Business-Economics-Management Seminar

04/03/2014 - 13:00


Dr. Ari Dothan

Faculty of Industrial Engineering & Management,

Technion, Haifa, Israel


"Capability enhancement through performance feedback learning"


What drives the development of a firm’s organizational capabilities? In addressing this question, the resource-based view has referred to organizational learning, endogeneous lifecycles of capability evolution, mechanisms of capability reconfiguration, and the microfoundations of capabilities. This study offers a behavioral perspective on capability development that integrates the theory of learning from performance feedback with the resource-based view. It proposes that capability development is driven in part by the firm’s performance gap relative to its aspirations. Whereas prior research has concentrated on only one step of this feedback loop, that is, either on the effect of performance gap on strategic behavior or on the performance implications of the firm’s organizational capabilities, this study overcomes this limitation by considering a full feedback loop, by which a negative performance gap prompts the firm’s managers to invest in developing their firm’s explorative and exploitative capabilities. In turn, these capabilities are expected to enhance the firm’s subsequent performance. Several contingencies are considered, suggesting that the impact of the performance gap on the firm’s capabilities intensifies under conditions of environmental uncertainty but is weakened when the firm faces environmental munificence. Furthermore, the contribution of the firm’s capabilities to performance is expected to intensify when the firm’s businesses are related and the firm can leverage rich internal resources.The analysis of 544 U.S. publically-traded firms in the computer and electronics industries during 1993-2001 furnishes support to performance feedback theory with respect to the firm’s exploitative capability. Nevertheless, performance improvements contribute to the firm’s explorative capability. These findings suggest that performance gaps encourage a firm to shift from exploitation to exploration and that performance feedback drives exploitation whereas exploration is driven by managers’ motivation to use slack resources. In addition, the findings reveal that whereas exploitative capability contributes to improvement in the firm’s performance in the subsequent year, explorative capability generates losses in that year yet improves performance in the following year. Furthermore, the findings show that both environmental uncertainty and munificence negatively moderate the association between performance gap and capability development. Finally, the findings reveal the interplay of the firm’s resources and capabilities, whose interaction enhances the positive performance effect of exploitative capability while diminishing the negative effect of explorative capability. Business relatedness further reinforces the benefits that the firm can derive from its organizational capabilities. Overall, this study introduces the theory of learning  from performance feedback to research on organizational capabilities and offers a fresh perspective on the drivers of capability development and subsequent performance implications.