Capability creation: Heuristics as microfoundations

• Date: 01 June 2019
• Published date: 01 June 2019
• Author: Christopher B. Bingham,Timothy E. Ott,Travis Howell
• DOI: http://doi.org/10.1002/sej.1312

RESEARCH ARTICLE

Capability creation: Heuristics as

microfoundations

Christopher B. Bingham | Travis Howell | Timothy E. Ott

Kenan-Flagler Business School, The University

of North Carolina at Chapel Hill, Chapel Hill,

North Carolina

Correspondence

Christopher B. Bingham, Kenan-Flagler

Business School, The University of North

Carolina at Chapel Hill, 4600 McColl Building,

Chapel Hill, NC 27599.

Email: cbingham@unc.edu

Funding information

National Science Foundation

Research Summary:While much research suggests that capabilities

are critical for firms, little is known about the individual-level origins

(“microfoundations”) of capabilities. Using in-depth nested case

studies, we explore how firms develop an internationalization capa-

bility. The setting is six entrepreneurial firms from three culturally

distinct countries. Our data show that executives begin by seeding

the process with imperfect heuristics and then managers continue

development by elaborating their understanding of what task to

perform and how to perform it. Importantly, managers across hier-

archical levels support the development of their firm's international-

ization capability by abstracting key heuristics away from any one

experience such that the capabilities become less routine over time.

Overall, we contribute to the microfoundations movement in strat-

egy and to the literature on organizational learning.

Managerial Summary:Firm capabilities are not just important to

strategy, but often are the strategy of firms, especially in dynamic

markets. Popular examples include Cisco's acquisition capability,

Hewlett–Packard's alliance capability, Starbuck's internationaliza-

tion capability, and Apple's product development capability. Unfor-

tunately, it is often unclear to executives how to build a firm

capability. We explore how entrepreneurial firms develop their

own internationalization capability over time. Our data show that

these capabilities develop through a process of seeding, elaborat-

ing, and abstracting key heuristics for internationalization. Impor-

tantly, we show that this process is shaped by extensive

communication within and across multiple hierarchical levels. In this

way, heuristics move from individual-level “rules of thumb”for

action to firm-level understandings for fueling growth and creating

competitive advantage.

KEYWORDS

capabilities, heuristics, learning, microfoundations, strategy

formation

Received: 5 January 2016 Revised: 7 December 2018 Accepted: 20 December 2018 Published on: 7 March 2019

DOI: 10.1002/sej.1312

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2019;13:121–153. wileyonlinelibrary.com/journal/sej 121

1|INTRODUCTION

Organizational capabilities are central to firms and their performance. Scholars argue that firms possessing particular

capabilities hold a competitive advantage over firms that do not, thus improving firm performance relative to com-

petitors (Barney, 1991; Helfat & Winter, 2011). Yet, while much research highlights the essential role of capabilities,

surprisingly little empirical research examines the process of capability creation (Eggers & Kaplan, 2013; Felin, Foss, &

Ployhart, 2015). Rather, research generally examines capabilities after they have been formed and then focuses on

their path-dependent evolution over time (Helfat & Lieberman, 2002; Nelson & Winter, 1982). For example, several

empirical studies infer capability development based on performance outcomes such as productivity (Epple, Argote, &

Devadas, 1991), quality (Levin, 2000), and profitability (Haleblian & Finkelstein, 1999; Hayward, 2002) and so make

inferences regarding the development process that might have occurred. While a few theoretical articles exist

describing how capabilities might emerge (e.g., Helfat & Peteraf, 2015; Winter, 2003; Zollo & Winter, 2002), they are

generally not grounded in data and often revert back to traditional high-level learning curve assumptions such as

experience accumulation and “learning-by-doing.”

This lack of in-depth understanding of how capabilities come to exist has recently prompted scholars to issue

repeated calls for more research on the “microfoundations”of capabilities (see Table 1). By microfoundations, we

refer to the underlying individual-level and group-level actions that shape strategy and organization (Eisenhardt,

Furr, & Bingham, 2010, p. 1263). Work in this area suggests that in order to understand capabilities at the organiza-

tional level, scholars must understand the micro factors that lead to those capabilities (Felin & Foss, 2005).

To better understand the origins of organizational capabilities, some scholars study the impact of individual fac-

tors such as diversity of knowledge or individual network positions on performance (Morris, Hammond, & Snell,

2014; Paruchuri & Eisenman, 2012). However, while these studies offer valuable insight into capability creation, they

generally gloss over the intervening process of how individual factors become firm capabilities. This is because such

studies are generally theoretical or set in larger-scale empirical settings, obscuring the key granular activities associ-

ated with emergence. Yet, given how capabilities are central to competitive advantage and firm performance

(Barreto, 2010; Helfat, 1997), understanding how capabilities come to exist is essential to theory in strategic manage-

ment. Understanding capability creation is also practically relevant as some scholars suggest that organizational capa-

bilities are not just crucial to strategy, but rather may be the strategy of firms, especially in entrepreneurial settings

and dynamic markets (Bingham & Eisenhardt, 2011). Overall, understanding the origins and emergence of capabilities

is of fundamental importance to both theory and practice.

Our paper seeks to complement and extend existing microfoundations theory by exploring these unanswered

questions. Specifically, we ask what are the individual-level origins of organizational capabilities, and what is the process

by which they become a firm-level capability? In this paper we focus on how firms develop an internationalization capa-

bility. We define an internationalization capability as a firm's ability to repeatedly enter new countries based on an

understanding of where to enter and how to act. Our definition of an internationalization capability is thus in line

with broader definitions of capabilities as a firm's capacity to accomplish a key task in a reliable manner (Helfat &

Winter, 2011).

To address our questions of interest, we use a multiple-case inductive study approach. The setting is six

technology-based entrepreneurial firms with headquarters in three culturally distinct countries (i.e., Finland, United

States, and Singapore). Given the presence of extant theory but the general lack of empirical research on capability

development, we combine theory elaboration (Lee, 1999) and theory generation (Eisenhardt, 1989) in our analysis.

The major outcomes are theoretical insights regarding how firms build their own internationalization capability over

time through a process of seeding,elaborating, and abstracting key heuristics. First, our case data reveal that capabili-

ties begin from rough and often flawed initial heuristics that entrepreneurs use to seed experience. Second, these

capabilities further develop as managers add detail to their understanding of what tasks to perform as well as how to

perform them. Third, data show that abstraction, not just elaboration, is key. In other words, the development of a

122 BINGHAM ET AL.

TABLE 1 Calls for research

Topic Study Explanation of research gap

Capability development

Abell, Felin, and Foss (2008) “Thecapabilities-based view…has seen virtually no attempts to build explicit

micro-foundations. As a result, it is unclear how crucial collective or

macro-level constructs, such as routines and capabilities, impact firm-level

performance (and it is unclear how they emerge from individual action and

interaction).”

Eggers and Kaplan (2013) “Given that few studies speak directly to the assembly of capabilities, this area is

ripe for future research.”

Felin and Foss (2005) “The organizational capabilities-based literature in strategic management.. serves

as a specific example of a more general problem of lack of attention to

individuals in strategic organization…Our hope is that this essay will serve as a

clarion call of sorts for strategic organization (and more broadly organizational)

scholars to take individuals and micro-foundations more seriously …”

Felin et al. (2015) “The notion of organizational capability or competence provides an important

opportunity for future theoretical work in the domain of microfoundations. As

discussed previously, capability is generally seen as residing at the

organizational level…Comparatively less attention has been paid to the micro

factors that might constitute or dissipate (in cases of mobility) the capability of

organizations.”

Gavetti (2005) “…research on capabilities needs microfoundations that capture more fully what

we know about cognition and action within organizations”

Helfat and Peteraf (2015) “To date, the cognitive underpinnings of dynamic managerial capabilities remain

largely unexplored”

Laamanen and Wallin (2009) “…there continues to be a scarcity of empirical research on how firms make

sense and plan ex ante for capability development and why they end up

choosing the capability paths that they choose”

Salvato and Rerup (2011) “There is no clear understanding of how individual-level competencies relate to

firm level routines and capabilities…we suggest that research could advance

significantly by unbundling collective entities, such as routines and capabilities,

into their component elements”

Winter in Murmann

et al. (2003, p. 29)

“…the question of where routines and capabilities come from …deserves vastly

more attention”

Winter (2012) :

“When a specific capability first appears at a specific site, where does the

requisite knowledge come from?”

Zollo and Winter (2002) “As the field progresses in the characterization of the phenomena [capabilities],

however, the need for a better understanding of the origins of capabilities

becomes increasingly apparent.”

Heuristics

Baron (2004) “It is possible that successful entrepreneurs are more proficient than less

successful ones at formulating effective heuristics…Entrepreneurship

researchers may well wish to investigate these predictions, derived from a

cognitive perspective.”

Felin et al. (2015) “The specific opportunity vis-a`-vis microfoundations is to study how disparate

individual-level propensities, biases, and heuristics instantiate themselves in

collective, organizational, and strategic contexts…”

Maitland and Sammartino

(2015)

“Future research should study firms also embarking on their first international

investments, plus investigate how individual-specific heuristics may evolve

into firm-level heuristics through repeated decision processes”

Ott, Eisenhardt, and

Bingham (2017)

“Existing research cites the importance of ‘simple rules’heuristics as central

features of successful strategies …Major next steps include better

understanding their sources and evolution.”

BINGHAM ET AL.123