Firm capabilities: Industry, firm and individual influences

Guide(s)

Yayavaram, Sai

Department

Strategy

Area

Strategy

University

Indian Institute of Management Bangalore

Place

Bangalore

Publication Date

3-31-2025

Year Awarded

March 2025

Year Completed

March 2025

Year Registered

June 2019

Abstract

According to the Resource-Based View (RBV), firms differ in their ability to effectively combine resources, known as capabilities, for specific purposes. This variation in capabilities leads to differences in performance between firms (Leiblein, 2011; Nelson and Winter, 1973). This definition suggests that the ability of firms to carry out a wide array of tasks can be examined from the perspective of capabilities. Therefore, capabilities can be categorized into different types, such as zero-order capabilities and higher-order capabilities, depending on the level of sophistication involved in the activity being considered (Winter, 2003). Higher-order capabilities pertain to a firm’s ability in carrying out more sophisticated activities such as undertaking innovation. Zero-order capabilities, also known as operational capabilities, pertain to a firm's ability in carrying out fundamental production tasks efficiently, or their aptitude for managing costs (Jacobides & Hitt, 2005). The objective of my thesis is to examine the factors that impact the operational capabilities of a firm. Although there is a wealth of literature on capabilities, it is rare to find large-scale empirical studies due to the challenge of identifying a universally applicable measure for assessing capabilities. To address this challenge, I utilized a widely employed metric for firm efficiency borrowed from the field of economics. I utilize the firm's total factor productivity (TFP) as a surrogate for operational capabilities, leveraging upon a precedent established in prior studies (Dutta, Narasimhan & Rajiv, 2005; Jacobides & Hitt, 2005; Mahmood, Zhu & Zajac, 2011; Chen, Delmas & Lieberman, 2015). Total Factor Productivity (TFP) quantifies the efficiency with which firms can integrate various inputs to generate a single output (Syverson, 2011). In addition, there is vast literature on productivity and its measurement (Del Gatto et al., 2011). In my thesis, particularly in the first essay, I strive to establish a connection between the literature on productivity and the literature on capabilities. Each of my three thesis essays examines the impact of individual, firm and industry contingencies on firm operational capabilities. The scope of my thesis encompasses both listed and unlisted non-financial firms operating in all sectors of the Indian economy for the first and third essay and only listed firms for the second essay. I use listed and unlisted firms so that the study sample records heterogeneity in capabilities and allows us to theorize on effects arising from self-capability levels. In the first essay (Chapter 2) of my doctoral dissertation, I analyze the outcomes that arise from a firm's embeddedness in inter-industry buyer-supplier networks within an economy. In particular, I examine the phenomenon of spillover of capabilities, which is the unintentional transfer of abilities between firms in these types of networks. I further illustrate the diversity among firms in their ability to benefit from the transfer of skills and knowledge that occur within these networks. The diversity in leveraging spillover arise due to the directional nature of inter-industry networks with products flowing from upstream to downstream but only knowledge flowing from downstream to upstream. Hence, I find that capabilities spillover from upstream firms to all firms in the focal industry as it is in the direction of product flow. Additionally, variations among firms in leveraging spillovers can arise from availability of alternate spillover networks and motivation to engage in capabilities development. Hence, I find that upstream spillovers benefit standalone businesses (lack of alternate networks) and firms operating in less competitive industries (less motivation) the most. Moreover as spillover from downstream firms are knowledge flows, firm’s ability to absorb knowledge is crucial. Thus, it is evident that capability spillovers from downstream firms accrue exclusively to firms with high capabilities or those at the frontier. Ultimately, I contend that the diversity in how firms profit from spillovers contributes significantly to the observed increase in the dispersion of firm capabilities within an economy. Consequently, in my first essay, I contribute to the literature on the heterogeneity among firms in their ability to leverage spillovers (Wu et al., 2018; Tzabbar et al., 2022). The second essay (Chapter 3) of my thesis examines the role of business education, specifically an MBA degree, among CEOs in influencing operational capabilities. Contrary to popular belief, the impact of business education among CEOs on firms remains inconclusive, even though it is apparent that higher education levels among CEOs are advantageous for firms (Finkelstein et al., 2009). I concentrate on the ability of business graduate CEOs to process diverse information and their generalist abilities when developing operational capabilities. I then focus on context where the ability of business graduate CEOs is most useful. Complex industries (i.e., those with a large number of supplying-buying industries) require CEOs to think broadly. High managerial discretion industries (i.e., those with high freedom of actions and objectives afforded to managers) allows the CEOs to experiment with multiple solutions that arise from broad thinking. Hence, I find that firms with business graduate CEOs have higher operational capabilities only in complex industries as well as in industries with high managerial discretion. Additionally, industries with both managerial discretion and complexity experience the greatest impact from business graduate CEOs. I also investigate the likely pathway of these effects, focusing on the likelihood of selecting managers with innate ability for business schools, the impact of exposure to management curriculum, and top college experience. Therefore, I compare the effects of CEOs from top business colleges, CEOs from non-top business colleges and CEOs from any top college. No effect seen for CEOs from non-top business colleges disqualify exposure to management curriculum as the sole plausible explanation for the observed positive impact. As a result, my second essay contributes to the literature on the effects of management education on firms (Acemoglu et al., 2022; Kallias et al., 2023; Miller & Xu, 2019). My third essay (Chapter 4) looks at the relationship between industry complexity and firm operational capabilities. This essay is a replication and extension of Lenox et al.'s (2006) theoretical model, which proposes an inverted U-shaped relationship between interdependency and profitability. According to the Lenox et al. (2006) argument, operational capabilities mediate the relationship between interdependency and profitability, but this is not measured in the subsequent Lenox et al. (2010) empirical study. By explicitly measuring operational capabilities, I address the above gap and provide clarity on how complexity influences operational capabilities, the returns to profitability from increasing complexity, and the dispersion of capabilities with increasing complexity. My dataset supports an inverted U-shaped relationship between industry complexity and profitability. However, unlike Lenox et al. (2006), I discover that operational capabilities only mediate the relationship between interdependency and profitability for less capable firms. The limiting condition is because only less capable firms are affected by the rugged landscape of high complexity that increases difficulty of managerial search, leading to decrease in operational capabilities. My dissertation has significant macroeconomic relevance because the context of my dissertation, India, represents a stark contrast between overall output growth and productivity growth. Years of output growth have propelled India to the fifth position in 2023, but productivity and operational capabilities continue to grow at a slow pace (refer to Figure 1.1). Hence, there is a need to focus on operational capabilities in the Indian context. My dissertation contributes to a better understanding of the individual, firm and industry contingencies that influence firms' ability to possess superior operational capabilities. Essays one and three, in particular, highlight the variation in effects caused by self-capability levels. As a result, practitioners can gain a better understanding of the importance of investing in building capabilities. Furthermore, my dissertation encourages strategy scholars to shift away from theorizing capabilities based on average effects on firms. Finally, essays two and three emphasize the importance of industry complexity in driving capabilities improvement. Because complexity is increasing and businesses are constantly evolving to accommodate it, my findings are relevant to both practitioners and strategy scholars.

Pagination

xviii, 209p.

Copyright

Indian Institute of Management Bangalore

Document Type

Dissertation

DAC Chairperson

Yayavaram, Sai

DAC Members

Raj, Prateek; Mani, Dalhia

Type of Degree

Ph.D.

Relation

DIS-IIMB-FPM-P25-06

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