Abstract
This paper critically analyzes Naranjo-Gil’s (2009) study on the relationship between Top Management Team’s demographic diversity and organization performance.
According to Naranjo-Gil (2009), demographic diversity of experience and education background played a significant role in strategic performance in comparison with demographic features associated with age and tenure. Does top management team matter at all?
How and why do the top management teams shape the outcomes of the organization? Does diversity in Top Management Teams positively or negatively affect the overall performance of the organization?
This review seeks to answer these questions. This study would help managers and scholars in changing structures in societies and legal foundation, as well as the on-going research into identifying crucial factors that shape organizational outcome.
Introduction
The inquiry concerning the determinants of organization performance is a critical inquiry that confronts us on a daily basis. Bungles and errors of the Top Management Team are the long universal monetary cycles of these inquiries.
Regarding the top management case, the TMT composition is seen as a vital variable in defining organization outcomes. Naranjo-Gil (2009) conveyed an exploration study to explore this relationship.
Naranjo-Gil’s (2009) study investigates the relationship between Top Management Team demographic diversity and organization performance by integrating strategic performance and accounting system. However, it is unclear whether the general impacts of diversity in TMT for organizational results are positive or negative.
Naranjo-Gil (2009) significantly contends for exceptionally positive expectations, assuming diversity with TMTs would throughout lead to better decisions and performance. However, this critical review will attempt to analyze the negative impacts connected with demographic differing qualities.
Naranjo-Gil’s (2009) empirical study produces a mixed result and thus does not strongly favor any of the two competing theoretical propositions. This review will analyze the following questions in Naranjo-Gil’s (2009) investigation study: Do top management teams matter at all?
How and why do the top management teams shape the outcomes of the organization? Does diversity in Top Management Teams positively or negatively affect the overall performance of the organization? Through this approach, this review will bring existing gaps in Naranjo-Gil (2009) work for future research.
Description
Naranjo-Gil (2009) suggestes that accounting systems avail a variety of information to managers who enable them to estimate time and space, coordinate information in the organization and integrate data over a time duration. It also allowes the management to increase its frequency as well as reporting speed (p. 104).
Therefore, manager’s quick adoption and use of accounting systems enable them to achieve organization goals and objectives effectively.
According to Naranjo-Gil (2009) managers who understood accounting system were able to accomplish diverse strategic performance, particularly “flexibility” and “cost related” strategies (p. 105).
According to his indulgency towards literatures, cost related strategies emphasize “ the internal efficiency and cost control”, therefore it is founded on the “current firm rather than the new firm” (p. 105).
He argued that, even though, the organization may perform one objective better than other one, there was a positive correlation between refined management information system with strategic performance.
He also used various written works to demonstrate that management information systems were correlated to those strategic measures based on flexibility than to those based on cost reduction.
His assumption is that since flexibility related strategic goals demand “cross-functional interaction and decentralization … managers required accounting system so as to have insight into different transformation process” (p.105).
He differentiated this to cost related strategic performance which relayed on “standardization and comparability of activities and processes” (p.105).
Therefore, accounting system is used more often to achieve flexibility related strategic performance than cost associated one, which focused on monetary and comparability functions in an organization (p.105).
This assumptions made from the analysis of different literatures motivated Naranjo-Gil (2009) to the central hypothesis of his study. His study sought to prove that demographic diversity in top management team would positively influence MIS and strategic performance.
According to Naranjo-Gil, demographics, particularly age, experience, education and tenure played a significant role in influencing TMT in the decision-making process (106). Using various literature he demonstrated how accounting systems could significantly benefit TMT by availing extensive knowledge, understanding, and perspectives.
Thus, TMT were capable of achieving flexibility and cost related strategic performance. According to his assumption, the higher the demographic diversity in top management team, the greater the contribution of accounting system to strategic performance.
To legitimize his study, he conducted an empirical study using instruments applied by various scholars (p. 106). He also informed us of the obligations of the Spanish government in motivating the achievement of “performance goals and stresses on controlling cost and increasing organization flexibility, as well as decentralization” (p. 106).
In this study, Naranjo-Gil distributed questionnaires among top management team representatives of CEO, and directors in medical, finance, and nursing departments in 214 hospitals in Spain.
He incorporated timeliness, scope, aggregation and integration to measure variables of accounting system. Naranjo-Gil (2009) did an excellent job of applying the upper echelon approach in defining variables of demographic diversity.
He used variables of cost and flexibility related strategic goals in order to demonstrate strategic performance. His primary focus of doing this investigation was to find tout he influence of TMT demographic diversity in determining applications for accounting system and strategic performance.
According to his discoveries, top management team faced a substantial heap of information consistently. Such information is regularly questionable, mind boggling and unstructured.
From various perspectives, TMT is compelled to manage this situational uncertainty. In view of their experience and academic foundation, TMTs will decipher the information and sources, and this will positively impact their choice.
Analysis
Does top management team matter at all?
There are various standpoints of this question. Some scholars deny the influence of managers on organizational outcomes. Naranjo-Gil (2009) presumed external factors as being the only determinants or, at least, as being the most influential determinants of the organization and the strategic choices.
Many scholars have criticized these purely external determined approaches on a number of grounds. Strategic objectives encounter occasional problems at the implementation stage (Ferrier 2001, p 862). Heterogeneous teams tend to be less successful in time-pressured decision-making and efficient implementation.
With bids of acquisitions, speed in calculations, the estimation of the far-reaching consequences of higher bids or withdrawals are also important strategic decisions, which may enormously impact the organization. Trying to achieve unanimity, diverse TMT is in such circumstances likely to run out of time.
Therefore, in situations which demand quick and straightforward decisions, homogeneity within a team might be favorable (Cho et al. 1994, p 15)
Naranjo-Gil (2009) considered TMT explicitly as a team rather as a group of individuals. However, TMT working environment limits the possibility to create a real feeling of a “team” (Hill, 1995, p.240).
In fact, the team members are currently or previously successful people, like CEO, that is used to stand individually at the top of the organization making decisions often individually rather than collectively. However, the Top Management Team is organized following a principle of collective responsibility.
For instance, major decisions made are voted and approved by the chairman. Therefore, the TMT is understood as an episodically interacting group over an extended period with the task of “information processing, evaluating it critically and achieving consensus” (Hill, 1995, p.249).
Thus, certain aspects of Team decision-making differ significantly from those corresponding to individual decision-making.
How and why do the top management teams define organization outcome?
One of the influential theories of TMT that was taken by Naranjo-Gil (2009), was the concept of bounded rationality as a starting point of introducing his article of how the organization is a reflection of its top managers.
The point to which Naranjo-Gil (2009) refers as Hambrick and Mason’s “upper-Echelons-Theory” has also been investigated by many scholars.
The focal point of Naranjo-Gil’s (2009) argument is that organizational outcome – both strategies and effectiveness – viewed as a reflection of the values and cognitive bases of powerful actors in the organization.
Instead of assessing values and cognitive basis directly, Naranjo-Gil (2009) suggested the use of observable managerial variables such as age, experience, education background and tenure. He demonstrated that these demographic indicators can serve as proxies for the cognitive basis of managers (p.106-108).
Hambrick and Mason (1984) agreed with this approach for reasons of simplicity of access and measurement and reliability.
In fact, they believed that environmental variables and demographic variables can predict strategic choices (Hambrick and Mason, 1984). Consequently, demographic and strategic choices can predict the performance.
Naranjo-Gil’s (2009) work considered TMT as a whole, as it added greater predictive power than the investigation of single TMT members. Various scholars have confirmed this fact on a different occasion (Hambrick, 1987, p. 91; Papadakis and Barwise, 2002, p. 87).
Naranjo-Gil (2009) did an excellent job of formulating propositions about the demographic composition of the TMT and its effects on strategic choice and performance. The most applicable measures of central tendencies take place at the aggregate level.
Finally, Naranjo-Gil (2009) formulated propositions about the effects of demographic outcome within TMT on organizational outcome. According to his discussion, demographic variables influence strategic performance by influencing the decision-making process (p.108).
Pfeffer’s (1983) written work about “Organizational Demography” supports this argument. He affirms that the distributional properties are of significance. The mere use of single descriptive statists is not sufficient to explain organization outcomes.
He claimed that demographic effects were not simply the sum of individual variants. According to Pfeffer (1983), for one to understand the impact of demography on organizational outcomes, the distribution of demographic characteristics of any social entity is essential.
In using demographic Naranjo-Gil (2009) offers a parsimonious, comprehensive, testable and objectively measurable model. However, Pfeffer (1983, p 301-352) argued that the use of demographics can potentially account for a broad variety of a hypothetical construct, such as attitude, which might relate to organizational outcomes.
According to Pfeffer’s conclusion, the dispersed aggregate demography measure is an important causal variable that affects a number of intervening variables and process and through the number of organization outcomes (1983, p. 350)
Does diversity in Top Management Teams positively or negatively affect organization outcome?
Naranjo-Gil (2009) concluded that demographic diversity, mainly experience and education, can proxy cognitive diversity. Variables for decision-making are usually variables of values, beliefs, perceptions, judgment, attitudes, norms, commitment, personality and openness.
These variables are hard by their nature to access and difficult to measure and, therefore, vulnerable to result in unreliable and invalid data. The difficulty to access an outcome must be seen as a major shortcoming, especially as the upper echelons approach, as the target persons are usually not at the free disposal of being questioned.
In any case, psychological instruments to assess cognitions use series of issues, which are very time-consuming. Besides, cognitive data would not be available to former top management team (Hambrick et al., 1996, p. 663)
In contrast to cognitive variables, demographic variables are easy to use and measure; and are reliable, objective and valid. Therefore, explanations using demographics offer the possibility of generating more parsimonious models which are easier to test, than models which include cognitive measures (Pfeffer, 1983).
However, demographics is not only potential proxies for cognitions but are also good proxies for a wider range of other variables like status. Resultantly, they are also called “global variables” (Hambrick et al. 1996, p.663). Consequently, they can include a lot of “noise” (Lawrence 1997).
An extreme position that one could take is abandoning demographics. On the other hand, given that demographics rests on a vague ground, the relationship between cognitive concepts and performance should even be stronger (Hambick and Mason 1984).
Also, not all demographically similar people have had the same experience, thus, would not have identical cognitions (Flyn et al. 2001, p.415). However, one could argue that they are, on the basis of their observable characteristics, more likely to have shared experience, than randomly selected people.
Both sides of the argument find empirical supporting evidence (Kilduff et al. 2000, p. 31). Therefore, it is hard to reach a concrete particular
Finally, it is not clear which demographic proxy represents the desired aspect of cognitions (Kilduff et al., 2000, p.31). Hambrick et al. (1996, p.663) have noticed this shortcoming.
They argue for greater distinctions and a theory of various types of demographics or demographic diversity and their relationship to cognitions or diversity in decision-making. Needless to say, the lack of the theoretical foundation for different kinds of demography and cognitions is a limitation.
However, the interdependence of differing types of demography makes it a fruitless undertaking.
Naranjo-Gil (2009) assumed positively relationship between demographic diversity and cognitive diversity. Cognitive diversity is, thereby, a reference to the Team’s ability to process information and to perceive and interpret varying stimuli differently (Milliken and Martins 1996, 416).
As a result, cognitive diversity within the team should lead to a wide range of perspective, more creative ideas, and a variety of requisites, more alternatives and a better quality of decisions.
Conclusion
In retrospect, Naranjo-Gil’s (2009) investigation has given insight into the relationship between top management team diversity and organization performance.
Naranjo-Gil’s (2009) study could help managers and scholars in changing structures in societies and legal foundations, as well as the on-going research into identifying crucial factors which shape organizational outcome.
Besides, this research has raised the attention of practitioners and academics to the potential impact that diversity can have. In particular, the effect of the group composition in TMTs is valued highly, as their ability to arrive at high-quality decisions is a critical determinant of organizations performance.
On the basis of their empirical study, one must conclude that the relationship is indeed dynamic and complex. The question outlined in the analysis section of this paper, need to be substantiated by future research.
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