What is the upper echelons theory of entrepreneurship?
The underlying assumptions of the upper echelons theory are that top managers’ decision-making processes determine competitive strategies, and that strategies affect firm performance (Hambrick and Mason, 1984). Further, decision-making processes are expected to be affected by the characteristics of individuals in top management as well as the composition of teams.
Competitive strategies may include the choice of business strategy, such as low cost, differentiation, and focus strategies. They may also affect corporate strategy such as vertical and horizontal integration, as well as diversification. Business and corporate strategies are well-known to affect the financial performance of firms and new ventures.
When applied to entrepreneurial teams, characteristics that have been examined include age, formal education, length of job tenure, and functional experience. Heterogeneity, such as the diversity of functional backgrounds, age and experience, has been found to affect new venture strategy-making (Vanaelst et al., 2006). Team cohesion and conflict have also been found to affect strategy and performance of new ventures.
Because the upper echelons theory posits that the characteristics of individuals and teams influence their decision-making, it is viewed as a counter-balance to population ecology and institutional perspectives that tend to view individuals as unimportant.
Vanaelst, I., Clarysse, B., Wright, M., Lockett, A., Moray, N., and S’Jegers, R. (2006). Entrepreneurial team development in academic spinouts: An examination of team heterogeneity. Entrepreneurship Theory and Practice, 30(2), 249-271.