Managerial Cognition and Development of Dynamic Capabilities in New Technology Based Firms

The fast changing environment faced by many industries and the intense competitive battles between firms have led to the development of dynamic capabilities as a paradigm to understand the nature of competitive advantage and firm level heterogeneity. However, the micro processes involved in the development of these dynamic capabilities has largely been understudied in the literature though some efforts have been made recently to incorporate cognitive and behavioural processes that underlie organizational learning, adaptation and performance. Improved cognitive maps come from knowledge of industry trends, varied job experiences (source of diverse experience) and reading signals from the environment. Zander and Kogut (1995) argue that an individual can bring in transfer effects, in the form of prior founding experience to benefit an organization’s performance. However, strategy development requires a breadth of prior experience & a good fit between the employee context and prior experience. In this study, we look at cognitive and group level factors that influence the development of dynamic capabilities in an organization. Managerial cognitive frames drive organizational search which in turn leads to the development of new capabilities (Gavetti, 2005). Gavetti argues that the accuracy of cognitive frames depends on where managers are in the hierarchy. Different groups will have different perceptions of the value at different times. A group can initiate actions that will persuade top management to consider and authorize preferable actions. Teece (2007) describes how the psychological foundations of transforming/reconfiguring is underdeveloped in comparison with seizing/sensing partly because strategy research on human aspects of capability has been underdone. Teece’s analysis indicates that organizations must be able to evaluate sensed opportunities and threats and they must be able to unlock dysfunctional fixations with existing strategies to remove bias, inertia and strategic persistence.Mental models of managers play a critical role in the resource accumulation process and a change may be needed if the current set of beliefs is not able to explain outcomes. A rapidly changing environment can leave firms behind if the mental models of decision makers do not consider new areas of development. Thus a key component of dynamic capability in a firm is an ability of the managers in a firm to change their mental models in response to change in the environment. Managerial sensemaking influences the bottom up initiatives driven by middle managers who put their credibility with the senior management at stake while driving such initiatives. The success or failure of the early operational outcomes reinforces perceptions while adding or taking away resource commitments. These outcomes also influence the process of sensegiving by the top management.