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Influence of Founding Teams' Affiliations

The Influence of Founding Teams’ Affiliations on Company Behavior

By Christine Beckman
Assistant Professor of Organization and Management 

What type of management team impacts a new company the most?

This paper argues that the composition of a company’s founding team—in particular, the prior affiliations of team members—shapes the behavior of new companies.

Firms with founding teams whose members had worked at the same company engage in exploitation, meant in its most positive context, because they have shared understandings and can act quickly. Conversely, founding teams whose members have worked at many different companies have unique ideas and contacts that encourage exploration. In addition, firms whose founding teams have both common and diverse prior-company affiliations have advantages that allow them to grow.

The terms “exploration” and “exploitation” have been used broadly to capture a wide array of a firm’s actions and behaviors. Exploratory behaviors are those that increase variance and generate internal variety (1). Exploration involves radical innovation, creating new markets and products, frequent change and discovery (2).

Exploitive behaviors are variance-decreasing and efficiency-oriented (3). Exploitation involves incremental innovation, implementation, refinement, routinization, local search and efficiency (4).

Although there are benefits to doing both, organizations that explore may have processes, strategies, structures and capabilities quite distinct from those engaging in exploitation (5). Existing research suggests there is an important antecedent to exploration and exploitation: managers who create the right structures or develop supportive contexts (6). How do managers decide which structure or processes to adopt?

EXECUTIVE CHOICES DRIVEN BY THE PAST

Managers bring ideas with them when they move across corporate boundaries, and an executive’s career experiences shape the range of actions she or he will consider at a new firm (7).

This study examines groups of executives that comprise a new company’s founding teams and argue that their prior experiences pre-dispose firms to engage in explorative or exploitative behaviors. In a broader sense, this view suggests that team composition both informs and constrains later action by the firm.

Prior affiliations of management team members shape company exploration and exploitation behaviors. Teams with some common prior-company affiliations share a language and a vision (8) that enable them to easily implement and routinize activities. Teams with diverse prior-company affiliations have different perspectives and points of view that enable them to develop new ideas.

Thus, firms whose management-team members have shared affiliations should be more likely to pursue exploitive behaviors such as improving on existing processes and moving new products or processes quickly to market. In contrast, firms whose teams have diverse affiliations should be more likely to pursue explorative behaviors such as investigating multiple ideas and becoming technical pioneers.

MIX OF DIVERSE AND COMMON TEAMS

Overall, this study develops the concept of team affiliations as an important antecedent to corporate exploration
and exploitation. Imagine two engineers from the same company deciding they should exploit an innovation that their current employer is not exploiting. Or imagine two sales representatives from different firms comparing notes and deciding to take advantage of a market opportunity that neither firm has acknowledged. The experiences of the individuals shape the ideas that are considered, and the combination of experiences are thus embedded in the new firm that is created (9).

LANGUAGE, CULTURE AND NARRATIVES

Founding team members with prior common-company affiliations have a shared language, culture and narratives. A shared language suggests a common perspective and trustworthiness (10). A shared organizational culture provides a common frame of reference, a shared vision and set of goals, and a conceptual filter that helps generate expectations about work (11). A shared narrative suggests that people from the same company will have many of the same stories and examples of appropriate and inappropriate behaviors.

In fact, common work experiences affect the development of shared benefits and culture as well as firm performance (12). Eisenhadt and Schoonhoven, in 1990, found that founding teams with joint prior work experience had higher levels of growth than teams with less overlapping experience. They discussed the cohesion stemming from managers having worked together in the past, but this study finds that this cohesion may result from shared affiliations as well as from direct experience with one another.

Hypothesis 1: Founding teams with common prior company affiliations are likely to engage in exploitive behaviors. 

EXTERNAL SOURCES

Although common company affiliations may give a team shared understandings, firms also need access to external social capital to improve the amount of available information. External social capital refers to the actual and potential resources, outside information and new ideas obtained through external ties (13). Although common prior affiliations build internal communication, diverse prior affiliations provide new insights and knowledge that allow firms to pursue explorative, innovative behavior. External social capital increases the heterogeneity of available information, encourages deeper deliberations and discussions about the reasons for variety, and can result in debate and the surfacing of new alternatives (14).

Access to information, contacts and perspectives from a diverse set of company affiliations should encourage and facilitate exploration and innovation. Explorative behaviors include efforts to win a technology race in a new niche or to gain competitive advantage by being the first to develop new, hitherto unproven, technologies. When founders come from a range of prior companies, the common knowledge they share includes broader market issues.

Hypothesis 2: Founding teams with diverse prior company affiliations are likely to engage in explorative behaviors. 

MANAGING EXPLORATION AND EXPLOITATION

Firms capable of both exploring and exploiting do better than firms rooted in either one (15). Research by He and Wong in 2004 found companies that had both strategies had higher growth rates than other firms.

Within a larger ambidextrous organization, the parallel operation of exploring and exploitation units can lead to exploration and exploitation at the organizational level. Entrepreneurial firms, however, are more likely to exist as a single business unit.

The question, then, is whether the same team can engage in both behaviors. Studies cited above suggest that engaging in both exploration and exploitation may be particularly difficult. The pattern of affiliations in a founding team may be important for understanding which firms are able to do both and, thus, this pattern may be important for understanding a company’s performance.

Diversity of poor affiliations alone will not improve performance because diversity encourages innovation but not implementation. Common prior affiliations alone will not improve performance because shared affiliations promote efficiency but not new discoveries. Teams with both common and diverse prior company affiliations will have the shared understandings to efficiently transmit knowledge and the unique perspectives to support innovation and change.

Firms whose founding teams have both common and diverse affiliations will be more likely to recruit managers with both types of affiliations and will both explore and exploit over time.

Hypothesis 3: Firms whose founding teams have both common and diverse prior company affiliations will have higher levels of performance. 

METHODS OF THIS STUDY

Data for this paper were drawn from a longitudinal study of 141 young high-technology firms in Silicon Valley, particularly those in computer hardware and software, telecommunications, medical and biological technologies, manufacturing, research and semiconductors. Sampled firms had at least ten employees and were no more than ten years old.

Trained MBA and doctoral students conducted semi-structured interviews with a member of the founding team of each firm to learn about their founding teams. Sixty-four percent of the firms reported that their founding teams evolved before the companies were formed. The study controls for factors such as industry and whether the firm receives venture capital funding.

CONCLUSIONS

The results support the hypothesis and suggest that prior company affiliations of a founding team predict whether a firm pursues exploratory and exploitive behavior. Firms whose founding teams have both types of affiliations are more likely to grow over time.

This article indicates that teams are more constrained by history than current work suggests and that differences in firm exploration and exploitation are built in when the team is formed. Thus, ambidextrous firms may be those whose teams have significant common and diverse experiences when they were formed.

These results confirm that initial starting positions shape the potential for change and growth (16). The link between firm growth and founding team affiliation is consistent with the path of dependencies of learning. Furthermore, research indicating that the founding teams are generally formed for reasons of convenience (17) suggest a founding team’s ability to support innovation and incremental learning may be an accident of founding.

These findings also contribute to network theory in important ways. In addition to shared norms developing through close relationships, shared values and understandings develop through identification and experience with a common former organization, even if employees did not work for the organization at the same time.

This research suggests that managers pay more attention, during the company’s founding, to creating a team with both common and unique priorcompany affiliations. This is not to say that, without such initial team planning, history dictates a firm’s outcomes. This research suggests that rather than focusing solely on functional experience, race, or gender, managers should consider more subtle experiences that shape perceptions and alters team dynamics: prior company affiliations.

By examining the antecedents of explorative and exploitative behavior in organizations, this article develops links between the team and the firm’s levels of analysis. Team-level priorcompany affiliations, and experiences more generally, influence company-wide choices and behaviors. Firms that have founding teams whose members have both diverse and common affiliations are more likely to grow over time. This suggests that team composition is an important part of a company’s ambidexterity.

Footnotes:
(1) McGrath, 2001; Tushman and Smith, 2002.
(2) Katila & Ahuja, 2002; Miner, Bassoff & Moorman, 2001 Rosenkopf
and Nerkar, 2001.
(3) March, 1991.
(4) Beckman, Haunschild and Phillips, 2004; Benner & Tushman,
2003; March, 1991, March, 2001.
(5) Benner & Tushman, 2002; Katila & Ahuja, McGrath, Rosenkopf &
Almeida, 2003.
(6) Brown & Eisenhardt, 1997; Gibson & Birkenshaw, 2004; Smith &
Tushman, 2005; Tushman & O’Reilly, 1996.
(7) Baty, Evan & Rothermel, 1971; Boeker, 1997; Kraatz & Moore,
2002, Sorensen, 1999.
(8) Nahaouet & Ghoshal, 1998.
(9) Thanks to an anonymous reviewer for making this point.
(10) Tsai & Ghoshal, 1998.
(11) Nahapiet & Goshal, 1998
(12) Baron, Burton & Hannan, 1996; Chattopadhay, Glick, Miller &
George, 1999.
(13) Adler & Kwon, 2002
(14) Beckman & Haunschild, 2002
(15) Gibson & Birkinshaw, 2004; Katila & Ahuja, 2002; Tushman & O’
Reilly, 1996.
(16) Levinthal, 1997.
(17) Ruef, Aldrich & Carter, 2003.

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