The Problem & The Question
If you’re traveling abroad and want to torture yourself with something uniquely American, you can stop at a Wal-Mart. In fact, more than 1 out of every 10 Wal-Mart employees works at one of their global stores. The same can’t be said for Target. Just two or so years ago, they pulled the plug on their only international gamble and closed its 130 Canadian stores.
So, the problem is that some companies enjoy success and others experience failure and heartbreak on the global scene. Logically, some scholars believe that wins and losses can be directly attributed to the top management team (TMT). The study that the Kimono looked at wondered what the relationship was between TMT characteristics and a firm’s global strategic posture. If you’re looking for some sleep-inducing stats and theories, you can look here at the actual study.
The Theory Behind the Science
Let’s begin with some definitions. Global strategic posture (GSP) is the degree to which companies rely on international markets for customers or for factors of production like manufacturing plants.
Successful firms often want a GSP for several reasons. If the U.S. market is saturated, they must move beyond our borders to grow. After all, there’s only so many Starbucks the U.S. can handle. The second reason is that it spreads risk across the globe. For instance, if the U.S. suddenly decided to eat healthy, McDonald’s would still have their thousands of stores in Europe, Russia, and Latin America to keep them going. Going international means that you aren’t putting all of your eggs in one basket.
The authors of this study point us towards a rather straightforward logic. Namely, doing business internationally is incredibly complex with different cultures, laws, and regulations making expansion overseas problematic.
The authors assert that complex situations require complex and diverse top management teams (TMTs). For instance, they suggest that senior executives that possess varying international assignments (e.g., Europe, Asia, and Latin American) and diverse educational backgrounds (e.g., science and engineering, law, economics, and business) will perform much better on a global scale than those with similar international assignments and similar educational experiences.
They also predicted that varying and diverse functional backgrounds (e.g., finance, marketing, R&D, and production) will give the executive team the diversity and complexity of problem solving skills to navigate tricky international waters. In other words, diversity equals more complex executive mental models which equals more creative global problem solving.
The Samples and Measures
The professors looked at a random sample of 300 U.S. industrial firms. They collected the functional, educational, international experience, and tenure for the TMT—defined as the top two levels in an organization. For the dependent variable of global strategic posture, they built a composite score consisting of foreign sales, foreign production, and the number of subsidiaries that a firm operated outside the U.S.
Let’s Open the Kimono!
As we open the Kimono, there’s not much of a surprise, at least, initially. When the TMT possessed more diversity in their international experience and in their educational backgrounds, they enjoyed superior global performance. It seems that multiple and different international experiences and educational backgrounds do, indeed, promote diverse perspectives, skills, and networks that allow a firm to succeed on the international stage.
But two surprises emerge. First, as the TMT became more functionally diverse (executives with backgrounds in law, marketing, production, sales, distribution, finance), their GSP, actually, went down. In a way that makes sense. Get marketing, HR, legal, and production in a room and there’s likely to be conflict. Because they approach the world through their own functional lens, they are less apt to get along and compromise—all of which is necessary to execute on a global scale.
Second, when the researchers accounted for the variable of uncertainty, measured as volatility of a firm’s net sales, new relationships emerged. In particular, in highly uncertain environments, companies with executives who were more functionally diverse performed worse than those who were less diverse in backgrounds. In this case, being more alike (all from accounting!) worked better. In fact, when the researchers re-analyzed the data and compared executive diversity in low and high uncertainty environments, the only variable to do well, across the board, was educational diversity. As environments get more uncertain, educational background diversity will still lead to better globalization results.
We’re taught that diversity reigns supreme. We know from this study that this isn’t always the case. While educational diversity (mixing poets with quants) seems to always matter, functional diversity seems to harm global performance—in periods of low and high uncertainty.
Finish the day smarter than what you started.