakage), lending further support to the hypothesis that more openness to change values should be associated with more external openness.

CEOs can influence their corporations through their ability to exercise discretion (Hemingway and Maclagan 2004). The more discretion they have, the more they will imprint their values on the firm by designing processes according to what they view as ‘good’. Finkelstein and Hambrick (1987, 1990) identify three factors that determine discretion, namely the degree to which the environment allows change, the degree to which the organization itself can accommodate change and the extent to which the CEO can envision multiple forms of action. More diverse TMTs tend to exhibit more cognitive diversity (Finkelstein and Hambrick 1996), which means that more alternative ideas and views are voiced. In most firms, the TMT plays an important role in major decisions that cannot be taken by the CEO alone. The greater the number of alternative views and ideas that circulate in the boardroom, the more unlikely it is that the CEO will be able to enforce all his/her own ideas. In other words, diversity limits consensus (Knight et al. 1999). Hence, it can be assumed that the greater the diversity in the TMT, the more it will act like a filter when it comes to the CEO imprinting values onto the corporation. The same logic should apply to the relationship between the CEO and the strategy making process, and we would therefore expect TMT diversity to have a similar effect as a limitation of managerial discretion (Finkelstein and Hambrick 1990). In other words, we would expect it to limit the extent to which a CEO can simply implement processes at will.

We have already argued that CEOs can project their values onto the organization in their capacity as role models and thus also shape the organizational climate (Schein 2010). Yet the other members of the TMT are also likely to serve as role models. Hence, greater diversity in the TMT is likely to mitigate the role model effect of the CEO as the other TMT members (unknowingly) project different values onto the organization. We thus expect TMT diversity to moderate both of the ways in which CEO values influence strategy making processes, namely the intentional design of processes according to desired end-states and the unwitting projection of values. This leads us to the following hypothesis.

Our five hypotheses are summarized in Fig. 2. As this graphic shows, higher levels of self-transcendence values should have an effect on (de-)centralization and formalization, openness to change values should have an effect on (de-)centralization, flexibility and external openness, while TMT diversity is expected to moderate all of these relationships.