Upper echelons theory
Upper Echelons Theory (UET), introduced by Hambrick and Mason (1984), operates on a powerful premise: top managers' decision-making processes determine competitive strategies, and these strategies determine firm performance.
"The organization is a reflection of its top managers."
In short, to understand why a company acts the way it does, you must study the biases, values, and experiences of the people in the C-Suite.
The Core Mechanism: Opening the "Black Box"
Traditional economics often treats the firm as a "black box" that makes rational decisions. UET opens that box. It argues that executives cannot scan every piece of information in the world. Instead, they view the world through a lens filtered by their own Bounded Rationality.
Research focuses on two types of characteristics that filter this lens:
- Observable Characteristics (Proxies): Age, formal education, functional background (e.g., finance vs. marketing), and job tenure.
- Psychological Characteristics: Cognitive complexity, risk tolerance, and personal values. (Since these are hard to measure, researchers often use the observable traits as "proxies" for these).
Application to Entrepreneurial Teams
In the context of startups, UET shifts focus from the solo founder to the Top Management Team (TMT).
The Role of Heterogeneity (Diversity)
Vanaelst et al. (2006) and Patzelt (2008) examined how team composition affects success. A key concept here is Heterogeneity (diversity of background):
- The Benefit: Diverse teams bring wider perspectives, leading to better problem-solving and innovation.
- The Risk: High diversity can reduce Team Cohesion, leading to conflict and slower decision-making.
Strategic Consequences
The characteristics of the team directly influence the two main levers of firm strategy:
- Business Strategy: How to compete (e.g., Low Cost vs. Differentiation).
- Corporate Strategy: Where to compete (e.g., Vertical Integration, Diversification, or Acquisitions).
Theory Wars: Agency vs. Determinism
Upper Echelons Theory is significant because it serves as a counter-balance to "deterministic" theories.
| Perspective | Main Theory | The Argument |
|---|---|---|
| Managerial View | Upper Echelons | Strategic Choice: Individuals matter. The pilot flies the plane. |
| Environmental View | Population Ecology | Determinism: The environment matters. The storm dictates if the plane survives, regardless of the pilot. |
Video: Hambrick's Theory Explained
Academic Sources
- Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9(2), 193-206.
- Patzelt, H., Zu Knyphausen‐Aufseß, D., & Nikol, P. (2008). Top management teams, business models, and performance of biotechnology ventures: An upper echelon perspective. British Journal of Management, 19(3), 205-221.
- Vanaelst, I., Clarysse, B., Wright, M., Lockett, A., Moray, N., & S'Jegers, R. (2006). Entrepreneurial team development in academic spinouts: An examination of team heterogeneity. Entrepreneurship Theory and Practice, 30(2), 249-271.
