Reasoning in the Executive Suite: The Influence of Role/Experience-Based Expertise on Decision Processes of Corporate Executives

Abstract

This study investigates the effect of high-level executives' professional experience, expertise, and role in a specific functional area such as finance or corporate development on their reasoning processes when making managerial decisions. Chief Financial Officers (CFOs) and Vice-Presidents of Corporate Development (VPs) in the diversified foods industry were tape recorded as they thought aloud while evaluating four restaurant chains which were candidates for corporate acquisition. The experiment was designed so that these four acquisition candidates varied with respect to key financial and profitability data and such measures of a firm's strategic business position as product concept, markets, distribution channels, labor relations, and managerial expertise and loyalty. The attributes of financial performance and strategic position embedded in the descriptions of candidate firms were validated by an expert panel. The executives also provided rating-scale evaluations of the strategic, financial, and overall desirability of the four candidate firms. The taped thought processes (verbal protocols) were analyzed to determine whether CFOs and VPs differed when evaluating the overall desirability of the acquisition candidates in their use of such lines of reasoning as assessments of the candidate's competitive environment, financial strength, management, operations, and the potential financial, managerial, and operational synergies offered by the proposed acquisition. The probability of generating these assessments during the evaluation process did not appear to be related to expertise based on experience or organizational role. When the protocols were analyzed with respect to specific business issues identified by CFOs and VPs when evaluating acquisition candidates, however, there was a role/experience effect. Overall ratings of candidate-firm desirability were straightforward functions of the executive's ratings of the candidate's strategic position and financial performance. On average, VPs tended to be more optimistic in their evaluations than CFOs. There is modest statistical evidence that VPs and CFOs differ in the emphasis they place on strategic and financial ratings in evaluating a candidate's overall promise. VPs tend to take a balanced view in forming their overall ratings, whereas CFOs place the predominant weight on financial matters. The similarity in lines of reasoning used by CFOs and VPs presents evidence of shared expertise at the corporate level. The difference in the attention that CFOs and VPs place on specific business issues suggests that collectively these different perspectives constitute an adaptive survival mechanism which evolves in successful organizations. The mechanism complements the shared expertise and protects organizations from making flawed strategic decisions. Analyzing these role/experience-based differences has value in developing an understanding of how organizations do and should integrate recommendations from executive officers of various functional areas.

The effects of executives’ experiences and perceptions on their assessment of potential technological alliances

“…While a number of studies have not found support for Dearborn and Simon's original, somewhat simplistic contentions, there is support for a more complex relationship between functional work experience and strategic decision-making processes (e.g., Hitt and Tyler, 1991;Melone, 1994). For example, Walsh (1988) found that the belief structures (mental understandings) managers brought to bear on problems were not particularly simplistic or narrowly functional.…”

“…Furthermore, research suggests that these observable executive characteristics are significantly related to what information is noticed and how it is weighted when top executives evaluate the desirability of strategic alternatives (Hitt and Tyler, 1991;Melone, 1994). Child (1974) proposed that older executives are more committed to the status quo than are younger executives.…”

“…Research suggests that the result of this enactment process is dependent on the cognitive orientations or mental understandings established in the minds of the individual executives involved (Hambrick and Mason, 1984;Melone, 1994;Miller, Kets de Vries, and Toulouse, 1982).…”

The Process of Postmerger Integration: A Review and Agenda for Future Research

“…In the context of mergers and acquisitions, acquiring firm leaders' 55 hubris (Hayward & Hambrick, 1997), narcissism (Chatterjee & Hambrick, 2007) and self-interest (e.g., Deutsch, Keil, & Laamanen, 2007;Gamache, McNamara, Mannor, & Johnson, 2014;Devers, McNamara, Haleblian, & Yoder, 2013) have been shown to influence decisions in the deal-making phase. Leaders' prior experience (e.g., Walters, Kroll, & Wright, 2008;McDonald et al, 2008), functional position (Melone, 1994), gender (e.g., Chen, Crossland, & Huang, 2014), tenure and educational background (Nadolska & Barkema, 2014) also influence decisions regarding whether to acquire a firm and how much to pay. This suggests that a promising avenue for future research would be to examine how leaders' personality traits and backgrounds influence their decisions regarding PMI.…”

Microlevel Opportunity Structures as Determinants of Non-Ceo Executive Pay.

“…Contingency relationships were identified intuitively, with specific executive functions linked to those contingencies that appeared most relevant to them. For example, according to our framework, the finance function should be critical to capital-intensive or highly diversified firms (Melone, 1995;Song, 1982). Similarly, the marketing function should be most valuable in firms that devote large amoimts of resources to marketing and advertising (Bowman & Daniels, 1995;Chaganti & Sambharya, 1987); executives in R&D are expected to be most valuable to finns that spend a laige amount of resources in developing new and innovative products (Chaganti & Sambharya, 1987).…”