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Kathleen Sutcliffe
  Kathleen Sutcliffe

Divergence of Informant and Archival Measures

3/30/2006 --

Perceptual biases of company managers can affect their assessments of the firm environment.

ANN ARBOR, Mich.—The perceptual biases of company managers may contribute to differences between their own assessments and more objective archival measures of their firm's environment—which can complicate decision-making and forecasting, says a University of Michigan business professor.

"Managers should realize when they make an assessment of the firm environment that they are in effect assessing two aspects: the actual environment facing the firm and their perceptions about it," said Kathleen Sutcliffe, professor of management and organizations at Michigan's Ross School of Business. "Although there are some real differences between managers' assessments and more objective (scientific) measures of the industry environment, the possibility of perceptual bias cannot be ruled out."

Sutcliffe and colleagues D. Harold Doty, dean of the University of Southern Mississippi's business school, and Kathleen Wheatley, assistant professor at the University of Tennessee at Chattanooga, use data collected for three different research projects to examine the causes of divergence between informant and archival measures of the environment.

The data include 137 questionnaires completed by upper-level managers at 41 financial institutions in Arkansas; Compustat II archival measures and questionnaires completed by 364 top managers from 64 firms in 34 industries; and interviews and questionnaires completed by 91 top managers in five industries over a two-year period.

The researchers, whose work appears in last month's issue of the Journal of Business Research, demonstrate a distinction between "environmental uncertainty" and "environmental variation."

Environmental uncertainty, they say, refers to an internal mental state of the manager (i.e., informant) and can be assessed only by using informant measures. In contrast, environmental variation, which refers to changes external to the organization, occurs independently of the manager's ability to notice, understand or interpret. Changes in external components, such as sales, technology, customer preferences and governmental regulations, are often assessed using archival measures. However, external changes also can be assessed by asking managers questions about them.

Sutcliffe and colleagues further distinguish between two types of variables that affect managerial reports of environmental uncertainty and variation. These include organizational-level mediating filters, influenced by firm structure and strategy, and individual-level filters, shaped by individual thought processes, work experiences and social expectations.

In practical terms, their findings suggest that managers are well-advised to use variation measures, such as the rate of change in sales, technology, etc., to assess the actual firm environment, and to utilize uncertainty measures, such as "we do not know what type of changes in the environment we will have to deal with," to assess the reaction of individuals.

"Moreover, managers need to be aware of other factors that may influence their scanning and forecasting abilities," Sutcliffe said. "Although the strategy and structure of the firm (organizational-level filters) affect managers' reports of environmental variation, individual-level variables influence their uncertainty judgments."

Written by Claudia Capos

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847