Application to the Norwegian Research Council

Impact of Top Management Team Diversity on Firm

Performance through Innovation Management

STR451: Managerial Decision Making

Candidate No: 451007

Date: June 14, 2017

Table of Contents
1. Introduction ....................................................................................................................... 2

1.1 Background ................................................................................................................ 2

1.2 Objective of the Research .......................................................................................... 3

1.3 Research Proposal Structure ...................................................................................... 3

2. Specific Aims .................................................................................................................... 3

2.1 Specific Aim 1: TMT Diversity, Innovation Management and Firm Performance ... 3

2.2 Specific Aim 2: Moderating role of Innovation Management on TMT Diversity and
Firm Performance ............................................................................................................... 10

2.3 Alternative Hypothesis ............................................................................................ 12

3. Background and Significance of the Research ................................................................ 13

3.1 Significance of the Proposed Research .................................................................... 13

3.2 Literature Review .................................................................................................... 14

3.3 Future Study of the Proposed Research Model ....................................................... 19

4. Research Design and Methods ........................................................................................ 20

4.1 Research Approach and Strategy ............................................................................. 20

4.2 Data Collection and Measures ................................................................................. 21

5. Results and Conclusion ................................................................................................... 21

5.1 Data Analysis, Discussion and Presentation ............................................................ 21

5.2 Implication of the Results ........................................................................................ 22

5.3 Conclusions.............................................................................................................. 22

6. References ....................................................................................................................... 23

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1. Introduction
1.1 Background
There is no easy answer why some firms and organizations in the world today are
performing very well and why others are not. Top managers determine the future path of the
organization and they decide how and where the firm is going to. Top management team has
high influence on the firm overall strategy, action, and performance. There is a significant
growing body of research in the field of organizational performance and top management
team (TMT) (note: hereafter top management team will be referred as “TMT”) diversity
(Hambrick & Mason, 1984). Since the development of this model by Hambrick and Mason
(1984), there have been many studies been undertaken following the upper echelon model.
According to the authors, the core idea of this model is, “Upper Echelons Perspective”,
which means that organizational outcomes, performance, and other strategic choices are
partially influenced by the top management teams’ strategic actions and their cognitive
abilities and these abilities are predicted by their observable characteristics such as age,
functional track, and education as so on. Though there are significant bodies of study in this
field have been done, the results from the research are quite contradicting. There is no
consistency in the results, as seen from researches with significant results (Barsade, Ward,
Jean, & Sonnenfeld, 2000; Cannella, Park, & Lee, 2008; Donald C. Hambrick, Theresa
Seung Cho, & Ming-Jer Chen, 1996), to the ones with non-significant and/or negative results
such as (Michel & Hambrick, 1992; West Jr & Schwenk, 1996).

This inconsistency opens up the new era of research and thinking in this field. There could
be many reasons behind the inconsistency of the results, different researchers argue that only
TMT characteristics may not be sufficient to predict the organizational performance, there
could be some other important factors within TMT or within the firm which actually affect
the firm performance (Camelo-Ordaz, Hernández-Lara, & Valle-Cabrera, 2005). Since the
firm performance and innovation is the ongoing process, and top management team has a
great influence in the decision making, researchers are using the same upper echelon model
for the further research. But at the same time, the original model of upper echelon has no
consistent results. Therefore researchers extend the model adding some moderating factors
such as strategic consensus in the original model to fit with their requirement and focus on
some important characteristics and organizational performance (Knight et al., 1999; Murray,
1989; Smith et al., 1994) such as strategic consensus.
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1.2 Objective of the Research
The major objective of this research is to study the impact of top management team diversity
on firm performance. Till date, there are so many researches that have been done on the
similar topic. However, and most of the researchers have only developed and tested only the
direct link between the TMT diversity and firm performance. There are only a few
researches available which actually considered analyzing other moderator variables and their
impact on firm performance. Thus, the aim of this study is to analyze the TMT diversity and
firm performance directly as well as through innovation management as moderator and
compare the results. And the assumption behind this research is that additional moderating
variables will increase the explanatory power of the dependent variable which is firm
performance. Thus, if managers are better able to manage the innovation in the organization
well then that will lead to better performance in the firm.

1.3 Research Proposal Structure

The research proposal is organized as follows: the introductory part is the background of the
research area, objective and research idea. Section 2 outlines the specific aims for this
research and leads to develop different hypothesis for the research and investigation. Along
with the hypothesis development, section 2 includes the alternative hypothesis and extensive
literature review on the given topic. In addition to that, the relevance of this research, and
future study will be discussed in section 3. Section 4 will be about the methodology and
research design, which includes all the research design procedure in details. In the same way,
the data analysis, implication of the research and conclusion will be discussed in section 5.

2. Specific Aims

2.1 Specific Aim 1: TMT Diversity, Innovation Management

and Firm Performance
The research proposal is based on the upper echelon theory, and the purpose of this research
is to investigate the impact of TMT diversity on innovation management and firm
performance, where the innovation management construct will work as a moderator as well.
The model is based on the assumption that observable demographic characteristics of TMT

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are the main predictor of the individual’s psychological and cognitive traits. On the basis of
the same assumption of upper echelon theory, I would like to investigate the impact of some
important TMT characteristics on innovation management and how it will moderate the
output of firm performance. Thus the general hypothesis 1 for this research will be the study
of impact of the TMT diversity on the firm performance. And hypothesis 2 will be the study
of impact of the TMT diversity on the innovation management.

Hypothesis 1: TMT Diversity has a positive impact on the Firm

Performance

Hypothesis 2: TMT diversity has a positive impact on Innovation

Management

Gender Diversity
There are so many researches that have been done in the TMT diversity and firm
performance, but mostly researchers have focused on the other factors than the gender.
Gender diversity is also one of the main factors for the firm performance. Though this topic
has very little attention in the literature and management, some good studies have been done
on the gender diversity in the top management team. Krishnan and Park (2005) did the study
of gender diversity and its direct impact on the firm performance and they concluded that
there is a positive relationship between the proportion of women on TMTs and
organizational performance. Ruiz-Jiménez and Fuentes-Fuentes (2016) conducted the
research on management capabilities, innovation and gender diversity in top management
team and concluded that women in the top management team acts as a moderator and have a
very high influence in the management capabilities, innovation, and product and process
development. This is one of the few and good articles on the gender diversity on TMT and
its impact on the innovation. There are some others important research on the gender
diversity in the top management and firms performance such as (Dwyer, Richard, &
Chadwick, 2003; Khaw, Liao, Tripe, & Wongchoti, 2016; Quintana-García & Benavides-
Velasco, 2016; Shore et al., 2009; Tsui, Egan, & O'Reilly, 1992).

Furthermore Reineke, Isidor, and Steinmetz (2016) analysed the relationship between the
proportion of women in the top management and firm performance using the recruitment
source, and concluded in overall there is no such impact but if the women member is from
the family or internal labour force then there is a negative impact and if there are extremely
highly skilled women from the external source then that leads to positive impact on the firm
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performance and better innovation management in the organization. All the studies listed
above have some contribution to the field.

In addition to that, Bear, Rahman, and Post (2010) studied how the board diversity and
gender composition have an impact on corporate social responsibility and firm performance
and concluded that corporate social responsibility ratings had a positive impact on reputation
and mediated the relationship between the number of women on the board and corporate
reputation. Conyon and He (2017) further investigated the relation between firm
performance and boardroom gender diversity and their result revealed that there is a positive
correlation between firm performance and board gender diversity, which is consistent with
the result of previous studies. Triana, Miller, and Trzebiatowski (2014) took the study in the
broader sense including the power of the women director along with the gender diversity and
analysed its impact on firm performance and strategic change. They analysed this context
from different perspective including different scenarios such as diversity could create
conflict in the board and it will negatively affect the firm’s ability to make strategic change
when firm performance is low, so their findings revealed that when there is not conflict in
the TMT then gender diversity and power in women director would give positive impact on
performance and strategic change. Similarly, there are few other studies that have found the
positive relationship between gender diversity and firm performance such as (Ali, Ng, &
Kulik, 2014; Garnero, Kampelmann, & Rycx, 2014). Not only in the firm performance and
strategic change, a recent study by Kassinis, Panayiotou, Dimou, and Katsifaraki (2016)
concluded that gender diversity is significant predictors of a firm's environmental
sustainability initiatives, which means gender diversity is better for sustainability issue as
well. These reasoning give the clear ground to propose the hypothesis as:

Hypothesis 1a: Gender Diversity has a positive impact on Firm Performance.

Hypothesis 2a: Gender Diversity has a positive impact on Innovation Management.

Age Diversity
Age diversity is one of the main factors in the top management team and it is the main
construct in the upper echelon theory. As Hambrick and Mason (1984) assume that average
age of the TMT member will have a great impact on the strategic choice and strategic
decision making. There are different assumptions that older managers will have less physical
and mental stamina to cope with the situation and that they are not inclined to take risky
strategy as well when needed (Child, 1974). Chown (1960) mentioned that in terms of
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innovation and adoption as well, older managers have less capability to grasp new and
innovative ideas and learn new behaviours as well.

As compared to the young managers, old managers focused more on the financial and career
security than the organizational performance (Hambrick & Mason, 1984). Vroom and Pahl
(1971) also concluded that older managers normally would like to engage in less risk-taking
strategy and decision making. This scenario is very important because an organization may
face a very difficult situation and if managers are not able to generate new ideas and are not
willing to take the risk when needed the performance of the firm will be negative. When
young people are there in the management team that will improve the firm performance
because young manager are willing to take the risk and have more ability to create new ideas
and deal with the uncertainty and problems better. De Meulenaere, Boone, and Buyl (2016)
study the impact of age diversity on labour productivity and their result also supported that
the relationship will be positive when it is heterogeneous. The result is also in the same line
with the study discussed above. Tanikawa, Kim, and Jung (2017) explore the function of age
on TMT diversity and firm performance and concludes that TMT age diversity has a positive
impact on firm performance on return on assets but not on return on equity. They argue when
there are older members than the younger member in the TMT that leads to the negative
relationship. Thus with the assumption that, the age diversity will generate the more
creativity in the organization, nurture good values and attitude (Bantel & Jackson, 1989;
Hambrick & Mason, 1984; Tihanyi, Ellstrand, Daily, & Dalton, 2000; Wiersema & Bantel,
1992; Williams & O’Reilly III, 1998) and which ultimately leads to the better innovation
management in the organization and improve the firm performance. These considerations
lead to the following hypothesis:

Hypothesis 1b: Age Diversity in TMT will have a positive impact on Firm Performance
Hypothesis 2b: Age Diversity in TMT will have a positive impact on Innovation
Management

Functional Diversity
Functional diversity refers to the special expertise on the particular field such as marketing,
finance, information technology, human resource on the TMT member. Managers with the
different functional expertise will have different attitude, knowledge, viewpoint, and
perspectives on the particular problem and solutions (Bantel & Jackson, 1989; Hambrick &
Mason, 1984). Furthermore, Bantel and Jackson (1989) mentioned that different education
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and experience plays the important role in forming cognitive and attitudinal perspective, and
which ultimately affect the way how the managers deal with the different problems
associated with the new idea generation, innovation management, strategy formulation and
implementation. To improve the organizational performance every process within the
organization should perform well. Innovation management is the heart of the organization to
improve the performance.

Functional diversity is very useful to promote the group discussion and to form the open
disagreement which helps to create more creative solutions (Donald C Hambrick, Theresa
Seung Cho, & Ming-Jer Chen, 1996; Lant, Milliken, & Batra, 1992). In the same way,
researcher argues that functional diversity could create conflict in the workplace to solve the
problem and this conflict could be the constructive one in a way to find the more creative
and innovation solution for the problem (Bantel & Jackson, 1989; Camelo-Ordaz et al.,
2005; Milliken & Martins, 1996; Pelled, 1996). Qian, Cao, and Takeuchi (2013) conducted
the research on top management team functional diversity and organizational innovation in
China considering the moderating effect of environment. Their assumption behind this
research was that in the organizational decision making for the innovation will be moderated
by the environmental factors such as competition and institutional environment. From their
research, they have concluded that both competitive uncertainty and institutional support
were found to shape top management team decision-making processes and their outcomes,
and here the outcomes represent the organizational innovation. Which is in line that the
functional diversity has an impact on innovation that leads to better performance in the
organization. Functional diversity is mostly associated with the knowledge and expert skill
of the TMT members. To analyse the relationship between the TMT support and
management control system innovation J. Lee, Elbashir, Mahama, and Sutton (2014) did the
survey research and concluded that TMT’s knowledge creation process, CIO's strategic
business and IT knowledge, TMT/CIO interactions have influenced TMT belief in MCS
innovations. Guo, Pang, and Li (2017) further emphasized that when there is functional
diversity in the TMT it will positively impact the relationship between the business model
innovation and firm performance. Thus, leads to the following hypothesis:

Hypothesis 1c: Functional Diversity in TMT will have positive impact on Firm
Performance
Hypothesis 2c: Functional Diversity in TMT will have positive impact on Innovation
Management.

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Educational Diversity
A person’s formal educational background is the important sources of assets of any
organization. The educational degree most of the time represent the person’s knowledge,
skills, and capability. Because of this, MBA program is still recognized as the best education
for the managers. Education is the base to form the cognitive preference, person’s value, and
problem solving skills, creative solutions and innovative ideas, information base and greater
capacity to analyse the data and awareness to the change and innovation (Bantel & Jackson,
1989; Camelo-Ordaz et al., 2005; Hambrick & Mason, 1984; Milliken & Martins, 1996;
Tihanyi et al., 2000). Recently C. Lee, Park, Marhold, and Kang (2017) investigated the
relationship between characteristics of the firm’s top management team (TMT) and its
research and development (R&D) activities. For the research they analysed how observable
characteristics of the TMT, such as functional experiences or educational background, and
average tenure affect the firm’s proportion of explorative R&D activities, and their analysis
revealed that the top managers’ educational background in science or engineering, as well as
their previous functional experiences with R&D, have a positive effect on the firm’s
explorative innovation activities. This represents that the educational and functional
characteristics have a high impact on the firm’s innovativeness.

Innovation management and innovation adoption could impact the firm performance.
Innovation and technology adoption is also the main factor for the organization’s success and
the adoption could be affected by the educational background of the TMT members. Ding
(2011) concluded from the research that firms with proportionally more Ph.D.-holding
entrepreneurs (higher education) on the founding team have a higher chance of adopting
open science.

Thus with the assumption that, educational diversity in the TMT team will facilitate the
creative ideas and better problem-solving skills to the managers, and leads to better
management of ideas and innovation in the organization and improve the firm performance,
it leads to the following hypothesis:

Hypothesis 1d: Educational Diversity in TMT will have a positive impact on Firm
Performance
Hypothesis 2d: Educational Diversity in TMT will have a positive impact on Innovation
Management

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Tenure Diversity
Bantel and Jackson (1989) linked age and tenure with the cognitive ability and innovation,
they argued that average age will affect the level of cognitive ability and tenure will affect
their attitudes towards innovation. Thus in the long run that will affect the change and
innovation in the organization. Thus the team heterogeneity will have a positive impact on
the organizational performance. Ancona and Caldwell (1992) mentioned that tenure diversity
in the internal group dynamics will lead to the better work performance and goal-setting and
priorities.

Similarly, researcher claim that high diversity in the TMT team tenure will bring different
kind of experience, perspective, and attitudes which encourage the manager to involve in
more innovation and change management (Boeker, 1997; Milliken & Martins, 1996; Tihanyi
et al., 2000; Wiersema & Bantel, 1992). Barkema and Shvyrkov (2007) stated that a manager
who has been a member for a long time in the top management have also more experience
and different perspective for the understanding opportunities in innovation process compared
to the fresh and new top management team member who joined recently from outside, and
the new diversity team will have more innovative impact on the firm performance. The
managers who have a long experience could be older than the new manager. To address this
gap Tanikawa and Jung (2016) conducted the research on TMT tenure diversity and firm
performance examining the moderating effect of average age and their result reveals that
TMT tenure diversity had a negative and significant main effect on return on equity but not
return on asset. Furthermore, their results also indicated that the negative relationship
between TMT tenure diversity and firm performance was attenuated by having older TMTs,
which is in the same line with initial arguments that longer tenure only could have a negative
impact on firm performance. Thus, this leads to the following hypothesis:

Hypothesis 1e: Tenure Diversity in TMT will have positive impact on Firm
Performance
Hypothesis 2e: Tenure Diversity in TMT will have positive impact on Innovation
Management

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2.2 Specific Aim 2: Moderating role of Innovation
Management on TMT Diversity and Firm Performance
As I already presented the impact of TMT diversity on innovation management in the
specific aim 1, here I further would like to analyse the impact of Innovation management on
the firm performance. Since the innovation management comprises all the proper steps of
managing new ideas, and process within the organization as well as the formation of
organization and change according to the new requirement to explore and exploit
opportunities. So many researches have been done on the innovation, but there is only few
research that actually addresses the field of management innovation, such as (Cozzarin, Kim,
& Koo, 2017; Hamel, 2006; Mol & Birkinshaw, 2009; Volberda, Van Den Bosch, & Heij,
2013). Organizational innovation will help to adopt the technological innovation that leads to
the firm performance. To analyze the similar relationship Camisón and Villar-López (2014)
conducted a survey research on Spanish industrial firms and concluded that organizational
innovation support the development of technological innovation capabilities and these both
could lead to organizational performance. Which means that for the better organizational
performance organizational innovation plays an important role, which is the basis for this
hypothesis as well.

Innovation management is mostly associated with the innovation strategy. Which means that
innovation management and innovation strategy complement each other in some way. The
firms which can develop, select and afford the complex innovation strategy could have better
organizational performance and productivity as compared to those who have simple
innovation strategies (Tavassoli & Karlsson, 2016). This research also support the general
assumption to develop the hypothesis that proper innovation management will lead the better
organizational performance. Innovation management includes both technological innovation
and organizational innovation. Organizational innovation mostly supports or enhance the
technological innovation, and the combination of these two will promote the better
innovation management that leads to the better organizational performance. Technological
innovation such as product innovation has a significant impact on organizational
performance (Azar & Ciabuschi, 2017; Geldes, Felzensztein, & Palacios-Fenech, 2017).

Innovation is mostly associated with the strategy. Top management team plays the important
role to formulate the competitive and international strategy for the firm. Innovation

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management falls under the competitive strategy because it is implemented to make the firm
more innovative and competitive. Bayraktar, Hancerliogullari, Cetinguc, and Calisir (2017)
did the research to explore the relationships between competitive strategies, innovation, and
firm performance in Turkey and their results revealed that competitive strategies such as
cost-leadership and differentiation can lead to innovation, which, in turn, increase firm
performance. And they have an assumption that managers are the one who actually develops
the competitive strategy. Thus, this research also forms the base to develop the hypothesis
that top management team has an impact on innovation and innovation has an impact on firm
performance.

Talke, Salomo, and Kock (2011) analysed the top management team and their influence firm
innovativeness and performance and concluded that firm innovativeness will lead the firm
performance. Walker, Chen, and Aravind (2015) also tried to establish the link through their
study and concluded that technological innovation and management innovation (both) have a
strong impact on firm performance. But on the contrary Atalay, Anafarta, and Sarvan (2013)
found from their research that technological innovation (product and process innovation) has
a significant and positive impact on firm performance, but no evidence was found for a
significant and positive relationship between management innovation (organizational and
marketing innovation) and firm performance. Following the similar study Karabulut (2015b)
found that technological innovation and organizational (management) innovation have
positive impacts on financial performance, customer performance, internal business
processes performance and learning and growth performance. In the same way, innovation
strategy will also have a positive impact on the firm’s strategy (Karabulut, 2015a).

And here I would like to use this variables Innovation management as a moderator and
would like to analyse its moderating impact on the firm performance. Since the TMT
diversity is a compositional characteristic of the top managers that strongly and significantly
influence the cognitive and information processing capabilities of the TMT on innovation
management and firm performance. From the above literature analysis, there is a direct
relationship between the TMT diversity and firm performance, and again there is a positive
impact of innovation management on firm performance, my assumption is that TMT
diversity which has better innovation management ability will amplify firm performance
than direct impact. Thus these arguments will lead the following hypothesis:

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 Hypothesis 3: Innovation Management will moderate the relationship
between TMT Diversity and Firm Performance, such that Impact of TMT
Diversity will be higher on Firm Performance when Innovation
Management is better.

Research Model for the study:

TMT Diversity
-Gender Diversity (+) Innovation Management (+)
H2 H3 Firm
-Functional Diversity (+) -Management Innovation
Performance
-Educational Diversity (+) -Technological Innovation

-Age Diversity (+) H1

-TMT Tenure Diversity (+)

Figure 1: Hypotheses development

2.3 Alternative Hypothesis

These formulated hypotheses are not the only approach to understanding the firm
performance. Because here the main purpose of this research is to understand the impact of
TMT diversity on the firm performance directly and through innovation management. There
could be another different way to analyse the impact. First, I have only taken five
components of TMT diversity, and I would like to analyse only the diversity issue and its
impact. There could be some other factors such as average age, because average age and age
diversity are the two different factors, and measure two different things. There could be a
positive impact on the age diversity but negative with the average age. Bantel and Jackson
(1989) did a comprehensive study on the innovation in the banking sector and they have used
quite extensive factors such as average age, average education, organization size, team size
and so on. And this could be also interesting if included all the factors, but to be specific it
would be better to take one dimension only. Since this study is aimed to study the impact of
TMT diversity, thus I have included only diversity factors.

Besides that, there is a possibility to add some other approach such as analysis the resources
of the organization, and link with the upper echelon theory, but it will be also more general
than to address the specific topic. Thus to be more specific and to add some contribution in
this field, the hypotheses proposed above are the good one to go further.
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3. Background and Significance of the Research

3.1 Significance of the Proposed Research

Firm performance is the broad area and the influence of top management team is universal.
Every firm will do what the managers would decide, every strategic decision will have a
direct or indirect impact on the firm performance. Thus this is the growing research body in
this business world. Upper echelon theory by Hambrick and Mason (1984) opened the door
to explore in this field. There are so many influential studies have been done such as (Bantel
& Jackson, 1989; Certo, Lester, Dalton, & Dalton, 2006; Donald C Hambrick et al., 1996).
But most of these studies only focused on the direct impact of TMT diversity on the firm
performance. There are only a few studied conducted to study the mediating effect of some
other factors which actually have the larger impact on the firm performance such as
(Camelo-Ordaz et al., 2005; Camelo, Fernández-Alles, & Hernández, 2010). Though there
are so many research in this field, there are no consistent results. Some researcher found the
significant impact with some construct while other found the not significant impact, so there
could be many reasons behind this results. To address this thing I propose the research model
where I am going to analyse only diversity factors, not including other factors and their
impact on the firm performance.

Many researchers argued that innovation management is the key to the organizational
success (Betz, 2003; Karabulut, 2015a, 2015b). Both technological and management
(organizational) innovation have a strong impact on the firm performance. Thus in this
research, I will analyse the results from both ways, direct impact and indirect impact on the
firm performance. This research will contribute to some extent to reduce the confusion and
gap between the direct and indirect impact. Not only this, this research will open up the path
for the future research since the innovation management is a new concept and is the broad
topic to do research and explore.

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3.2 Literature Review

TMT Diversity
The upper echelons theory was developed on the basis of the behavioural theory of the firm
(Cyert & March, 1963), which suggest that manager’s choices and decision making are not
always rational because of the limitation of bounded rationality. And Hambrick and Mason
(1984) suggested that managers’ observable characteristics could be used to explain different
psychological dimensions of their personalities. They also argued that if we are interested in
understanding “why organizations do the things they do, or why they perform the way they
do” we have to study their top executives, because they are the one who decides the future
strategy and actions of the organization. And for that, we need to study the observable
characteristics of the top management team, because of the difficulties in measuring
cognitive ability of the TMT.

As Carpenter, Geletkanycz, and Sanders (2004) did a comprehensive review of the articles
between 1996 to 2003 it seems that there are a large number of studies have been done using
upper echelon theory during the 90s and 20s. Research on top management and innovations
in banking by Bantel and Jackson (1989) was quite popular research at that time, which also
includes the good review of the articles on upper echelon theory till the date of the
publication. On the research, they analysed the relationships between the composition of the
TMT and innovation adoption in the banking sector. They collected data from 199 banks and
analysed the observable characteristics of the management team such as average age,
average tenure, education level and heterogeneity with respect to age, tenure, functional
background, and concluded that mostly the educational level and functional expertise have a
high impact on innovation. Similarly, recent research by Yoon, Kim, and Song (2016) is also
the good implication of upper echelon theory. The aim of their research was to investigate
the impact of TMT characteristics on organizational creativity. Creativity is the source of
innovation, in other word, creativity feeds the innovation. The results from their study
revealed that functional diversity in the TMT have significant positive impact on
organizational creativity and TMT size has significant negative impact. The results seem
plausible, as the size of the TMT getting bigger it would be difficult to maintain consensus
and formulate the right strategy and decision making, while different functional expert would
have higher chance to become more creative in the organization.

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Khan and Vieito (2013) conducted the research on CEO gender and firm performance. They
evaluated the risk level as well and concluded that on average the gender difference matters
the firm performance, as when the firm CEO is female the risk level is smaller than the male.
And which have an impact on the firm overall performance. Nowadays gender diversity and
firms performance is also growing research areas. The study by Julizaerma and Sori (2012)
on gender diversity in the boardroom and firm performance of Malaysian Public Listed
Companies also concluded that there is a positive association between the gender diversity
and firm performance. There is a positive and significant impact on the firm performance
when female is on the board of director, and further mentioned that the performance of the
firm will be higher if there are more than two females on the board then fewer females (Levi,
Li, & Zhang, 2014; Liu, Wei, & Xie, 2014).

To explore the effect of TMT diversity on banks innovation Shuying, Shuijuan, and bobo
(2017) conducted the research in China and conclude that age, level of education and
functional experience diversity significantly affect the bank's ability to innovate in the
“stated-owned” banks but in the “non-state owned” banks only age and education have
significant impact but not functional experience. Normally the state-owned banks are quite
popular and people normally works there for a long time, and their experience could have
more impact on innovation, while in the non-state-owned banks, mostly the private kind of
banks, they could hire young and highly educated people, and though they have no long
experience they have an impact through education and age.

Top management innovativeness also produces the better firm performance. Wang and Dass
(2017) concludes from their empirical analysis that top managers' innovativeness makes
them more likely to adopt exploration orientation over-exploitation orientation in innovation,
means that makes them become more creative in new idea generation and innovation. And
which is directly linked with firm overall innovative performance and financial performance
as well. Where this innovativeness plays the mediating role of the top management diversity
and firm performance. We know that innovation is the generation of something novel and
useful, and that could be anything such as product, process or service. Ridge, Johnson, Hill,
and Bolton (2017) analysed the role of TMT attention on the product development, they
categorized the TMT composition on the basis of their functional areas such as field people,
planning people, technical people and manufacturing people and theorized that thinking of
the managers could be different according to their functional expertise and that will impact
the process of new product development. And concluded that field and planning people

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increase the product introduction to the market and technical and manufacturing decrease the
product introduction to the market. This study opens the doors to do more research
specifically on the functional diversity and innovativeness.

Bjornali, Knockaert, and Erikson (2016) recently conducted the research on the impact of
TMT characteristics and board service involvement on Team Effectiveness in the Norwegian
high tech start-ups and concludes that diversity and cohesion among TMT members directly
and positively affect TMT effectiveness, and that board service involvement mediates the
relationship between TMT diversity and TMT effectiveness. And they further states that
higher proportions of board outsiders positively moderate the relationship between board
service involvement and TMT effectiveness. This is quite interesting findings. As in this
research I would like to study the TMT diversity and firm performance, and this really
depends on the TMT effectiveness. If the TMT effectiveness is high then that would lead to
better innovation management and leads to better firm performance. Kristinsson, Candi, and
Sæmundsson (2016) also conducted the research on TMT diversity and innovation
performance analysing the moderating role of causation logic, and their results reveals that
founder team informational diversity is positively related to both idea generation and the
implementation of ideas into new products or services and the relationship will be stronger
when the moderating causation logic is stronger. This is the one of few articles which
actually uses the moderating variables, and I am also going to use Innovation management as
a moderating variables between the TMT diversity and firm performance.

The field of TMT diversity is growing, Shao, Feng, and Hu (2017) conducted the research on
impact of top management leadership style and organizational learning. This is important
research, because innovation can be both product innovation and organizational innovation,
so organizational learning is related to the organizational innovation (management
innovation) and their results revealed that influence of transformational leadership on
organizational learning was strong but mediated by the learning culture, means that
organizational culture have also impact on the organisational learning and innovation.

There are few articles which actually conducted using different moderating variables
between the TMT diversity and firm performance, such as (Talke et al., 2011; Talke,
Salomo, & Rost, 2010), which I already mentioned in the hypothesis development.

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Innovation Management
Innovation is the key for competitive advantage. Depending on the situation different form
of innovation can occur. According to the Australian government business (gov.au, 2016):
Innovation generally refers to changing processes or creating more effective
processes, products and ideas. For businesses, this could mean implementing new
ideas, creating dynamic products or improving your existing services. Innovation can
be a catalyst for the growth and success of your business, and help you to adapt and
grow in the marketplace.
In the same way, Betz (2003, p. 4) defines the innovation as “Innovation is introducing a
new or improved product, process or service into the marketplace”. Betz mostly focused on
the management of technological innovation. Innovation is the key driver for success
because innovation is not only the creation or acquisition of new ideas but it is all the process
and combination of all activities from the development of ideas to implementation in the
marketplace.

Dereli (2015) argues the importance of innovation management in the global competitive
environment. He states that in this competitive global environment the only introduction of
new product or service is not enough, to be successful that should be properly managed. He
further mentioned that “In the global competitive environment, organizational and
managerial innovations are the keys to success for companies. While technology and
research and development activities significantly influenced the organizational structure and
culture, right innovation management provides a competitive advantage”. This line of
argument could be the reasonable to think and analyze the moderate effect of innovation
management on firm performance.

Recent research argues that firm success is not only the result of technological innovation
but is also mainly dependent on the management innovation, where management innovation
is more about the organizational innovation and which consists of changing the firm
organizational form, process and practice to increase the firm technological knowledge base
and its performance in terms of innovation, productivity and competitiveness (Volberda, Van
Den Bosch, & Heij, 2013).

According to the OECD (Directorate, 2017), “An organizational innovation is the

implementation of a new organizational method in the firm business practices, workplace
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organization or external relations”. And Betz (2003, p. 3) defined technological innovation
as “Technological innovation is the invention of new technology and the development and
introduction into the market place of products, process or services based on the new
technology”.

Now researchers want to integrate the innovation and strategy with the firm performance.
This field of research is growing and there are numbers of research already available in the
innovation performance of the firm (Camelo-Ordaz et al., 2005; Camelo et al., 2010; Talke
et al., 2010) and all are based on the upper echelon theory and most of this research are based
on the technological innovation and discuss the firm performance through mediating effect
as well. Kocak, Carsrud, and Oflazoglu (2017) conducted a recent and quite comprehensive
research analyzing all the concepts of entrepreneurial orientation, radical innovation, market
and technological orientation. The purpose of their research was to examine the effects of
market, technology, and entrepreneurial orientations (EOs) on both innovation and firm
performance mediating the effect of incremental and radical innovation and results reveals
that Entrepreneurial orientation impact on the performance directly and indirectly via both
incremental and radical innovation. Similarly to continue the research with the moderator
factors, the recent research by Hambrick , Humphrey, and Gupta (2015) analyzed the
structural interdependence as a key moderator of TMT heterogeneity and firms performance
and finally concluded that there is a positive association with this. Donald C. Hambrick
himself involved in this research, and they used the moderator, the reason could be that there
is no any consistency with the results of the upper echelon theory, and they used the
moderator to remove this ambiguity and confusion. This is in the same line with my
proposed research, and it would give some consistent and good results.
There is one interesting research by Eesley, Hsu, and Roberts (2014) who analyzed the effect
of top management team with aligning with the founding member with innovation strategy
and commercialization. It is reasonable to analyze this kind of relationship because in most
of the firms the decision of the top management team could be biased because of the impact
of founding members. In the same way, they conclude that firm/venture should not ignore
the founding team composition in the strategic environment because there is a positive
impact on the founding team diversity and firm competitive commercialization environment.

Innovation and technology creation will have a positive impact on the firm performance.
Huang, Wu, Lu, and Lin (2016) did a study on the effect of innovation and technology
18 | P a g e
creation on firm performance and found that technology creation, innovation, quality
management, and information management capabilities have a positive impact on the firm
performance. Which is also the indication that there is a positive relationship between the
innovation management and firm performance.

Innovation management is related to the all level and employee of the firms. In an
organization level, top management makes the strategic decision but it is the role of middle
and lower manager to implement the actions and strategy. Østergaard, Timmermans, and
Kristinsson (2011) analyzed the employee diversity on innovation. They argue that
“Innovation is an interactive process that often involves communication and interaction
among employees in a firm and draws on their different qualities from all levels of the
organization”. And from their research, they conclude that there is a positive relation
between diversity in education and gender on innovation and a negative effect of age
diversity and no significant effect of ethnicity on the firm innovation. In a similar way,
management information system (MIS) is also the part of organizational innovation.
Implementing the better information system will provide the managers wide range of
information in the different format which is really valuable for the strategic decision making.
Naranjo-Gil (2009) concluded that the effect of MIS on strategic performance (focused on
flexibility) is moderated by top management team diversity composition.

Thus from the above literature review, we can conclude that research shows that there is a
relationship between the TMT diversity and firm performance, TMT diversity and
Innovation management and firm performance, but there is no such research which exactly
analyzes the moderating effect of innovation management on TMT diversity and firm
performance. So this is the gap that I would like to address with this research. As in the
review, we saw that now Donald C. Hambrick, himself added the moderator and analyzed
the data, and therefore this research will contribute some degree of knowledge in this field
and future research.

3.3 Future Study of the Proposed Research Model

This research proposal is based on the upper echelon theory and would aim to explore the
impact of TMT diversity on firm performance. Since I intend to investigate the moderating
effect of innovation management, the research could be extended adding more control and
19 | P a g e
independent variables. Besides, that including other attentional variables would be more
beneficial such as conflict on the top management team and how that will impact on the firm
performance and internal environment. The power distribution in the TMT could also be the
way to explore further.

Not only this, it would be great research to analyze the interaction of three models upper
echelon, attention-based view and resource-based view to analyses the firm performance
extensively. Because upper echelon theory measured only observable variables and it may
not give the exact result of firm performance. There could be other more important factors
which actually impact on the firm performance. Thus attention-based view can fill the gap
covering the attitudinal feature as well and the resource-based view will cover the
organizational characteristics. Thus this research opens the door for future research.

4. Research Design and Methods

4.1 Research Approach and Strategy

Research is defined as a “step by step process that involves the collecting, recording,
analyzing and interpreting of information” (Wilson, 2014, p. 6). Finding best research
method and approach is important for any research. Zikmund, Babin, Carr, and Griffin
(2012) discuss different types of research strategy on the basis of research purpose such as
exploratory research for the ambiguous situation, descriptive research for the description
purpose to describe characteristics of objects, people, groups, organizations, or
environments, and explanatory to find the causal relationship between the variables. Thus for
this purpose, descriptive research is mostly suitable because descriptive research is mostly
useful to explain the particular group of people or population.

In the same way, quantitative and qualitative methods are widely used methods in the business
research. Where quantitative is more numerical and associated with the statistical analysis, and
qualitative is more logical reasoning and interpretation. Since this in this research I am going to
analyze the observable characteristics of the TMT thus quantitative methods would be best
suited.

20 | P a g e
4.2 Data Collection and Measures
Survey research strategy is most popular in business research. Saunders, Lewis, and
Thornhill (2012) state that survey research allows the researcher to collect the data from
large sample group which can be analyzed using the quantitative techniques. In the same
way, to gather the qualitative data the popular methods are the interview and observation
method, interview is fundamentally organized in either ways such as structured, semi-
structured and unstructured. For this research, I am going to use mix method to collect the
data as well as to analyse the data. The survey questionnaire mostly suitable to capture the
observable data of TMT diversity, innovation management, and firm performance. And the
interview method will be effective to gather the other insights and feelings from the
management, their perceptions towards the innovation management and firm performance.
And at the same time the observation method could be used to check how actually their
saying and doing differ. For the questionnaire I would like to take the sample question from
the previous research. Because these questionnaires are already validated and tested so that
will capture the real data and will give the proper estimates. For the interview it would be
good to conduct the semi-structured interview, so that it would be nice to flow the
conversation with the open-ended questions and real time discussion.

5. Results and Conclusion

5.1 Data Analysis, Discussion and Presentation

Data analysis is the key point of every research. Since this research is quantitative in nature,
I will use the statistical software for the quantitative data analysis. Statistical software SPSS
is more suitable for the social science and business data and can generate all the necessary
figure to analyze the data, so SPSS software will be the primary statistical tool for data
analysis. To find the relation between the data I would like to analyze the correlation
analysis, and for the prediction and estimation, I would like to use regression analysis.
Regression analysis is the best statistical tools to find the impact of one variable on another,
so for this research, this is the best tools to analyze quantitative data. There are different
software available for the qualitative data analysis as well, but the fundamental data analysis
of qualitative data would be coding, conceptualization and category development and pattern
analysis.

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5.2 Implication of the Results
This research already opens the new insights to analyze the firm performance using the
upper echelon theory. This research would be useful for the researcher to see the upper
echelon model in different dimensions and will motivate the new researcher to do research in
this field using not only upper echelon model but adding another research model and
moderating factor. In the same way, this research will be beneficial for the top managers to
analyze and adjust their strategy accordingly.

5.3 Conclusions
The main purpose of this study is to analyze the how TMT diversity affects the innovation
management and firm performance. It will compare the research from two analysis, one
direct impact of TMT diversity and firm performance and another indirect impact through
innovation management, and the impact of innovation management to the firm performance
as well. Survey methods will be used for the data collection and quantitative analysis will be
used for the data analysis. Since this is one of the few researches to conduct and compare
both direct and indirect impact of TMT diversity on firm performance, it will open the new
insight for the future research.

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