CEO LOCUS OF CONTROL AND GAME PERFORMANCE AND PLAYING BEHAVIOR Developments In Business Simulation & Experiential Exercises, Volume 23, 1996 CEO LOCUS OF CONTROL AND GAME PERFORMANCE AND PLAYING BEHAVIOR Joseph Wolfe, University of Tulsa ABSTRACT The effects of a business game player’s locus of control on company performance, risk-taking behavior, information-seeking activity and product innovation effort was examined. Those with an internal orientation out-performed those with an external orientation. The ‘internals” mounted consistently higher product innovation efforts as hypothesized. The hypothesis regarding risk- taking behavior was not supported while the hypotheses regarding differential information- seeking activity were untestable due to a general lack of information acquisition. Locus of control and grade-point-average were relatively strong predictors of company economic performance. INTRODUCTION Since the beginning of the modern business gaming movement in the late-1950s a number of research streams have flourished. One stream embraces demonstrations of simulations that have been produced or the teaching, training and management development environments that have been created by simulations. Another stream has dealt with the gaming process’ internal and/or external validity. This validity is usually either affirmed or denied by such measures as participant behavioral or attitudinal changes or increased learning levels. Another stream has dealt with business gaming procedures while another stream has dealt with those elements which make the gaming situation an optimal learning environment. This latter stream typically deals with the game’s external and internal structure with the tacit belief the simulation must possess a requisite level of validity if it is to be a meaningful experience given the (1) receptiveness, talents and motivations of the game’s players and (2) game administrator’s skills. The research study reported here deals with this last research stream. It deals with how a significant personality trait, a player’s locus of control, may dictate (1) how the simulation’s playing environment is negotiated by the player and (2) the success that player will obtain in the gaming situation. If a playing environment created by a simulation has validity it must allow for, and reward and punish, those personality traits and qualities rewarded and punished in the real-world environment the simulation has copied or replicated. Given this validity its user can be confident the simulation’s lessons are transferable to the real world and that real-world management trainees or practicing managers can benefit from playing the business game. LITERATURE REVIEW Much research has been conducted on the personality traits and characteristics of successful versus unsuccessful real-world managers and executives. Psychological tests have been conducted or summarized, such as those by Henry (1948), Rosen (1959), Piotrowski and Rock (1963), Ghiselli (1966), Berlew and Hall (1966) and Kraut 81 Developments In Business Simulation & Experiential Exercises, Volume 23, 1996 (1969), on real-world managers to either determine or predict which individuals are or will be more successful in higher management positions. This has also been the case in the business gaming field. Studies have been conducted by Haley and Stumpf (1989) on personality types and strategic decision- making biases, Wolfe and Chacko (1980) on cognitive structure, ambiguity tolerance and category width, Badgett, Brenenstuhl and Marshall (1978) on locus of control and interpersonal trust, Hoffmeister and De Marco (1977) on order, autonomy, endurance, time competence and locus of control and Davis (1982) on cognitive styles. More recently a flurry of activity has revolved around insights into the gaming process brought about by applying the Myers-Briggs Type Indicator Myers and McCaulley (1985). The work of Chanin and Schneer (1984), Patz (1992), Anderson and Lawton (1993), Gosenpud and Wash-bush (1992) and Michael, Johnson, Fleming and Lynch (1991) typifies these activities. Faria (1987) found the majority of North America’s business games are used in business policy or strategic management-type management development and education situations. Accordingly, research into the personality characteristics associated real-world strategic managers as expressed in management games would be useful. Research of this nature would also be useful to the field of strategic management as it has been recommended by some that management games can be employed as laboratories for the study of the strategic management process (Nees, 1983; Schwenk, 1982). One relevant personality trait that has recently received emphasis is the locus of control (LOC) possessed by a firm’s strategic manager or chief executive officer (CEO). Locus of Control is a fundamental personality trait reflected in a generalized belief in either an internal or external control of actions taken by the individual (Rotter, 1966). Those with an external locus of control, labeled “Externals”, believe their lives are largely controlled by forces outside of themselves such as luck, powerful people or institutions. Those with an internal LOC, labeled “Internals”, believe they can influence their environments and can control their lives through effort and expertise. Given these two possible orientations, researchers have investigated this personality trait as applied to the CEOs of large organizations. Because top managers have a strong impact on their organizations, their personalities should influence the types of strategies chosen, the product/domains entered or retained, and the degree of risk-taking innovations attempted and implemented. “Internals” are more task oriented and functioned better in stress situations, certainly the nature of a CEO’s job situation (Anderson, 1977; Anderson, Hellriegel and Slocum, 1977; Lesage and Rice, 1979). “Internals” are also more likely to possess the entrepreneurial qualities necessary for product and service innovation (Brockhaus, 1975; Durand and Shea, 1974; Miller, 1983; Shapero, 1975). Miller, Kets De Vries and Toulouse (1982) found that “Internals’ led companies that were more innovative, took greater risks, were proactive with the changes they faced in 82 Developments In Business Simulation & Experiential Exercises, Volume 23, 1996 competitive environments, and used more planning in their attempts to take advantages of industry-wide changes. Operating at the organizational level firms led by "Internals” also performed better than those led by “Externals” (Boone and De Brabander, 1992; Boone and De Brabander, 1993; Hodgkinson, 1992). In obtaining this superior performance the “Internals” engaged in more environmental scanning in both the amount of information sought and the frequency at which it was obtained (Dutton, Walton and Abrahamson, 1989). They scanned the environment in an opportunistic fashion rather than for defensive purposes (Begley and Boyd, 1987) and they were more innovative (Khan and Manopichetwattana, 1989). Given these real-world results and associations, a valid gaming experience should produce the same results if the LOCs of each company in the simulation were controlled. The following section presents the hypotheses to test the role of a player’s LOC on firm performance and decision- making behavior. HYPOTHESES Based on the literature cited, the following hypotheses were formulated: H1 Companies led by Internals will outperform companies led by ‘Externals’. H2: Companies led by Internals will seek greater amounts of information about their firm’s competitive environment than companies led by Externals. H3: Companies led by Internals will seek information about their firm’s competitive environment more often than companies led by Externals. H4: Companies led by Internals will engage in greater levels of risk taking behavior than companies led by Externals. H5: Companies led by Internals will engage in risk-taking behavior earlier in their leadership tenures than companies led by Externals. H6: Companies led by Internals will engage in greater levels of product innovation activity than companies led by Externals. METHODOLOGY The study’s subjects (n=68) were graduating seniors enrolled in capstone strategic management courses conducted in Spring-Fall 1994 and they displayed the demographic characteristics presented in Exhibit 1. These characteristics were typical for the southwestern institution at which the study was conducted. Participants were randomly assigned to single-member firms in one of four, 8-9 firm industries in The Executive Game (Henshaw and Jackson, 1990), a moderately complex game under the complexity scale of Wolfe (1978b). The simulation requires firms to make both strategic and tactical price, sales promotion, production, capacity expansion, research and development, raw material, maintenance and dividend decisions on a quarterly basis. Single-member teams were employed to eliminate group process effects on decision making practices and to make most direct the relationship between an individual player’s locus of control, 83 Developments In Business Simulation & Experiential Exercises, Volume 23, 1996 the decisions made and the results obtained in the game. Each firm’s ranked cumulative earnings over nine playing periods for 20.0% course credit was employed as the indicator of company success. Although other indicators of a firm’s economic performance could have been employed, company earnings or profits are the most commonly employed criterion employed in studies of this type. Ranked earnings were employed as (1) this method allowed merging the results of separately- operating industries regardless of the absolute performance levels obtained in each industry and (2) the student’s simulation grade was based on comparative within-industry performance. Accordingly, all statistical tests in this study were nonparametric. Each subject’s locus of control (LOC) was determined by administering a game-specific version of Hodgkinson’s (1992) strategic locus of control scale. Although similar studies of chief executive officer locus of control have employed Rotter’s (1966) I-E scale, the instrument suffers from a lack of context specificity (Phares, 1976; Adler and Weiss, 1988) and possesses a social desirability bias (Spector, 1988). The Hodgkinson scale remedies these problems and possesses good reliabilities with Cronbach coefficient alphas ranging between 0.70 and 0.88. The LOC instrument was administered at the simulation’s midpoint after the players had gained considerable experience with the game’s competitive environment. The instrument’s game- specificity was obtained by replacing Hodgkinson’s general terms with those relating to The Executive Game itself such as in the following manner: There is very little my company in THE EXECUTIVE GAME can do in order to change the “rules of competition’ in its industry. My company in THE EXECUTIVE GAME is able to influence the basis upon which it competes with other firms in its industry. Market opportunities in my industry in THE EXECUTIVE GAME are largely predetermined by factors beyond my company’s control. The amount and frequency of competitive environment information-seeking by player, was tested by allowing each company to purchase up to sixteen bits of information per playing period. The information possessed point estimate errors ranging from plus or minus 10.0%-15.0% and could be requested on an industry-wide basis or by specific competitors within the industry. Companies were charged $2,000 for each bit of information, which included such items as a competitor’s plant capacity, marketing budgets and total-industry and company R&D budgets. Each company’s degree and order of risk-taking behavior was judged by plant and equipment expansion levels in the face of ambiguous sales- forecasting situations with unknown rewards yet specific excess capacity costs. Each company’s product innovation activity was measured by its R&D budget levels, which in this simulation are “aimed mainly their at improving and differentiating the firm’s product’ (Henshaw and 84 Developments In Business Simulation & Experiential Exercises, Volume 23, 1996 Jackson, 1990, P. 18) EXHIBIT 1 STUDY GROUP DEMOGRAPHIC CHARACTERISTICS Age: 25.0 Work Experience: 4.86 years Grade-point-average: 2.97 Major: Accounting Economics Finance Management Marketing Mgt. Info. Sys. 44.8% 4.5 14.9 11.9 11.9 11.9 Total 100.0% Sex: Male Female 55.2% 44.8 Total 100.0% Marital Status: Single Married Widowed Divorced Engaged Separated 68.7% 6.4 1.5 4.5 7.5 1.5 Total 100.0% RESULTS The first hypothesis tested whether companies led by Internals outperformed those led by Externals. As shown in Exhibit 2 the Internals significantly outperformed the Externals p=0.31. The Spearman rank-difference correlation between LOC score and company performance was 0.38 significant beyond the .05 level in a one-tail test. The next two hypotheses tested for differential information- seeking activity by LOC score. These hypotheses could not be tested, as only four of the sixty-eight companies ever requested information, and only 18 information bits out of a total possible 9,792 bits were requested during the game. Those who requested information asked for an average of 3.8 bits on five separate occasions and almost all requests were made within the simulation’s first three playing periods. EXHIBIT 2 COMPANY EARNINGS BY LOC GROUP (Median Earning In Millions) Locus of Control Earnings Internals Externals $ 3,280.3 - 464.4 Significance = 0.031 Spearman rho = 0.380 Exhibit 3 graphs each LOC group’s plant and equipment expenditures. Contrary to what was hypothesized, the Externals outspent the Internals early in the simulation. Although the Internals outspent the Externals later in the game the initial expenditure lead built up by the Externals was not overcome by the Internals. The first-year average quarterly plant and equipment investment for the Internals was $375,843 versus $392,234 for the Externals, significant beyond the .001 level. The Internals outspent their counterparts in five of game’s nine quarters later in the simulation, but overall the Internals spent $9,835,870 less than the Externals significant beyond the .001 level. Given the Externals outspent their rivals early in the simulation, when it was most difficult to predict both demand and the benefits that could be derived from plant expansions, it could be concluded they engaged in greater risk-taking be- 85 Developments in Business Simulation & Experiential Exercises, Volume 23, 1996 havior. The Internals did much of their expanding when demand was more easily forecasted and therefore their expansions entailed a lower degree of risk. The fact that the Internals made these expansions later in the simulation also indicates they were followers rather than leaders in this effort thus rejecting hypothesis H5. Exhibit 4 shows the last hypothesis regarding product innovation activity was supported beyond the .001 level for both total and average quarterly spending. An additional test investigated whether a relationship existed between a player’s GPA and LOC score to test whether it was the CEO’s GPA rather than LOC score that was associated with the firm’s economic performance. A zero correlation was found. This lack of association indicates the player’s combined locus of control score and GPA afforded a more powerful explanation of company performance than when these personal attributes were considered in isolation. DISCUSSION Although this study’s major hypothesis regarding the expected performance levels exhibited by the Internals was supported, the contrary and equivocal results associated with four of the remaining five hypotheses requires a further examination. Regarding the general lack of information seeking behavior regardless of LOC score, it is possible the companies felt that both the simulation’s quarterly and year-end industry- wide information, which was provided gratis, was adequate for their planning purposes. It is also possible the companies either thought the information obtained for $2,000 per bit was either too inaccurate or presented data that was not relevant to the decision maker’s needs. Moreover, given the information costs were a strict known, but the information’s benefits could not be quantified, the rigidly rational choice would be to forego purchasing information. Another explanation for the lack of information-seeking activity could lie 86 Developments in Business Simulation & Experiential Exercises, Volume 23, 1996 in the complexity of the game it-self. Given The Executive Game is of intermediate complexity, with only one product being sold in one market, it is possible that relatively little competitor and product-performance information is needed or desired by players. Players engaged in such simulations as, The Multinational Management Game (Keys, Edge and Wells, 1994), The Business Management Laboratory (Jensen, 1992) or The Business Policy Game (Cotter and Fritzsche, 1995), which entail multiple products sold in multiple markets, might avail themselves of the opportunity to purchase additional information. Further research into this area with more complex simulations is warranted. Because studies have found moderate to high and positive correlations between academic achievement and game results in single-member company situations (Vance and Gray, 1967; Gray, 1972; Wolfe, 1978a) the relationship between LOC scores and GPAs was examined. It is possible the Internals performed better because they possessed higher GPAs and therefore were better prepared for the simulation. Exhibit 5 shows this was true. A fairly strong relationship existed between the player’s past academic achievement level and game performance. This relationship, moreover, is even stronger than that which existed between the player’s LOC score and game performance. A regression analysis was performed to determine if a relationship existed between a player’s GPA and LOC score as this would test whether it was the CEO’s GPA rather than LOC score that was associated with the firm’s economic performance. A zero correlation was found. This lack of association indicates the player’s combined locus of control score and GPA affords a more powerful explanation of company performance than when these personal attributes are considered in isolation. EXHIBIT 5 COMPANY EARNINGS BY GPA (Median Earnings In Millions) GPA Earnings High Low $ 2,625.3 - 332.4 Significance = .002 Spearman rho = .470 CONCLUSION As generally hypothesized, a player’s strategic locus of control in a general management game was associated with company economic performance. Those who were Internals outperformed those who were Externals and the Internals engaged in higher levels of product innovation activity as hypothesized. It is suggested that further study into this lack of information- seeking activity be conducted with more complex games and/or with simulations that offer less “free’ information. This study also reaffirmed the positive relationship that exists between a player’s past academic achievement levels and game success. REFERENCES Due to space limitations the references to this paper will be supplied upon request. 87 Table of Contents Volume 23, 1996 Modeling Advertising Effectiveness Simulation as an Aid to Learning: How Does Participation Influence the Process? Administering Business Simulations in Transitioning Economies: The Introduction of Simulation Gaming to Estonia Business Simulation Games: Current Usage Levels. A Ten Year Update The Relationship Between Interpersonal and Task Cohesiveness and Performance in a Business Simulation Game The Design of an ITS-Based Simulation: A New Epistemology for Learning Correlates of Learning in Simulations How Do We Know where we're going if we don't know where we have been: A Review of Business Simulation Research Making Cash Flow Come Alive and Sensible in the Classroom Enhancing Simulation Learning through Objectives and Decision Support Systems An Analysis of Deliberate and Emergent Strategies Relative to Porter's Generic Differentiator and Cost Leader: A Bias and Variance Modeling Approach Introducing Ethical Dilemmas into Computer-Based Simulation Exercises to Teach Business Ethics CEO Strategic Locus of Control Effects on Game Performance and Playing Behavior The Relational Database As a Link between Operations and Cost Accounting Goal Setting over Time in Simulations Computerized Business Simulations: A Workshop Exploring the Tutor's Role, Task & Needs Strategic Analysis of the Product Portfolio with the COMPLETE PPA Package: A Strategic Market Planning Tool Draft Standards and Registration Procedure for Assessment Instruments Perspectives on a New Generation of Business Games An Economic Multiple Regression Case In Experiential Learning Changing Institutional Norms and Behavior, Not Culture: Experiential Learning Comes to Myanmar Strategic Management and the Case Method: Survey and Evaluation Individual Differences in Internet Attitude and Use Long Live the Plan - or Should It? Examining the Impact of Detailed Strategic Plans on Organizational Performance Do Your Students Really Read the Manual? A Computerized Contextual Tool As A Surrogate for the Traditional Student Manual Pilot Analyses of Self-Peer Evaluations in an Experiential-Exercise Human Resources Management Course Leader Behavior Feedback: A Learning Exercise Dilemma-Dilemma: An Exercise for Teaching Significance Of Communication Computer Mediated Conferencing: Technology and Classroom Learning Multimedia in the Workplace: Who is really using it and where is it Headed? Using Experiential Exercises for Collecting Research Data: Integrating Teaching and Research Interactive Distance Learning as a Tool in a College's Theory and Practice The President's Decision: An Experiential Exercise in Decision Making Integrating Computer Literacy Skills in the Undergraduate Curriculum: The Advanced Accounting Experiment Imperatives for the Transfer of Experience-Based Training Deciding How to Decide The Internet as a Pedagogical Tool Internet Scavenger Hunt Two Management Exercises Based on Committee Work Multimedia in the Year 2000: How Will It Affect Our Lives? Bootstrap Benefit Segmentation: Finally A Way to Teach Benefit Segmentation without Primary Data or Those Fancy Statistical Methods Multimedia and Learning: Is There A Connection? A Changing Business Policy Collaborative Learning Through Real-Life Assignments in Accounting Classes The Necessity Of Incorporating Local Cultural Aspects Into International Business Experiential Exercises Utilizing Cultural and International Landmark Constructs to Assess Business Student's International Awareness Legal Issues related to the Use of Application Blanks: An Experiential Exercise The Family in the Classroom: An Experiential Exercise for Teaching Issues Related To Expatriate Assignments Using Internet Resources to Enhance Teaching of Information Systems Courses: A Demonstration Proposal Chalkboards to Chipboards for Teachers and Consultants How Do We Measure The Learning In Experiential Learning and How Do We Best Simulate It?