Top management team certainty: Environmental assessments, teamwork, and performance implications

Journal of Management 1994, Vol. 20, No. 4, 835-858

Top Management Team Certainty: Environmental Assessments, Teamwork, and Performance Implications Lynn A. Isabella University of Virginia

Sandra A. Waddock Boston College This research explored the concept of top management team (TMT) certainty, that is, the degree of confidence that the TMT has about its environment assessments and subsequent strategic decisions. Using a banking simulation, this exploratory study suggested that beliefs about the environment and a strong team orientation were critical determinants of TMT certainty, while actual environmental volatility and consensus within the TMT were not. Additionally, the research explored the positive relationship between TMT certainty and organizationalperformance.

Increasing research attention is being given to the cognitive aspects of organizational life as researchers attempt to understand how managers come to perceive, interpret, and act upon environmental information. Although research in this area is relatively new, a number of works have already focused on the interpretations or interpretational processes of managers (Daft & Weick, 1984; Isabella, 1990). Of particular interest are the interpretive dynamics of top management teams (Daft & Weick, 1984; Eisenhardt, 1989; Thomas & McDaniel, 1990). As the front line responsible for the organization/ environment alignment, these managers are instrumental in reading the environment and translating those readings into strategic and operational plans. Emerging from some of these studies is the notion of certainty, that is, the extent to which these managers “feel confident” in their environmental assessments and strategic decisions (Milliken, 1990, p. 43; Eisenhardt, 1989; Bourgeois & Eisenhardt, 1988). While certainty has been discussed theoretically (Weick, 1987) and linked to the interpretation process (Milliken, 1990) few studies have really explored this concept in depth. Because top management success may depend to some extent upon building that confidence, particularly in volatile environments (Eisenhardt, 1989), the purpose of this study was to Direct all correspondence to: Lynn A. Isabella, University Administration, Charlottesville, VA 22906. Copyright

@ 1994 by JAI Press Inc. 0149-2063 835

of Virginia,

Darden

Graduate

School of Business

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explore more about the concept of certainty and its determinants. Based upon the above definition of certainty asserted by Milliken (1990) it should be noted that, throughout this research, confidence and certainty are used interchangeably. We realize certainty and confidence may not be preceisely the same concept, though we suspect they may be closely correlated, as indicated in Milliken’s definition. The Case for Certainty While traditional strategic research has focused on the fit between environmental characteristics and the firm’s strategic choices (cf. Miles & Snow, 1978; Hofer, 1975; Porter, 1980, 1985; Rumelt, 1986; Prescott, 1986; Venkatraman & Camillus, 1984), an alternative strategic perspective is gaining research momentum. This perspective views strategy as an enacted process (Anderson & Paine, 1975; Mintzberg, 1978; Mintzberg & Waters, 1982; Smircich & Stubbart, 1985; Weick, 1979) and organizations as interpretive systems in which top managers develop a thread of coherence about their environmental assessments (Chaffee, 1985; Daft & Weick, 1984). The concept of certainty is anchored in the model of strategy making that relies on enactment, interpretation, and retrospective sensemaking (Starbuck, 1983; Weick, 1987). Fundamental to such a model of strategic decision-making are several crucial assumptions about the nature of organizations and organizational interactions (see Isabella (1990) for complete discussion). First, consistent with the interpretive paradigm is the premise that organizational members actively create or enact the reality they inhabit and use that “reality” as a basis for future action (Berger & Luckmann, 1966; Weick, 1979; Smircich & Stubbart, 1985; Silverman, 1970). Second, through discussion and negotiation (Burrell & Morgan, 1979; Walsh, Henderson & Deighton, 1988) or as an evolutionary process over time (Isabella, 1990), managers develop a cognitive consensuality (Gioia & Sims, 1986), that is, a common frame of reference. Finally, sensemaking is retrospective (Weick & Daft, 1983). That is, interpretations are made after situations have been experienced and managers have had time to look back and sum up their observations and feelings. In this model, managers “read” the environment, make interpretations, and translate those readings into strategic and operational plans (Daft & Weick, 1984). This interpretation process involves gathering data, making sense of those data in light of multiple realities, and, then developing a set of appropriate actions (Daft & Weick, 1984). Throughout the interpretation process there are areas in which managers struggle for strategic understanding and, thus, in which they can experience certainty or feel confident (Milliken 1987, 1990). Managers must struggle to understand the environmental conditions they face, struggle with the extent to which those conditions will affect their firm, and, finally top managers struggle, in weighing strategic alternatives, with the consequences and results that their decisions and actions will have. For top management teams the certainty experienced as a result of the struggle for this understanding had been identified as particularly instrumental to their decision making and implementation (Eisenhardt, 1989; Bourgeois & JOURNAL

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Eisenhardt, 1988). Certainty appears to come from the team’s investigation of multiple alternatives through rigorous analytic thinking and is important to both implementation and decision speed. Bourgeois and Eisenhardt (1988, p. 830) hypothesize that having the confidence to act serves as a “psychological especially when conditions are rapidly changing and coping mechanism,” actions have high-stakes significance. Ultimately, according to Weick (1987), that sense of confidence can be a substitute for strategy. Given the importance of certainty to implementation, decision speed and boldness of decisions, this research posed two exploratory questions in order to better understand certainty. First, what are the particular factors accounting for the certainty experienced by top management team (TMT)? Second, what is the nature of the relationship between certainty and performance?

Factors Related to Certainty Drawing upon past research, this study proposed four factors that appear to be related to TMT certainty. The possibility of different situations encouraging the certainty experienced by TMT’s is based on the assumption that different environments, both objective and subjective, can be associated with different interpretations (Daft & Weick, 1984; McCabe & Dutton, 1989). The four factor studied are: (1) the actual environmental volatility; (2) consensus within the TMT; (3) strong team orientation; and (4) the beliefs about the analyzability and predictability of the environment. Each will be described and expanded upon below.

Environmental Volatility Distinct characteristics of the objective environment are believed to impact an organization’s strategy and infrastructure (Bourgeois, McAllister & Mitchell, 1978; Lawrence & Lorsch, 1967; Thompson, 1967). Previous studies have identified three such characteristics: (1) Dynamism or rate of change in the environment (Dess & Beard, 1984); (2) Complexity or the diversity of environmental factors (Child, 1972; Dess & Beard, 1984; Duncan, 1972; Thompson, 1967); and (3) Munificence or the level of slack resources available for development (Dess & Beard, 1984). Of these, dynamism is believed to create a greater degree of risk and difficulty for effective strategy making because more change, particularly if unpredictable, means more discontinuity or volatility (Bourgeois, 1985). The majority of studies on environmental volatility indicate increased volatility prompts uncertainty and by implication decreased confidence (e.g., Duncan, 1972). The thinking seems to be that as the rate of change increases in the environment, managers become more uncertain and less confident about courses of action anticipated in the future. Thus, one viable hypothesis is that more volatile environments will result in greater uncertainty than certainty. While the weight of evidence would support the above hypothesis between volatility and uncertainty, Eisenhardt’s (1989) work raises the suggestion that, under certain specialized conditions, increased certainty and increased volatility are a viable combination. We speculate that volatility under certain conditions JOURNAL OF MANAGEMENT,

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could encourage, rather than discourage, certainty by creating a set of conditions in which the struggle to understand has positive outcomes. Eisenhardt (1989) has suggested that TMT’s making fast strategic decisions do so by accelerating their cognitive processing, engaging in procedures and processes that sharpen and quicken the pace of information analysis, despite the uncertain environment. When time is short, information is jumbled and changing, the environment is altering rapidly, and the consequences of decisions are costly, the pressure to act wisely increases, and TMTs need to have some sense of certainty or confidence to make their strategic decisions (Eisenhardt, 1989). Environmental volatility, thus, may positively affect the degree of certainty experienced by the top management teams. Teams derive certainty from struggling to navigate a course in seemingly uncharted and choppy waters. Thus, although often seen as problematic, volatility may have functional consequences in volatile environments for those who engage in the struggle it prompts (Bourgeois, 1985). Therefore, we propose an opposing prediction: HI: More volatile environments will result in greater TMTcertainty (confidence) than environments that are less volatile.

Consensus Consensus, defined as “the agreement of all parties to a group decision” is an important issue in management research (Dess & Origer, 1987, p. 313). While the principal studies on consensus have made distinctions in the operationalization of the concept (cf. Grinyer & Norburn, 1977/ 1978; DeWoot, Heyvaert & Martou, 1977/ 1978; Bourgeois, 1980, 1985; Dess, 1987, Hrebiniak & Snow, 1982), an underlying assumption is that low variance in perceptions within the top management team should result in better coordinated actions (Bourgeois, 1985; Child, 1972). Increasingly, this notion represents the core building block of Japanese management techniques (Ouchi, 1981; Vogel, 1979). High levels of agreement within the top management team may be experienced by the TMTs as a sense of certainty in their interpretations. Past research has suggested that consensus groups report feeling more satisfied and desirous of future work encounters, as well as more accepting of group decisions (Dess, 1987; Fredrickson & Iaquinto, 1989). It is, therefore, possible, that these same groups might also experience more certainty as a result. This process is consistent with Janis (1972) in which groups feel invincible and invulnerable, given strong consensus within the group. While recent research reiterates the limitations of consensus (Schweiger, Sandberg & Rechner, 1989; Schweiger, Sandberg & Ragan, 1986) it is nonetheless possible that TMT become more certain, rightly or wrongly, about their assessments and decisions, based upon their objective level of agreement. Thus, this research posited the following hypothesis: H2: Top management teams with high levels of consensus, that is, agreement about decisions, will have higher degrees of certainty (confidence) than TMTs with less consensus. JOURNAL

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Team Orientation Previous research has suggested that executive satisfaction with the decision-making process is important, and that a key determinant of this satisfaction is teamwork, that is, the extent to which management see themselves as part of a team rather than as individual decision makers (Stagner, 1969). A strong team orientation involves group members’ perceptions that their interactions, communication patterns, and levels of trust and participation all enhance working toward the group goals (Hare, 1976), which some have suggested creates a structured dialectical inquiry process that results in a common sets of assessments (Brodwin & Bourgeois, 1984). In other words, communication, trust, and participation lead to increased information sharing, which in turn results in more information processing. A strong team orientation can exist independently of whether or not the team actually works toward or achieves consensus on decisions. Indeed, Janis’s (1972) work on groupthink and Bourgeois (1985) would suggest that conflict rather than consensus, which can be developed in the context of a strong, well functioning team, may in fact result in better decisions than in those in which conflict is smoothed over. It is entirely possible, therefore, that when there is a strong team orientation, individuals will be more certain about their strategic assessments. Participation in group decision making has been shown to increase commitment to and understanding of group goals (Miner, 1984; Murninghan, 1981). It is reasonable to assume that a strong team orientation might result in strategic actors being more certain of the decisions with which they have just wrestled. Thus, the following hypothesis is proposed: H3: Higher levels certainty.

of team orientation

will result in greater

TMT

Beliefs about the Nature of the Environment Several scholars have suggested that managerial actions are predicated upon management’s beliefs about what the environment is like (Hofer, 1975; Jackson & Dutton, 1988; Prescott, 1986; Walsh, 1988; Walsh et al., 1988). These belief systems, which represent simplified portraits of the world (Keilser & Sproul, 1982; March & Simon, 1958; O’Reilly, 1983; Simon, 1955), allow managers to confront ambiguous or complex problems in a cognitively economic manner (Mischel, 1981; Taylor, 1975). Recently, scholars are paying particular attention to the beliefs of the top management team, contending that their beliefs about the environment ultimately shape strategic choices and by implication performance (Daft & Weick, 1984; Hambrick & Mason, 1984; Smircich & Stubbart, 1985). Weick (1987) has suggested that beliefs shape outcomes in a manner similar to social-psychological notions of the self-fulfilling prophecy (see Snyder, Tanke & Bercheid, 1977; also see Snyder, 1984, for an extensive review on the creation of beliefs and reality). Beliefs create the structure that orders events and situations, resulting in the manager “[knowing] all along that the situation would JOURNAL OF MANAGEMENT,

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make sense” (Weick, 1987, p, 230). Thus, what managers believe to be true becomes the reality because managers enact it. Among the beliefs that have been identified as critical to strategic decision making of top management teams are beliefs about environmental analyzability and predictability (Waddock & Isabella, 1989). When top management believes that the environment can be understood and that they can predict upcoming relationships and action consequences, enactment would suggest that is exactly what they “find” in the environment. Knowing that they know what’s going on (because they believed it to be present), may instill that sense of certainty or confidence necessary to determine a coherent course of action, and prepare the team for dealing with whatever uncertainties it discovers along the way. Thus, we formulated a fourth hypothesis: I-U: Beliefs that the environment is more analyzable andpredictable will result in a higher level of certainty in TA4Ts than when the environment is believed to be less analyzable andpredictable. Certainty

and Performance

The extent to which the top management team experiences certainty has been linked in prior research to implementation and decision speed. Ultimately, that same certainty also may be positively related to the performance of the organization. The question of this research was the nature of that relationship. On the one hand, the rigorous analytical thinking that contributed to the strategic decisions, and the struggle by the team to incorporate multiple perspectives may result in a feeling of “no stone unturned” (Eisenhardt, 1989, p. 572). That sense of mastery and control afforded by feeling confident may yield actions that are more directed, more coherent, bolder, and more timely. As a result, the organization’s strategic posture is definitive and responsive, and the firm’s performance may increase as a result. On the other hand, there is also significant evidence that being too certain may be negatively related to performance. Illusions of invulnerability and invincibility (Janis, 1972) and overconfidence from various cognitive decision biases (Russo & Schoemaker, 1992) have been linked to an increased probability of poor performance, Other scholars suggest that continued success can breed complacency and overconfidence, decreasing vigilance and increasing the probability of failure. The Challenger disaster stands as a vivid example of these negative performance effects (Starbuck & Milliken, 1988). While the relationship between certainty and performance is indeed complex, and there may be a number of intervening variables affecting that relationship, there is preliminary evidence for investigating the connection between performance and TMT certainty, at least in certain specialized situations (Eisenhardt, 1989; Bourgeois & Eisenhardt, 1988). In a series of studies on strategic decision making in high velocity environments, having the confidence to act has been delineated as one of the variables that distinguishes strong and weak performing firms (Bourgeois & Eisenhardt, 1988). In these JOURNAL OF MANAGEMENT,

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environments, where decision makers rely extensively on real-time information and make speedy decisions, top management teams are believed to overcome initial anxiety and build confidence through a variety of processes, which ultimately contribute to increased firm performance. Thus, this research also explored the manner in which TMT certainty was related to firm performance. Research Design and Methods

The purpose of this research was to explore the factors related to certainty, and then to see how, if at all, certainty was related to performance. The hypotheses suggest that environmental volatility, a strong team orientation, consensus and beliefs that the environment is both analyzable and predictable can each account for top management team certainty. To test these hypotheses, a bank simulation game was used. This structure seemed ideal since it provided objective measures of performance as well as an objectively similar environment for all participants in which differences in beliefs and interpretations could be assessed. Simulation

Game

The simulation game employed, BankSim, was designed in collaboration with bankers (and to be played by bankers) to model real world conditions by simulating strategic asset and liability management in an uncertain economy. According to the game’s designers, no prespecified pattern of strategic decisions necessarily lent themselves to successful performance in the game. Banks compete against other banks as well as other non-bank financial services competitors built into the simulation. A complex computer program, based upon financial and economic equations of competitive market behavior, evaluates each bank’s strategic decisions (on such variables as loan rates, fees, funds borrowed, etc.) against the decisions of other banks, interest rates and the general economic climate within the broader national economy, and the potential threats or opportunities created by other national financial institutions. In this simulation 40 banks were created, each composed of 4-7 bankers attending the American Bankers Association’s Stonier Graduate School of Banking third year program. Banks were subdivided into eight communities, five banks to each community. A total of 225 participants, all bank officers and managers, were randomly assigned by the school’s coordinators to one of those banks, distributing experiences, bank tenure, and education randomly across groups. All banks started identically, and received two years’ worth of financial history about the bank. Each team functioned as the top management of that bank and was responsible for making strategic decisions at 8 different times (quarters) in which they were to determine product/market focus, interest rates and fee schedules on products (e.g., consumer loads, residential loans, commercial checking), and investment opportunities for generating, investing, or reallocating funds. Each bank made 24 types of these decisions per quarter in a very compressed JOURNAL OF MANAGEMENT,

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timeframe (1 I/ 2 hours per decision). Prior to each decision, every bank received an economic forecast of interest rates per quarter on a variety of government and bank-issued notes and bonds, and detailed data about the financial position of their bank and the four others in their community, which resulted from the previous quarter’s decisions. A questionnaire was completed by each individual banker after the eighth and final decision period. At this time participants had just submitted their final decision sets, but had not received final performance outcomes. The timing of this questionnaire was critical to the research. Enough time must pass for each banker to have information to order and interpret, as a basis for confidence, yet the final performance outcome was still undetermined. This placement is consistent with the theoretical premises of the retrospective sensemaking process (Weick, 1979). This questionnaire asked respondents to evaluate on a l-7 Likert scale the degree to which they were certain about the environment and the actions they took, an assessment of various group and organizational factors and an assessment of how well the group worked as a team. In addition, the questionnaire also included basic demographic information. A total of 177 participants from 39 banks returned the questionnaires. Data from three banks were eliminated because only one individual per bank returned a completed questionnaire, resulting in usable questionnaire sets from 36 banks. Operationalization

of Variables

Certainty: Certainty was measured by a set of questions inspired by Milliken (1990), in which respondents were asked to rate on a 7 point Likert scale the degree to which they were certain about the changes taking place in the economy, the degree to which they were certain about the effect of these changes on their banks, and the degree to which they were certain of the responses they should be making. Seven represented completely certain and 1 represented completely uncertain. Because all the certainty questions were highly intercorrelated (see Table l), and because factor analysis revealed a one factor solution, a single certainty score was calculated by using factor scores to combine the 10 items (alpha = .99) and used in further analyses. Performance: Three measures of performance were used: total return to shareholders (stock price -I- accumulated dividends), net operating earnings, and net income after taxes. These measures were chosen as representative performance variables from which top managers would track how well their banks were doing. A measure of volatility was calculated using Environmental Volatility: a measure similar to that developed by Tosi, Aldag and Storey (1973), and adapted by Bourgeois (1985). Our measure strove to account within the framework of the banking simulation for the attributes of volatility previously established (Dill, 1958; Duncan, 1972). Within the simulation, the following areas were subject to varying degrees of change: interest rates; diversity of loans and investments; and, changing volume of community demand growth and new loan availability. Coefficients of variations (standard deviation divided by the JOURNAL

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Notes:

bank

* p < .05 **p < .Ol *** p < .ool **** p < .ooo1

8. Alternative decisions available to bank 9. What competitive changes meant to

bank

6. Relative worth of various options I. Impact that changes would have on

response to changing envt

5. Decisions bank should make in

change after each decision

4. How competitors & economy would

changing envt

3. How well bank would respond to

strategy

2. Effect of changes on bank & its

1. Gen’l changes in envt

How certain was your bank about.. . .

Question

1.oo

1

Table 1.

1.00

.55****

2

1.00

.60****

1.oo

.71****

.58***+

.61****

4

1.oo

.66****

.64****

.75**** 1.oo

.65****

.69****

.67****

.37*

6

Variables

.62****

.51***

5

Matrix for Certainty (N = 36)

.52***

3

Correlation

.54**** .49*** .53**** 1.oo

1.oo

.63****

.50***

.61****

.39*

8

.59**** .60****

.61****

.73****

,71****

.34*

7

.65**** .54**** .37* .65**** .71****

.54**** .68**** 1.oo

.59****

.44**

.53****

.50***

IO

.59**** .60****

.53****

.60****

.71****

,57****

9

E

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Table 2. Factor Loadings Certainty Variables Question

Factor Score .670 .831 ,766 ,834 .723 ,825 ,830 .753 ,810 .816

8 9 10 Eigenvalue % Variance

6.264 63%

mean) were calculated for each of the 15 national interest rates and the 8 community economic measures. Total environmental volatility was calculated by summing the 15 national and 3 community coefficients of variation per community. Team Orientation: Team orientation, or how the top managers perceived they were working together as a team, was measured by a set of 10 questions exploring team dynamics. Each question asked participants the extent to which they agreed or disagreed with various aspects of their team interactions (7 = strongly agreed; 1 = strongly disagreed). The questions, means, standard deviations, and correlations are presented in Table 3. Because one question was consistently unrelated to the others, it was dropped from the analysis and the nine remaining questions were summed and averaged per bank. The reliability on this team orientation measure was alpha = .91. Consensus: Consensus, or the degree to which individual members of each bank agreed with the assessments and decisions of each bank, was calculated by examining the standard deviation of each of the 10 individual certainty questions. The researchers examined the breakdown by bank of each of the ten certainty questions and noted whether or not the standard deviation for that question was above or below its median standard deviation (meaning the standard deviation for that question). Thus, each bank was awarded a score between 0 and 10 points for consensus depending upon the number of standard deviations below the median. The greater the number of points, the greater was the consensus among the team. Environmental Assessments: Two questions, both using a Likert scale, were asked to ascertain the banks beliefs about the environment in these areas. The first question asked how analyzable each bank viewed their environment (1 = not at all analyzable; 7 = completely analyzable). The second question asked bankers to assess the degree to which the changes in the environment were predictable (1 = not at all predictable; 7 = completely predictable). These JOURNAL OF MANAGEMENT,

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Notes:

* p < .05

****p <

*** p <

,001 .ooo1

** p < .Ol

1.oo

5.86 .74

I

1.00

.88**** 1.oo

.77****

.85**** .69**** .69**** 1.00

.82**** .73**** .74**** .92**** 1.oo

.79****

6.04 .61

6.21 .71

.84****

6

5

Deviations,

.81**** J37**** 1.00

5.72 .77

5.87 .70 .90****

4

Means, Standard

3

Measure:

.91****

6.22 .72

2

Team Orientation

Building consensus Trusting each other’s judgments Communicating freely and openly Listening to a variety of opinions Tolerating a high level of disagreement/dissension 8. Delegating decision making authority 9. Agreeing on final decisions 10. Allowing all members equal participation

3. 4. 5. 6. 7.

2. Getting along with each other

1. Making decisions as a team

(Means) (Std Dev.)

Variables

Table 3.

-.07 .30*

-.14 1.oo 1.00

1.00

.38**

.69**** .lO

1.00

.43** .47** .52*** &I** .46**

.46**

5.34 .70

5.90 .78 .69****

10

9

.68**** .73**** .j4**** .68**** .72****

.Ol _.03 .03 -.14 -.16 -. 19 .58****

4.97 2.74

5.69 .80

.56**** .60**** .49**** .55+*** .59****

8

7

Correlations

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questions were based upon prior empirical and conceptual work (Daft & Weick, 1984; Waddock & Isabella, 1989) demonstrating the importance of analyzability and predictability. These questions were averaged to form a total measure of environmental assessment (alpha = .86). Data Analysis Descriptive statistics, including means, standard deviations, and medians, as well as Pearson correlations between variables were calculated for all variables. These data are presented in Table 4. Multiple regression (variables entered individually), with certainty as the dependent variable, was performed to determine support for hypotheses 1 through 4. Finally, a backward, stepwise multiple regression was performed to determine the relative contribution of each factor to TMT certainty. Consistent with prior methodological suggestions (Joreskob & Sorbom, 1988; Bentler & Bonett, 1980), and to explore the effect of past performance on certainty, path analysis was used to explore a relationship between certainty and performance. First, we explored the nature of the relationship between certainty and performance at the end of 4 quarters, using cumulative, year-todate past performance. Second, to illuminate how that relationship was affected by the most immediate performance feedback, we explored, again using path analysis, the relationship of certainty to individual quarterly performance. Results This research set out to understand the factors that lead to top management team certainty, and subsequently, to explore the implications of certainty on performance. The first hypothesis proposed that environmental volatility would affect certainty. Results of multiple regression (see Table 5) using environmental volatility as the independent variable and certainty as the dependent variable indicated that the hypothesis was not supported, although the results did approach significance (F = 3.36, p = .08). Thus, statistically, banks were no more or less certain if the environment was actually stable or volatile. It should be noted, however, that the correlation between certainty and volatility was significant and in the anticipated positive direction (r = .3 1, p < .05), indicating that TMT certainty increased as environmental volatility increased. The second hypothesis suggested that greater consensus would result in greater certainty. Results of the multiple regression (see Table 5) indicated that the relationship between consensus and certainty was not supported. In other words, TMTs that actually had high levels of agreement were no more likely to be certain than groups experiencing low levels of agreement. In terms of top management certainty, it does not seem to matter whether or not the TMTs actually agree or disagree on their course of action. It is possible, as one of reviewers of this paper noted, that this result is an artifact of the way in which consensus was operationalized and thus, while this finding is provocative, further research with better measures is required. The third hypothesis proposed that a strong team orientation would result in more certainty among the top management teams. Results (see Table 5) JOURNAL

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Table 5. Dependent

Volatility,

Variable

Independent

Variable

Volatility Agree Team Orientation Beliefs

Certainty

Certainty Certainty Certainty Notes:

Consensus, Team Orientation, Beliefs and Certainty: Results of Individual Regressions

df

F value

35 35 35 35

3.36’ 1.08 11.82** 14.20***

* p < .05 ** p < .Ol *** p < ,001 **** p < .ooo1 ‘p<.lO

Table 6.

Determinants

of Certainty:

Results of Multiple

Regression

R’

df

F

.36

35

11.04***

B

Beta

T

Beliefs

.51

.41

2.80**

Team Orientation

.57

.35

2.41*

.35 .19

1.82’ 1.40

Model

Variables in Equation

(Constant)

-5.66

Variables not in Equation Consensus Volatility ‘p<.lO * p < .05 ** p < .Ol *** p < ,001 **** p < .OOOl

Notes:

Table 7.

Results of Path Analysis Controlling for Past Performance on Relationship between Certainty and Performance (Y2)

ldf

NFP

ldf

125.23/21

NULL MODEL 1 Performance @ Y2 explained only by Performance @ Y 1

17.93115

MODEL 2 Performance @ Y2 explained also by Certainty

4.85112

MODEL 3 Certainty explained also Performance @ Y 1 Note:

Rho*

(Yl)

* Based on suggestions fit.

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3.3019

.961

.857

107.3016

1.12

.961

13.08/3

1.128

.974

of Bentler & Bonett (1988), .90 was considered

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as a minimum

1.5313

criterion

of

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CONFIDENCE

YI

(Y’I’D Stockprice)

.54** ____________________>

Y2 (YTD Stockprice)

.22** y1 (mD Net Income) -__________________._>

Y2 (YTD Net

Income)

.55**

Yl

Note:

(YTD Net Earnings).

** This diagram

Oper.

depicts MODEL2

.23** _________-_________-___>

in Table 5. Numbers

represent

Y2 (YTD Net Earnings)

significant

Oper.

beta coefficients.

The Null model provides desired baseline fit information. MODEL1 tests the hypothesis that the year-to-date performance at the end of Year 2 is explained only by year-to-date performance, aggregated at the fourth quarter. While there is improvement in fit relative to the null model, the large chi-square (relative to df) and small0 rho and NFI (the normed-fit index) suggest that much of the covariance among the variables is unexplained. In MODEL2 (depicted schematically in Figure I), paths connecting certainty to the three performance measures at the end of Year 2 (Y2) are added. The result is a large drop in the chi-square as well as great improvement in rho and NFI. Finally, MODEL3 in Table 7 presents the alternative hypothesis that certainty is determined by past year 1 performance. Since the change in chi-square is virtually identical to the change in df and there is minimal increase in rho and NFI, this alternative hypothesis, therefore, is not supported (and, thus, this path does not appear in Figure 1).

Figure 1. Diagram of Model2 as Presented in Table 5 Effects of YTD 1 performance and confidence on YTD 2 performance. indicated support for this hypothesis (F = 11.82, p < .Ol). Thus, when perceptions of strong team functioning increased, so did the certainty about the decisions the TMT made and about the impact of those decisions on themselves and other banks. Alternatively, those teams who reported a low team orientation experienced far less certainty about their environmental analysis and subsequent actions. The fourth hypothesis suggested that beliefs about the analyzability and predictability of the environment would result in greater certainty. This hypothesis was supported (see Table 5) (F = 14.20, p < .OOl). Thus, the more predictable and analyzable banks viewed the environment as being, the more certain they reported being about their decisions. Alternatively, the less strongly JOURNAL

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Srkpr

97

AND WADDOCK

--------------_-__________>

Stkpr

Q8

r - .99

i \ -:‘I:Certainty

NS

NS

NS

1. oo***

1

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.97***

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a Quarterly

stockprice

Figure 2.

66

--------->

S&p;

.93***

was the performance

47

---------> . go***

measure used. Beta coefficients

\ Stkpr

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are reported.

Relationship between Certainty and Performance:a A Quarter by Quarter Evolution

banks viewed the environment as analyzable and predictable, the less certain they were about their decisions. Results of the multiple regression to determine the relative contribution beliefs about the nature of the of environmental volatility, consensus, environment and team orientation are displayed in Table 6. Not surprisingly in light of the previous results, significant results were shown for beliefs about the analyzability and predictability of the environment and team orientation (T = 2.80, p < .Ol; T = 2.42, p < .05, respectively). In fact, beliefs about the nature of the environment accounted for the largest change in R squared. No significant results were found for environmental volatility or consensus. Thus, these results suggest that beliefs that the environment is analyzable and predictable and a strong team orientation account in part to TMT certainty. These results also suggest that the volatility of the environment and the degree of agreement within the team are not significant explanators of certainty. JOURNAL

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Finally we explored the possible relationship between certainty and performance. The results of our initial path analysis showed a significant and positive relationship between certainty and performance, when past yearly performance was controlled for. Table 7 provides the results of these analysis and Figure 1 displays the results schematically. Because the above analysis relied on cumulative year-to-date data, however, and because participants received 3 more quarters of performance data before the certainty measure was taken, two additional path analyses were run to provide a more accurate sense of how the most immediate performance feedback would be affecting top management team certainty. The results, depicted in Figure 2, are reported for a single performance measure (stock price). The first path analysis isolated the effect of performance at quarter 7 on the relationship between certainty and performance. Results indicate that the relationship is dominated by 47 performance, the most immediate performance feedback. The correlation, however, between stockprice at 47 and 48 (r = .99) suggests that multicollinearity may be a significant influencing factor, thus making 47 and QS performance almost identical. It should also be noted that due to sporadic missing data in quarterly results, the sample for these analyses dropped precipitously (N = 31). The second path analysis explored each of the previous quarter’s performance relative to certainty. Those results indicate that the relationship between confidence and performance continued to be unaffected by performance in past decision periods (QS or 46) though the correlations were increasingly becoming more positive (r = .20 at 44; r = .31 at 46; r = .46 at 47) indicating performance feedback was having a growing effect. Discussion

This exploratory research began with two questions, one identifying the factors that might explain certainty and a second speculating on a relationship between TMT certainty and performance. The results of this research distinguished two critical factors related to TMT certainty and supported a positive relationship between certainty and performance. Although the results should be interpreted with caution, due to the small sample size, they are nonetheless powerful because a controlled environment was possible in the simulation, thereby providing all participants with an “objectively” more similar environment than is possible in a real world study. Because of the controls possible in the simulation, the role of interpretive processes and the links of that process to other factors can be directly addressed. Certain factors do appear to be related to the development of certainty in TMTs. According to results of this research, the certainty experienced by the top management team is explained by internal processes more than by external or objective factors. In this study, two variables were associated with higher degrees of certainty: stronger team orientation and positive beliefs about the analyzability and predictability of the environment. Top managers are more certain when they are interacting positively and constructively with one another, that is, when they maintain a team versus individual perspective. When the team JOURNAL OF MANAGEMENT,

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perceives it is working well as a group, then the team is perhaps less likely to doubt the effectiveness of its interpretations and be more assured that it is doing the right thing. Having a strong team orientation implies that the strength of the team can overcome any uncertainties associated with a more volatile environment (note that there is no relationship between teamwork and volatility) and thereby potentially generate more confidence about one’s interpretation of the environment. A key point from this research is that teamwork is relevant, but it does not necessarily follow that teamwork implies consensus. This research indicates that TMT’s do not need to agree to feel certain about their decisions. To the extent that a team orientation creates an environment whereby the capabilities of individual group members are efficiently utilized, such as described by Schweiger and Sandberg (1989), disagreement or lack of consensus is advantageous. A constructive level of disagreement can be the variable that keeps groups from blinding themselves to current conditions. Numerous hypotheses are possibly related to the internal processes associated with the lack of association between teamwork and consensus. Consistent with Eisenhardt (1989), perhaps well functioning teams trust their leaders or other pivotal individuals to make the right decisions even if they disagree with others within the team about the actual decisions. Alternatively, certainty is related to teamwork and not consensus because the TMTs are aware of the dangers of groupthink (Janis, 1972), but still need to work together productively and feel confident when teamwork is high. A third explanation is that simply lighting out the battles results in consideration of a wider variety of alternatives with an associated feeling of assurance that all nuances have been covered. Although exploring these processes in more detail is subject for a different type of study, the latter hypothesis and the present research findings would support Eisenhardt’s (1989) contention that TMT’s who struggle more to achieve their certainty achieve it because of the “no stone unturned” struggles through which they have gone. The results of this research also indicate that certain beliefs contribute to creating a sense of TMT certainty. Specifically, beliefs about the analyzability and predictability of the environment are very predictive of the certainty felt by the top management team, as other researchers have contended (Waddock & Isabella, 1989; Walsh et al., 1988). Thus, TMT’s feel more confident when they believe they understand the external environment; they feel less confident when they believe they can not understand nor predict the environment. Regardless of whether one actually understands the environment or not, believing one understands the environment one faces (i.e., it is both predictable and analyzable), can result in certainty in one’s powers to set a realistic course of action for the organization. Thus, positive beliefs may have substantial power to shape the reality in which TMT’s act. In contrast to other studies delineating the importance of the external environment in determining strategic actions (Bourgeois et al., 1978; Bourgeois, 1985), actual environmental volatility did not significantly influence TMT certainty. Top managers were apt to feel no more or less certain when the external environment was turbulent or stable. What is actually happening in JOURNAL OF MANAGEMENT,

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the environment (its volatility) is not as important in explaining the degree of certainty that managers have in their assessments of the environment and subsequent responses as are other factors more internal to the top management team. This interpretation must be treated with caution, however, since these results do suggest a trend toward significance. Even this trend, however, invites researchers to broaden consideration of the impact of the environment to include, not only objective decisions and observations, but the cognitive processes triggered within top management teams to understand those environmental conditions. While the indications are not definitive, the trend toward significance in this research suggests that the possible positive effects of volatility deserve more study. To the extent that such turbulent or changing conditions present the team with opportunities for conscious and real-time cognitions (Louis & Sutton, 1991), or to the extent the. conditions in high velocity environments present unique challenges to TMTs, more research is needed. The final finding of this research involves the relationship between certainty and performance. Some would contend that a relationship between certainty and performance is a reflection of the fact that some organizations were already doing well and knew it (Bowman, 1978, 1984). This research offers general support for that contention: that banks who were told that they did well or were doing well became more confident. The certainty-performance results also suggest that managers may rely on performance feedback to give them a sense of the likely accuracy of their perceptions of the environment and that they rely on performance in the immediate past rather than in the distant past. The process by which certainty facilitates performance, however, may be a complicated “black box” in which there are several unexamined, yet feasible, managerial processes, a notion supported by Tainio, Korhonen and Santalainen (1991). One alternative is that more certain TMTs are simply capable of developing better strategies that outperform less effective strategies. Because they understand the environment better than competitors, the strategies developed are more effective than those developed by teams with less understanding. Under conditions of better understanding and hence better strategies, improved performance would be expected. A second possibility is that certainty increases the speed of decisions, which at least in high velocity environments, is increasingly being associated with improved performance (Eisenhardt, 1989). Given the possible and complex relationship between certainty and performance, further investigation of that relationship would be in order. A third is that certainty results in increased confidence, which leads to better performance. To the extent that certainty and confidence are related, but distinct, constructs, these results may support the instrumental role of affect in organizations (c.f. Park, Sims & Motowidlo, 1986), as a part of the top management team, and in relationship to firm performance (Eisenhardt, 1989). Feelings of confidence may just create that sense of mastery and control, as suggested by others researchers (Eisenhardt, 1989), which unifies the team, and provides a stable platform from which to explore, discuss, and launch relevant strategic initiatives. If affect influences managerial judgments (Gioia, 1986; Park JOURNAL OF MANAGEMENT,

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et al., 1986) then emotion and feelings of confidence are important topics for future research. Such research, however, should proceed in ways that there may be multiple routes to confidence, with only one source being struggle, information gathering and preparation. As the certainty-performance relationship suggests, it is that certainty, which is built up by strong teamwork and positive beliefs, that is associated with better performance. In fact, this research intimates that the ideal state for generating high levels of future performance is to be in a volatile environment but to believe that the environment can be analyzed and predicted and to use strong teamwork to do just that. Perhaps certainty under these conditions leads to more “decisive decisions,” that is, as Weick (1987) notes, decisions about which one is confident actually end up shaping (enacting) the environment in a manner with which the organization can better cope. Obviously, this linkage remains as a subject for future empirical studies. Certain limitations of this research should be noted in proceeding with future research and managerial applications. First, the managers were not members of a team of long standing, but rather were formed into teams for a relatively short, but intensive program. Second, it is not clear how the results of team performance and confidence within a simulation will translate directly into the world of practice where all sorts of pressures not accounted for in this simulation would affect decision making. Third, several of the variables were measured using only a single question. Though there is some face validity for the results (see footnote I), there is still a monomethod question to be addressed in future research efforts. Finally, while the managers participating in the study were bank managers, many were not top managers at the time of this study, hence extrapolation of their decision processes to those of actual top management teams needs to be made with care. Despite these limitations, we believe the results of this research are intriguing enough to warrant additional and careful study. Acknowledgment: The authors wish to thank Tony Baglioni for his extensive statistical advice and consultation, and, especially the two reviewers of this manuscript whose suggestions and thoughts helped expand and transform our thinking. Appendix A CERTAINTY Participants

MEASURES

were asked to respond to the following uncertain; 7 = completely certain:

questions

on 1-7 scale

(I = completely

How certain do you believe your team was about the general nature of changes that would take place in the bank’s external environment? To what extent were you certain about the changing conditions would affect your bank and the strategy being pursued? JOURNAL

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To what extent could you be certain of HOW WELL your bank would do when you made a decision to respond to conditions outside of the bank? To what extent do you think your team was certain of how components of the environment, such as competitors and the economy, would change from decision to decision? To what extent were you certain about what decisions your bank should be making in response to changes in the environment? How certain was your bank about the relative worth of each of the options being considered? How certain were you of the impact that changing economic and competitive conditions outside of your bank would have on what you were going within your bank? To what extent were you certain of what alternative decisions were available to your bank in response to changing external conditions? To what extent were you certain what changes in the competitive situation and economy meant for your bank? With what degree of certainty could your bank predict what was likely to happen to the competitive and economic situation outside the bank from decision to decision? Appendix B TEAM ORIENTATION

QUESTIONNAIRE

The following questions relate to your team’s internal functioning. Rate your team with respect to how well the group performed as a team with regard to the following [l-7 scale; 1 = very poorly; 7 = extremely well]: Making decisions as a team. Getting along with each other. Building consensus. Trusting each others’ judgments. Communicating

freely and openly.

Listening to a variety of opinions. Tolerating a high level of disagreement/ dissension. Delegating decision making authority. Agreeing on final decisions. Allowing all members equal participation. JOURNAL OF MANAGEMENT,

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Notes 1.

Unfortunately, due to the compressed nature of the game, and limited time for decisions, direct observation of the teams was precluded by the game’s administrators. The principal researcher, however, was in constant contact over the course of the two weeks with the bankers who provided technical assistance and resources. They routinely shared their observations and impressions informally with the researcher as to how the teams were evolving and performing. The thrust of those impressions was that the teams that “had it together or were working to get it together”were making the better sets of decisions.

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