How CEOs and TMTs Build Adaptive Capacity in Small Entrepreneurial Firms

• Date: 01 September 2016
• Published date: 01 September 2016
• DOI: http://doi.org/10.1111/joms.12184
• Author: Abraham Carmeli,Asher Tishler,Yair Friedman

How CEOs and TMTs Build Adaptive Capacity in

Small Entrepreneurial Firms

Yair Friedman, Abraham Carmeli and Asher Tishler

Tel Aviv University

ABSTRACT Research suggests that a CEO may have more influence in the context of small

entrepreneurial firms, but it is still unclear how a company’s chief executive facilitates strategic

decision-making. Little is known about the ways in which these individuals build strategic

capabilities, such as the capacity to adapt to changing environments. This study addresses

these issues and develops a model indicating that transformational leadership facilitates

behavioural integration and comprehensiveness in the decision process among members of the

top management team (TMT), which in turn enhances organizational capacity to adapt to

environmental changes. Survey results shed light on the complex way in which CEOs

facilitate processes within the TMT and enhance small entrepreneurial firms’ capacity to

adapt, thereby increasing their viability. This study contributes to the literatures on Upper

Echelon Theory, strategic decision-making, and dynamic capabilities by shedding light on the

ways in which transformational leaders influence behavioural and decision-making processes.

Keywords: adaptability, behavioural integration, comprehensiveness, small entrepreneurial

firms, top management teams, transformational leadership

INTRODUCTION

Small entrepreneurial firms are often depicted as proactive and agile (Irvine and Ander-

son, 2004; Golann, 2006; Pisano, 2006; Katila et al., 2012). However, evidence indi-

cates that they are in fact highly fragile organizational entities that often fail to survive

beyond three years (Australian Bureau of Statistics (ABS), 2001; The European Com-

mission (EC), 2013; UK Department for Business, Enterprise and Regulatory Reform

(BERR), 2008; US Small Business Administration (SBA), 2006). The literature (see

Rosenbusch et al., 2011) generally cites the liability of newness (Stinchcombe, 1965) or

the lack of formal routines (Bruderl and Schussler, 1990; Sine et al., 2006) associated

with these enterprises, although some studies have pointed to the capacity of small

Address for reprints: Yair Friedman, Faculty of Management, Tel Aviv University, Ramat-Aviv, Tel-Aviv

69978, Israel (yair@friedman.org.il).

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 53:6 September 2016

doi: 10.1111/joms.12184

organizations to build greater resilience through smallness (Carmeli and Markman,

2011). However, it remains unclear why some small entrepreneurial firms develop a

greater capacity to adapt to changing environments than others.

We theorize that strategic decision-making processes comprise a key mechanism

underpinning the capacity of small entrepreneurial firms to adapt to their competitive

environments. CEOs and other executives vary in their personality, values and attitudes

and thus may also exhibit different orientations and behaviours that may lead to varia-

tion in firm-level outcomes (Markman and Baron, 2003). Leadership scholars suggest

that the leadership of CEOs of small entrepreneurial firms is likely to have a substantial

influence on their functioning. In the absence of resources and formal routines, CEOs

act as a resource platform providing experiences, skills, abilities that the firms can rely

on (see Lubatkin et al., 2006). Put differently, small firms that have a relatively limited

hierarchical structure and resource pool are likely to rely more extensively on a limited

set of assets (mainly their executives and employees), processes and mechanisms

(Golann, 2006; Katila and Shane, 2005) in the decision-making process.

Strategic decisions are defined as decisions that are substantial, unusual and all-

pervasive (Hickson et al., 1986) since they require the TMT to commit considerable

organizational resources (Mintzberg et al., 1976). Furthermore, strategic decisions often

have emotional, financial, environmental and ethical implications that can ‘critically

affect organizational health and survival’ (Eisenhardt and Zbaracki, 1992, p. 17; see also

Hambrick, 2007). Research has shown that the strategic decision-making processes of

effective TMTs differ considerably from those of less effective ones (Eisenhardt, 1999).

Although there has been enormous interest in strategy and management (e.g., Hart, 1992;

Quinn, 1980), the scholarly focus on processes that ‘serve to transform executive characteris-

tics into strategic action’ is relatively underdeveloped (Hambrick, 2007, p. 337), and scholars

have encouraged a Behavioral Theory lens (Kunc and Morecroft, 2010) to identify how

CEOs and TMTs utilize inherent behavioural factors to manage cognitive processes (Car-

ter, 1971; Cyert and March, 1992; Gavetti, 2012). The Behavioral Theory of the Firm

(Cyert and March, 1992) argues that while small firms may operate under the guidance of

the entrepreneur, larger firms include coalitions of individuals or groups that participate in

setting goals and making decisions. Nevertheless, the issue of how CEOs facilitate strategic

decision-making processes in TMTs (Carmeli et al., 2011), influence organizational

processes (Garcia-Morales et al., 2008) and help to build adaptability (Nadkarni and

Herrmann, 2010) remains elusive. Hambrick (1994) noted that a focus on TMT behaviou-

ral integration (BI), which refers to the extent to which a TMT is engaged in a mutual and

collaborative interaction (Hambrick, 1994), may explain adaptive and maladaptive organi-

zational responses to changing environments (Hambrick, 1998), but this line of research still

needs further theoretical development and empirical evidence (Hambrick, 2007; Simsek

et al., 2005), particularly in the context of small entrepreneurial firms (Johnson et al., 2003;

Lubatkin et al., 2006).

Here, we develop and test a serial mediation model, shown in Figure 1, which elabo-

rates on the complex ways in which CEOs shape and facilitate behavioural and cogni-

tive processes. The findings indicate that transformational CEOs help their firms to

become more adaptive to environmental jolts by developing behaviourally-integrated

TMTs in which members engage in strategic decision comprehensiveness (which is

997Adaptive Capacity in Small Firms

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies