This lecture reflexts my research area. It was given as a guest lecture at Kristinastad University for business policy and strategy course students at bachelors level.

1. The Role of Managerial Discretion
Business Policy and Strategy
Fall 2014
Yuliya Ponomareva, PhD Candidate.
Linnaeus University

2. 2FE017 Yuliya Ponomareva
Short Outline
• The influence of top managers on organizational outcomes
• The main theoretical perspectives
• Defining managerial discretion
• Dimensions of managerial discretion
• Presentation of papers

3. • “Corporate strategy is the pattern of decisions in a company that
determines and reveals its objective purposes or goals …” (Foss,
2003 p. 52)
• Who is responsible for creation and execution of corporate strategy?
- In European context: strategy is jointly created by the board and
theTMT
- In Anglo-Saxon context: strategy is created and executed by the TMT
•

4. Do managers matter?
Google CEO Eric Schmidt (Creative Commons)

5. Strategic Choice Perspective
• The Central Assumption:
• Managers have a profound influence on organizational
outcomes.
• ”The fundamental attribution error” (Weber et al., 2001)

6. CEO Decisions that changed the history
of a company
• Paper production,
• Rubber production,
• Electricity production,
• Telecommunications cables,
• Consumer electronics,
• Personal computers,
• Electricity generators,
• Robotics,
• Military communications equipment,
• Plastics, aluminium, chemicals
• www.Nokia.com

7. CEO as the
”Savior”
CEOs as the
”Failure”
matt buchanan/http://www.flickr.com/CC BY-ND 2.0
The Still Man/http://www.thestillman.com/CC 3.0

8. Strategic choice perspective: Theories I
• Organization Man vs. Economic Man (Simon, 1947)
• Behavioral Theory of a Firm (Cyert and March, 1963):
• How internal organizational factors influence firm’s
strategic decisions (price, resource allocation, output, the
goal).
• - The emphasis on decision-making process.

9. Strategic choice perspective: Theories II
Upper Echelon’s Theory (Hambrick and Mason, 1984)
• Top-Managers are responsible for creation and execution
of firm’s strategy
• Top-Managers are bounded in their rationality:
http://goo.gl/A8ykMA using a Creative Commons licence.

10. Empirical Evidence:
• Study 1:
• Methodist ministers with experience in successfully
accoplishing their prior assignments are more likely to
successfully accomplish their present assignment in a
church. (Smith, Carson, and Alexander, 1984)
• Study 2:
• Prior experience of professional sports coaches may
predict their performance with present teams. (Rowe et
al., 2005)
• Study 3:
• TMTs composed of members with different length of
tenure outperform TMT composed of members with
similar tenures. (Murray, 1983)

11. Strategic Choice Perspective Environmental Determinism
Perspective
“Managers Matter”
Behavioral Theory of a Firm
Upper Echelons Theory of a Firm
CEO and TMT characteristics

12. Environment determination perspective
- Organizational Ecology: organizational inertia
- Institutional theory: Institutional forces
- Contingency theory: Situational influence
•Managers are constrained by the environmental forces,
organizational inertia, and social norms.

13. Empirical Evidence
• Study 1:
• 6.5% to 14.5% of firm’s performance variation can be
attributed to the function of executives (Lieberson and
O'Connor's, 1972)
• Study 2:
• 5% to 15% of variance in city expenditures are attributed
to the individual roles of mayors (Salancik and Pfeffer's,
1977).
• Study 3:
• 5% of variation in firms’ returns on assets can be attributed
to firm’s executives (Bertrand and Schoar,2003).

14. Organizational Environmental Adaptability
Strategic choice Environmental Determinism
Hambrick and Finkelstein 1987

15. Managerial Discretion: 2 central
perspectives
• Strategic perspective: the scope of managerial actions
• Governance perspective: the scope of managerial
objectives

16. Managerial Discretion: Dimensions
(Hambrick and Finkelstein,1987)
Individual
Organizational
Environmental

17. Environmental Level of Managerial
Discretion
- Product differentiability
- Market growth
- Industry structure
- Demand instability
- Quazi-legal constraints
- Powerful outside forces

18. Industry Clasifications
•High Discretion Industries
Computers and Electronics,
Cosmetics, Engineering, Toys
•Low discretion Industries
Oil and Gas, Water Supply,
Railroads
Hambrick and Abrahamson (1995)

19. Empirical evidence
• CEO compensation is higher in high-discretion
environments (Finkelstein and Boyd, 1998)
• CEO compensation predicts corporate performance more
in high-discretion environments (Rajagopalan, 1997)
• The higher the level of diversification the higher the level
of variable executive compensation (1987)

20. Headlines From Wall Street Journal
” Oil and Gas CEO Pay Beats Other Industries” (by D.
Mattioli, 2012).

21. The influence of culture
Steiman (creative commons)
Guillaume Paumier on Wikimedia Commons under a Creative Commons license
Creative Commons

22. The ”effect” of the CEO is significantly
higher in the US firms when compared to
German and Japanese CEOs
• Potential explanations:
• Formal insitutions:
• - legal tradition, firm ownership structure, board structure
• Informal Insitutions:
• - cultural values: uncertainty avoidance, power distance,

23. http://geert-hofstede.com/

24. External governance mechanisms:
• Market for managerial labor
• Financial Audit
• Market for corporate control

25. Organizational Level: Strategic
determinants
- Inertial forces: size, age, strong culture, capital intensity
- Resource availability
- Powerful inside forces

26. Organizational Level: Governance
determinants
Internal mechanisms:
• Ownership concentration
• The board of directors
• Executive compensation

27. Individual Level (Habrick and Finkelstein,
1987)
Manager’s Individual Characteristics:
• Aspiration level
• Commitment
• Tolerance for ambiguity
• Cognitive complexity
• Locus of control
• Power base: personal reputation, authority

28. Empirical Evidence
• Executives with internal locus of control and impression
management tendencies have a positive effect on
managerial discretion. (Carpenter and Golden, 1997)