Diverse teams survive longer when facing changes in the business environment

As business ventures grow, they must navigate the opportunities and challenges presented by changes in the social, financial and business context that they operate in. In a new study, researchers examined the interplay of this environmental change and the internal and external conditions governing a venture’s founding.

For businesses founded in environments of rapid change, they found that assembling more functionally and cognitively (in terms of mindsets and assumptions) diverse founding teams lead to longer survival when facing increasingly uncertain environments, while functionally homogeneous teams — those with relatively few distinct roles and viewpoints — do better when environments become more predictable.

What the researchers say: “Predicting the course of environmental change is difficult, but entrepreneurs who can synchronize their predictions with their decisions about team composition perform better,” suggests the leader of the study.

Prior studies on the effect of external contextual changes on business ventures have examined the role of the impact of recent events. They have not explored how the relationship between recent change and performance outcomes depends on ventures’ past, including conditions that existed when the firm was founded.

“If contextual conditions at founding have a lasting influence on ventures’ internal processes, and recent changes determine the effectiveness of these processes, it is crucial for our theories of business environment change to account for both periods,” explains the co-author of the study.

To address this matter, the study integrated research on the persistence of founding conditions with research on the effects of social and financial change. Researchers created a dataset of more than 1,000 US entrepreneurs who founded ventures between 1960 and 2011; the ventures represented 19 industries, from agriculture to energy and utilities. Respondents’ self-reported data were verified by cross-referencing their information with lists of public and private companies.

The survey assessed the length of time ventures survived and whether ventures achieved positive “liquidity events” (e.g., underwent an initial public offering or a merger or acquisition). It also asked founders about the functional roles present on their founding teams (e.g., sales and marketing, general administration, operations, finance).

Leadership teams that are functionally and cognitively diverse have members who occupy a range of roles (marketing, sales, manufacturing, and distribution) and have a variety of life experiences and outlooks. They also seek out and exchange large amounts of information and debate a wide range of perspectives because multiple viewpoints are represented.

The interaction of high business environment dynamism and thus unpredictability at founding and a diverse founding team helped ventures survive longer when disruption increased over the lifetime of the venture, the study found. But when conditions became more stable after founding then leadership teams with less diversity of function or outlook did better.

“Our findings highlight the importance of firms developing capabilities to enable flexibility in decision-making processes, which are often inflexible, which limits firms’ ability to take advantage of unique opportunities provided by environmental change,” the researchers note.

So, what? This is an interesting study, though it is flawed for a number of reasons. Nevertheless, the main premise of it warrants further study: the idea that diverse leadership teams—of which much has been written of late—work best in times of rapid change, especially in a start-up business. However, the researchers find, when conditions are more settled, or the business is more stable, a more homogeneous team is required.

If that’s true, then much that is taught in prestige business schools about leading and creating businesses will have to be rethought.