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Staying Agile in the Saddle

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STAYING AGILE IN THE SADDLE : CEO TENURE, TMT CHANGE , AND

ORGANIZATIONAL AMBIDEXTERITY

PAUL FERREIRA University of Geneva 40 Blvd. Pont-d’Arve

1205 Geneva, Switzerland Phone +41 22 379 85 86

[email protected] (CORRESPONDING AUTHOR)

SEBASTIAN RAISCH University of Geneva 40 Blvd. Pont-d’Arve

1205 Geneva, Switzerland [email protected]

PATRICIA KLARNER Munich School of Management

University of Munich Ludwigstr. 28

80539 Munich, Germany [email protected]


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STAYING AGILE IN THE SADDLE : CEO TENURE, TMT CHANGE ,

AND ORGANIZATIONAL AMBIDEXTERITY

ABSTRACT

This study examines how interrelated CEO and TMT changes affect an organization’s

ability to simultaneously explore and exploit. Drawing upon the upper echelons perspective, we

argue for a curvilinear CEO tenure-ambidexterity relationship. We then propose that the timing

of TMT change critically affects this relationship. While TMT change negatively impacts

ambidexterity in the early stages of CEO tenure, it has a positive relationship to ambidexterity in

the later stages of CEO tenure. We empirically test and find evidence for our arguments based on

a preliminary longitudinal sample of 30 European insurance companies between 2000 and 2011.

Our main contribution to the ambidexterity literature is the development of a dynamic model

revealing the interrelated effects of CEO and TMT changes on firm ambidexterity.

Keywords:

Ambidexterity; chief executive officers; top management team dynamics; panel data analysis


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INTRODUCTION

“Because once you decide to become a blackBerry user, you kind of stay there for life, and

let’s not be too penny-wise, pound-foolish when we do get very good absolute margin. ” (Co-

CEO James Balsillie, April 2008)

“We are on the right track to put these last two quarters behind us." (CEO Richard Fuld,

September 10, 2008)

Both Balsillie and Fuld experienced at Research in Motion and Lehman Brothers

respectively, a time when both firms were considered highly innovative or even pioneers and

outperforming the competition. Both CEOs, who by the time of their (forced) turnover, had been

characterized as long-tenured CEOs having grown “stale in the saddle”, were running firms

averse to innovation, being overwhelmed by the competition, and showing strong performance

decline. The pattern is so common (e.g., Kodak, the Edison Company, DEC) that it seems worth

investigating how can CEOs stay “agile in the saddle” – managing their daily operations, but also

continuing to explore new products, markets, and capabilities?

Organizational scholars increasingly apply the concept of ambidexterity – the human

ability to use both hands with equal skill – as a metaphor for an organization’s ability to

simultaneously explore and exploit (e.g., Gibson & Birkinshaw, 2004; O’Reilly & Tushman,

2008). To become ambidextrous, organizations have to reconcile internal tensions and

conflicting demands in their task environments. Research has shown that the top management

team (TMT) plays an important role in addressing these tensions and conflicts (e.g., Lubatkin,

Simsek, Ling, & Veiga, 2006; Smith & Tushman, 2005). For example, scholars have

documented the role of TMT composition (Beckman, 2006) and TMT processes (Jansen,

Tempelaar, van den Bosch, & Volberda, 2009) as antecedents to ambidexterity.


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While these studies provide rich insights, there are two important dimensions of the

TMT-ambidexterity relationship that have received scarce research attention. First, previous

studies describe the current state of the TMT, but did not capture how changes to the TMT affect

ambidexterity (Raisch & Birkinshaw, 2008). Since the upper echelons perspective shows that

TMT change – defined as changes to the composition of the TMT (Hambrick, 2007) – alters the

senior team’s demography (Williams & O’Reilly, 1998) and decision-making processes

(Hambrick, Cho, & Chen, 1996), analyzing its impact on ambidexterity may be worthwhile.

Second, previous ambidexterity studies generally tended to treat the TMT as a unit of

analysis, which did not allow for a more fine-grained analysis of the interrelated impact of the

chief executive officer (CEO) and other TMT members on ambidexterity (Cao, Simsek, &

Zhang, 2010). This distinction is particularly relevant for the TMT change-ambidexterity

relationship, since it is frequently the CEO who drives TMT change (Helmich & Brown, 1972),

and his or her propensity to undertake such change was found to vary over the tenure cycle

(Kesner & Dalton, 1994). Further research may thus be required into the dynamic interrelations

between CEO change, TMT change, and organizational ambidexterity.

In this study, we draw upon prior work from the upper echelons theory (Hambrick &

Mason, 1984), which explores the dynamics of CEO tenure (Hambrick & Fukutomi, 1991;

Miller, 2001). These studies are particularly insightful for our research objective, as they not

only describe temporal changes in CEO behavior, but also their interrelations with TMT

changes. Drawing upon these theoretical concepts, we first argue for a curvilinear CEO tenure-

ambidexterity relationship. We then introduce TMT change as a moderator of the CEO tenure-

ambidexterity relationship. Our arguments imply that TMT change is not only critical for

sustaining ambidexterity, but that it is the right timing of TMT change in relation to the CEO’s


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tenure that gives rise to or hinders ambidexterity. While TMT change negatively affects

ambidexterity in the early stages of CEO tenure, it has a positive relationship to ambidexterity in

the later stages of CEO tenure. We find evidence for our arguments from preliminary panel data

analyses based on a sample of 30 European insurance companies between 2000 and 2011.1

Drawing upon our findings, we make two contributions to the ambidexterity literature.

First, while prior research has stressed the importance of TMT characteristics for ambidexterity

(e.g., Jansen et al., 2009), we provide a dynamic perspective of how the timing of changes to the

TMT composition relate to ambidexterity. Second, while ambidexterity theory has generally

considered the TMT as a unit (e.g., Lubatkin et al., 2006), we show that CEO and TMT have

distinctive, but interrelated effects that need to be orchestrated to enable ambidexterity (see also

Cao et al., 2010). Finally, we discuss our study’s practical implications, especially how CEOs

can “stay agile in the saddle” by strategically timing TMT changes.

THEORETICAL BACKGROUND AND HYPOTHESES

TMT’s Role for Organizational Ambidexterity

There is growing evidence that ambidextrous organizations – those that have the ability to

simultaneously manage exploration and exploitation – outperform others in the long run (Gibson

& Birkinshaw, 2004; He & Wong, 2004; Lubatkin et al., 2006). Exploratory behaviors generate

internal variety, create new markets and products, and involve experimentation (March, 1991;

Rosenkopf & Nerkar, 2001). Conversely, exploitative behaviors decrease variance, ensure

operational efficiency, and involve implementation (Beckman, Haunschild, & Phillips, 2004,

1 The final sample is comprised of 115 insurers and banks and data collection effort is completed. We report findings for a subsample of 30 firms and 181 firm-year observations in this version of the paper and plan to finish our analysis by the end of January 2015.


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2004; March, 1991). Scholars have warned that a one-sided focus on exploitation results in

inertia and escalating conservatism (Leonard-Barton, 1992), while too much exploration may

deter firms from gaining returns on their knowledge (Levinthal & March, 1993). To become

ambidextrous, organizations have to manage the contradictory forces of exploitation and

exploration, since both compete for scarce resources and require distinct processes, strategies,

and structures (Benner & Tushman, 2003; Gupta, Smith, & Shalley, 2006).

A prominent research stream within this literature conceptualizes leadership characteristics

as an important antecedent to ambidexterity (for reviews, see Lavie, Stettner, & Tushman, 2010;

Raisch & Birkinshaw, 2008). Cognitive and behavioral inclinations of the senior management

team may affect an organization’s proclivity toward exploratory or exploitative actions (Lavie et

al., 2010). Smith and Tushman (2005) thus noted that the senior team’s abilities to develop

accurate cognitive representations of the opposing activities and engage in paradoxical thinking

are vital for effectively managing exploitation and exploration. Extending this view, Lubatkin et

al., (2006) describes “behavioral integration” – the synchronization of the senior team’s social

and task processes – as an important precursor of ambidexterity. More specifically, the authors

argue that the “level of behavioral integration directly influences how its members deal with the

contradictory knowledge processes that underpin the attainment of an exploitative and

exploratory orientation, such that greater integration enhances the likelihood of jointly pursuing

both” (Lubatkin et al., 2006: 647). Moreover, Jansen et al., (2009) empirically show that senior

team social integration and contingency rewards are enablers for ambidexterity.

While these studies focused on TMT processes, Beckman (2006) shows that the founding

team composition – in particular, members’ prior company affiliations – is an important

antecedent of ambidexterity. Firms whose founding teams had both diverse and common prior


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company affiliations demonstrated a higher degree of ambidexterity. Several authors argue that

heterogeneous senior management teams may be better equipped to attend to the contradictions

associated with exploration and exploitation (Boeker, 1997; Virany, Tushman, & Romanelli,

1992). Carmeli and Halevi (2009) found empirical evidence that TMT behavioral complexity is

positively related to ambidexterity. Finally, Cao et al., (2010) show that the CEO’s network

extensiveness (i.e., a system of relationships CEOs have inside and outside their organizations)

positively impacts ambidexterity, particularly when the CEO-TMT interactional interface

enables the TMT to process disparate information.

Despite these rich foundations, ambidexterity scholars have repeatedly criticized the

limited explanatory power of studies assessing TMT characteristics at a given point in time

(Raisch & Birkinshaw, 2008; Simsek, 2009). Ambidexterity has been described as a ‘dynamic

capability’ (O’Reilly & Tushman, 2008) that depends on the senior team’s ability to repeatedly

and intentionally orchestrate firm assets. It is thus important to investigate how changes to the

senior team’s composition and processes affect ambidexterity. Further, scholars have encouraged

studies to investigate how interrelated CEO-TMT effects relate to ambidexterity (Cao et al.,

2010). In this study, we investigate the dynamic interrelations between CEO tenure, TMT

change, and ambidexterity. We draw upon theoretical arguments from the upper echelons

literature on CEO tenure dynamics, which provide rich insights on the temporal dynamics of

CEO behaviors over different tenure phases and their interrelations to TMT changes.

CEO Tenure and Organizational Ambidexterity

A central argument of studies on the dynamics of CEO tenure is the notion of an ‘executive

life cycle’ (Hambrick & Fukutomi, 1991), which implies that CEOs vary in their patterns of


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behavior and strategic choices throughout different tenure phases. In the early stages of tenure,

new CEOs operate with limited repertoires, since their understanding of how the environment

functions and how the company should be run are still incomplete (Miller, 2001). As a result,

new CEOs strive to learn about their teams, firms, markets, and environments, a process that can

be expected to go hand in hand with exploration (Hambrick & Fukotomi, 1991). For example,

Miller and Shamsie (2001) showed, in a longitudinal study of the movie industry, that studio

chiefs were experimenting with their product lines in their early tenures to learn about their jobs.

Consistent with this logic, researchers also found evidence that related proxy variables such as

R&D spending (Barker & Mueller, 2002) and firm invention (Wu, Levitas, & Priem, 2005) are

greater at firms with short-tenured CEOs if compared to those with long-tenured CEOs. It is

understood that CEO behavior varies across different contingencies such as CEO origin, CEO

predecessor retained as chairman (Quigley & Hambrick, 2012), but we can expect that new

CEOs generally tend to engage in increased exploration activities.

If short-tenured CEOs tend to prioritize explorative activities, one can expect that they

engage less in exploitative activities during the same period. The reason is that exploitation and

exploration rely upon learning activities that are located at two ends of a continuum (Levinthal &

March, 1993), which makes it difficult for individuals to engage in extensive exploitation and

exploration at the same time (Gupta et al., 2006: 695). This view also derives support from

Ocasio’s (1997) work, which shows that executives’ attentional orientation serves to filter and

distort the abundant information in strategic decision-making processes. For example, a CEO

with an attentional orientation towards exploration would scan the firm’s environment for

exploratory opportunities, focus on comprehending and making sense of explorative demands,

and foster the generation of exploratory initiatives. Following Ocasio’s (1997) theory, such a


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CEO would be heavily limited in his or her ability to simultaneously dedicate attention to

exploitation activities. We thus argue that short-tenured CEOs tend to prioritize exploratory

activities, while paying less attention to exploitative activities.

Conversely, with increasing tenure, CEOs tend to select and retain a set of strategies that

define how their firm should be configured (Miller, 2001). Tenure can be equated with the

validation of the CEO’s past strategic approach, which in turn prevents him or her from

experimenting with other ways of doing things (Prahalad & Bettis, 1986). Consequently, in the

later stages of their tenure, CEOs are likely to draw strongly upon past experiences (Hambrick &

Fukutomi, 1991), which can be related to exploitative activities. As exploitation often leads to

early success (Levinthal & March, 1993), the exploitation activities are further reinforced, which

leads to an increasing path dependency on exploitation and restricts the search for new

competencies (Lavie & Rosenkopf, 2006; Lavie et al., 2010).

Empirical studies provide supportive evidence for these theoretical arguments. For

example, Miller and Shamsie (2001) found that movie industry executives with increasing tenure

progressively shift their focus towards a set of proven managerial routines. Their growing

knowledge and security renders them less pressed to learn by experimenting, but rather to resort

to increasing exploitation (Levitt & March, 1988). Long-tenured CEOs thus tend to become

complacent and no longer follow market trends; they stick to an obsolete formula and apply it

well beyond its utility, which adversely affects firm performance. They get more internally

focused, which facilitates exploitation while driving out exploration (Hambrick, Finkelstein, &

Mooney, 2005; O’Reilly & Tushman, 2008). Consistent with these arguments, Barker and

Mueller (2002) found that R&D spending decreases with CEO tenure and Wu et al., (2005)


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found a curvilinear relationship between CEO tenure and firm invention. We thus assume that

long-tenured CEOs generally prioritize exploitative over exploratory activities.

Since ambidexterity requires simultaneous exploration and exploitation (Gupta et al., 2006;

He & Wong, 2004), neither retaining long-tenured CEOs – which can lead to downward spirals

caused by one-sided exploitation (Hambrick & Fukutomi, 1991) – nor frequently replacing them

– which implies the risk of getting caught in unrewarding exploration cycles (Volberda & Lewin,

2003) – can be expected to lead to ambidexterity. However, these developments are likely to be

continuous (Miller, 2001): exploration gradually decreases, while exploitation gradually

increases with CEO tenure. We thus expect that intermediate CEO tenure is related to the

strongest orientation towards organizational ambidexterity.

Hypothesis 1: CEO tenure has an inverted U-shaped relationship to organizational ambidexterity.

CEO Tenure, TMT Change, and Organizational Ambidexterity

While the curvilinear CEO tenure-ambidexterity relationship highlights the central role of

the CEO, it may be an incomplete representation of how he or she affects ambidexterity. Upper

echelons scholars have stressed the added value of extending the focus to the TMT when

exploring the dynamics of CEO tenure (e.g., Shen & Cannella, 2002). For example, Tushman

and Rosenkopf (1996) argue that TMT changes have “more profound effects on organization

outcomes than simple CEO succession” (1996: 950). Williams and O’Reilly (1998: 99) noted

that “once turnover does occur, the heterogeneity of the group will, by definition, change.” Since

TMT characteristics were found to affect ambidexterity (e.g., Beckman, 2006), we can expect

that changes to TMT composition may as well play an important role for ambidexterity. In this

section, we thus introduce TMT change as a moderator of the CEO tenure-ambidexterity


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relationship. We argue that the timing of TMT change in relationship to the CEO’s tenure is

critical for ambidexterity.

Prior research on CEO tenure dynamics and the related literature on CEO succession claim

that TMT changes often occur in close alignment with CEO changes. If new CEOs take office,

they are likely to make immediate changes to the TMT composition to clear “executive

deadwood” and facilitate strategic reorientation (Kesner & Dalton, 1994). The need for TMT

changes may be explained by the fact that CEO changes by themselves fail to introduce

sufficient new experience and knowledge to radically alter established understandings and

entrenched activity patterns, and power positions (Shen & Cannella, 2002; Virany et al., 1992,

Wiersema & Bantel, 1993). For example, Ancona and Chong (1996: 276) argue for a combined

CEO and TMT change, suggesting that only if the “clocks at both levels are reset to zero at

once,” this provides a powerful mechanism to drive radical strategic change.

As argued above, CEOs may exhibit high levels of exploration and low levels of

exploitation in their early stages of tenure. TMT changes in these early stages can be expected to

further reinforce the CEO’s inclination towards exploration. The newly appointed members

reduce the team’s average tenure, which has been related to increased experimentation and

exploration activities (Miller & Shamsie, 2001). Furthermore, TMT change increases the

heterogeneity of the senior team’s experiences (Williams & O’Reilly, 1998). Such heterogeneity

can create task conflicts that force senior team members to share more varied information (Jehn,

Chadwick, & Thatcher, 1997) and engage in greater experimentation (Grinyer & McKiernan,

1990). Finally, the disruptive effects of TMT change are likely to encourage the executive team

to challenge established routines and experiment with novel approaches (Lavie et al., 2010).

From an ambidexterity perspective, TMT change in the early stages of CEO tenure may thus lead


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to a one-sided orientation of both the CEO and the TMT towards exploration, which negatively

affects ambidexterity.

Conversely, refraining from discretionary TMT changes – those that the CEO can

influence - in the early stages of CEO tenure may have positive effects on ambidexterity.

Maintaining stability in TMT composition increases the TMT’s average tenure. Long-tenured

TMTs have accumulated firm-specific human capital and develop common sets of experiences,

similar attitudes, and shared problem-solving behaviors (Allen & Cohen, 1969). In other words,

TMTs that continue with relatively few changes – some may be unavoidable due to causes of

force majeure such as death or criminal charges – tend to develop organizational routines that

they use to identify, frame and make convergent types of strategic decisions (Prahalad & Bettis,

1986). Routines are self-reinforcing (March & Simon, 1958), they give rise to a “dominant

logic” (Prahalad & Bettis, 1986: 485) the longer the TMT members have worked together.

Ambidexterity scholars have related the emergence of such organizational routines to

exploitative activities (Baum, Li & Usher, 2000). Since exploitation tends to drive out

exploration (Levinthal & March, 1993), TMT members who opt for proven responses to

environmental changes refrain from exploring new capabilities.

From an ambidexterity lens, the combination of a new CEO with a long-tenured TMT

should thus allow for balancing exploration and exploitation “across domains” (Gupta et al.,

2006). Short-tenured CEOs with a natural tendency towards exploration are paired with long-

tenured TMTs with an inclination towards exploitation. However, balancing across these

competing activities entails the inherent risk that the CEO and the TMT may not know how to

coordinate the activities and manage the task-oriented conflict induced by such an arrangement

of roles and responsibilities. In our study, we follow Smith and Tushman’s (2005) previous work


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suggesting that “team design” reflected in features such as “distinct roles, goals and rewards” is a

decisive antecedent in shaping the CEO and TMT’s ability to engage in paradoxical cognitive

processes and manage strategic contradictions. Accordingly, it is precisely the mismatch of their

tenure that gives rise to cognitive frames and processes that allow both the CEO and the TMT to

effectively handle potential tensions (Smith & Lewis, 2011). We therefore argue that low levels

of TMT change in the early stages of CEO tenure positively affect ambidexterity.

If a CEO refrains from discretionary TMT change, his or her organization eventually

reaches a stage characterized by the simultaneous presence of a long-tenured CEO and a long-

tenured TMT. As argued above, long-tenured CEOs face the increasing risk of getting overly

committed to increasingly outdated paradigms (Miller & Shamsie, 2001), and long-tenured

TMTs tend to exhibit a greater commitment to the status quo and the culture and norms of the

organization (Bantel & Jackson, 1989). Consequently, the combined presence of a long-tenured

CEO and TMT has the potential to decrease task-oriented conflict and the related exploratory

activities. As the orientation at both levels is directed towards exploitation, which can be

expected to mutually reinforce one another, the attentional orientation to exploration vanishes.

Refraining from discretionary TMT changes in the advanced stages of CEO tenure may thus

negatively affect ambidexterity.

Conversely, TMT change in the advanced stages of CEO tenure can prompt TMT members

to consider fresh insights and discuss alternative solutions (Amason & Sapienza, 1997).

Furthermore, new TMT members increase tenure heterogeneity, which has been related to

frictions and relational conflicts that push the TMT towards greater risk-taking and

experimentation (Hambrick et al., 1996). TMT change contributes new skills and shakes up

engrained group processes, which may shift previous TMT attentional orientations toward new


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ones. For example, Cho and Hambrick (2006) have shown in the context of airline deregulation

how firms that changed their TMT composition – notably their TMT industry tenure – have

experienced a shift in managerial attention toward an entrepreneurial orientation (relative to an

engineering orientation), which generally goes hand in hand with exploration activities.

From an ambidexterity perspective, we thus expect that new TMT members, who drive the

TMT towards greater exploration, challenge or revitalize long-tenured CEOs whose natural

inclination is towards exploitation. The tenure mismatch between the CEO and the TMT leads to

contradictory orientations and task-related conflicts, which are essential for stimulating

ambidextrous behavior (Smith & Lewis, 2011). We know from Arrow and McGrath’s (1995)

work on group dynamics that the more past continuity teams have experienced, the stronger the

immediate effects of changes to team composition. We thus argue that opposed to what we had

argued above for the early stages, TMT changes in the later stages of CEO tenure positively

affect ambidexterity.

Hypothesis 2: TMT change moderates the CEO tenure-ambidexterity relationship in such a way that TMT change combined with short-tenured CEOs decreases ambidexterity, while TMT change combined with long-tenured CEOs increases ambidexterity.

RESEARCH METHODOLOGY

Research Setting and Data Collection

To test our hypotheses, we composed a sample of insurance firms from the Stoxx Europe

TMI Finance Index for the period from 2000 to 2011. Due to the considerable industry dynamics

during our observation period (e.g., two global financial and economic crises and subsequent

rebounds; important regulatory changes), firms in this industry had to both exploit their

incumbent business and explore future growth platforms. The European financial services


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industry is thus a suitable context for our study. In addition, a single industry study allows us to

ensure comparability among firms (Klarner & Raisch, 2013).

In total, there were 68 financial services companies in the Stoxx Europe TMI Finance

Index. While 47 of these companies made up the index in 2000, the remaining 21 companies

were added to the index between 2000 and 2011. During our analysis period, the financial

services industry has experienced multiple mergers and acquisitions, as well as several delistings.

To account for these changes, we constructed a detailed list indicating the “family tree” of each

of the firms in our sample for the time period between 2000 and 2011. Due to insufficient data

availability (e.g., unavailability of annual reports or missing values in databases), we had to

discard 12 firms, leading to a final sample of 56 firms and 392 firm-year observations.2 The

number of firm-year observations was reduced due to missing values resulting from mergers,

acquisitions, and delistings. Since we included several lagged variables, we traced all firms back

to 2000.

We used different sources to collect our data. First, we used content analysis of press

releases on corporate websites to collect data on firm ambidexterity. Second, data on the CEO

and TMT members was obtained by studying the TMT composition of each firm and year using

annual reports. Third, firm-level controls were obtained through the Thomson Analytics and

Capital IQ databases.

Dependent Variable

We operationalized exploration and exploitation in accordance with Uotila, Maula, Keil,

and Zahra (2009) by quantifying the yearly relative amount of a firm’s exploitative orientation

2 The final sample is comprised of 115 insurers and banks and data collection effort is completed. We report findings for a subsample of 30 firms and 181 firm-year observations in this version of the paper and plan to finish our analysis by the end of January 2015.


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and explorative orientation. We collected textual data in form of press releases available on the

corporate websites (Duriau, Reger, & Ndofor, 2000). Each document was analyzed according to

the wordlist provided by March (1991). Organizational ambidexterity is operationalized as the

interaction between exploration and exploitation (Gibson & Birkinshaw, 2004; He & Wong,

2004). We measure a firm’s ambidexterity in year t as the interaction of exploration i,t and

exploitation i,t. This measure is calculated by the arithmetic average of all the exploration-

exploitation interactions for the focal (t) period, taking a minimum value of 0 (for firms that have

a one-sided focus on either exploration or exploitation) and a maximum of .25 (for firms that

show maximum values of both exploration and exploitation).

Independent Variables

CEO tenure refers to the total number of years a specific individual had held the CEO

position within a company (Shen & Canella, 2002). TMT change was measured for all

individuals that reported directly to the CEO (Tushman & Rosenkopf, 1996). For each year and

firm, we used annual reports to identify all the executives who were not on the team in the

previous year (the entering executives), and the executives who were listed in the previous year,

but not in the current year (the exiting executives). TMT change was measured as the number of

entering and exiting executives in a given year. We mean centered CEO tenure and TMT change

prior to testing interaction effects to avoid potential multicollinearity (Wu et al., 2005).

Control Variables

We included five general classes of control variables to mitigate potential misinterpretations of

our findings: Firm performance (Return on Equity), top management team size (measured by

counting all top management team members in a given year), firm age (years since founding),


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and prior firm ambidexterity. We also controlled for firm size (logarithm of the number of

employees) but had to drop this variable due to multicollinearity concerns. We lagged all

independent and control variables by one year to avoid simultaneity bias (Weng & Lin,

forthcoming).

Data Analysis

Since our dataset consists of multiple observations for each firm, we tested our hypotheses

using panel data analysis. A Wooldridge test (Wooldridge, 2010) revealed autocorrelation in our

data (p<0.001). In addition, following Greene (2000), we had to reject the null hypothesis of

homoscedasticity (p<0.001). We therefore used Prais-Winston regression with a panel-specific

autoregressive disturbance structure (the “xtpcse” command in STATA 11), specifying that there

is first-order autocorrelation and that the coefficient of the AR(1) process is specific to each

panel (“psar1” option) (Marquis & Huang, 2009). We also chose the “pairwise” option in

STATA, which includes all available observations with non-missing pairs (StataCorp, 2009).

A possible concern with our analysis and findings is endogeneity, since CEO tenure – the

independent variable – may correlate with unobservable factors in the error term (Wooldridge,

2010). In order to address this concern, we tested a two-stage instrumental variable model

(2SLS) using the “xtivreg2” command in STATA. We used CEO origin, CEO duality, and mean

CEO tenure in the industry as instrumental variables and designated CEO tenure as endogenous

variable. Prior research has found that CEO origin relates to CEO tenure (Karaevli, 2007; Zhang,

2008). In addition, CEO duality can influence the tenure of a CEO (Goyal & Park, 2002; Quigley

& Hambrick, 2012). Finally, a firm’s decision to maintain or replace the CEO may be influenced

by competitors’ tendency to keep their CEOs in office or replace them (Karaevli & Zajac, 2013;


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Zhang & Rajagopalan, 2003). Results from the 2SLS model indicated the consistency of OLS (p

= 0.4546).

We also tested each model for potential multicollinearity by calculating the variance

inflation factors (VIF). VIFs ranged between 1.23 and 7.04, which was below the suggested

cutoff value and thus not problematic (Neter, Wasserman, & Kutner, 1985).

RESULTS

Table 1 presents the descriptive statistics and the correlation matrix. First, we examined

Hypothesis 1 regarding the proposed inverted U-shaped relationship between CEO tenure and

organizational ambidexterity. Two models were estimated, as shown in Table 2. Model 1

included only the control variables and the main effects, and model 2 also included the squared

CEO tenure term. Both models were significant. The results in model 2 support Hypothesis 1

since the coefficient of CEO tenure is positive and significant (b = 0.0018, p < 0.05) and the

coefficient of CEO tenure squared is negative and significant (b = -0.0001, p < 0.01).

In Hypothesis 2, we argued that top management team change would moderate the

curvilinear relationship between CEO tenure and organizational ambidexterity. Model 3 in Table

2 included the control variables, main effects, CEO tenure squared, and the interaction of CEO

tenure and TMT change. Model 4 included all these terms, as well as the interaction term of

CEO tenure squared and TMT change. Both models were significant. The coefficient of the

interaction of CEO tenure squared and TMT change is positive and significant (b = 0.0001, p <

0.10) in model 4, thus supporting Hypothesis 2.

------------------------------------------------- Please insert Tables 1 and 2 about here

-------------------------------------------------


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DISCUSSION

In this study, we revisited the emerging research stream on the role of senior management

in attending to contradictory demands of exploration and exploitation (e.g., Cao et al., 2010;

Lubatkin et al., 2006; Smith & Tushman, 2005). Contrary to prior studies, our emphasis was on

the dynamics of the senior management-ambidexterity relationship. In essence, we investigated

how TMT changes at different stages of CEO tenure contribute to or hinder ambidexterity. We

find that the CEO tenure-organizational ambidexterity relationship is a dynamic one with TMT

change having varying effects on ambidexterity at different stages of CEO tenure. Drawing upon

these findings, we continue to discuss our paper’s contributions to the ambidexterity literature, as

well as its managerial implications, limitations, and avenues for future research.

Managing Ambidexterity: A Dynamic Perspective

Prior research has stressed the importance of TMT characteristics and processes for

organizational ambidexterity (e.g., Beckman, 2006; Lubatkin et al., 2006). In a recent review of

the ambidexterity literature, Lavie et al., (2010) criticize the static character of previous studies

and argue that shifting our research focus from the rather static notion of balance towards the

process of balancing over time could generate important new insights. In this paper, we respond

to this call for further research by providing a dynamic perspective of how senior team dynamics

relate to ambidexterity. This novel perspective allows us to derive several insights on the

dynamics of managing ambidexterity within the corporate team.


20

First, our results contribute a new dimension to ambidexterity research, revealing the thus

far neglected role that the timing of TMT change can play in successfully managing exploration-

exploitation tensions. Following executive life cycle theory arguments (Hambrick & Fukotomi,

1991; Miller, 2001), we show that ambidexterity varies with CEO tenure and that TMT change

critically affects this relationship. While we provide further evidence that long-tenured CEOs

generally face the increasing risk of growing “stale in the saddle” (Miller, 1991), which may

cause organizations to get caught in a “success trap” that exacerbates exploitation at the cost of

exploration (Levinthal & March, 1993), we also reveal that the appropriate timing of deliberate

TMT changes may be an important means to break these downward spirals and allow

organizations to foster and sustain ambidexterity. Future research can build upon these

foundations to explore how different paces, frequencies, and rhythms of change (Klarner &

Raisch, 2013) across different organizational levels and dimensions affect ambidexterity.

Second, prior ambidexterity studies increasingly argue that successful organizations do not

just strive for balancing exploration and exploitation, but also dynamically shift their relative

attention between these poles (Boumgarden, Nickerson, & Zenger, 2012; Lavie et al., 2010). The

gradual adaptations allow organizations to ensure continued alignment with changing

environmental conditions (Siggelkow, 2002; Simsek, Heavy, Veiga, & Souder, 2009). While

prior studies describe such adaptations, they did not explore the drivers and capabilities that

enable organizations to enact these shifts in their exploration-exploitation balance (Raisch,

Birkinshaw, Probst, & Tushman, 2009). In our study, we show that TMT change is one potential

driver for organizations to foster “adaptation capabilities” (Smith & Tushman, 2005). Future

research could build upon our findings to explore whether and how organizations can

intentionally and strategically time their TMT changes to shift their exploration-exploitation


21

balance. Such modification routines (Adler, Goldoftas, & Levine, 1999) support firms’

adaptation to environmental change and could enable them to sustain ambidexterity over time.

Finally, we present an alternative, more positive ambidexterity perspective of CEO tenure.

While upper echelons scholars traditionally accentuate the negative effects of CEO tenure such

as increasing path dependencies and reduced behavioral repertoires (Hambrick & Fukutomi,

1991; Miller, 1990), we argue that CEOs accumulate valuable organizational knowledge over

time. If combined with deliberate TMT changes, which introduce new knowledge for exploration

and challenge the status quo, long-tenured CEO’s accumulated organizational knowledge

represents the complement that ensures simultaneous exploitation.

Our theoretical arguments are contingent upon the quality and richness of exchanges

between the CEO and his or her senior management team. Future research should explore how

the CEO-TMT interactional interface (Cao et al., 2010), which includes communication richness

(Smith et al., 1994), functional complementarity (Taylor & Greve, 2006) and power

decentralization (Finkelstein, 1992), enables the executive team to consider the different

knowledge bases when addressing exploration-exploitation tensions.

Managing Ambidexterity: A Multi-Level Perspective

With the notable exception of Cao et al. (2011), prior ambidexterity research has

considered the TMT as a unit of analysis (Lubatkin et al., 2006). Scholars criticized this

approach since it does not allow for more fine-grained analysis of the interrelated effects of the

CEO and other TMT members on ambidexterity (Cao et al., 2001; Raisch et al., 2009). In this

paper, we contribute to the emerging multi-level perspective to managing ambidexterity at the


22

corporate level by providing several new insights into the dynamics of the CEO-TMT

interrelations.

First, we show that CEO and TMT changes are interrelated and reveal how changes to

these two distinct types of actors have to be orchestrated to enable ambidexterity. While our

findings indicate that CEOs by themselves may be able to temporarily hold the exploitation-

exploration tension in mid-tenure, they also show that CEOs must rely upon the TMT’s support

to sustain ambidexterity over time. These insights confirm prior arguments that exploitation and

exploration are difficult to reconcile “within a single domain” (Gupta et al., 2006: 697) and

illustrate how these tensions may be resolved across domains (Raisch & Birkinshaw, 2008). This

requires future work to adopt a contingency perspective when exploring TMT characteristics and

processes, since their outcomes may vary dependent on the CEO’s background, behaviors, and

cognitions.

Second, an emergent perspective in recent ambidexterity research suggests domain

separation as an alternative means to address exploration-exploitation tensions (Lavie &

Rosenkopf, 2006; Lavie et al., 2010). While this line of work has so far been limited to inter-

organizational domains, we provide theoretical arguments and empirical evidence for its

usefulness in a top management team context. Domain separation in this context means that the

CEO and his or her senior team take different roles with regard to exploration and exploitation at

different stages of CEO tenure. Integration across domains is ensured through collaborative

behavior and joint decision-making within the senior team. By separating and investigating the

distinctive roles of the CEO and the senior management team, we are able to propose an

alternative approach to balancing exploration and exploitation at the corporate level. Future


23

research should take a micro-level approach to explore the differentiation and integration

processes at the CEO-TMT interactional interface.

Finally, our work has more general implications for the upper echelons theory. We

contribute a novel ambidexterity perspective to the executive succession literature (e.g.,

Finkelstein & Hambrick, 1990; Karaevli, 2007; Tushman & Rosenkopf, 1996). A core argument

in this literature is that CEO change drives first-order learning, but concurrent and extensive

TMT change is required to realize more fundamental, second-order learning (Dalton & Keener,

1985; Virany et al., 1992). Consequently, upper echelons scholars suggest that firms tend to

align CEO change with discretionary TMT change (Shen & Cannella, 2002). While this solution

may be appropriate for extensive exploration, the ambidexterity literature warns firms against

overly focusing on one-sided exploration (Gupta et al., 2006; Levinthal & March, 1993). More

importantly, the ambidexterity literature found strong empirical evidence that firms that balance

exploration and exploitation generally outperform those with a one-sided alignment in the long

run (for an overview, see Junni, Sarala, Taras, & Tarba, 2013). Firms that strive for

ambidexterity may benefit less from aligning CEO change and TMT change. Such alignment

may even be harmful since it implies the risk of reinforcing a one-sided orientation. In this paper,

we lay the foundations for an alternative perspective of executive succession, which accentuates

the benefits of decoupling CEO and TMT change to foster the senior team’s ability to deal with

the contradictory demands of exploration and exploitation.

Practical Implications


24

The results of our study have particularly important implications for top managers that

attempt to achieve ambidexterity within their organizations. “staying agile in the saddle” is

particularly challenging for CEOs since it forces them to address multiple challenges

simultaneously: First, they need to host and harmonize the conflicting requirements of

exploration and exploitation within their senior management teams. Second, they need to

withstand the temptations of falling into the trap of increasing alignment with one or the other

objective in different stages of their tenure. Finally, they need to identify “early warning signs”

that signal that “the time for a course correction has come” (Probst & Raisch, 2005: 100), which

allows them to strategically time their discretionary TMT changes to maintain ambidexterity.

Since this is a quite demanding set of expectations towards CEOs, we suggest that boards

of directors play a more active and supportive role in managing CEO and TMT changes. This

includes boards’ development of a long-term succession plan for TMT members in addition to

the CEO. A promising alternative to systematically replacing CEOs at intermediate tenures

(Fama, 1980) may be to only renew experienced CEOs’ contracts under the condition of

refreshing their senior management teams. The board of directors could even play an active role

in suggesting candidates that ensure increasing diversity in experience (Zhang, 2008). Similarly,

boards of directors could advice newly appointed CEOs – particularly if they have been recruited

from outside the firm – to retain some of the previous top management team’s members. This

would ensure adequate tenure diversity right from the start and should allow the TMT to

immediately engage in exploitative activities alongside the exploratory activities.

Limitations and Future Research


25

As most empirical studies, our research has its limitations. First, our findings are

preliminary and rely upon a first data analysis effort based on a subsample of 30 firms. We plan

to complete our data collection in the spring of 2014 and to present findings for the full sample

during the AoM Meetings in August 2014. At that point, we also plan to complement our

preliminary analyses with additional robustness checks and post-how analyses to ensure the

validity and reliability of our findings.

Second, reliance on a single industry implies that the findings cannot be simply generalized

to other industry settings. For example, industry characteristics may effect whether and to what

extent different TMT characteristics and processes matter for organizational ambidexterity

(Lavie et al., 2010). Furthermore, ambidexterity may not be equally beneficial to firms across

industries (Junni et al., 2013; Simsek et al., 2009). Future research should thus test the concept

of interrelated CEO and TMT changes in a broader set of industries.

Third, future research might also examine how CEOs, TMTs, and boards of directors can

implement and sustain organizational ambidexterity through the strategic timing of CEO and

TMT changes. While we introduced the concept of “staying agile in the saddle” and provided

evidence of its importance, our discussion of potential solutions to implement it within

organizations is limited. It remains to be explored how senior managers and directors may

accomplish it. We provided first ideas and pointed towards potentially promising avenues for

future research.

CONCLUSION


26

Prior research on the TMT-ambidexterity relationship has primarily described how the

current state of the TMT affects ambidexterity, but did not capture how changes to the TMT alter

ambidexterity over time. This study explores how TMT changes at different stages of CEO

tenure contribute to or hinder ambidexterity. Our findings show that the CEO tenure-

organizational ambidexterity relationship is a dynamic one with TMT changes distinctively

affecting ambidexterity along the different stages of CEO tenure. Owing to the evidence that

ambidextrous organizations outperform others in the long run, as well as the crucial role played

by senior managers in this strategic endeavor, the analysis of how interrelated CEO and TMT

changes influence ambidexterity is particularly relevant. We hope that our findings pave the way

for future studies in this field towards a more dynamic conception of organizational

ambidexterity and its antecedents.


27

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33

TABLE 1

Descriptive Statistics and Correlations

Variable Mean SD Min Max 1 2 3 4 5 6

1 Firm ambidexterity 0.04 0.45 0.00 0.25

1

2 CEO tenure 0.00 4.56 -4.88 24.12

-0.02 1

3 TMT turnover 0.00 2.13 -1.65 14.35

-0.06 -0.11** 1

4 ROE -1.39 38.16 -974.34 6.58

0.01 0.02 0.01 1

5 TMT size 4.87 2.98 0.00 20.00

-0.01 -0.08+ 0.37*** 0.04 1

6 Firm age 95.99 61.40 5.00 187.00

0.02 -0.26*** 0.32*** -0.03 0.32*** 1

+p < .10 * p < .05 ** p < .01 *** p < .001


34

TABLE 2 CEO Tenure, TMT Turnover, and Firm Ambidexterity

Model 1 Model 2 Model 3 Model 4 CEO tenure 0.0006 0.0018* 0.0017* 0.0019**

(0.00) (0.00) (0.00) (0.00) TMT turnover -0.0001 -0.0003 -0.0002 -0.0014

(0.00) (0.00) (0.00) (0.00) CEO tenure squared -0.0001** -0.0001** -0.0000 (0.00) (0.00) (0.00) CEO tenure*TMT turnover 0.0003 -0.0001 (0.00) (0.00) CEO tenure squared*TMT turnover 0.0001+ (0.00) ROE 0.0078 0.0079 0.0080 0.0089

(0.01) (0.01) (0.01) (0.01) Firm ambidexterity 0.0281*** 0.0277*** 0.0277*** 0.0273*** (0.01) (0.01) (0.01) (0.01) TMT size -0.0011 -0.0012 -0.0012 -0.0011

(0.00) (0.00) (0.00) (0.00) Firm age -0.0000 -0.0000 -0.0001 -0.0000

(0.00) (0.00) (0.00) (0.00) Constant 0.1528*** 0.1559*** 0.1564*** 0.1528***

(0.02) (0.02) (0.02) (0.02)

N 181 181 181 181 r2 0.47 0.50 0.51 0.52 chi2 45.25*** 51.21*** 69.63*** 84.77*** Standard errors in parentheses; two-tailed for all variables. +p < .10 * p < .05 ** p < .01 *** p < .001

s agile in the s ceo t tmt c and organizational...

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