Ceo Personality, Strategic Flexibility, and Firm Performance: the Case of the Indian Business Process Outsourcing Industry

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Academy of Management Journal 2010, Vol. 53, No. 5, 1050–1073.

CEO PERSONALITY, STRATEGIC FLEXIBILITY, AND FIRM PERFORMANCE: THE CASE OF THE INDIAN BUSINESS PROCESS OUTSOURCING INDUSTRY SUCHETA NADKARNI Drexel University POL HERRMANN Iowa State University We examine the relationships between CEO personality, strategic flexibility (ability to adapt quickly to environmental changes), and firm performance, using a sample of 195 small and medium-sized firms from the Indian business process outsourcing industry. We hypothesize that strategic flexibility mediates the relationships between CEO personality and firm performance. Our results extend previous research by not only highlighting the importance of CEO personality in driving strategic flexibility, but also indicating how each facet of CEO personality either enhances or inhibits strategic flexibility.

With increasingly intense competition, shrinking product cycles, accelerated technological breakthroughs, and progressively greater globalization, the business arena may best be described as being in a chronic state of flux, with continual variation in its external environment. Given such everchanging environmental conditions, a firm’s ability to change direction quickly and to reconfigure strategically is crucial to its success in achieving sustainable competitive advantage (Hitt, Keats, & DeMarie, 1998). In other words, firms need to embrace strategic flexibility (Hitt et al., 1998; Johnson, Lee, Saini, & Grohmann, 2003). Ample empirical evidence supports the contention that strategic flexibility drives firm performance (Grewal & Tansuhaj, 2001; Nadkarni & Narayanan, 2007; Worren, Moore, Cardona, 2002). It is therefore not surprising that the academic and practitioner literature in strategic management is increasingly recognizing strategic flexibility as an important research area. Nevertheless, several gaps remain in scholars’ understanding of how firms embrace strategic flexibility. One particularly prominent gap relates to the role of CEOs in fostering strategic flexibility. A great deal of the research that has examined the influence of resource, product, and alliance network structures on strategic flexibility

We would like to thank professors Deepak Datta and Mary Uhl-Bien for their helpful comments on earlier versions of this article. We especially thank Associate Editor Gerard Sanders and the three anonymous reviewers for their excellent and developmental feedback, which helped us immensely in improving the paper. 1050

(Sanchez, 1995; Worren et al., 2002; Young-Ybarra & Wiersema, 1999) has ignored the role of CEOs in developing strategic flexibility. This gap is especially notable because the strategic choice (Child, 1972) and upper echelons (Hambrick & Mason, 1984) perspectives have highlighted the importance of top managers, especially CEOs, in driving strategic changes in firms (Rajagopalan & Spreitzer, 1997). The CEO has been characterized as a firm’s chief cognizer and decision maker (Calori, Johnson, & Sarnin, 1994). Hambrick and Mason (1984) argued that firm strategies reflect the characteristics of its powerful actors, among whom the CEO is prominent. Moreover, empirical evidence has suggested that characteristics of CEOs affect strategic decision processes (Peterson, Smith, Martorana, & Owens, 2003) and strategic actions (Carpenter, Sanders, & Gregersen, 2001; Miller & Toulouse, 1986; Nadkarni & Narayanan, 2007) that have implications for firm performance. However, these studies have examined the influence of CEO personality on firm performance without paying adequate attention to the mechanisms that underlie this relationship (Peterson et al., 2003). The bounded rationality (Simon, 1991) and managerial cognition (Weick, 1995) literatures have suggested cognitive filtering mechanisms that may explain how attributes of CEOs dispose them toward specific strategic behaviors with implications for firm performance. Examining these underlying mechanisms...
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