Theory about Upper Echelon when making decisions

1. UPPER ECHELONS THEORY
Donald C. Hambrick
Presented by: Johan Setiawan – October 19, 2018
Binus DRM

2. The Central idea of Upper Echelon theory
is that executives act on the basis of their
highly personalized interpretations of the
situations and options they face

3. AGENDA
Overview
SCA: Novelty
SCA: Robustness
SCA: Applicability
SCA: Relevance

4. THE FIRST
READING
Carnagie
School
Simon
(1945)
March and
Simon
(1958)
Cyert and
March
(1963)

5. FORTUNE ARTICLE
CEO’S OF FORTUNE
500 COMPANIES,
WITH A COMPLETE
- AGES - TENURE - FUNCTIONAL
BACKGROUNDS
- EDUCATIONAL
INSTITUTIONS
- FIELD OF STUDY - RELIGION - HOMETOWN

6. 3 MAJOR POINTS
Top managers act on the basis of their personal biases, experiences,
and values
The characteristics of the entire top management team (TMT) will be
far more predictive of organizational outcomes than will those of the
individual top executive (CEO) alone
We argued that demographic variables may serve as useful, albeit
muddy and imprecise, proxies for executive cognitions and values.

7. One of the major refinements Phyllis and I brought to our AMR
paper, compared to the earlier version I had written as a student,
was that we attempted to specify the operative mechanisms by
which executives’ biases become manifested in their choices.
This refinement was an essential component to our claim of a new
theory. After all, in order to establish a theory it is not sufficient
simply to propose that X leads to Y; rather, there must be a
description of why the association exists, or a portrayal of the
operative mechanism at work (Dubin,1969)

8. THE MECHANISM THAT CONVERTED EXECUTIVE
BIASES INTO BEHAVIORS WAS AN
INFORMATION FILTERING PROCESS.
THUS, UPPER ECHELONS THEORY IS, ULTIMATELY,
AN INFORMATION PROCESSING THEORY,
OFFERING A WAY TO SYSTEMATICALLY EXPLAIN
HOW EXECUTIVES ACT UNDER CONDITIONS
OF BOUNDED RATIONALITY.
WE DEVELOPED A SCHEMATIC OF THE
PROCESS WE ENVISIONED, WHICH SYD
FINKELSTEIN AND I LATER REFINED IN OUR BOOK
ON STRATEGIC LEADERSHIP (FINKELSTEIN AND
HAMBRICK1996), AND WHICH I FURTHER ADAPT
HERE AS FIGURE 6.1

10. On the far left side of the figure is the ‘‘strategic
situation’’ confronting an executive, or the myriad
events, trends, and conditions that exist inside and
outside the organization; this situation consists of far
more phenomena than the executive can comprehend.
Confronting this situation is the ‘‘executive’s
orientation,’’ comprised of an interwoven set of
psychological characteristics (including values and
personality) and observable experiences (such as
age and functional background).
This executive orientation, then, serves as the basis by
which the executive engages in a three-step
information filtering process which eventually yields
a highly personalized ‘‘construed reality.’

11. As the first step in the filtering process, the
executive’s orientation affect his or her field of
vision —those sectors to which attention is
directed. Namely, a manager, or even an entire
team of managers, cannot scan every aspect of
the environment and the organization.
Second, the manager’s perceptions are further
limited because he or she will
selectively perceive only some of the phenomena
that lie within the field of vision. That is, an
executive sees or notices only a subset of what is
on the radar screen.
As the third step in the sequential field filtering
process, the executive then interprets, or attaches
meaning, to the stimuli that have been noticed.

12. As an example of this three-step process, we can imagine
(1) a manager (or TMT) intently scanning the technological
environment, but not the customer environment (restricted
field of vision); (2) then, among all the technological
information the manager has accessed, he only notices or
comprehends a subset (selective perception); (3) then, the
manager weighs the implications of what he has noticed—in
terms of opportunity vs. risk, probabilities of occurrence, and
so on (interpretation).
As a result of this three-step filtering process, an
executive’s ultimate reading of the strategic situation, or
‘‘construed reality,’’ may bear only a faint correspondence
to the overall objective situation. Or, put another way, two
executives who have very different personal orientations will
arrive at very different construals of a given situation.

13. EMPIRICAL EVIDENCE

14. FOUNDATIONAL
EVIDENCE
De Witt Dearborn and Herbert Simon (1958) argued that
exposure to the goals and reinforcements of a particular
functional area will cause managers to attend to certain
information in a complex business situation and, in turn, to
interpret that information in terms that suit their functional
expertise.
Miller, Kets de Vries, and Toulouse(1982) examined the influence
of a CEO’s locus of control—a personality factor that captures
whether individuals believe that events in their lives are within
their control
Gupta and Govindarajan (1984) conducted a systematic study of
division general managers, finding that certain managerial
characteristics were associated with performance of businesses
that were pursuing ‘‘build’’ strategies (in pursuit of marketshare),
while a very different set of managerial characteristics were
associated with performance of businesses that were pursuing
‘‘harvest’ ’strategies(in pursuit of cashflow)

15. THEORETICAL
REFINEMENT
Proposed two major refinement
Introduction of “managerial discretion” as
a moderator
Introduction of the idea that the collective
characteristics of TMT’s will only affect
organizational outcomes to the extent
that the TMTs act as teams rather than as
collection of solo operators, has had far
less impact

16. MANAGER DISCRETION
Discretion exist
when there is an
absence of
constraint and
when means-ends
ambiguity is great
01
Discretion,
emanates from the
environment, the
organization, and
from the executive
himself/herself
02
Discretion as an
underlying driver
03

17. BEHAVIORAL INTEGRATION
Behavioral integration is the degree to
which mutual and collective interaction
exists within a group, and it has three
main elements or manifestations:
 information exchange,
 collaborative behavior, and
 joint decision making
These factors included environmental
factors, organizational factors, and the
CEO’s own personality or performance

18. Simsek, et al found based on the study of
402-small and mid size company, that
behavioral integration was positively related
to the CEO’s own collectivist orientation and
tenure, and negatively related to TMT size
and several types of TMT diversity

19. Hambrick (1998) wrote in the prevailing merits of behavioral integration, or
conversely, the cost of absence of behavioral integration.
These costs include the following:
1. potential economies of scope unrealized
2. brands and market positions of different businesses are poorly coordinated
3. business units failed to exchange key learnings and intelligence, and
4. the company is slow to formulate company-wide strategic changes in response to
major environmental shifts

20. FRUSTATION
Shortcomings in testing and verifying the theory
Poor job of getting inside “the black box” (Lawrance, 1997; Marcoczy, 1997)
When we observe that long-tenured executives engage in strategic persistence, why
is that?
Are they committed to the status-quo? Risk-averse? Tired? Or What?
We find that executives who have a high tolerance for ambiguity perform well when
they pursue ‘growth-oriented strategies’

21. SESSION CRITICAL ANALYSIS

22. NOVELTY
(Hambrick, 1979) examined environmental scanning
practices of top executives
Phyllis and Hambrick married the concept of executive
field of vision with “selective perception” (Dearborn
and Simon, 1958), “noticing” (Porter and Robert,
1976) and “sensemaking” (Kiesler and Sproull, 1982)

23. ROBUSTNESS
Three influential studies
DeWitt Dearborn and Herber Simon (1958) test the idea to 23
Managers to read 10,000 words business case
Miller, Kets De Vries and Toulouse (1982) locus of control – internals
or external
Gupta and Govindarajan (1984) - build strategy or harvest
strategy

24. APPLICABILITY
Day and Lord (1992) found that the cognitive structures of executives in machine tool
companies were related to their organizations’ strategies.
In particular, executives whose firms had the widest arrays of product or service
offerings tended to draw the finest distinctions between different types of strategic
problems (in an experimental setting).

25. RELEVANCE
Executives compensation can be differ from one
industry to the other industry
A lot of TMTs not have many “team” properties, so for
Indonesian upper echelon should find TMTs that have
“team” properties

26. REFERENCES
Smith, Ken G; Hitt, Michael A., (2005), “Great Mind in Management: The Process of
Theory Development”, Oxford