Managerial ability and strategic orientation

I examine the relation between managerial ability and the strategic orientation of the firm. The strategic orientation of the firm is characterized in terms of the firm’s investment in exploration and exploitation activities. Managerial ability is characterized in terms of strategic ability and operational ability. I find the strategic ability positively influences exploration and exploitation activities, while the operational ability positively influences exploitation activities but negatively influences exploration activities unless the managers are provided high risk incentive. My results suggest that managerial ability influences the firm’s choice of strategic orientation. Further, the bi-directional relationship I find suggests that the strategic orientation of the firm influences the managerial ability. My results are consistent with the emerging behavioral theory of the firm in that high strategic ability managers can sense, seize, and shape innovative opportunities. My results are consistent with the resource-based view in that there is a bi-directional positive relation between operational ability and exploitation activities. The growth opportunities and managerial risk incentive drive the tradeoff between the managerial ability and the strategic orientation.