Dynamic capabilities’ functioning in a private equity‐backed firm

• DOI: http://doi.org/10.1002/jsc.2177
• Date: 01 January 2018
• Author: Biagio Ciao
• Published date: 01 January 2018

RESEARCH ARTICLE

DOI: 10.1002/jsc.2177 Received 13 April 2016; Final revision received July 14 2016

Strategic Change. 2018;27(1):23–33. wileyonlinelibrary.com/journal/jsc © 2018 John Wiley & Sons, Ltd. 23

Abstract

Private equity acquision is a source of dynamic capabilies that develop resources to both

improve the target rm’s compeve advantage within the original business and create econom‐

ic growth, even though they could generate more value by promong new businesses. Private

equity‐backed rms adopt a focused strategy because dynamic capabilies work to generate

compeve advantages in the exisng businesses, feed exploitaon rather than exploraon, and

focus on original value chain acvies without integraon processes. The target rm adopts

responsible behavior because it is oriented to economic growth; thereby the worries about

private equity‐backing can be migated. Future quantave works could test the results of this

arcle on a larger sample and in industries where the economic growth is insucient to dene

responsible social behavior involving crucial social needs such as health care.

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 INTRODUCTION

Dynamic capabilies are the processes that change resources (Teece,

Pisano, & Shuen, 1997). According to the media, when an organizaon

is acquired by a private equity rm, it ceases to generate resources

for its growth (Weinberg & Vardi, 2006). Private equity rms erode

the target company’s development because dynamic capabilies

stop operang. This arcle aims to understand whether the dynamic

capabilies connue to work in a private equity seng and, if so, to

explore how they connue to operate in that parcular seng. The

results suggest that dynamic capabilies connue to expand the rm’s

resources and drive growth following acquision. In addion, this

arcle suggests that the rm’s growth could be incenvized more by

pursuing the “principles” of the resource‐based view (RBV). As growth

occurs within the original market, dynamic capabilies could use the

original resources, and they could create new ones to expand the rm

within new markets populated by new clients.

This arcle is a rst aempt to analyze the target rm’s corpo‐

rate strategies from the perspecves of the RBV (Barney, 1991; Wer‐

nerfelt, 1984) and the dynamic capability theory (Teece et al., 1997).

While it has all the intrinsic limitaons of a single‐case study, future

works could test the results of this arcle on a larger sample.

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 THEORETICAL BACKGROUND

According to the RBV, a rm is a bundle of resources. These resources

can generate a compeve advantage if they have certain charac‐

teriscs, such as being valuable, rare, inimitable, and sustainable. A

resource is valuable if it allows a rm to perform beer than its com‐

petors, making its acvies more eecve or ecient. A resource is

rare if few rms possess it. If many rms have the same resource, they

can formulate and apply similar strategies using it; when resources are

not rare, they generate a market structure within which many rms

share the same market, and no rms can obtain a signicant and larger

market share. A resource is inimitable when competors cannot rep‐

licate it for one or more reasons; for example, the resource could be

the product of a historical path that is not possible to recreate in the

present or in the future, because that path is too long or because past

condions cannot reoccur in the present or in the future. Alternavely,

the resource could be linked to compeve advantage in an ambigu‐

ous way. It might be impossible to recognize which resource is gen‐

erang a given compeve advantage; in essence, when observing a

rm, competors might not be able to nd an answer to the queson,

“With which resource does the rm generate a compeve advan‐

tage?” Alternavely, the resource could be intrinsically complex. It

could be an enty comprising several elements linked by mulple rela‐

ons and that cannot be deeply understood; in such circumstances, it

Dynamic capabilies’ funconing in a private

equity‐backed rm*

Biagio Ciao

Department of Business and Law,

University of Milan‐Bicocca, Milan, Italy

Correspondence

Biagio Ciao, Department of Business and

Law, University of Milan‐Bicocca, Via R.

Bicocca degli Arcimboldi, 8, 20126 Milan,

Italy.

Email: biagio.ciao@unimib.it

* JEL classicaon codes: M10, M20, and L10.