Structure of organizational capabilities

The firm-level factors (resources) introduced in the previous section have been defined slightly differently by different authors, thus creating a troubling ambiguity of terms. Given this fact, cited research has in common that it refers to some sort of factor controlled by, or semi-permanently tied to, the firm. In addition to traditional tangible re-sources, definitions also include intangibles and organizational factors such as: collective or shared skills, knowledge and experience (Caves, 1980). Barney (1991) explicitly states that the concept of resources in-cludes such things as capabilities, organizational processes, firm attrib-utes, information and knowledge. Hence, the logic of economic value creation, sustainability and value appropriation also applies to organiza-tional capabilities. We now turn to the structure of organizaorganiza-tional ca-pabilities.

2.2.1 Prior studies on organizational capabilities

Grant (1991:119) defines organizational capability as “[…] the capacity for a team of resources to perform some task or activity.”. Organiza-tional capabilities are seen as consisting of teams of resources working together under the coordination of organizational routines.

According to Dosi et al (2000:2), “[t]o be capable of some thing is to have a generally reliable capacity to bring that thing about as a result of

intended action. Capabilities fill the gap between intention and out-come, and they fill it in such a way that the outcome bears a definite resemblance to what was intended.”. Hence, capabilities can be viewed as working towards a specific outcome that reflects organizational in-tention. A similar notion is offered by Amit & Schoemaker (1993:35) who define organizational capabilities as "[…] a firm's capacity to de-ploy Resources, usually in combination, using organizational processes, to effect a desired end. They are information-based, tangible or intan-gible processes that are firm specific and are developed over time through complex interactions among the firm's Resources.".

The notion of organizational capabilities can, in one sense, be dated back to Penrose (1959) and her emphasis on the deployment and use of bundles of productive resources rather than on the resources per se. A second important contribution to contemporary capability research has been made by evolutionary economic theory (Nelson & Winter, 1982).

Evolutionary economic theory characterizes firms in term of heteroge-neous sets of organizational routines⁸, which act as a form of storage room for the firm’s operational knowledge. Hence, in the sense that capabilities reflect a firm’s reliable or stable capacity for achieving cer-tain desired outcomes they are seen as analogous to routines. This view is, for example, reflected in Winter’s (2000:983) definition of organiza-tional capabilities as a “[…] high-level routine (or collection of rou-tines) that, together with its implementing input flows, confers upon an organization’s management a set of decision options for producing sig-nificant outputs of a particular type.”. However, as also emphasized by Winter (2000), the concept of routines is, although primitive; separate from that of organizational capabilities. According to Winter (2000), this difference lies in that capabilities are, contrary to routines, substan-tial in scale and significance, and known to management.

8Routines are, in the evolutionary economic tradition, seen as learned, tacit and repetitive action sequences performed within the firm. Nelson & Winter (1982:73) define routines, analogous to skills, as “[…] a smooth sequence of co-ordinated behaviour that is ordinarily effective relative to its objectives, given the context in which it normally occurs.”. Winter (2003:991) define routine as “[…]

behaviour that is learned, highly patterned, repetitious, or quasi-repetitious, founded in part in tacit knowledge – and the specificity of objectives.”.

Table 2.1 presents a sample of definitions, or similar statements, of ca-pabilities used in contemporary research. From the definitions used in prior studies, it is possible to extract some key properties of organiza-tional capabilities. First, capabilities rely on assets or resources for their execution. Second, capabilities involve routines, activities and organiza-tional processes. Third, capabilities work towards a desired end or a cer-tain intended outcome.

Table 2.1 Definitions of organizational capabilities in prior studies.

Publication Definition

Amit & Schoemaker (1993)

"[…] a firm's capacity to deploy Resources, usually in combination, using organizational processes, to effect a desired end. They are in-formation-based, tangible or intangible processes that are firm spe-cific and are developed over time through complex interactions among the firm's Resources." (35)

Dosi et al (2000) “[t]o be capable of some thing is to have a generally reliable capacity to bring that thing about as a result of intended action. Capabilities fill the gap between intention and outcome, and they fill it in such a way that the outcome bears a definite resemblance to what was in-tended.” (2)

Dutta et al (2005) See Amit & Schoemaker (1993) Ethiraj et al (2004) See Amit & Schoemaker (1993)

Grant (1991) A capability is “[…] the capacity for a team of resources to perform some task or activity.” (119)

Helfat & Peteraf (2003) “[…] organizational capability refers to the ability of an organization to perform a coordinated set of tasks, utilizing organizational re-sources, for the purpose of achieving a particular result.” (999) McEvily & Marcus

(2005)

(competitive capabilities)

“Competitive capabilities are the set of organizing processes and principles a firm uses to deploy its resources to achieve strategic objectives.” (1034)

Winter (2000; 2003) “An organizational capability is a high-level routine (or collection of routines) that, together with its implementing input flows, confers upon an organization’s management a set of decision options for producing significant outputs of a particular type.” (991)

2.2.2 Definitions

As shown by the literature review in section 2.2.1, definitions of organ-izational capabilities differ slightly across studies. This requires the de-velopment of a distinct set of definitions for further use in this thesis.

These are developed based on three different criteria. First, concepts should fit the aim of the thesis to develop the concept of pricing

capa-bility and explore the mechanisms connecting such a capacapa-bility with firm performance. Second, concepts should be largely consistent with the majority of prior studies on organizational capabilities. Third, con-cepts should be sufficiently operational to be used in an empirical study. By and large, and with smaller changes in terminology, the defi-nition provided by Amit & Schoemaker (1993) satisfies all three criteria (see Table 2.1). Hence, the following definitions and terminology are adopted: (1) Resources or factors denote any factor of strategic rele-vance that is controlled by, or semi-permanently tied to the firm. (2) Organizational capabilities are a distinct type of factor capable of bringing about a certain desired end. They are composite constructs built on the deployment of capability elements in activities leading to-wards the attainment of a desired end. (3) Capability elements cause variation in the degree to which the capability’s desired end is attained.

They consist of single assets/routines or discrete bundles of assets and routines.⁹

The relationship between concepts is illustrated in Figure 2.1.

(3) Capability elements

(3a) Assets

(2) Organizational capabilities (1) Resources/factors

(3b) Routines (3) Capability elements

(3a) Assets

(2) Organizational capabilities (1) Resources/factors

(3b) Routines

Figure 2.1 Hierarchical relationships between concepts.

The definitions stated above require some additional comments. Or-ganizational capabilities are, as shown in the literature review and in the definition above, defined in relation to organizational objectives or de-sired ends (Amit & Shoemaker, 1993; Gibe & Hallberg, 2005; Gibe, 2007). The desired end expresses the distinct purpose of a particular

9See Gibe (2007) for an examination of capability elements as the prime unit of analysis in the deployment of organizational capabilities and Salvato (2006:19) for an examination of the related concept of replication bases as the prime unit of analysis in the adaptation of organizational capabilities.

organizational capability. An illustrative example of how the notion of desired ends has been used in prior studies to define and delimit a cer-tain capability is provided by Dutta et al (2003:616), who define pric-ing capability in terms of systems and processes that address the issues of “[…] appropriating rents and balancing competing internal inter-ests.”.

In addition to the notion of desired ends, organizational capabilities rely on organizational processes or activities for their deployment (Amit

& Schoemaker, 1993). This reflects the simple fact that a particular en-dowment of assets and routines does not itself bring the services of these endowments to market. Hence, the design and execution of firm activities are central for the realization of the value inherent in capabil-ity elements.

A final clarifying comment involves the use of the concept of capability elements. The term capability element has been adopted from Gibe &

Hallberg (2005) and Gibe (2007), but is, as can be noted in the litera-ture review, not a well-established concept in prior research on organ-izational capabilities. The concept is however similar to how the term

“resources” is used in other studies on organizational capabilities (see for example Amit & Schoemaker, 1993). The reason why the term “ca-pability elements” is preferred to “resources” is that: (A) it allows for a conceptual separation between the analysis of stand-alone resources and the elements of organizational capabilities, (B) it emphasizes the causal relationship between the element and the desired end, thus highlighting the element’s prime purpose of bringing about a particular desired end, and (C) it allows specifying commonly accepted and distinctive proper-ties of organizational capabiliproper-ties as consisting of capital or assets tightly integrated with behavioral components (i.e. routines).