Team Design and its Implications for Competition and Disclosure

Abstract

This article examines how the composition of managerial teams influences the information and competitive landscapes in which firms operate. Specifically, the impact of teams depends on the task environment under which they operate and the extent of competition the firm faces in the product markets. Under a substitute task environment, team heterogeneity better facilitates firm learning, whereas, under a complementary task environment, team homogeneity enhances learning. However, more learning is not always optimal, as this accentuates adverse selection concerns, which leads the firm's rival to counter by becoming more aggressive in competition. This, in turn, forces the firm to cede some of its information advantage through disclosures. In effect, when designing teams to manage information, the firm must balance its learning needs with its rival's competitive threats. Consequently, in a substitute task environment, team heterogeneity is only optimal for the firm when competition is not fierce, and homogeneity is desirable otherwise. In a complementary task environment, the preference for teams as a function of competition is reversed. Additionally, any inherent heterogeneity in the level of competition in the product markets in which the firm operates diminishes the demand for team heterogeneity. The article also derives the firm's optimal team composition when the markets are characterized by Bertrand or Cournot competition, when the available managerial pool for the firm is constrained or unconstrained, when tasks are market-specific or firm-specific, and when the task environment is generalized.