The relative importance of the top management team's managerial skills

The relative importance of the topmanagement team’s managerial

skillsAbraham Carmeli

Graduate School of Business Administration and Department of Political Science,Bar-Ilan University, Ramat-Gan, Israel, and

Asher TishlerFaculty of Management, Tel Aviv University, Ramat Aviv, Tel Aviv, Israel

Abstract

Purpose – The goal of this study is to examine the effect that nine managerial skills of the firm’s topmanagement team (TMT) (persuasiveness, administrative ability, fluency in speaking, knowledgeabout group tasks, diplomacy and tact, social skills, creativity, conceptual skills, and cleverness) haveon the performance of industrial firms (a weighted average of seven performance measures).

Design/methodology/approach – Data were collected from chief executive officers of 93 industrialenterprises in Israel through structured questionnaires and complementary in-depth investigation.Both multivariate (robust canonical analysis and hierarchical regressions) and in-depth analyses wereused to analyze the study’s results.

Findings – The results show that managerial skills possessed by the TMT strongly affect firmperformance, their impact apparently being greater than that of variables representing industrysectors, firm size and age, and perceived environmental uncertainty. In particular, skills that arerequired to manage people (human resources skills) are found to be more important to firmperformance than intellectual abilities.

Practical implications – The study emphasizes the importance of complementary managerialskills as an indicator of quality TMT. The TMT’s ability to make good decisions and lead theorganization to meet external and internal constituents is a very complex task.

Originality/value – The study contributes to the literature by first, providing support to theimportance of managerial skills for firm performance; second, suggesting a new avenue to incorporatethe resource based view into the field of strategic leadership in general and managerial skills inparticular; and finally, indicating the importance of simultaneously testing the effect of a set ofpredictors (managerial skills) on a set of performance measures.

Keywords Management skills, Chief executives, Senior management, Organizational performance,Israel

Paper type Research paper

1. IntroductionThe role of the firm’s top management team (TMT) – the chief executive officer (CEO)and senior managers – in creating sustainable competitive advantage and gainingabove-normal performance has long attracted the attention of strategy researchers.Resource-based view (RBV) strategists and upper-echelon theorists suggest that thefirm’s TMT is a critical resource for its success because of the significant influence it

The current issue and full text archive of this journal is available at

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The authors wish to thank Constance E. Helfat, the Editors and the anonymous reviewers of thisjournal for their helpful comments and suggestions.

TMT’smanagerial skills

9

International Journal of ManpowerVol. 27 No. 1, 2006

pp. 9-36q Emerald Group Publishing Limited

0143-7720DOI 10.1108/01437720610652817

www.emeraldinsight.com/0143-7720.htm

has on the firm’s strategic decisions and their implementation (Barney, 1991; Castaniasand Helfat, 1991, 2001; Hambrick and Mason, 1984; Wiersema and Bantel, 1992).Indeed, the ability of managers “to understand and describe the economic performancepotential of a firm’s endowments” (Barney, 1991, p. 117) rests on the integration of all,or most, of the relevant managerial skills.

Though several researchers (e.g. Katz, 1974; Stogdill, 1974; Whetten and Cameron,2001; Yukl, 2002) have identified skills that effective leaders should possess, relativelylittle has been done to estimate the impact of the TMT’s skills and their relativeimportance to firm performance. Even though there is agreement about themultidimensional nature of performance, to the best of our knowledge, there is littleempirical work relating managerial skills to such performance measures. Finally,though researchers tend to view the TMT as a strategic resource, apart from a fewstudies (e.g. Castanias and Helfat, 1991, 2001) little has done to connect the RBV andthe upper-echelon theory. This is especially problematic given that “real progress will[not] be made on strategic leadership theory until researchers within this tradition arewilling to learn from other theories and streams of research and incorporate them intotheir own work” (Boal and Hooijberg, 2000, p. 524).

Using both in-depth investigation and multivariate analyses, this study estimatesthe effect that nine managerial skills of the firm’s TMT (persuasiveness, administrativeability, fluency in speaking, knowledge about group tasks, diplomacy and tact, socialskills, creativity, conceptual skills, and cleverness) have on the performance ofindustrial firms (a weighted average of seven performance measures). We argue thatafter controlling for the effect of industry type, organizational age and size, andperceived environmental uncertainty, the managerial skills of the TMT will have astrong influence on firm performance. Furthermore, we argue that “people-related”managerial skills affect firm performance more than intellectual abilities.

The findings of this study show that, indeed, the managerial skills possessed by theTMT of the firm strongly affect firm performance. Multiple hierarchical regressionresults indicate that both human resources skills and intellectual abilities affect firmperformance, but the effect of the human resources skills is greater. Furtherinvestigation, using the method of robust canonical analysis (RCA), reveals thatthough all nine managerial skills have a strong effect on the seven performancemeasures, they differ in their importance.

This paper is organized as follows. Drawing on the RBV, Section 2 presents thestrategic role of the firm’s TMT, reviews the relevant managerial skills, explores howthe TMT may affect firm performance, and states the study’s major research questionand hypotheses. The research method is presented in Section 3 and the results of thisstudy are in Section 4. Section 5 summarizes the study’s results and limitations.

2. Theory and hypotheses2.1 The strategic role of the firm’s TMTThe role of the firm’s TMT is to organize and direct all the activities of the organizationby making and implementing strategic and operational decisions capable of creatingrents that cannot be taken away by competitors (Castanias and Helfat, 1991, p. 157).The upper-echelon theory (Hambrick and Mason, 1984) holds that the TMT has acritical role in positioning the organization strategically (making the organizationdistinct from its competitors). Evidence indicates that the quality of the TMT is crucial

IJM27,1

10

to the organization’s position in the market (Hambrick and Mason, 1984), asdemonstrated in the successful recovery of IBM, led by CEO Louis Gerstner and hismanagement team (Austin and Nolan, 2000).

To explain the value of a firm’s TMT, we draw on the RBV, which suggests directingthe major part of the research effort to analyzing the performance of organizations interms of their resources, rather than their product market activities (Wernerfelt, 1984),because distinctive (strategic) organizational resources have the potential to generate asustainable competitive advantage and lead an organization to superior performance (seeAmit and Schoemaker, 1993; Ansoff, 1965; Barney, 1991; Conner, 1991; Hofer andSchendel, 1978; Prahalad and Hamel, 1990; Reed and DeFillippi, 1990; Selznick, 1957).

Resources, capabilities, competencies, skills and assets, as the basic terms that RBVresearchers have been using (see Javidan, 1998). Strategic resources are “sociallycomplex routines that determine the efficiency with which firms physically transforminputs into outputs” (Collis, 1994: 145). The implications here are firstly, they are notvested in a single individual and secondly, they complement other resources, activitiesand policies (see Siggelkow, 2002) and have a role in advancing a direct improvementin efficiency as well as conceiving new ways to create value (Collis, 1994). Gainingsustained superiority in a competitive market depends on the firm’s ability to identify,develop, deploy, and preserve particular resources that distinguish it from its rivals(Amit and Schoemaker, 1993; Dierickx and Cool, 1989). In order to produce asustainable competitive advantage, resources and capabilities need to be highlyvaluable (i.e. contribute to improving the firm’s performance), rare (i.e. are possessedby fewer of the firms than necessary to create perfect competition dynamics),inimitable (i.e. costly to copy by competitors), nonsubstitutable (i.e. competitors haveno immediately available substitute to fulfill the same function) (Barney, 1991) andnontransferable (i.e. they cannot easily be purchased) (Dierickx and Cool, 1989).

As a strategic resource a TMT is valuable when it is able to analyze opportunities tobe exploited and threats to be neutralized (Mahoney, 1995), that is, when it makes adifference in advancing an improvement in efficiency, or has the ability to conceive newways to create value. If “cultural” resources (Wernerfelt, 1989) or organizational skillsand abilities in a combination of organizational resources (Barney, 1986) are to generatecompetitive advantage, a TMT has to build and use them effectively (Castanias andHelfat, 1991, p. 157). The TMT is rare when it holds organization-specific knowledge atboth the individual level and the team level. That is, a framework of competing valuesevolves over time within the firm (Quinn and Rohrbaugh, 1983). This framework iscomplex and balanced in a way that is unique to the firm. It is also imperfectly imitable(inimitable) due to unique historical conditions, causal ambiguity, and socialcomplexity. Though a member, or several members, of the TMT may sometimesleave the organization, it is difficult to see how an entire TMT that currently operates inharmony with the organization’s design, strategy and other core resources can beperfectly transferable (or imitable). In many cases, the TMT is also nonsubstitutable(irreplaceable) due to specific knowledge it possesses. Furthermore, in some cases, thefirm is a reflection of its leader (Hambrick and Mason, 1984).

2.2 Managerial skillsWe aim to develop ideas about the importance of TMT skills for firm performancethrough an in-depth investigation of two firms of this study’s sample. To this end, we


11

used our consulting experience with both firms and secondary data (reports andarticles). We begin this examination with a cautionary tale of two firms, one thatachieved its goals and one that did so following initial failure. Against all odds, Alpha,a middle-sized Israeli firm performed the quite exceptional feat of achieving theposition of leader in the country’s highly competitive food industry. Just how Alphasucceeded in making it to the top was through the synergy created by its highlytalented top management team (the CEO and senior managers). With theircomplementary and combined knowledge, intellectual abilities and human resourcesskills, the six members of Alpha’s TMT succeeded in selecting an innovative course ofaction and creating a strong culture of proficiency and customer service. They were notonly able to exploit market opportunities by introducing innovative products, but alsoskillfully managed to establish strong external relationships with suppliers anddistributors in order to generate their market leadership position. In sum, it was thebalance of Alpha’s TMT that led it to succeed where others had failed.

By the end of the 1990s, the critical mistakes that Beta, a firm operating in thechemical industry, had been making for several years in the management of itsmultinational strategy, particularly in assessing new markets and solvingmanufacturing problems, had brought it to the point where its survival was inquestion. Ultimately, once it was recognized that Beta’s TMT had failed to sustain theadvantages it had gained because it had become an imbalanced group, lackingcomplementary managerial skills, the CEO and a few other key executives were forcedout of the firm. The new CEO, who was particularly skilled in knowing how to build acoherent and dynamic team of executives, hired several new managers, taking care toensure the balance of his new TMT with respect to intellectual abilities and humanresources skills. Himself skilled in the art of persuasion, he soon managed to hire a newand highly professional CFO who knew how to restore good working relationshipswith the managers in charge of marketing and operations. With the new TMT in place,Beta was being managed effectively from both within and without the firm, and in aposition to restore stability, certainty and confidence among the organizationalmembers, strategic partners, suppliers and customers. Today, after implementing itsrecovery based on a refinement of its vision, the firm is well positioned as a globalleader in its core businesses and has strengthened itself enough to be a key playerwithin its market.

These two examples illustrate the significant role, long recognized byorganizational scientists and strategy researchers, of the firm’s TMT in creating asustainable competitive advantage and gaining above-normal performance. RBVstrategists and upper-echelon theorists suggest that the firm’s TMT is a criticalresource for its success because of the significant influence it has on the firm’s strategicdecisions and their implementation (Barney, 1991; Castanias and Helfat, 1991;Hambrick and Mason, 1984; Wiersema and Bantel, 1992). Indeed, the ability ofmanagers “to understand and describe the economic performance potential of a firm’sendowments” (Barney, 1991, p. 117) rests on the integration of all, or most, of therelevant managerial skills.

Leadership researchers have long been interested in managerial skills and traits,presuming they are a source of the differences between leaders and non-leaders (Ghiselli,1963; Stogdill, 1948, 1974; Yukl, 2002). Strategy researchers have long recognized theimportance of managerial skills and their place at the heart of the superiority of a TMT

IJM27,1

12

(e.g. Chandler, 1962, p. 382). Fondas and Wiersema (1997) showed that changes in theexecutive team influence the strategic direction of the firm; this strategic orientationchange may be explained by differences the leader’s work experience, educationalbackground, personal characteristics and role context. We argue that managerial skillsmay have a role in explaining variation in firm performance.

Table I summarizes and provides representative studies on managerial skills inboth the fields of leadership and strategy. As can be seen, most research on managerialskills has been conducted within the domain of leadership studies and most of themhave focused on what makes an individual manager or leader successful. However,TMT research provides “clear support for the conclusion that the top team, rather thanthe [individual] person, has the greatest effects on organizational functioning” (O’Reillyet al., 1993, p. 150). Hence, “the ongoing search to identify and understand the mostimportant TMT skills and characteristics is essentially a search to understand thenature of superior management” (Castanias and Helfat, 1991). With the emergence ofthe RBV, researchers have also tried to link managerial skills to competitive advantage(Mahoney, 1995, p. 92) and rents (Castanias and Helfat, 1991, 2001). What then arethese skills and how are they arrayed?

With the emergence of the RBV, researchers have also tried to link managerial skillsto competitive advantage (Mahoney, 1995: 92) and rents (Castanias and Helfat, 1991,2001). What then are these skills and how should they be sorted and analyzed in thecontext of firm performance?

The literature often discusses both traits and skills interchangeably. According toYukl (2002, pp. 175-6), the term trait refers to a variety of individual attributes,including aspects of personality, temperament, needs, motives, and values, while theterm skill refers to the ability to do something in an effective manner. Our studyfocuses on managerial skills. Managerial skills are defined here as a set of integratedcomplementary skills possessed by the organization’s TMT. An individual manager,however talented, is unlikely to possess all the managerial skills that are required forthe successful operation of a complex organization. An effective TMT is likely topossess complementary managerial skills that are aligned with the organization’sstrategy and design, in a complex array that integrates external and internal elements(see Hunt, 1991). As explained above, we draw on Winter’s view (2000, 2003) to arguethat a TMT is a strategic asset when it holds complementary managerial skills, whichevolve over time, are highly patterned, specific to the organization’s needs, andfounded upon tacit knowledge. Skills would not become a strategic asset unless theywere specific, tacit and highly patterned to align with the overall organizationalsystem. As such, a TMT, which possesses complementary managerial skills, has thepotential to generate a competitive advantage.

The literature suggests several typologies of managerial skills of successful leaders(e.g. Castanias and Helfat, 1991; Christensen et al., 1978; Katz, 1974; Shipper, 1995;Yukl, 2002). A hierarchy of four types of skills emerges from the studies of Castaniasand Helfat (1991) and Bailey and Helfat (2003):

(1) generic skills, which are transferable across sectors and organizations;

(2) sector-related skills;

(3) organization-specific skills; and

(4) “industry-related” skills.


13

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(continued

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Table I.Research on managerialtraits and skills

IJM27,1

14

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(continued

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Table I.


15

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Table I.

IJM27,1

16

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Table I.


17

Hence, one may argue that the importance of specific managerial skills depends on thetype of industry in which a firm is involved. As noted by Castanias and Helfat (1991),generic skills do not produce quasi-rents (the difference between the value of an assetin its first best use and its value in its next best use) because they are easilytransferable among uses. “Industry-related” skills can be transferred across industries,which make related products or which utilize related resources and productionprocesses. All four types of managerial skills, however, may generate Ricardian rents.

Based on the work of Stogdill (1974), Yukl (2002) reviewed nine skills ascharacteristic of successful leaders: cleverness (intelligence), conceptual skills,creativity, diplomacy and tact, fluency in speaking, knowledge about group tasks,organizing skills (administrative ability), persuasiveness, and social skills. Table IIprovides the skills and their definition.

These managerial skills are not industry specific, industry related or firm specific.Thus, how can this set of managerial skills be a source of competitive advantage?According to the RBV, productive resources may exhibit differential levels of efficiency(Peteraf, 1993). Clearly, managerial skills’ differentials may affect firm performanceand, thus, generate Ricardian rents. Superior TMT should possess an integrated set ofskills that complement one another and create higher value and distinctiveness.Although managerial skills are generic in nature, they may become firm specificbecause of the unique combination of managerial skills that each firm holds. It is not somuch the particular skill that each of the senior managers possesses but rather howthey complement one another to affect firm performance.

The importance of the TMT’s managerial skills should also be discussed in relationto the external environment, as well as the size and age of the organization.Researchers have long argued that the organization’s functionality depends on thecondition of the external environment (Burns and Stalker, 1979; Lawrence and Lorsch,1967; Scott, 1992). Strategy researchers have considered the task environment as asource of competitive advantage and superior performance (Bourgeois, 1980a, 1980b;Dess and Beard, 1984; Porter, 1980). Porter (1980) suggests that the collective effects offive environmental forces set the rules of competition of an industry, which determinesthe firm’s competitive strategy and ability to attain its goals.

To examine the effects of an industry, Dess and Beard (1984, p. 64) suggested thatsome industrial classification would provide a useful building block to improve theconceptualization and measurement of organizational task environments. In this study,we classify the firms into 11 industries and test whether the industry type influencesthe firm’s performance. Strategy researchers have also asserted that the perceptionsheld by the competing firms about the environment’s uncertainty, defined in terms oftop management’s perceptions of its own ability or inability to comprehend the futuredirection of the environment, might play a significant role in the way they behave andact (Harrigan and Porter, 1983). Thus, firms operating in an uncertain competitiveenvironment may find it difficult to formulate their optimal future direction (Milliken,1987). Two of the organizational factors recognized as affecting performance,organizational size and age, are also employed in this study. Finally, it has long been indispute whether the task environment has a more pronounced effect than internalresources and capabilities on firm performance. Thus, the major research question ofthe study is:

IJM27,1

18

How much do the managerial skills of the firm’s top management team explain variations infirm performance, relative to other effects such as the type of industry to which the firmbelongs, the perceived environmental uncertainty, organization size and organization age?

As the environment generates constraints for all the players in an industry, it is mostlikely that only the “fit” firms (Itami and Roehl, 1987) will be in an advantageouscompetitive position and achieve above-normal performance (i.e. return). Althoughmany industries operate in turbulent and uncertain markets, firms have managed todevelop and exploit their resources and capabilities to cope with these conditions

Skill Definition Source

Cleverness (intelligence) Ability to understand and learnquickly and easily

Cambridge InternationalDictionary of English

Conceptual skills A general analytical abilityenabling one to analyze events,perceive trends, anticipatechanges and recognizeopportunities and threats

Yukl, 2002

Creativity “The production of novel anduseful ideas by an individual orsmall group of individualsworking together.”

Amabile (1988, p. 126)

Diplomacy and tact Exhibiting consideration andsensitivity in dealing with othersand avoiding giving offence

www.cogsci.princeton.edu/cgi-bin/webwn

Fluency in speaking Effective verbal communicationwith firm’s constituencies

Knowledge about grouptasks

Creating collaborative behaviorswithin a team to produce goodcommunication, coordination,balance of member contributions,mutual support, effort, andcohesion among team members

Hoegl and Gemuenden (2001)

Organizing skills(administrative ability)

A combination of technical,cognitive and interpersonal skillswhich enable the ability tocoordinate and organize theelements within a system

Yukl (2002)

Persuasiveness “The power to induce the taking ofa course of action or theembracing of a point of view bymeans of argument or entreaty”;“the strength of his argumentsettled the matter”

www.cogsci.princeton.edu/cgi-bin/webwn

Social skills Knowing how to interact wiselywith others

Riggio (1986)Table II.

Managerial skills ofsuccessful leaders


19

efficiently and effectively. For example, charismatic leadership is critical in uncertainenvironment (Waldman et al., 2001).

Several typologies have been suggested to better explain the relative importance ofmanagerial skills. For example, Katz (1974) identified three types of skills: technical,human and conceptual, indicating that the latter is the most critical for top leaders.Christensen et al. (1978) proposed a typology of managerial skills with respect to typesof leadership according to which taskmasters, mediators, motivators and leadersshould possess human, sensitivity and administrative ability; personal leaders need tohold persuasion and articulation skills; and architect leaders need creativity skills,intellectual ability, and conceptual ability. Despite the agreement about the importanceof managerial skills, more effort is required to identify the managerial skills that will bemost critical in a future of rapid globalization, technological advancement and socialchange (Boal and Hooijberg, 2000; Goleman, 1995; Hunt, 1991; Whetten and Cameron,2001; Yukl, 2002). For example, Yukl (2002) suggested that there will be a premium oncompetencies such as cognitive complexity, emotional and social intelligence,self-awareness, cultural sensitivity, behavioral flexibility, and the ability to learn fromexperience and adapt to change.

Though intellectual abilities have been at the focus of academic research, we find agrowing interest in studying the effects of skills required for managing people, whichmay be behind the emergence of the belief that emotional intelligence is moreimportant than IQ. As Cherniss (2000) puts it: “If you’re a scientist, you probablyneeded an IQ of 120 or so simply to get a doctorate and a job. But then it is moreimportant to be able to persist in the face of difficulty and to get along well withcolleagues and subordinates, than it is to have an extra 10 or 15 points of IQ. The sameis true in many other occupations.” (emphases are not in the original text).

Research on managerial skills suggests that high-performance organizations havemanagers with well-established skills for managing people (Whetten and Cameron,2001). Based on the logic presented in this section, the following hypotheses aresuggested:

H1. The managerial skills possessed by the organization’s TMT will have asignificant positive effect on firm performance, after the effects of industrytype, perceived environmental uncertainty, and organizational size and agehave been accounted for.

H2. Each managerial skill may have a different effect on firm performance; Theeffect of the TMT’s human resources skills on firm performance is larger thanthe corresponding effect of the TMT’s intellectual abilities.

3. Data and methodologyThe data used in this study were taken from a comprehensive research project thatevaluated organizational resources and competencies (managerial skills,organizational communication, organizational culture, internal control and others) ofkibbutz-owned industrial enterprises in Israel, a kibbutz being a collective settlementbased on agriculture and industry (see Segev, 1987). The kibbutz industries’ share inIsraeli industry amounts to 7 percent of sales, 9 percent of exports, 7 percent ofinvestment, and 6.5 percent of industrial employment (Kibbutz Industries Association,2001).

IJM27,1

20

The research population was drawn from a list of all kibbutz enterprises publishedby the Kibbutz Industries Association (1999). From the 385 industrial enterpriseslisted, we omitted very small enterprises and sub-units of larger businesses to arrive ata population of 300 industrial enterprises. The sample includes industrial enterprisesfrom a variety of industries from the old economy (e.g. agriculture, food, textiles, steel,construction, paper and plastics) and the new economy (e.g. biotechnology, electronics,communication and pharmaceuticals); the variety is representative of Israeli industry.

Questionnaires were mailed from a university address to the enterprises’ CEOs, whowere asked to return them to the same address using a self-addressed reply envelope.This design raises some concerns about the probability that the respondents are biasedin estimating the skills of their top managers. Indeed, one cannot rule out that therespondents are biased towards overestimating the top managers that constitute theTMT, because presumably the CEO thought well enough of each of the team membersto put them in the TMT. To circumvent this problem, or at least diminish it, we askedthe CEOs to rate the skills possessed by the entire TMT, rather than the skill of eachindividual senior manager. A second concern with the data collected by questionnairesis whether the respondents possess sufficient knowledge to rate the skills of their topmanagers relative to those of other firms. We believe that CEOs know the topmanagement teams of their main rivals. Israel is a small country, and the community ofsenior managers constitutes a professional network in which the relevant informationflows freely. Furthermore, previous studies indicate that top managers are a reliablesource of information (O’Reilly et al., 1993; Miller et al., 1998).

In order to encourage the CEOs to participate, we made two commitments in a coverletter. We guaranteed respondents complete anonymity, and we promised to deliverthem the results and conclusions of the study. To increase the response rate, twomailings were sent out with a gap of about a month. A total of 93 completequestionnaires were returned, yielding a response rate of approximately 32 percent,which is similar to previous studies of the same research population (Segev, 1987). Thedistribution of the sample firms across industries is similar to that of the entirepopulation of industrial firms in Israel. The average age of the enterprises was 27.7years (SD 15.2). The average number of employees was 94. The average annualrevenues were about 15 million US$. The average age of the CEOs was 49 (SD 7), andtheir mean tenure in the organization was 5.5 years (SD 4.4). The majority of the CEOs(87 percent) held at least a bachelor’s degree; the others had 14 or less years ofeducation. The study investigates the influence of managerial skills, perceivedenvironmental uncertainty, industry effects, and organizational size and age on a set offirm performance measures. These variables are described below.

3.1 The research variables – dependent variablesFirm performance. Seven measures of firm performance were used:

(1) Annual revenues’ growth – the ratio of annual income in the current year to thatof the last year.

(2) Return on sales – the ratio of net profit to net sales (revenues); the higher theratio, the more profitable is the firm (e.g. Waldman et al., 2001).

(3) Return on equity – the ratio of net profit to total equity investment; the higherthe ratio, the more profitable the firm (e.g. Smith et al., 1994).


21

(4) Liquidity soundness – an assessment of liquidity soundness based onparameters such as the quick ratio and cash flow from operating activities.

(5) Market share change – estimate of last year’s change in the firm’s market share;the larger the increase in market share, the more successful is the firm (e.g.Eisenhardt and Schoonhoven, 1990).

(6) Customer satisfaction – an assessment of the extent to which the firm fulfillscustomer’s needs, in comparison to its competitors (e.g. Collis and Montgomery,1998).

(7) Quality of products and services – an assessment of the quality of the firm’sproducts and/or services relative to its competitors. We have constructed asingle measure of overall firm performance as the simple average of the sevenitems representing performance (Cronbach’s a ¼ 0:77).

Each CEO was asked to rate the performance of her firm relative to the performance ofits competitors. Performance was rated on a five-point scale (1 ¼ much worse thancompetitors, 2 ¼ worse than competitors, 3 ¼ as good as competitors, 4 ¼ better thancompetitors, 5 ¼ much better than competitors).

3.1.2 The research variables – independent variablesManagerial skills. This measure consists of the nine managerial skills identified byStogdill (1974) and reviewed by Yukl (2002: 178) as characteristic of successful leaders.These skills are cleverness (intelligence), conceptual skills, creativity, diplomacy andtact, fluency of speech, knowledge of group tasks, administrative ability,persuasiveness, and social skills. Factor analysis with Varimax rotation on the ninemanagerial skill items produced two factors that together explained 57 percent of theoverall item variance. The first factor, denoted intellectual abilities, is formed from thefollowing three items: cleverness, conceptual skills, and creativity skills(eigenvalue ¼ 3:49). The other six items form the second factor, which we denotehuman resources skills (eigenvalue ¼ 1:64). The correlation between the twocomposite scales is moderate (r ¼ 0.33, p , 0.001), indicating that they are related,but distinct factors. The CEOs were asked to evaluate to what extent the firm’s TMTpossessed these skills. Responses were on a five-point scale ranging from 1 ¼ stronglydisagree, to 5 ¼ strongly agree. Cronbach’s a‘s of intellectual abilities and humanresources skills are 0.78 and 0.79, respectively.

3.1.3 The research variables – control variablesWe controlled for industry and perceived environmental uncertainty because firmperformance and the need for managerial skills may vary across industries. As Agleand Sonnenfeld (1994), who observed four leadership qualities (assessed by 400prominent CEOs of major US firms), indicated that even if we agree on some of theserelatively static leadership qualities, their importance varies at different times andacross industries. Yukl (2002, p. 198) concluded: “managers need many types of skillsto fulfill their role requirements, but the relative importance of the various skillsdepends on the leadership situation. Relevant situational moderator variables includemanagerial level, type of organization, and the nature of the external environment”.

The measure of perceived environmental uncertainty used here was developed byMiller and Droge (1986), and has been extensively examined in organization research

IJM27,1

22

(e.g. Khandwalla, 1976; Milliken, 1987; Singh, 1986; Waldman et al., 2001). It consists offive items, including changing rate of marketing practices, product obsolescence rate,prediction of competitors’ action, forecasting demand and customer tastes, andchanging rate of production/service technology. The items were assessed on afive-point scale ranging from 1 ¼ strongly disagree to 5 ¼ strongly agree. The firms inthe sample were classified into 11 industries: electronics, medical, agriculture,chemicals, food, construction, electrical, textile, metal, software, and communication.Each industry type was represented by a dummy variable. Organizational size wasincluded to control for variations in the size of the firms in the sample, size beingrepresented by two variables: the organization’s revenues in the previous year, and thenumber of employees in the organization. Organizational age was included to controlfor variation in the age of the firms in the sample.

3.2 The data analysisWe use two multivariate data analysis procedures. First, we employ a multiplehierarchical regression model to assess the effect on overall firm performance of thetwo dimensions (factors) of managerial skills: intellectual abilities and humanresources skills. Second, we use the method of RCA to assess the relative importance ofthe nine managerial skills with respect to the seven performance measures[1].

4. ResultsThis section presents and analyzes the results of the research hypotheses. Table IIIexhibits the means, standard deviations and correlations among the research variables.The correlation between firm performance and the control variables is very small andinsignificant. The correlation between firm performance and intellectual abilities ispositive and significant, as is the even larger correlation between firm performance andhuman resources skills. That is, the values of the correlations lend some support to H1and H2. To formally test the research hypotheses, we present in Table IV the results ofthree hierarchical regression models. The first stage of each model presents theestimates of the regression of firm performance on all the control variables. The secondstage of each model adds the variable intellectual abilities (model 1) or human resourcesskills (model 2) or both (model 3) to the first stage regression and presents the incrementin the regression’s R 2 and its significance level due to the additional regressor(s). Theresults of the first model indicate that intellectual abilities have a significant effect onfirm performance (with a coefficient estimate of 0.3 and t-statistic of 2.8), after thecontrol variables have been accounted for. The results of the second model indicate thesignificant effect of human resources skills on firm performance (with a coefficientestimate of 0.4 and t-statistic of 3.9), after the control variables have been accounted for.First, note that model 3, which estimates the combined effect of intellectual abilities andhuman resources skills, outperforms models 1 and 2, and both intellectual abilities andhuman resources skills exhibit a positive and significant effect on firm performance.Second, the relative importance (the magnitude) of human resources skills on firmperformance is larger than that of intellectual abilities. These findings lend strongsupport to research H1 and H2.

An additional and more detailed test of the research hypotheses is obtained byusing RCA. The results in Table V support hypothesis 1 of this study postulating thatthe managerial skills of the firm’s TMT affect firm performance. Clearly, the effects of


23

Mea

nS

D1

23

45

67

89

10

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irm

per

form

ance

3.50

0.59

2.M

anag

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um

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ills

3.30

0.61

0.48

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3.M

anag

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s)sk

ills

3.32

0.63

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(continued

)

Table III.Means, standarddeviations (SD), andcorrelations

IJM27,1

24

Mea

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23

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1516

1718

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Notes:

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0.00

1

Table III.


25

Mod

el1a

Mod

el2b

Mod

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b(t

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b(t

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EU

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es)

20.

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)0.

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du

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lete

rate

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(0.6

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pet

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tion

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(21.

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20.

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7)P

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ance

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20.

20(2

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(21.

49)

R2

0.24

0.24

0.24

Step2

Inte

llec

tual

abil

itie

s0.

30(2

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**

* )0.

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um

anre

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rces

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forDR

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35*

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for

tota

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ion

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Notes:

En

trie

sre

pre

sen

tst

and

ard

ized

coef

fici

ent

esti

mat

es;a

the

effe

ctof

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tual

(con

cep

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-rel

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ills

onfi

rmp

erfo

rman

ce;b

the

effe

ctof

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man

reso

urc

es(p

eop

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Table IV.Hierarchical regressionanalyses: predictingoverall firm performance

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the control variables on the firm’s performance (the absolute values of the estimatedparameters) are small compared to the effects of the managerial skills on the firm’sperformance. The results in Table V also indicate that that the human resources skillsare relatively more important to firm performance than the intellectual abilities as theaverage of the variables representing intellectual abilities is much smaller than theaverage of the variables representing human resources skills. This finding supportsthe second hypothesis.

All the performance measures, except for quality of products and services, exhibit alarge weight in the measure of firm performance and, thus, are important to overall

Weight

Performance measuresAnnual revenues’ growth 0.49Return on sales 0.37Return on equity (ROE) 0.40Liquidity soundness 0.37Change in market share 0.47Customer satisfaction 0.29Quality of products and services 0.12

Control and independent variablesIndustry (Electronics) 0.11Industry (Medical) 0.03Industry (Agriculture) 20.11Industry (Chemicals) 0.01Industry (Food) 0.17Industry (Construction) 20.04Industry (Electrical) 0.01Industry (Textile) 20.24Industry (Metal) 20.03Industry (Software) 0.05Organizational age 20.13Organizational size (number of employees) 0.07Organizational size (annual income) 0.09Perceived environmental uncertainty (change in customer practices) 20.05Perceived environmental uncertainty (products’ obsolete rate) 20.04Perceived environmental uncertainty (prediction of competitors’ action) 20.14Perceived environment uncertainty (prediction of customers’ taste) 20.01Perceived environmental uncertainty (change in technological advancement) 20.24Clever (intelligent) 0.24Conceptually skilled 0.25Creative 0.27Diplomatic and tactful 0.29Fluent in speaking 0.32Knowledgeable about group tasks 0.31Organized (administrative ability) 0.31Persuasive 0.35Socially skilled 0.27

Notes: The model includes all the variables that are discussed in this study; the correlation betweenoverall performance and the weighted average of all the regressors is 0.45

Table V.The relationships

between industry effects,perceived environment

uncertainty,organizational age andsize, managerial skillsand firm performance


27

firm performance. This finding suggests that the firm’s stakeholders are concernedwith a variety of performance measures. Annual revenues’ growth and change inmarket share, with coefficients of 0.49 and 0.47, respectively, are the most importantperformance measures. The performance measures return on equity (with a coefficientof 0.40), return on sales (with a coefficient of 0.37), and liquidity soundness (with acoefficient of 0.37) are also highly important in forming the overall measure of “firmperformance”. Customer satisfaction, with a coefficient of 0.29, was the least importantperformance measure.

The analysis presented in Table V also indicates that two industries, food andtextile (with coefficients of 0.17 and 20.24, respectively) have some effect (relative toother industries) on firm performance. The effect of other industry dummies on firmperformance is negligible. Only one aspect of perceived environmental uncertainty, thechange in technological advancement (with a coefficient of 20.24), affects firmperformance. That is, firms that are required to frequently advance their technologyexhibit inferior firm performance. Other control variables, such as organizational sizeand age, have little or no effect on firm performance.

All nine managerial skills were important in explaining variation in firmperformance. The most important managerial skill is persuasiveness, with a coefficientof 0.35. Fluency of speech, with a coefficient of 0.32, knowledge about group tasks andadministrative ability, with coefficients of 0.31, and diplomatic and tactful behavior,with a coefficient of 0.29, are almost as important to firm performance as arepersuasiveness and fluency of speech. Finally, creativity and social skills, withcoefficients of 0.27, and conceptual skills, with a coefficient of 0.25, are also critical tofirm performance, but affect it somewhat less than the other six managerial skills.

The squared correlation between the estimated firm performance (the weightedaverage of all seven performance measures on the left-hand side of Table V) and theweighted average of all the control variables and managerial skills (listed on theright-hand side of Table V) is 0.45, suggesting that the managerial skills of the firm’sTMT are highly correlated with firm performance. That is, superior managerial skillsimply superior firm performance.

5. Discussion and summaryThe findings of this study lend strong support to the common belief that a highlyqualified TMT is essential to enhancing firm performance (Hambrick and Mason, 1984;Finkelstein and Hambrick, 1996). An examination of the relative importance ofmanagerial skills possessed by the TMT on the variance in firm performance supportsthe observation made by Whetten and Cameron (2001, p. 5)) that “successfulorganizations have managers with well-developed people skills”.

This study contributes to our knowledge in four ways. First, it provides empiricalsupport to the common belief that managerial skills are important to firm performance(Yukl, 2002). Second, we suggest a new avenue to incorporate the RBV into the field ofstrategic leadership in general and managerial skills in particular (Boal and Hooijberg,2000). Third, this study contributes to the generalizability of the existing results aboutthe effect of managerial skills on firm performance, because it examines 93 firms froma variety of industries (see also Hitt and Ireland, 1985; Markides and Williamson, 1994;Robins and Wiersema, 1995). Fourth, this study simultaneously tests the effect of a setof predictors (managerial skills) on a set of performance measures[2].

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This study emphasizes the multidimensional nature of firm performance. Inparticular, a firm whose TMT possesses superior managerial skills is likely to exhibitbetter performance in terms of annual growth, change in market share, profitability,financial soundness, and customer satisfaction. The study indicates that bothintellectual abilities and human resources skills possessed by the TMT are ofimportance to firm performance, and that the TMT’s human resources skills have alarger effect on firm performance than its intellectual abilities.

We also find that persuasiveness is the most critical skill of the firm’s TMT. Theorganization’s members will not be driven to excel unless strong leadership spurs themto do so. This cannot be done without a high value of TMT persuasive skill, especiallyin turbulent and changing times.

Administrative ability and fluency in speaking are the next most critical managerialskills. Managers tend to focus on creating a new vision for the organization. However,they may underestimate the importance of organizing. Fluency is critical in deliveringthe management “message” and strategy to both external and internal constituencies.Being knowledgeable about group tasks is also critical to all firms, because no onemanager, talented as he or she may be, can run a complex organization alone. Beingdiplomatic and tactful was the next most critical managerial skill. Clearly, whatmanagement is doing is important. However, it is also important how it is doing it.Creativity is also important for firm success. The management team is required to use itscreative skills to recognize the “strategic alternatives made valid by developments in themarketplace and the capability and resources of the company” (Christensen et al., 1978,p. 20). Social skills have not received much attention in business schools. Whetten andCameron (2001, p. 14) argue that analytical skill is a critical but not a sufficientprerequisite for success, suggesting that “successful managers must be able to work withpeople”.

Although the findings in this study allow us to rank management skills accordingto their importance to firm success, the ranking should be viewed with caution. Thedifferences among the effects of managerial skills on firm performance are relativelysmall, which suggests that all managerial skills in combination are of strategicimportance. Therefore, managers should internalize the importance of all themanagerial skills analyzed here, particularly the skills that are required for managingpeople.

The use of measures that capture the multidimensionality of performance is anothercontribution of this study. Of the seven performance measures examined in this study,the most important, as perceived by the CEOs, were annual revenues’ growth, changein market share, return on equity, return on sales, liquidity soundness and customersatisfaction.

Managerial implicationsHaving a quality TMT that would be able to make good decisions and lead theorganization to meet external and internal constituents is a very complex task. At thevery basic level, beyond the demographic characteristics of the managers whoconstitute the team, a quality TMT holds superior managerial skills. Its ability to leadthe organization to meet its goals rests on an integration of these skills. This meansthat effective organizations often have TMTs that are organized around


29

complementary managerial skills, which enable the firm to deploy them, in differentcombinations and in particular circumstances.

Consider for example a firm that its TMT has extraordinary intellectual abilities.Who would not want to have such a TMT? This is probably why business schoolsaround the world have concentrated on endowing these “future leaders” withintellectual abilities, but have provided them with so little on behavioral (humanresources) skills. On the other hand, consider all the TMTs that fail to lead theirorganizations through difficult or even mildly problematic, times, and you will findthat they were lacking the skills required for managing people effectively.

This is also why many TMTs do not act as teams. They often have too much of agood thing (intellectual abilities) without having a system of managerial skills thatreinforce and complement one another. If a TMT does not possess an integrated set ofskills that interact with one another, it encounters difficulties in at least one key task.For example, a TMT with members possessing high intellectual abilities mayrecognize and understand environmental conditions, competitors’ moves and theirimplications. However, despite the TMT’s recognizing and internalizing the fact that aradical transformation is needed, its inability to communicate this message and towork with the board of directors, the organizational members and other constituentsresults in organizational failures.

Our study shows that managerial skills possessed by the TMT are positivelyrelated to firm performance. However, while we show that both intellectual abilitiesand human resources skills are of importance in achieving higher performance, ourstudy shows that skills relating to managing people are more critical. This study joinsa growing body of literature that conveys the message regarding the importance ofdeveloping behavioral skills, but our research is one of the first to provide empiricalevidence regarding the role of the TMT ‘s managerial skills and firm performance.

In particular, we found that persuasiveness is the most critical skill determiningfirm performance. Without persuasive skills, TMTs may encounter significantdifficulties in conveying important messages and making organizational members andother constituents support the strategic direction of the firm. Persuasiveness is at theheart of managing relationships. TMTs are responsible for managing the firm’srelationships with a wide range of stakeholders and for winning their trust, loyalty andcommitment to the firm. Hence, TMTs should develop persuasive skills in order tomore effectively build legitimacy and trust among the firm’s stakeholders.

Our research also has implications with respect to the indicators of overall firmperformance. Two indicators contribute the most influence to overall firmperformance: annual revenue growth and changes in market share. Hence, firmsshould direct particular efforts to improving their performance in these areas. Clearly,other performance measures should not be ignored, but the relative importance shouldbe considered while allocating limited organizational resources.

Limitations and future researchThe methodology of this study is based on an established body of literature in themanagement sciences, but it is somewhat new in the strategic leadership field; hence,the data and results should be interpreted with caution. Though the sample firmsbelong to a variety of industries, further research should be conducted, in Israel as wellas in other countries, to extend and generalize the results of this study.

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As the study relies on questionnaire data, its empirical validity may be somewhatlimited due to possible biases and reverse-causality/endogeneity problems. We find nosignificant relationship between respondents’ tenure and firm performance (r ¼ 0:15).We also used Harman’s one-factor test to evaluate the problem of common methodvariance (Podsakoff et al., 2003). We performed a principal component factor analysison items of firm performance, perceived organizational uncertainty and managerialskills. The results show that no one dominant factor has emerged. These results offersome indication that common method variance was not a severe problem in this study.

In addition, our results may suffer from self-selection in the data, as it is possiblethat the respondents had characteristics that differed from those of their counterpartswho did not respond. Yet, we believe that our data do not suffer significantly from thisproblem due to the fact that they represent the entire Israeli industrial sector. To betterassess the potential problems due to reverse-causality/endogeneity, we took two steps.First, we used established measures for all the research variables. Second, we obtainedobjective information on the performance of several of the firms in the sample andcompared it to the reported subjective performance measures. The objective andsubjective performance measures were similar. Thus, biases due toreverse-causality/endogeneity problems may exist, but their effects on the outcomeof this study are probably minimal.

This study suggests several avenues for future research. First, managerial skills areas important in the public and the not-for-profit sectors as they are in the businesssector. Thus, research efforts should be directed to these two sectors as well. Second,this study is an initial phase in a process of incorporating the RBV’s core concept intothe field of strategic leadership. Future studies may advance this path by explicitlyexploring the TMT’s managerial skill profiles in particular situations such as decline,crisis, stable, uncertain, or turbulent environments.

Notes

1. Canonical analysis is often employed when researchers need to relate one set of variables (ratherthan a single variable) to other sets of variables. This analysis facilitates the identification of theeffects of key variables in one data set on all or several of the variables in other sets. Tocircumvent multicollinearity problems and obtain reliable coefficient estimates we employ herethe method of RCA (Tishler and Lipovetsky, 2000), which has been successfully used in manymanagement applications (Ahituv et al., 1998; Carmeli and Tishler, 2004: Streissgutt et al., 1993;Tishler et al., 1996). Applying the RCA method to two data sets amounts to estimating theweights that maximize the covariance between the linear aggregators (weighted averages) ofthe two data sets. RCA is applied to standardized variables. Thus, although formal statisticalinference of the RCA estimates is unavailable (as is the case with other multivariate canonicalcorrelation method (see Cliff (1987) and Dillon and Goldstein (1984)), a variable with a largeestimated weight affects the connection between the two data sets more than a variable with asmall weight. Variables in one data set are defined as important relative to those in the seconddata set when their weights in the RCA are large.

2. Managers face many constituencies with different interests and requirements from theorganization. For example, customers are likely to care mostly about the extent to which thefirm meets their expectations, investors care mostly about the firm’s growth andprofitability, and credit bankers are interested mostly in the firm’s liquidity soundness.


31

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About the authorsAbraham Carmeli received his PhD from the University of Haifa. He is now a faculty member inthe Graduate School of Business Administration and the Department of Political Science (jointappointment) at Bar-Ilan University. His current research interests include complementarities ofintangible resources, managerial skills, top management teams, organizational prestige andimage and individual behaviors at work. Abraham Carmeli is the corresponding author and canbe contacted at: [email protected]

Asher Tishler received his BA in Economics and Statistics from the Hebrew University,Israel, and his PhD in Economics from the University of Pennsylvania. From 1976, he has been afaculty member at the Faculty of Management at Tel Aviv University. His main research topicsare focused on applied microeconomics, multivariate statistics, energy economics anddefense-related issues. He has done consultation work for the Israel Electric Co., The Ministryof National Infrastructures (Israel) and several high-tech firms in Israel.

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