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The importance of an effective management team in organizations is often taken for granted. Few organizations can clearly define why effective management is important and what effects the presence or absence of an effective management team produces on organizational performance. The goal of this paper is to delineate the major benefits of having an effective management team. The importance of effective management for financial performance, innovativeness and corporate strategy making is discussed. The paper provides recommendations to create and sustain effective management teams.
The Importance of Having an Effective Management Team
Effective management has already become a buzzword in today’s corporate world. Effective management is claimed to be the main predictor of sustained organizational growth. Firms seek to hire the best managers and the most experienced corporate leaders, to achieve the desired strategic goals. Yet, few organizations can clearly define why effective management teams are so important and what effects the presence or absence of an effective management team can produce on organizational performance. More often than not, the importance of having an effective management team is taken for granted. Therefore, it is important to understand what management team can and cannot do to improve organizations’ performance. In today’s corporate world, and bearing in mind the resource-based view of firms, an effective management team exemplifies a unique resource that leads the firm to better financial performance, encourages innovation and improves corporate strategy making; as such, an effective management team can become an important source of competitive advantage for contemporary organizations.
The resource-based view (RBV) of the firm is one of the main pillars of present day organizational thinking.
According to the resource-based view of the firm, resources and capabilities are the main drivers of sustainable competitive advantage, particularly those that are simultaneously valuable, rare, difficult and costly to imitate, and nonsubstitutable. (Michalisin, Karau & Conrad, 2006, p.109)
The presence or absence of an effective management team can be interpreted as the presence or absence of an important resource, and the effectiveness of management teams can be judged both by their inimitability and uniqueness and by the effects they produce on corporate growth and organizational performance. By defining how exactly an effective management team can impact organizations’ performance, organizations, their shareholders and corporate boards will be able to develop a system of reliable performance criteria and monitor the quality of decision making in their management teams. It should be noted that, for the purpose of this paper, a management team is defined as a group of top-level managers who are responsible for creating, formulating and implementing corporate strategies (Michalisin et al., 2006). This team of managers is regarded as the most influential and important team in the organization, whose power and control cover all aspects of the organization’s performance.
An effective management team is a strong predictor of better financial performance and higher returns. The current state of research suggests that an effective management team can potentially become a strong and potent strategic asset (Michalisin et al., 2006). Based on the recent analysis of Fortune 1000 companies, high-performing management teams and effective corporate boards are directly responsible for considerable improvements in firms’ performance (Payne, Benson & Finegold, 2009). According to Payne et al. (2009), effective teams are those which have high levels of knowledge and expertise, use external information to make strategic decisions, have sufficient power and spend a lot of time on relevant activities. Consequentially, these management teams have greater opportunities to improve the quality of their organizations’ financial performance, through improved decision making that builds on external information availability. Effective management teams have access to and use unique information, which further increases the quality of their decisions and creativity (Payne et al., 2009). Effective management teams have enough power and authority to make proactive decisions and positively affect strategic change (Payne et al., 2009). Finally, members of effective management teams spend considerable time on their primary activities, which increases their chances to represent stakeholders’ interests professionally and successfully and, as a result, make salient contributions to organizations’ financial performance (Payne et al., 2009). Therefore, it would be fair to assume that the presence of an effective management team can become a serious factor of improved financial performance in organizations.
Effective management teams move firms toward an innovative edge. This is particularly the case of new ventures, whose market standing and competitiveness depend upon their capability to produce and market innovative products (Zahra & Wiklund, 2010). Reasons why effective management teams drive innovations are numerous. To begin with, effective management teams are believed to possess the degree of alertness needed to notice, identify and use available market opportunities (Zahra & Wiklund, 2010). Innovative products represent a unique and timely response to the emerging market opportunities and signify the degree, to which a management team is innovative and effective. Furthermore, effective management teams are claimed to be inherently growth-oriented, which means that these teams and their decisions motivate firms to either update the existing products or develop radically new ones (Zahra & Wiklund, 2010). Finally, bearing in mind the functional heterogeneity of most management teams, these teams can successfully produce and exploit multidisciplinary knowledge for the benefits of organizations and firms (Zahra & Wiklund, 2010). This knowledge drives the creation of new product and service ideas which further facilitate firms’ transition to a higher level of financial and market performance.
Effective management teams play a crucial role in firms’ corporate strategy making. Successful strategy making is the foundational ingredient of firms’ performance (Li & Li, 2009). Corporate strategy making captures the methods, styles and processes used by firms to generate and implement their strategic decisions (Li & Li, 2009). The more effective management teams are the more capable they are of being proactive, innovative and risk taking in their strategy making. It should be noted, that the quality of strategy making greatly depends upon the quality of business relationships among members of management teams. Conflicts in management teams are not uncommon. However, it is at least incorrect to say that conflicts are by themselves unproductive; rather, both shared cognition and conflict can become the distinguishing features of effectiveness in management teams. Effective management teams can turn their conflicts into an instrument of achieving a strategic consensus; the latter is defined as understanding and agreeing on a particular strategy (Ensley & Pearce, 2001). Cognitive conflict, which is actually “the process of thinking about multiple ideas, […] sharing and developing those ideas through cognitive tug and pull” (Ensley & Pearce, 2001, p.146), can also lay the groundwork for achieving the desired level of team effectiveness and better quality of strategy making in firms. Effective management teams do not lose their commitments and do not betray their decision making patterns during conflicts. In effective management teams, effective information sharing reduces decision making uncertainties affecting organizations and strategies (Li & Li, 2009). As such, the relationship between management team effectiveness and strategy making is directly positive. Effective management teams precipitate productive strategy making and can lead firms to considerable strategic and financial improvements.
While the role and importance of an effective management team have been abundantly documented, the main question is what factors mitigate teams’ effectiveness and how to sustain this effectiveness in the long run. There is no definite answer to this question. The nature and effectiveness of management teams vary across organizations, and factors affecting the quality of their performance are increasingly diverse. In the age of globalization, uncertainty is probably one of the principal explanations as to why some management teams fail to achieve their strategic objectives (Carpenter & Fredrickson, 2001). Also, members of some management teams may have similar interests and information, whereas others may have their information and interests diverge (Edmondson, Roberto & Watkins, 2003). Asymmetric distributions of information, capabilities and resources within management teams can reduce their strategic decision making effectiveness (Edmondson et al., 2003). Consequentially, management teams are faced with the challenge of developing and maintaining their effectiveness over the longer periods of time. Edmondson et al. (2003) recommend that management team leaders use process design to enable their members to perform a more thorough analysis of available decision making alternatives and reduce the existing information asymmetries. Management team leaders should encourage a structured debate, when all team members have an opportunity to discuss alternative viewpoints and share information with others. Apparently, the quality of team leadership is at the heart of effectiveness across management teams, although it does not reduce the significance of the decision making contributions made by each team member. Based on everything said in this paper, an effective management team predisposes better financial performance, innovativeness and strategy making in firms, and it is within the limits and capabilities of every organization to create a management team that drives this organization to a sustained competitive advantage.
The effectiveness of management teams is an important factor of business and strategic performance within organizations. Based on the resource-based view of the firm, an effective management team is one of the firms’ most important strategic assets. An effective management team leads organizations to better financial performance, innovativeness and strategy making. An effective management team is that which is proactive in strategic decisions and capable of risk taking. In effective management teams, members are growth-oriented and possess the degree of alertness to capture the existing and emerging market opportunities and exploit them for the benefit of their organizations. Certainly, not all teams are effective by nature. Uncertainty and conflict mediate the relationship between management teams’ effectiveness and organizational performance. However, even conflict can become a productive source of effective strategy making in firms. Based on everything said in this paper, it is within the limits and capabilities of every organization to create a management team that drives this organization to a sustained competitive advantage.