CEOs Driving Decision Making Toward Higher Performance: Strategic Micro-foundations of Small-Sized Family Firms

Strategic Decision Making: A Micro-foundation Lens

Strategic decisions are characterized as decisions that commit substantial resources (Mintzberg et al., 1976), ones that are nonroutine and complex (Schwenk, 1988), as well as those that are unusual and all-pervading (Hickson et al., 1986) and as such affect organizational performance (Child, 1972; Finkelstein & Hambrick, 1996). Hambrick and Mason (1984) articulated the notion that an organization is a “reflection of its upper echelon”, suggesting that a firm's processes and outcomes may be, at least in part, explained by the background, values, norms, attitudes, and behaviors of its top executives (CEO and TMT members). Following this line of thinking, scholars have provided useful findings as regards the links between TMT decision processes and organizational outcomes (e.g., Boeker, 1997; Eisenhardt & Schoonhoven, 1990; Kunc & Morecroft, 2010; Pollanen et al., 2017).

In recent years, researchers have drawn on the micro-foundation movement (Felin & Foss, 2005; Felin et al., 2015) and directed increased attention to the micro-processes that underlie the strategic decision making of executives and TMTs (e.g., Carmeli et al., 2013). By micro-foundations we mean the “interactions of individuals, processes, and structures that contribute to the aggregation and emergence of the collective constructs” (Felin et al., 2012, p. 3), which we see as holding great promise for developing and advancing the theory of and research into family firms (De Massis & Foss, 2018) and strategic leadership (Carmeli et al., 2016; Friedman et al., 2016). We view the decision-making process in a TMT of family firms as a manifestation of micro-level dynamics between executive members by focusing on the strategy-making process and further integrate it with the micro-level capacity of the CEO to implement decisions. This line of research promises to advance theory on TMTs, decision-making processes, and firm outcomes (Atuahene-Gima & Li, 2004; Barrick et al., 2007; Friedman et al., 2016; Li & Hambrick, 2005; Lubatkin et al., 2006) as it is still unclear how “processes by which executive profiles are converted into strategic choices” (e.g., Hambrick, 2007, p. 337), or why these choices are pursued and how “team inputs are transformed into outcomes” (Mathieu et al., 2008, p. 412). Furthermore, with its micro-foundation lens a multilevel perspective burgeons research that captures the individual leader's capacities and their influence on these team-level processes. Our focus here is on the capacity of the CEO to implement strategic decisions. Such a focus is important because it remains unclear why in some small-sized firms, CEOs are more capable than others of realizing the decision-making processes in a TMT in general, and in small-sized family firms in particular. This is because CEOs in family firms, particularly in small-sized ones, have greater managerial discretion, and are thus in a position to influence the decision making (Mitchell et al., 2009). An emphasis on the CEO's capacity rather than the TMT level is suitable because of the CEO's centrality in the context of small-sized family firms (Brockmann & Simmonds, 1997; Jennings & Beaver, 1995). Specifically, in small-sized family firms managerial decision-making processes are often characterized by “highly personalized preferences, prejudices and attitudes” and their success is highly dependent on the manager's ability to implement (Jennings & Beaver, 1995).

We start out by theorizing about the essence of being comprehensive in the strategic decision-making process and the implications for firm performance, following with a discussion on the importance of CEOs with the capacity for implementation.

SDC and Firm Performance

SDC refers to the “extent to which firms attempt to be exhaustive or inclusive in making and integrating strategic decisions” (Fredrickson & Mitchell, 1984, p. 402). A comprehensive approach to strategic decision making is likely to improve effective organizational decisions and subsequent organizational performance (Dean & Sharfman, 1996; Forbes, 2007; Miller, 2008). Thus, it is important to understand how strategic decision processes materialize.

A TMT that is characterized by SDC is “inclusive in making and integrating strategic decisions” (Fredrickson & Mitchell, 1984, p. 402), such that while confronting strategic issues its members thoroughly and inclusively evaluate underlying reasons, mechanisms, and potential consequences. As a systematic examination of a wide range of alternatives, objectives, costs, risks, alternative actions, data and information, intensive assessment of positive and negative consequences of alternatives and subsequent planning, SDC is key in the development of theorizing about a firm's strategic choices, decision-making theory and practice (Atuahene-Gima & Li, 2004; Forbes, 2007; Fredrickson, 1984; Janis & Mann, 1977; Miller, 2008; Papadakis, 1998).

While SDC may have some limitations such as slowing the decision-making process, a growing body of evidence suggests that it is beneficial in promoting organizational performance (e.g., Mitchell et al., 2016). This is because rigorous attempts to provide multiple alternatives are crucial for accurately understanding situations, making high-quality decisions (e.g., Bourgeois & Eisenhardt, 1988; Dean & Sharfman, 1996; Nutt, 1998, 1999; Papadakis, 1998; Papadakis & Barwise, 2002) and subsequently performing in the marketplace. Further, in the specific context of small-sized firms, because of the absence of adequate formalization and organizational design, a TMT that applies a more inclusive process is likely to reach a deeper understanding of the situation and make better assessments of multifaceted issues emerging from the competitive environment (Sniezek, 1992). Scholars have also noted the importance of questioning the chosen paths, a key aspect of decision comprehensiveness, as a means of improving competitiveness of family businesses (Ensley, 2006). More specifically, in small-sized family firms with goals that seemingly capture opposing orientations (Gómez-Mejía et al., 2011; Mustakallio et al., 2002) and specific emergent social contexts (Zahra, 2010), inclusiveness in the decision-making process can help reconcile potentially conflicting demands and needs. This is important because it helps in managing these multiple agendas in ways that enhance the performance of the firm. Thus,

Hypothesis 1: Strategic decision comprehensiveness (SDC) is positively related to organizational performance of small-sized family firms (i.e., firm performance).

CEO Implementation Capacity

Execution is key to organizational success, especially for smaller, capital-deficient companies. Comprehensiveness in the decision-making process is vital to identify and seize opportunities and address emerging demands and thus is likely to drive firm performance. However, we extend this line of thinking and argue that the ability to reach high-quality decisions and subsequent performance is not sufficient unless the decisions are fully realized. Following previous research, we point to the particular role of CEOs in realizing the decisions they and their TMTs make and more specifically refer to the CEO's capacity to execute the decisions at hand (i.e., CEO implementation capacity). We treat the CEO as part of the TMT but for empirical purposes treat him/her separately from other TMT members.

Interestingly, considerable attention has been directed to decision-making processes, but only limited efforts have been made to unveil strategic decision implementation (Dean & Sharfman, 1996; Greer et al., 2017; Lampaki & Papadakis, 2018). The relatively scant existing research shows that effective implementation depends on the existence of a supportive context (Alamsjah, 2011), which following Edmondson (1999) is referred to as a work environment in which members have access to and get vital information, as well as resources conducive to learning and performing the tasks at hand.

Most past research has referred to the implementation act itself, and to the actions rendered by the implementing executives (Brenes et al., 2008; Elbanna et al., 2014). However, following recent research on effective change leadership (Higgs & Rowland, 2011; Krummaker & Vogel, 2013), we take a different stance and focus on the CEO's implementation capacity as an intricate construct, an ability of the CEO involving several important organizational and personal facets:

Transforming vision into action. The CEO's ability to transform the organizational vision into practical outcomes seems to be of high importance. While executives often struggle to form a coherent vision, CEOs with adequate implementation capacity transform their visions into day-to-day action and implement the devised strategy in competitive moves in the marketplace.

Harnessing coalitions (managing organizational politics). A CEO's implementation capacity must also include the ability to navigate through organizational politics and build coalitions to help support and transform the goals into actions. This is done by recruiting managers and employees to promote the decision implementation, obtaining support of multiple stakeholders and harnessing them to promote chosen courses of actions (Lampaki & Papadakis, 2018).

Being decisive. Another important element is the decisiveness with which the CEO operates. Decisiveness refers to “the ability to take the unconventional and unprecedented course of action whenever it is called for” (Ishida, 2008, p. 1), or to “ the degree to which the leader is willing to make decisions or take decisive action (House et al., 1971)” (in: Williams et al., 2009, p. 74). Conversely, indecisiveness occurs when a decision maker is reluctant to make decisions because of low self-esteem, insecurity, or a preference not to bear responsibility and feeling regret (Mulki et al., 2012). The CEO's ability and power to decide on a specific action when needed is essential to enable a quick and effective response to market threats. However, this does not mean that one needs to rush into decisions (Simpson et al., 2002), but rather be willing to engage in the decision task at hand, make choices, and bear the responsibility for a chosen course of action, which is key for effective leadership (Williams et al., 2009).

Handling the TMT. The CEO's ability to handle the TMT efficiently is required for effective implementation. Managerial awareness and an ability to solve intrateam problems as well as dealing with predicaments of individual executives is of immense importance to the team's well-being, dynamics, and SDC.

CEO self-efficacy. The CEO's belief in his or her ability to achieve most of the targets set has been shown to highly influence the organizational ability to execute. Self-efficacy is defined as a general perception of one's capability. Self-efficacy components shape thoughts and beliefs, which in turn influence behaviors and specific action (Bandura, 1989). Research suggests that efficacious CEOs are likely to perform better because they tend to both engage and persist in situations that others tend to avoid, and shows that CEO self-efficacy is positively related to market performance (Westerberg et al., 1997). Thus,

Hypothesis 2: CEO implementation capacity is positively related to organizational performance of small-sized family firms (i.e., firm performance).

The Interactive Influence of CEO Capacity for Implementation and the TMT Strategic Decision Comprehensiveness

We suggest that when the CEO possesses the capacity to implement decisions made following a comprehensive process (i.e., SDC), and the TMT comprehensively engages the decision-making process, the performance of the firm is likely to improve. These two mechanisms manifest formulation and implementation processes, which are conducive to higher levels of firm performance. Conversely, when the CEO lacks implementation capacity, it is unlikely to expect that the decision-making process will be fully realized, and this hampers firm performance. Thus,

Hypothesis 3 (3a, 3b, 3c): There is a positive interactive effect of CEO implementation capacity and SDC on organizational performance of small-sized family firms (i.e., firm performance), such that the link between SDC and firm performance is stronger when the CEO implementation capacity is high (3a), is moderate when the CEO's implementation capacity is average (3b) and is low when the CEO's implementation capacity is low (3c).

Research Setting

Small-sized family firms (defined as family firms with fewer than 100 employees) are a relevant research context for exploring the decision processes of executive teams and CEOs since these firms are perceived as a key vehicle for economic and social growth and are known to be extremely fragile (Freeman et al., 1983). Our definition is slightly different from the definition of small-to medium-sized firms (SMEs), entities that usually employ not more than 250 members in most developed countries (in the Unites States, the figures revolve around 500 employees). Small-sized family firms provide a suitable context for our research because they lack (1) the economic resources needed for their development and growth (each firm employing fewer than 100 employees in our sample applied for a loan to allow for better cash flow management and opportunities for new growth-oriented investments) and (2) the resources and formal administrative system and thus rely more heavily on the ability of their CEOs and TMT members (Ling et al., 2008; Lubatkin et al., 2006).

In addition, family firms, which are the most ubiquitous form of ownership (Boyd & Solarino, 2016), also seem to be a fitting context to test our model as their managers and CEOs are known to identify strongly with their organization, are often more motivated to assure its long-term survival, are disposed to be deeply embedded in its socioeconomic context (Le Breton-Miller et al., 2011), and are thus likely to appreciate the importance of good management and organization.

While effective strategic decision-making processes, implementation capacities, and performance are important in all organizations, scholars have reasoned that because of their lack of formalization (Sine et al., 2006), these decision-making processes are even more crucial in small-sized firms. Thus, scholars have called to develop a fuller understanding of strategic decision making in smaller organizations (Johnson et al., 2003). In this study, we attempt to address these calls and promote scholarly understanding of small-sized family firms’ strategic decision-making processes.

Measures

Data Analysis

The model proposed here was estimated using structural equation modeling (SEM) with Mplus 8.0 (Muthén & Muthén, 1998–2013) to create a latent variable representing the interaction of the latent variables and other constructs.

We employed Anderson and Gerbing’s (1988) standard two-step approach to SEM. This involves first assessing the measurement model using confirmatory factor analysis, then sequencing alternative structural models. Several goodness-of-fit indices for the research model are reported below. These indices include the χ² statistic divided by the degrees of freedom (χ²/df), the comparative fit index (CFI), the Tucker–Lewis coefficient (TLI), and the root mean square error of approximation (RMSEA). Jöreskog and Sörbom (1993) and Kline (1998) suggested that the χ²/df ratio should be less than three, the values of CFI and TLI should be greater than 0.90, and RMSEA should ideally be below 0.05 but is acceptable if less than 0.08.

Finally, we employed a test for variance inflation factors (VIFs) to determine whether the data suffered from multicollinearity, which is said to exist when the VIFs exceed a value of 10 (Belsley et al., 1980). The highest VIF in the data was estimated to be 5.014 (for CEO implementation capacity), indicating no multicollinearity problem in our data and showing none of the variables to be linearly predicted from the others to any significant degree.

Model Test

A structural linear model (without interactions) was tested next. This model included the control variables mentioned above (firm size, organizational age). The χ² for this model was significant with χ²(86) = 146.72; p < .001 (with a scaling correction factor for MLR c = 1.051); CFI = 0.93; TLI = 0.92; RMSEA = 0.73; and SRMR = 0.74.

A nonlinear model was analyzed next. In addition to the variables included in the linear model, this model added the moderating effect of CEO implementation capacity on the relationship between SDC and perceived performance. A latent variable representing the interaction of the CEO's implementation capacity with strategic decision comprehensiveness was also added to the model. This interaction was significant and improved the model fit (B = 0.269, p = .027). Note that the use of such an interaction as a latent variable has been shown to be effective for testing moderating relationships in structural equation models (e.g., Klein & Moosbrugger, 2000; Mathieu et al., 2009). To this end, we followed the two-step method proposed by Maslowsky et al. (2015). In sum, the nonlinear model yielded a better fit than the linear model.

As is customary in such models and since it is not possible to employ fit statistics such as χ², CFI, TLI, or RMSEA in models that contain latent interaction terms, the model fit was compared by the Akaike information criterion (AIC) and sample-size-adjusted Bayesian information criterion (BIC) (hereafter, SABIC). For the nonlinear model, we obtained AIC = 3214.095; SABIC = 3201.148. These measures for the linear model were AIC = 3217.834 and SABIC = 3205.175, thus indicating the better fit of the interaction model (Akaike, 1987).

Finally, the interaction was plotted using common formulas (in the R program environment) for depicting relationships at low (one standard deviation below the mean), medium (at the mean) and high (one standard deviation above the mean) values of the moderator (see Cohen et al., 2003). This plot is shown in Figure 1.

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Figure 1.

The link between strategic decision comprehensiveness and perceived firm performance at different levels of chief executive officer (CEO) implementation capacity.

Simple slope analyses (Aiken & West, 1991) indicated that when CEO implementation capacity is high, SDC is positively and significantly related to perceived firm performance (b = 0.38, t = 2.067, p < .039); when CEO implementation capacity is at its mean, SDC is positively and insignificantly related to perceived firm performance (b = 0.208, t = 1.371, p = .17), and when CEO implementation capacity is low, SDC is positively and insignificantly related to perceived firm performance (b = 0.03, t = 0.213, p = .832), though the coefficient is lower than the high- and medium-level conditions. Figure 1 illustrates these relationship patterns.

Practical Implications

The findings presented here depict how the CEO and the TMT can facilitate improved organizational decision processes and subsequent performance. This issue is especially crucial for small-sized family firms since they tend to have relatively small management teams and lack the bureaucratic organizational systems that larger firms build and use in their day-to-day activities as well as in their strategic decision-making processes. As small-sized firms appear to be highly fragile and face major challenges vis-à-vis larger entities (OECD, 2018) particularly in times of crisis (OECD, 2020), such organizations should attempt more extensively to promote decision-making processes and not simply rely on individual capacity (Lubatkin et al., 2006) and in parallel strive to improve the implementation capabilities of their CEOs.

Lastly, this study suggests that CEOs and their TMT members should pay closer attention to actively advancing and promoting more comprehensive and extensive decision-making processes while acknowledging that there are costs in terms of time and resources consumed by decision-making processes (Forbes, 2007). Measures that may prove effective include the study of best practices (promoting improved decision making through the study of highly successful organizations) as well as fostering and promoting organizational learning (Da Silva & Roglio, 2015).

Limitations and Future Research Directions

This study has several limitations and some important questions require answers. First, this work is contextual (focused on small-sized family firms in Israel) and caution should be exercised when attempting to generalize our findings on small-sized family firms to other contexts since small-sized family firms are seldom multinational and center in specific geographical areas. Thus, the Israeli setting may differ in terms of leadership capacity, decision-making processes, risk taking, and other attributes. Expanding this research to additional countries and cultures can improve the generalization of our results and will likely shed further light on differences (and similarities) among small-sized family firms in different settings. In addition, the decision-making mechanisms may be qualitatively different in small-sized family firms than those of large organizations (Huang & Wang, 2012). However, Israel is also similar to other nations in which family firms, including those small in size, account for the majority of the business population. The results may also be applicable to small-sized family firms around the world and particularly to the strategic decision-making processes and the importance in the capacity of the CEO to follow a chosen course of action. They may further advance our knowledge about small-sized family firms since these entities often rely on the CEO's capabilities in their early stages of development. Thus, our research opens up a new window of opportunity about the ways the CEO can transform decisions into actions to drive firm performance.

Second, the data are cross-sectional (relating to behavior and performance in the three years prior to the research), and examination of TMT processes at numerous points in time will likely strengthen the results. Caution is advised when drawing conclusions from survey-based data, particularly when evaluating causal inferences. Although a crude test was used to assess the appropriateness of the proposed model in connecting the variables, reverse models, involving SDC and performance cannot be ruled out. Thus, additional research is needed to assess the causal direction of the proposed model. For example, we cannot rule out at this point that higher levels of performance do not positively influence TMT dynamics and decision processes rather than vice versa. Finally, there may be other, unobserved, variables which could affect the observed organizational outcomes.

Regardless of these limitations, this paper also raises some significant questions and research avenues. We are still at the beginning of the learning process of understanding the ways in which CEOs shape processes (O’Reilly et al., 2010) such as SDC. Further, scholars have much to learn about the conditions under which the connection between SDC and organizational outcomes can be strengthened or weakened, and mediating constructs still need to be explored. In particular, as many small-sized family firms fail to survive in the long term, which is a key priority in many countries (OECD, 2020), the question of resilience (Sutcliffe & Vogus, 2003) and the ability of small-sized family firms to cope and bounce back from experiences of failure and adversity seems imperative and important to study. We also believe that research can further advance by focusing on founder-CEOs as well as when founder-CEOs are replaced by the second generation in family firms. Research on decision processes in small-sized family firms is also scant despite their importance as a vital component of every economy. Smaller business fragility (USSBA, 2006; ASBFEO, 2015) may only be mitigated by effective strategic decision-making, and gaining insights into these processes should make a significant contribution to our understanding of this discipline (Johnson et al., 2003). We acknowledge the richness of each facet of our concept of implementation capacity. For example, handling a TMT is much more complex and multidimensional than we portray, and requires a set of skills and behaviors from effective communication patterns, conflict-resolution skills, and relationship-building capability, among others. However, we also believe that handling a TMT allows a CEO to implement a strategic decision by harnessing the support of members (“bring them on board”). Finally, our research captures the dynamics and particularly the decision-making processes within a TMT but applies a variance theoretical explanation. Thus, a process model can further advance our research on how the decision-making process unfolds over time such that we can more precisely capture choice events and activities over a period of time (Langley, 2009).