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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 1: 2747 (2007)


Published online 16 November 2007 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/sej.1

WHAT MAKES A PROCESS A CAPABILITY?


HEURISTICS, STRATEGY, AND EFFECTIVE CAPTURE
OF OPPORTUNITIES
CHRISTOPHER B. BINGHAM,1* KATHLEEN M. EISENHARDT,2
and NATHAN R. FURR2
1
Robert H. Smith School of Business, University of Maryland, College Park,
Maryland, U.S.A.
2
Department of Management Science and Engineering, Stanford University,
Stanford, California, U.S.A.

While organizational processes, such as internationalization, acquisition, and alliance, are


a fundamental concept within many literatures and central to firm capabilities, controversy
exists regarding how they become high performing. One view emphasizes the role of experi-
ence while a second view emphasizes cognition and, in particular, the role of articulated
heuristics. Using qualitative and quantitative field data on the internationalization process
of entrepreneurial firms from three culturally distinct regions (Finland, U.S., Singapore), we
juxtapose these two competing theoretical views to better gain insight into organizational
processes and capabilities. The core contribution of our paper is insight into the structure
of firm capabilities. Results show that organizational heuristics more closely relate to the
development of a high performing process and hence a firm capability. At a broader level, we
contribute to strategy by empirically validating the strategic logic of opportunity, a logic that
is particularly relevant in dynamic markets and growth oriented firms. We also contribute to
entrepreneurship by adding to the opportunity discovery vs. opportunity creation debate, and
by shedding light on the relationship between structure and performance in new ventures.
Overall, we contribute to the emerging but growing body of research emphasizing a more
cognitive view of firms. Copyright 2007 Strategic Management Society.

Organizational processes are a central concept within Teece, Pisano, and Shuen, 1997). Common pro-
the strategy, organizations, and entrepreneurship lit- cesses include acquisitions (Zollo and Singh, 2004),
eratures (Eisenhardt and Martin, 2000; Helfat and alliances (Kale, Dyer, and Singh, 2002), product
Peteraf, 2003; Pentland, 1995; Zollo and Winter, development (Brown and Eisenhardt, 1997; Miner,
2002). By organizational processes, we mean the Bassoff, and Moorman, 2001), and internationaliza-
sets of actions that repeat over time and allow man- tion (Sapienza et al., 2006; Zahra, Ireland, and Hitt,
agers to accomplish some business task (Pentland 2000). Organizational processes have long been
and Rueter, 1994; Ray, Barney, and Muhanna, 2004; seen as central to how the work of organizations
gets done (Miles and Snow, 1978; Weber, 1947).
Recent theoretical arguments go a step further
Keywords: organizational process; capabilities; experience;
heuristics; opportunity capture; cognition to designate organizational processes as a central
* Correspondence to: Christopher B. Bingham, Department of feature of capabilities. Amit and Schoemaker (1993:
Management and Organization, Robert H. Smith School of 35), for example, describe how capabilities refer to
Business, University of Maryland, 4519 Van Munching Hall,
College Park, MD 20742, U.S.A. a firms capacity to deploy resources . . . using orga-
E-mail: cbingham@rhsmith.umd.edu nizational process, to effect a desired end. Others

Copyright 2007 Strategic Management Society


28 C. B. Bingham, K. M. Eisenhardt, and N. R. Furr

argue that organizational processes form dynamic performing when country entry experience is paced
capabilities that are crucial to strategy (Eisenhardt (Vermeulen and Barkema, 2002) and accumulates
and Martin, 2000; Teece et al., 1997). Teece and col- in culturally similar regions (Davidson, 1980; Hof-
leagues (1997: 524) state, The essence of a firms stede, 2001; Kogut and Singh, 1988). But, while
competence and dynamic capabilities is presented studies in this stream are useful, it is unclear what
here as being resident in the firms organizational is actually learned from experience and how that
processes. In addition, there is growing consensus learned content leads to high process performance.
that capabilities imply a threshold of performance The second stream relates to organizational cog-
(Grant, 1996; Helfat et al., 2007; Maritan, 2001), nition. It emphasizes that firms must translate their
suggesting the particular relevance of high perform- experience into articulated heuristics in order to
ing processes to capabilities. develop an organizational process. Simply gaining
Some scholars have even suggested that organiza- experience is not enough. By opening up the black
tional processes are not just crucial to strategy, but box of what is learned from experience, empiri-
rather are the strategy of firms, especially in entre- cal research finds that these heuristics are simple
preneurial firms and dynamic markets (Bingham and rules that focus on capturing opportunities within
Eisenhardt, 2007). In contrast to positioning (Porter, a given process (Bingham, Eisenhardt, and Davis,
1996) and leverage (Collis and Montgomery, 1995) 2007). These heuristics delineate the selection, pri-
strategic logics, the logic here is that organizational ority, pacing and execution of specific opportunities
processes put firms in the midst of opportunity flows from the larger set of possibilities that is especially
(e.g., flows of new product opportunities, alliance common in dynamic markets where opportunities
opportunities, and country opportunities). By select- are often super-abundant (Davis, Eisenhardt, and
ing processes with the most attractive flows of oppor- Bingham, 2007). The semi-structure of heuristics
tunities and effectively executing those processes, enables flexibility to adjust to the unique demands of
firms can gain a series of temporary performance any particular opportunity while still retaining some
advantages (Wiggins and Ruefli, 2005). Supporting coherence and efficiency (Brown and Eisenhardt,
this strategic logic of opportunity, Roberts (1999) 1997; Burgelman, 1996; Rindova and Kotha, 2001).
found that pharmaceutical firms adopting a strategy But while work in this second stream finds that
of product development, where leaders continually some firms develop heuristics as they gain process
repeated the process to create a series of new prod- experience (Bingham et al., 2007), the link between
ucts, were able to stay ahead of the competition, these heuristics and high process performance lacks
capture emergent product opportunities and gener- empirical validation.
ate a string of short-term competitive advantages The purpose of this paper is to compare experi-
over time. Other popular examples of organiza- ence and heuristics as theoretical explanations of
tional process as strategy include Ciscos acquisi- organizational process performance. Specifically,
tion process, Hewlett-Packards alliance process and we ask whether firms learn high performing pro-
Starbucks internationalization process. cesses by simply gaining more or particular types of
Despite their fundamental importance for firm experience, or whether they have to translate experi-
action, capabilities and even strategy, it is unclear ence into articulated heuristics. We begin by devel-
how organizational processes become high-perform- oping predictions for each theoretical explanation.
ing. Two streams of research are particularly rel- We then examine these alternative explanations by
evant. One stream is organizational learning from focusing on the internationalization process of tech-
experience. Numerous studies in this area emphasize nology-based entrepreneurial firms from three cul-
the role of more experience in developing a high- turally distinct regions (Finland, U.S., Singapore). A
performing organizational process. Research shows unique feature of our study is combining both quali-
that as firms engage in more acquisitions (Haleblian tative and quantitative data. This research approach
and Finkelstein, 1999), country entries (Barkema, is particularly appropriate when the research aim is
Bell, and Pennings, 1996) or alliances (Kale et al., to reinvestigate measures from prior theory, and yet
2002) process performance improves. Other organi- simultaneously test promising new measures from
zational learning studies emphasize that particular provisional theory (Edmondson and McManus,
types of experience (e.g., similar and paced) lead to 2007). Such an approach provides not only granu-
a high performing process. For example, research on larity and depth of understanding, but also statistical
internationalization finds that this process is higher precision and generalization.
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
What Makes a Process a Capability? 29

Our core contribution is the insight that heuristics one of the earliest pieces of research on organiza-
are at the heart of firm capabilities. That is, firm tional learning curves is a study by Wright (1936) on
members must actively translate their process expe- the labor required to build airplanes. Wright found
rience into shared heuristics for opportunity capture that, as more airplanes were produced, the amount
in order to develop a high performing process, and of labor hours needed to produce a single plane
hence a firm capability. In contrast, experience decreased at a decreasing rate. Later research on
per se is insufficient for creating high performing the manufacturing process of automobiles (Levin,
organizational processes. Thus, capabilities rest 2000), trucks (Epple, Argote, and Devadas, 1991),
on an explicit structure of heuristics, and not just and ships (Rapping, 1965) also showed that, as firms
tacit knowledge built from accumulated experience. produced more of a discrete product, the unit cost
Broadly, we contribute to strategy by confirming the of production typically decreased at a decreasing
strategic logic of opportunity, a logic that is particu- rate. Beyond its historical roots in manufactur-
larly relevant in dynamic markets and growth-ori- ing settings, organizational learning research in a
ented firms. We also contribute to entrepreneurship wide variety of settings, such as pizza assembly
by adding insights into the creation vs. discovery (Darr, Argote, and Epple, 1995), alliance forma-
of opportunities debate, and the crucial importance tion (Anand and Khanna, 2000), surgical procedures
of increased structure in new ventures. Overall, by (Pisano, Bohmer, and Edmondson, 2001), semicon-
combining rich field insights with theory and evi- ductor production (Chung, 2001; Gruber, 1994) and
dence from psychology and cognitive science, we internationalization (Martin and Salomon, 2003)
promote a fresh and empirically valid view where lends support for experience effects. To illustrate,
simple cognitive structures are central to firm capa- Kale and colleagues (2002) analyzed approximately
bilities and the effective capture of entrepreneurial 1572 alliances from 78 firms. The authors found that
opportunities. cumulative alliance experience was significantly
related to abnormal stock gains following alliance
announcements. As a whole, theoretical argument
THEORETICAL BACKGROUND and empirical evidence suggest that more experience
should lead to a higher performing organizational
Organizational learning: experience
process.
Extensive literature on organizational learning
links experience with an organizational process to Hypothesis 1: Organizational experience is posi-
improvements in the performance of that process tively associated with process performance.
(for a review see Argote, 1999). Typically, these
studies tie experience to performance while positing The timing of experience is also likely to influ-
an underlying learning mechanism. Much of this ence the learning of a high performing organiza-
research has theoretical roots in early psychologi- tional process. On the one hand, insufficient time
cal studies (e.g., Thorndike, 1898). Psychologists between discrete experiences (e.g., specific alliances,
discovered that the amount of time individuals used acquisitions or country entries) may lower process
when performing a task, as well as the extent of mis- performance since it limits a firms ability to absorb
takes when accomplishing the task, decreased with new knowledge (Gersick, 1994). When experiences
increased experience (Thurstone, 1919). Organiza- occur in quick succession, firm members do not have
tional researchers later identified learning curves at time to draw inferences or assimilate learning from
the firm level, and emphasized repeated experience the past (Hayward, 2002; Levitt and March, 1988).
as a primary mechanism for the creation of high per- A rapid internationalization process consisting of
forming processes. Through ongoing trial-and-error multiple country entries within the same quarter,
and repeat practice, firm members better comprehend for example, can lead to poor internationalization
the specific causal links between prior firm decisions performance by exceeding the cognitive limits of
and firm outcomes. They also gain insights about the managers to internalize the learning from each new
production and management of processes such that country. Consistent with this logic, Vermeulen
these processes become more efficient and reliable, and Barkema (2002) found that the development
and thus higher performing (Argote, 1999). of a high performing internationalization process
Much empirical evidence supports the tie between depends on the firms rhythm of expansion. Using
experience and process performance. For example, a panel of 572 observations covering the country
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
30 C. B. Bingham, K. M. Eisenhardt, and N. R. Furr

entries of 22 Dutch firms over 26 years, the authors tions in context permit firm members to focus their
discovered that irregularity in movement abroad time and effort, elaborate on existing knowledge,
negatively moderated internationalization perfor- and develop deeper causal understandings for how
mance. Similarly, research on the acquisition process to accomplish tasks. The result is often steeper
(Haunschild, Davis-Blake, and Fichman, 1994) also organizational learning curves and greater gains in
suggests that firms cannot learn effectively when efficiency (Von Hippel, 1998). This relationship is
acquisitions follow each other too rapidly. consistent with psychological research which shows
On the other hand, too much time between that becoming expert in a given field (e.g., chess)
experiences may lower process performance since often requires at least ten years of dedicated study
firms may forget lessons from the past (Argote, (Hayes, 1989). Overall, these arguments imply that
1999). Such organizational forgetting may occur similarity of experiences is helpful for developing
for two reasons. First, when the time interval a high performing organizational process. Studies
between experiences is long, individuals believe on internationalization, for example, show that
that the experiences are one-time events that are firms entering culturally similar countries develop a
unlikely to repeat. In this situation, firm members better internationalization process than firms enter-
are less prone to encode action steps in memory ing countries at random (Johanson and Vahlne,
since they foresee little future performance payoff 1977).
(Winter and Szulanski, 2001). Organizational for- But, if experiences are too similar, firms are unable
getting can also occur when individuals learn some to form the generalist skills needed to cope with het-
action steps from their experience, but then leave erogeneity (Hayward, 2002). Ongoing experience
the firm or move on to other activities within the with the same alliance partners or entering culturally
firm. Thus, unless knowledge is currently relevant similar countries may lead to a lower performing
for those individuals involved with the focal process, process by stifling creativity and making it difficult
knowledge from prior experience with that process to capture a broad range of future opportunities. This
is likely to be seen as less salient, inappropriate, occurs because the ability to understand, integrate,
or even obsolete, and to be forgotten (Hayward, and effectively leverage new knowledge is largely
2002). dependent on the state of prior related knowledge
(Cohen and Levinthal, 1990). Thus, the more similar
Hypothesis 2: The period of time between experi- a firms process experiences are to each other, the
ences has an inverted U-shaped relationship with more likely that the firm is to develop core rigidities
process performance. (Leonard-Barton, 1992), under invest in exploration
(March, 1991), and fail to recognize fresh opportu-
Similarity of experience also influences the devel- nities for growth and profit (Schilling et al., 2003).
opment of a high performing process. Unlike rela- Research on individual learning supports these argu-
tively homogeneous experiences (e.g., production ments by showing that reinforcing a specialized
of automobiles, ships, or planes) where experiences knowledge base dampens problem solving skills by
are highly similar to one another, experiences with strengthening connections among existing cognitive
organizational processes such as product develop- nodes without fostering connections with new nodes
ment, alliance formation, acquisitions, and country that are essential for bridging knowledge gaps and
entries are often heterogeneous. For example, the assimilating new information (Martindale, 1995).
acquisitions of a given firm may be undertaken Research on personal insight likewise shows that
for many reasons, involve different negotiation new understandings of problems are less likely to
challenges, and present distinct integration issues arise when domains are too closely related (Simon-
(Graebner, 2004). Therefore, the learning benefits ton, 1999). Taken together, these arguments suggest
of prior acquisitions exist only to the extent that that moderately similar experience is likely to lead to
these past experiences are sufficiently similar a high performing organizational process (Schilling
to provide insight to the focal one. In particular, et al., 2003).
research suggests that, when the focal experience
is similar to those of the past, processes improve Hypothesis 3: The similarity of experiences has
through specialization (Haleblian and Finkelstein, an inverted U-shaped relationship with process
1999; Zollo, Reuer, and Singh, 2002). Small devia- performance.

Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
What Makes a Process a Capability? 31

Organizational cognition: heuristics markets.1 But they also allow for at least some effi-
ciency since that limited structure provides guid-
In contrast to the first stream, a second and ance that keeps behavior partially constrained. This
more recent research stream deals directly with creates the coherence necessary during adaptation
the content of learning from experience. This to achieve congruence with new opportunities (e.g.,
research emphasizes cognition, and the related artic- new countries, new products) (Teece et al., 1997).
ulation of what is learned as experience is gained Third, heuristics limit errors. They provide guide-
(Bingham et al., 2007; Zollo and Singh, 2004). lines and rough preliminary plans for how individuals
Although studies identify elaborated and codi- should respond to future events, thereby reducing the
fied tools such as check-lists, integration manuals, amount of learning that needs to take place through
and training books (Kale et al., 2002; Szulanski pure trial-and-error (Eysenck and Keane, 1995). In
and Jensen, 2006; Zollo and Singh, 2004) as the their studies of expertise, for example, Chi and col-
articulated learning in stable environments and leagues (1981) found that physicists who spent more
large firms, we focus on dynamic markets and time creating cognitive representations of the problem
entrepreneurial firms where studies highlight situation before beginning were more successful
that articulated learning takes the form of simple solving problems than those who began without such
heuristics. By heuristics, we mean articulated and representations. Similarly, Gitomer (1988) described
often informal rules-of-thumb shared by multi- how electronics technicians who engaged in trouble-
ple participants within the firm. In the context of shooting after creating a conceptual model of the
organizational processes, these heuristics center task were more successful than those technicians
on capturing discrete opportunities (e.g., entering who began immediately using trial-and-error. As a
specific countries, developing specific products, whole, these arguments suggest that, while experi-
acquiring particular firms) (Bingham et al., 2007; ence is probably needed to learn a high performing
Burgelman, 1996; Rindova and Kotha, 2001), and process, it is the articulation of that experience into
become increasingly expert as experience with heuristics by firm members that leads to a high per-
opportunities accumulates (Bingham et al., 2007). forming process. The use of heuristics focuses atten-
Our theoretical argument is that, while experience tion, reduces errors, and provides structure, and leads
may improve process performance, active learning to expertness that improves process performance.
by which firm members translate their accumulat- This leads to the following hypothesis:
ing experience into increasingly honed heuristics
that are expected to apply across multiple country Hypothesis 4: A greater number of heuristics is
entries is more likely to be associated with a higher positively associated with process performance.2
performing process.
There are several reasons why heuristics 1
The differences between extensive codified knowledge and
create a high performing organizational process. simple articulated heuristics may relate to differences in envi-
First, heuristics focus attention and save time. The ronments. In stable environments, codified knowledge is ben-
reason is that heuristics are cognitive structures eficial since there is greater predictability in situations and thus
greater efficiencies to be had from using many standardized
that categorize stimuli (e.g., types of countries, steps. In dynamic environments however, codification may
customers, mode of entry). Such categorization be less useful as situations are less predictable (more hetero-
frees up time to improvise unexpected aspects geneous). Here maintaining plasticity, not just efficiency, is
important. Therefore, we argue that effective knowledge is
of opportunities (Daft and Weick, 1984; probably simpler in dynamic environments, and probably more
Friedman, 1979), and so enables rapid and complicated and elaborated in stable ones.
2
accurate troubleshooting when surprises and The more general prediction is that the total number of heu-
ristics has an inverted U relationship with performance because
problems (e.g., this is an acquisition integration many heuristics may become too constraining and so lower
error or this mode of country entry is incorrect) performance (Davis et al., 2007). But since we study firms
arise. that are just beginning, we do not observe a sufficient range
to test this prediction. That is, in the setting investigated for
Second, heuristics allow for improvisation (Brown the study, entrepreneurial organizations suffered from having
and Eisenhardt, 1997; Miner et al., 2001). Their too few heuristics: managers generally struggled to learn new
semi-structure enables the flexibility and responsive- processes, making the development of sufficient heuristics the
primary challenge. Accordingly, we did not observe organiza-
ness necessary for the effective capture of attractive tions with enough heuristics to test a curvilinear (inverted-U)
but novel opportunities that are common in dynamic shaped relationship to performance.

Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
32 C. B. Bingham, K. M. Eisenhardt, and N. R. Furr

Prior research shows that firms learn several types Kotha, 2001). More generally, procedural heuris-
of process heuristics. Some of these are lower order tics lead to improved process performance because
heuristics i.e., selection and procedural heuristics they structure action, improve sensemaking, and aid
that relate to the capture of one particular opportunity problem solving. Psychological research shows that
such as a single country or acquisition (Bingham et making sense out of life requires that individuals
al., 2007). Selection heuristics are defined as rules learn not only what to do, but also how to do it
for choosing an opportunity, such as which types (Siegler, Deloache, and Eisenberg, 2003). It also
of countries to enter, which types of customers to suggests that effective problem solving involves
target, and which product to develop. They narrow problem structures that are defined by a goal and
the range of opportunity choices by specifying knowledge necessary to achieve the goal (Newell
which to pursue and which to ignore. Thus, they and Simon, 1972). Poor performance arises when
provide focus, and lead to higher process perfor- one of these elements is missing (Simon, 1973).
mance because they channel the efforts of dispersed Thus, procedural heuristics improve process per-
firm members into similar kinds of opportunities. formance by elucidating understanding about how
For example, firms may rely on selection heuris- to capture opportunities within the firms purview.
tics to restrict their product development activities Like selection heuristics, procedural heuristics focus
to retail software products and not financial ones, attention, structure action, and eliminate errors.
or low-cost mobile semiconductor products, not all In sum, these arguments imply that firms with
semiconductor products. Or, firms may use selection selection and procedural heuristics will have a
heuristics to focus on specific customer types (e.g., higher performing organizational process due to
large financial institutions or telecom operators), more focused choice of particular opportunities
or on targeted geographic locations (e.g., Asia, big from the larger set of possibilities, and more effi-
cities, or Scandinavia). cient guidance for actions regarding what to do (and
Without selection heuristics, firm members may not to do) while attempting to capture the selected
chase too many, widely varying opportunities, and opportunities.
so lose efficiency and lower process performance.
Or, individuals may become confused about which Hypothesis 5: A greater number of lower order
opportunities to pursue, and so may be reluctant to heuristics (i.e., selection and procedural) is posi-
do anything at all. Indeed, the inability to structure tively associated with process performance.
uncertainty can significantly reduce decision making
speed and process effectiveness in dynamic markets While lower order heuristics focus on the capture
(Eisenhardt, 1989). Hence, the absence of selection of a single opportunity, higher order heuristics such
heuristics reduces efficiency, engenders confu- as those dealing with time and priorities link mul-
sion, and leads to lowered process performance. In tiple opportunities together. As such, they require
contrast, selection heuristics enhance process per- greater cognitive sophistication, and are associated
formance by helping firm members allocate scare with higher expertise (Bingham et al., 2007). Tem-
resources to a more focused opportunity set and poral heuristics are defined as rules for opportunity
eliminate poor opportunities that do not fit the firm capture that relate to sequence, pace, or synchroniza-
well. tion (Brown and Eisenhardt, 1997; Gersick, 1994).
Procedural heuristics are defined as rules that Examples of sequence rules include Use the U.K.
specify the actions a firm should take to execute a as a launching pad into France and Germany, or
chosen opportunity (Bingham et al., 2007). Proce- Move from tier-three to tier-two to tier-one coun-
dural heuristics focus attention on how to capture tries, while examples of pace and synchronization
selected opportunities, and reflect learning on the rules include Enter one country every two months
part of firm members about past actions and their and Build up enough strength in current markets
efficacy for process execution. Their use leads before making a high-cost commitment to a new
to improved process performance by specifying market, respectively.
behaviors likely to prove helpful during execution. Temporal heuristics improve process performance
Examples include hold weekly meetings between for several reasons. First, they synchronize various
engineers and marketers in a product development work groups (e.g., sales, engineering, marketing)
process (Brown and Eisenhardt, 1997) and do no with each other and the market. Such timing allows
exclusive deals in an alliance process (Rindova and firm members to regulate the tempo of their actions,
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
What Makes a Process a Capability? 33

and so lower the likelihood of confusion, fatigue a priority heuristic of maximize-margin-per-wafer


and wasted effort. Second, temporal heuristics to allocate capacity in its manufacturing process
provide natural break points that are tied with market (Burgelman, 1996). When memory margins fell
rhythms such as the product development cycle of dramatically, Intel followed their heuristic and real-
customers. This allows firm members to entrain with located capacity to microprocessors where margins
the environment, and thus reassess their efforts and were higher. Priority heuristics may also improve
the competitive landscape at regular time intervals process performance by stipulating where within
(Ancona and Caldwell, 1992). Temporal heuristics its proscribed scope of operations the firm should
are especially valuable in dynamic markets where begin its opportunity search such as Enter regions
ongoing organizational change is critical to capture with the highest mobile penetration first, Start with
fleeting opportunities, but where it is easy to either the automotive sector, or Enter English speaking
change too often (Sastry, 1997) or too little markets first. Alternatively, priority heuristics can
(Gersick, 1994). Finally, temporal heuristics are specify where to end such as Work towards enter-
effective because they help managers maintain ing China. Firms lacking priority heuristics may
momentum. Momentum provides focus and direction not have high process performance because they
about when and where to move forward from current pursue low-value opportunities when better opportu-
opportunities. Overall, specifying the sequence, nities are available or because they pursue too many
synchronization and pace by which a process takes opportunities in parallel, thereby failing to capture
place is likely to improve performance (Barkema the value of any single opportunity. Collectively,
et al., 1996; Chang, 1995; Vermeulen and these arguments suggest that higher order heuristics
Barkema, 2002). are likely to lead to a higher performing organiza-
In contrast, processes may be lower performing tional process because they help firm members to
when firms lack temporal heuristics. Firm members synchronize and order their efforts more effectively
may try to capture too many opportunities at once, across multiple opportunities.
or execute the appropriate actions but in the wrong
order. Chang (1995), as one illustration, found that Hypothesis 6: A greater number of higher order
when Japanese electronic firms entering the U.S. fol- heuristics is positively associated with process
lowed a sequence of starting with small investments performance.
and then increasing the scale of those investments
over time, they performed better than other firms
that did not follow any sequence. Finally, without
heuristics for sequence, pace, and synchronization,
METHODS
firm members may not be able to effectively cho-
Sample
reograph the switch from one opportunity to another
and properly coordinate different parts of the firm Our setting is entrepreneurial firms i.e., small and
to manage the transitions (Brown and Eisenhardt, young organizations. We chose these firms because
1998). they offer methods advantages. Their young age
Priority heuristics are defined as rules that specify avoids left censoring by allowing observation of
the ranking of opportunities (Bingham et al., 2007). process development and learning from firm incep-
Specifically, they involve the identification of a tion. Their small size enhances transparency (Argote,
firms most important opportunities within the 1999), and so ensures better identification of shared
limits proscribed by its selection heuristics. Priority process heuristics if they exist.
heuristics increase the probability of high process We focus on the internationalization process in
performance because they target effort on the most which each discrete experience is a unique country
attractive opportunities. Since their creation and use entry. Our sample consists of 67 country entries
require thoughtful evaluation and comparison of performed by 12 entrepreneurial firms between 1997
multiple opportunities, firm members come to better and 2003. Consistent with the internationalization
understand which are more important to the perfor- literature (e.g., Root, 1994), we define a country
mance of an organizational process when they rank entry as a firms physical entry into a foreign country
opportunities in relation to others. Thus, they are through institutional arrangements (e.g., joint ven-
likely to create heuristics that focus their efforts on tures, acquisitions, Greenfield investments) for the
the best opportunities. Intel, for example, relied on primary purpose of enabling sales. Although often
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
34 C. B. Bingham, K. M. Eisenhardt, and N. R. Furr

overlooked as a setting in which to study organi- and Glick, 1997; Schwenk, 1985). Our interviews
zational processes, internationalization is a good yielded about 900 pages of single-spaced pages of
choice for several reasons. First, since each country transcript data.
entry is a discrete event, it can be analyzed in isola- All research designs make tradeoffs due to the
tion as a single opportunity and/or as part of a larger practical limits of data collection. Although archival
set of experiences. Second, since performance data sources often yield extensive data, they do not allow
exist for each country entry, process performance direct, rich observation of organizational processes
can be measured. Finally, a discrete experience in the field, and therefore, provide distant measures
such as a country entry, acquisition or alliance is an of the presence, content, and effects of constructs
appropriate, commonly used unit of analysis for the such as learned heuristics. Since a primary goal
study of organizational processes (Hayward, 2002; was to examine the relationship between learned
Vermeulen and Barkema, 2001). heuristics and process performance, archival data
Country entries were compiled from a random that would afford a large sample size is inadequate.
sample of entrepreneurial firms operating in four Therefore in order to ensure depth of understanding
global technology industries (IT hardware, software, and accurate measures, we elected to gather field-
medical equipment, and computer security) from three based measures across a varied sample of industries
key entrepreneurial metropolitan areas (Singapore, and geographies for our empirical test of the influ-
Helsinki, San Jose). We sample firms operating across ence of heuristics on process performance. Hence,
industries and locales to improve the generalizability although our sample is small, this was a necessary
of the results. We also sample firms that had experi- tradeoff to get accurate measures of constructs like
enced a minimum of three entries during the sample heuristics. Our qualitative data, in particular, play a
period, and that started internationalization within five critical role in uncovering unique insights that are
years prior to data collection. This helps to ensure that unavailable from archival data and quantitative mea-
we study firms where learning an internationalization sures alone (Jick, 1979). Thus, we sacrifice some
process is important, and where company informants statistical power in exchange for more measurement
would be likely to recall the events surrounding the accuracy. This choice increases the likelihood that
process in each country entry. our results will be not only generalizeable and thus
A unique feature of our research design is the externally valid, but also fresh and insightful.
collection of multiple types of data (Edmondson
and McManus, 2007). This helps to ensure greater
Dependent variable
measurement accuracy, and instill confidence in the
findings. There are currently no databases tracking Performance
international country entries in sufficient detail to Consistent with prior studies of the international-
measure learned content. Therefore, we collected ization process, we rely on multiple measures of
data from multiple primary and secondary sources: performance (Brush and Vanderwerf, 1992; Delios
quantitative and qualitative data from semi-structured and Beamish, 2001; Dunning, 1980; Geringer and
interviews with firm management; archival data from Herbert, 1990; Zahra and Dess, 2001). First, we
public and private documents such as annual reports, measured country entry performance as the log of
business press, Federal Reserve Economic Data and average revenue generated by the international entry
the Hofstede index (2001) on cultural differences; into the specific country, adjusted for inflation. We
and emails, phone calls, and follow-up interviews chose the log of average annual revenue because
to track the real-time internationalization process. it provides a reliable, objective measure of perfor-
The primary source of data is over 70 interviews mance available across the sample. Although we
during a 15-month period with corporate executives considered other financial measures such as CAGR,
of our focal firms on three different continents. We we found them unreliable or unavailable. Second,
conducted all interviews according to well-estab- we measured country entry performance using
lished research procedures including courtroom a Likert scale. We asked top management team
questioning, event tracking, and non-directive ques- members responsible for the entry to rate the overall
tioning from multiple informants at different levels success of the entry on a 10-point Likert scale (0 =
of hierarchy in order to ensure robustness, reliabil- very poor, 5 = moderate, 10 = excellent), and then
ity, and internal consistency (Golden, 1992; Huber, computed the mean response. Third, we measured
1985; Huber and Power, 1985; Miller, Cardinal, country entry performance with a qualitative assess-
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
What Makes a Process a Capability? 35

ment of entry performance. For this measure, we a firms first venture into another country, this lag
asked the informants to describe the performance of was coded as the time between founding and the first
each country entry that they knew (mean informants entry (the lag between founding and first entry was,
per entry = 5). One author then coded all responses on average, not significantly different than the lag
as positive, negative, or neutral. Examples of posi- between other entries).
tive responses include We have done very well in
Similarity of experiences
Malaysia, or I think Taiwan has been very suc-
Similar to others (Brockner et al., 2000; Gibson
cessful. Examples of negative responses include In
and Zellmer-Bruhn, 2001), we measured similar-
China, we were not very successful, or We got
ity of experiences as the cultural similarity between
nothing working in the Czech Republic. Examples
the focal country entry and the firms headquarter
of neutral responses include Difficult to estimate at
country. To measure cultural similarity, we first used
this point, or Not making losses, but not making
Hofestedes (2001) index of cultural distance and
too much profit. A second author confirmed this
calculated index rankings for each country relative
categorization. We then calculated two qualitative
to other countries. We then collapsed Hofstedes
performance measures: proportion of all comments
four dimensions into a single measure of cultural
that were positive and proportion that were negative.
distance for each country entry using a methodol-
These measures are likely to be accurate because
ogy developed by Kogut and Singh (1988). This
they span informants and hierarchical levels, thereby
measure calculates the sum of the squared differ-
providing a robust and rich assessment of process
ences for each of Hofstedes (1980) four primary
performance from multiple vantage points.
cultural dimensions.3
We combined the performance measures (log of
average revenue, Likert scale rating, and qualita- Heuristics
tive performance assessments) using factor analysis. We assessed the existence of heuristics in two dif-
This produced a single factor with an eigenvalue >1 ferent ways: behavioral and cognitive (Cyert and
(i.e., 2.2). Loadings occurred as expected with very March, 1963; Miner et al., 2001). First, we cap-
high positive loadings (0.8) for both the Likert scale tured the behavioral action patterns used to enter
rating and the proportion of positive comments, a new countries. Specifically, we analyzed the actions
very negative loading (0.8) for the proportion of of individuals before and during each country entry.
negative comments, and a positive loading for log We then coded actions as heuristics only if they
of average revenue growth (0.6). The performance consisted of a recognized guide for internationaliza-
factor score has a mean of 0 and a standard deviation tion that was articulated by more than one informant
of 0.9. Using multiple, independent assessments of in each firm.4 Second, we assessed the existence of
performance that are congruent provides convergent
validation and a more reliable performance measure
than is possible from objective or subjective mea-
sures alone. 3
Studies on the influence of cultural distance often use the four
dimensions of Hofstede (1980): power distance (the degree to
Independent variables which people accept the unequal distribution of power inside
organizations), uncertainty avoidance (the degree to which
Cumulative experience people tolerate uncertainty and ambiguity in situations), indi-
vidualism (the preference of people to belong to a loosely
We measured cumulative experience as a count of versus tightly knit social framework), and masculinity (the
the total country entries performed by a firm prior degree to which people prefer values of success and competi-
to the focal entry. Our measure is consistent with tion over modesty and concern for others). Although Hofstede
(2001) includes a recently developed fifth dimension, we calcu-
existing literature which also measures cumulative lated the index using only Hofstedes original four dimensions
experience as the sum total of events undertaken by to facilitate comparability to previous empirical studies.
4
a firm (Haleblian and Finkelstein, 1999; Hayward, To illustrate, to enter new countries one Singapore-based
security software firm followed a heuristic of targeting gov-
2002). ernment and financial institutions. As a senior executive stated
about the firms entry into Malaysia, Banks have the money to
Time between experiences spend, so you got to focus on them. He also added, Govern-
Consistent with prior research (Vermeulen and ment is again by design . . . If so much is going through the IT
Barkema, 2002), we measured time between expe- infrastructure, then protection is needed. The CEO noted the
same target group when he said, What we want is, whether
riences as the number of quarters between the focal you are a government agent or bank, when you think about
country entry and the prior entry. If the entry were info-security call (firm name).

Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
36 C. B. Bingham, K. M. Eisenhardt, and N. R. Furr

heuristics from a cognitive perspective. We analyzed provides thick description of heuristics with prox-
each informants articulated descriptions of what the imity to the data, and illumination of the learned
firm had learned in each country entry that could content in context.
be used in other country entries. These descriptions Total heuristics is the count of heuristics a firm
occurred in response to our open-ended questions employed in a focal country entry. It was calculated
about the chronology of each country entry (e.g., as the sum of both lower (selection and procedural)
Tell me the story of how you received your first and higher (temporal and priority) order heuristics
sale?). They also occurred in response to our wrap- used in a focal entry.
up questions where we focused on lessons learned Lower order heuristics is the count of selection
in the country (e.g., What, if any, were the lessons/ and procedural heuristics employed in a country
insights your firm gained from its experience in this entry. We categorized heuristics as selection heu-
country?). As with behavioral patterns, we consid- ristics if the articulated knowledge specified which
ered these to be articulated heuristics when two or countries to enter, which customers to pursue, or
more informants independently described the same which products to promote in each new country.
lessons regarding how to enter new countries.5 Each Examples include Enter English speaking markets,
author independently examined the data with the Focus on large original device manufacturers, and
aid of charts, tables, and cell designs to accurately Promote electronic diary solutions. We categorized
identify heuristics from both behavioral and cogni- heuristics as procedural heuristics if consistencies
tive perspectives. Two authors then iterated the dif- existed regarding how to enter new countries such
ferences in assessments using the definition criteria. as, Use acquisitions, Use joint venture partner-
The third verified this iteration independently. If ships, or Hire experienced locals using the advi-
there were still disagreements, the authors iterated sory board.
until they agreed (less than 1% of heuristics required Higher order heuristics is the count of temporal
iteration). Finally, we identified and categorized and priority heuristics used in each country entry. We
heuristics independent of the performance data. In categorized heuristics as temporal heuristics if con-
general, the combination of behavioral and cognitive sistencies emerged about (1) pacing (i.e., executing
approaches for assessing heuristics is consistent with processes in cadence with some internal timing); (2)
research describing how organizational processes synchronization, (i.e., executing a process in cadence
improve through the development of behavior con- with some external timing); and (3) sequence, (i.e.,
sistencies, in the form of repeated action patterns, the order of experiences that the firm needs to follow).
and through the improvement of cognitive frames, Examples include, Enter one country at a time,
in the form of enhanced mental models and causal Regulate entry according to the market readiness of
theories (Miner et al., 2001). This dual approach the country, and Build up Europe, move to U.S.,
then China. We categorized heuristics as priority
heuristics if consistencies emerged about opportu-
5
For example, during the aforementioned firms preinterna- nity rankings such as Tier-three countries or Large
tionalization experience in Singapore, management had been European retail markets.
successful by targeting their sales approach to IT groups within
customer organizations. Looking forward, managers believed
IT managers in other countries would also most appreciate their Control variables
technology and would have the greatest incentive to purchase
the companys software solutions since they were responsible We controlled for the country entry team because
for information security. However, after entering Hong Kong,
the TMT realized that the sales approach of targeting IT groups internationalization research indicates that these
was ineffective. Because new technology guidelines required management teams may affect process performance
senior executives to understand the risks associated with their (e.g., Carpenter, Sanders, and Gregersen, 2001;
technology, many Hong Kong corporations had shifted respon-
sibility for information security from IT and into audit. Thus, Daily, Certo, and Dalton, 2000). Consistent with
the new belief was that managers should target audit groups, this work, we define a country entry team as those
not IT groups (heuristic). The CEO stated, We learned from individuals directly involved with deciding and
experience who makes the decision the auditors of govern-
ments and banks instead of IT. In more and more organiza- executing the country approach, and who had direct
tions, IT security is out of IT . . . The audience is the CFO, the responsibility for the performance of the country
group-auditor, and the CEO. Another leader recounted the entry. We control for three effects suggested by the
same lesson when he said, Instead of talking to the technical
people, we learned that we need talk to the CEO and business literature: team size, team functional diversity and
people . . . team international experience.
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
What Makes a Process a Capability? 37

Team size is the count of country entry team cance. Therefore, we concluded that we had enough
members. Controlling for team size is important since variables controlling for firm effects, and that OLS
research demonstrates that a larger team increases was the most appropriate technique in this situa-
the quantity of skills and attention available to the tion. OLS results were tested for violations of the
firm (Eisenhardt and Schoonhoven, 1990). standard assumptions including autocorrelation and
Team functional diversity is an index measuring heteroskedasticity. We found no violations. We
the diversity of functional roles in the country entry further tested for the correct specification using the
team. A diverse team is better able to manage the Ramsey (1969) omitted variable test and found no
multi-faceted nature of international entry as well support for omitted variables. In results available
as lead to more effective problem solving by adding from the authors, we confirmed our results using
more divergent views (Bantel and Jackson, 1989; cluster analysis and ordered probit for three and six
Carpenter and Fredrickson, 2001). Consistent with clusters of performance. Overall, our use of OLS is
previous research, we operationalize functional consistent with prior studies exploring sequential,
diversity by first classifying individuals using func- discrete activities (e.g., country entries, acquisitions)
tional classifications established in the literature such performed by single firms (Hayward, 2002; Ver-
as backgrounds in sales, engineering, and marketing meulen and Barkema, 2001).6
(Bantel and Jackson, 1989; Michel and Hambrick,
1992; Wiersema and Bantel, 1992). We then cal-
culated a team heterogeneity measure using Blaus RESULTS
(1977) method (heterogeneity is measured as 1
(Pi)2 where Pi represents the percentage of individu- Table 1 reports descriptive statistics and correla-
als with a background in category i). tions. Table 2 presents the OLS regression results.
Team international experience is the number of Model 1 includes the team control variables. Of the
country entry team members who had lived and three team control variables (i.e., size, functional
worked outside their home country for over one year diversity, and international experience) only team
(Carpenter, Pollock, and Leary, 2003; Sambharya, functional diversity is significant (p < 0.01). The
1996). Controlling for team international experi- overall model is significant (p < 0.10).
ence is important since prior research suggests that Model 2 adds the results for the experience
such experience leads to a greater understanding hypotheses (H1H3). Hypothesis 1 predicted that
of foreign customers, employees, and competitors cumulative experience is positively associated with
and so can improve process performance (Carpenter country performance. This hypothesis is not sup-
et al., 2001; Daily et al., 2000). ported. Hypothesis 2 predicted that the time between
In results available from the authors, we also experiences has an inverted U-shaped relationship
examined additional controls beyond those reported. with country performance. Results show that the
These include year indicators for temporal effects; linear term is not supported and the quadratic term is
firm indicators for firm-specific effects and for firm
size, age, and headquarters location; and country
entry indicators such as entry mode. None of these
controls was significant or influenced the hypoth- 6
We considered several alternative statistical techniques. A
esized results, and so they were eliminated from fixed effects model, which is used primarily with panel data,
the models in order to focus on the estimation of was viewed as less appropriate for several reasons. First, fixed-
effects models eliminate across-firm variation, a key source of
theoretically relevant variables. interest to the study. Second, although we tested fixed effects,
resulting models were generally poor and failed to reject the null
hypothesis that the mean of firm indicator variables was equal
Estimation technique to zero, suggesting that our current variables may sufficiently
control for firm effects. Third, we tested a between fixed-effects
Given that we treat our data as cross-sectional model, which models between firm variation without account-
rather than panel data, we use ordinary least squares ing for within firm variation, and found that, although in line
with our hypotheses, the overall model was only weakly sig-
regression (OLS) which, similar to random effects, nificant due to the heavy loss of degrees of freedom. Besides
combines an un-weighted average of between and fixed effects, we tested a random effects model which combines
fixed effects (Kennedy 2003). In early estimations, a matrix-weighted average of the between and fixed effects
estimators. The results supported our hypotheses but we did use
we included indicator variables to control for firm random effects models because they are generally appropriate
effects but these variables dropped out of signifi- for panel data, not cross sectional data.

Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
38

Table 1. Descriptive statistics and bivariate correlations

Variable Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12

1 Performance 0.02 0.89

Copyright 2007 Strategic Management Society


2 Team Size 2.31 1.44 0.17

3 Team Funct. Diversity 0.18 0.25 0.29 0.53

4 Team Intern. Exp 6.37 7.07 0.07 0.35 0.09

5 Cumulative Experience 3.75 2.24 0.16 0.45 0.37 0.49

6 Time Btwn Experience 3.07 3.93 0.01 0.19 0.28 0.16 0.28

7 Time Btwn Experience2 24.63 54.02 0.04 0.26 0.22 0.19 0.28 0.94

8 Similar Experience 1.69 1.30 0.01 0.05 0.03 0.10 0.01 0.04 0.10
C. B. Bingham, K. M. Eisenhardt, and N. R. Furr

2
9 Similar Experience 4.54 6.31 0.03 0.08 0.04 0.06 0.05 0.02 0.07 0.94

10 Total Heuristics 7.71 4.10 0.49 0.18 0.10 0.28 0.23 0.16 0.21 0.07 0.01

11 Lower Order Heuristics 5.88 2.39 0.47 0.21 0.13 0.31 0.27 0.11 0.17 0.16 0.13 0.88

12 Higher Order Heuristics 1.69 2.06 0.41 0.09 0.02 0.20 0.13 0.17 0.20 0.07 0.12 0.87 0.54

DOI: 10.1002/sej
Strat. Entrepreneurship J., 1: 2747 (2007)
What Makes a Process a Capability? 39

Table 2. OLS regression results

Variable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6


(Controls) (Exp & (Controls & (Controls & (Full Model) (Parsimonious
Controls) Heuristics) Heuristic Model)
Types)

Model F Value 2.54* 1.53 6.07**** 4.96**** 3.6**** 7.47****


Adjusted R-square 0.06 0.06 0.23 0.23 0.28 0.33
N 67 67 67 67 67 67

Team Size 0.02 0.05 0.05 0.05 0.00


(0.09) (0.10) (0.08) (0.08) (0.09)
Team Functional Diversity 1.19*** 0.74* 1.21*** 1.22**** 0.76* 0.87***
(0.50) (0.56) (0.45) (0.45) (0.49) (0.36)
Team International Experience 0.00 0.00 0.00 0.00 0.01
(0.01) (0.01) (0.01) (0.01) (0.01)
Cumulative Experience 0.05 0.02
(0.06) (0.05)
Time Between Experience 0.09 0.04
(0.09) (0.08)
Time Between Experience2 0.00* 0.00
(0.00) (0.00)
Similarity of Experience 0.51** 0.55*** 0.54***
(0.26) (0.23) (0.21)
Similarity of Experience2 0.10** 0.11*** 0.11***
(0.05) (0.04) (0.04)
Total Heuristics 0.09****
(0.02)
Lower Order Heuristics 0.09** 0.11** 0.11***
(0.04) (0.05) (0.04)
Higher Order Heuristics 0.11** 0.12*** 0.12***
(0.05) (0.05) (0.05)

Coefficients with standard errors listed under coefficients


****p < 0.001; ***p < 0.01; **p < 0.05; *p < 0.10

only weakly supported (p < 0.10).7 Hypothesis 3 pre- Model 3 presents the results of total heuristics
dicted that similarity in experience has an inverted (H4), including the team control variables. Hypoth-
U-shaped relationship with country performance, esis 4 predicted that an increase in the total number
and is supported (p < 0.05). As a robustness check, of heuristics would positively impact process per-
we also measured similarity in experience as the formance. The overall model is highly significant
cultural distance between a focal entry and the entry (p < 0.001) and provides strong support for Hypoth-
immediately preceding it (Kogut and Singh, 1988). esis 4 (p < 0.001) indicating that the greater the
Because this measure provided roughly equivalent number of heuristics a firm employs when enter-
results, we do not report them in our tables. The ing a new country, the greater its performance in
overall model is not significant. that country. Model 3 also shows that the relation-
ship between heuristics and process performance is
7
much more significant than the effects of experi-
We further tested linear models for experience inverted Us
that were not significant (i.e., time between experience) and ence alone (adjusted R-square value of 0.23 versus
found that they were still not significant. 0.06).
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
40 C. B. Bingham, K. M. Eisenhardt, and N. R. Furr

Model 4 presents the results of the lower and stream emphasizes organizational cognition and, in
higher order heuristics (H5H6), including the particular, heuristics. Our purpose is to juxta-
control variables from Model 1 regressed on process pose these competing theoretical explanations
performance. We entered these variables as a sepa- to gain insight into organizational processes and
rate theoretical block from total heuristics due to capabilities.
high correlation between total heuristics and heu-
ristic types (see Table 1). Hypotheses 5 and 6 pre-
dicted that lower and higher order heuristics would
Principal results: heuristics-basis of capabilities
each have a positive effect on performance. Results
show that the model is highly significant (p < 0.001) Our core contribution is the insight that heuristics
with an adjusted R-square of 0.23. There is strong are at the heart of high performing organizational
and significant support for Hypothesis 5 (p < 0.05). processes, and so are central to firm capabilities.
The greater the number of lower order heuristics, Specifically, we find that high performing organiza-
the higher the country performance. Model 4 also tional processes consist of heuristics i.e., informal
strongly and significantly supports Hypothesis 6 rules-of-thumb that center on the capture of opportu-
(p < 0.05) indicating that the greater the number nities within flows of process-specific opportunities
of higher order heuristics, the higher the (e.g., new countries, acquisition targets, or product
performance. development projects). We also find that more heuris-
Model 5 presents a full model with all control tics relate to higher process performance. Moreover,
and hypothesized variables. This model is highly high performing organizational processes consist of
significant (p < 0.001) with continued statistical sig- particular types of heuristics. These are lower order
nificance for similarity of experience (inverted U) heuristics for choosing (selection) and executing
(H3), lower order heuristics (H5) and higher order (procedural) opportunities. For example, in one very
heuristics (H6). However, time between experiences high performing country entry, firm members used
(H2) is no longer significant. Model 6 is a parsimo- several selection heuristics such as Focus on low
nious version of Model 5, and includes only those cost chips for mobile devices, and Target countries
variables with statistical significance in previous that have ODMs or OEMs for mobile devices, and
models. This model is also highly significant (p < several procedural heuristics such as Use a consul-
0.001) with an adjusted R-square of 0.33. Together, tant to provide introductions and insight about the
Models 5 and 6 suggest that heuristics and experi- local market, and Segment customers into tiers.
ence similarity have significant and positive rela- We also find that higher order heuristics for pacing,
tionships with country performance, with heuristics sequencing, synchronizing (temporal) and ranking
having much stronger effects. (priority) multiple opportunities are especially
related to higher process performance. To illus-
trate, in one very high performing entry described
DISCUSSION as perfect, firm members used several temporal
and priority heuristics such as Take one continent
Organizational processes such as internationaliza- at a time (i.e., build up Europe, move to U.S., then
tion, acquisition, alliance, and product develop- China), Synchronize entry pace with countrys
ment are central within the strategy, organizations, retail lifecycle, and Begin with direct sales (then
and entrepreneurship literatures. They enable move to indirect sales). In contrast, in low perform-
firm members to perform tasks more effectively ing country entries, firm members have very few
(Pentland, 1995; Ray et al., 2004; Teece et al., 1997), heuristics that apply across country entries. Rather,
capture fresh opportunities for growth (Gilbert, they mostly engage in country-specific learning and
2006), adapt to changes in the market (Brown and related behaviors without developing or adapting
Eisenhardt, 1997) and, when high-performing, con- more generalized heuristics. Firm members are par-
stitute a primary feature of capabilities (Amit and ticularly unlikely to have higher-order heuristics that
Schoemaker, 1993; Eisenhardt and Martin, 2000; signal cognitive sophistication and expertness. For
Maritan, 2001). Yet, the source of high performing example, in one very low performing country entry
organizational processes is unclear. One research (e.g., not really any sales), heuristics were notably
stream emphasizes organizational learning from absent. As the CEO noted, Were taking it oppor-
experience. In contrast, an emerging research tunistically. Thus, we find that simply accumulat-
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
What Makes a Process a Capability? 41

ing experience (even when paced and appropriately a methodology that opens the black box of what is
similar) is weakly or not at all associated with a high learned from organizational process experience, we
performing process. can be more specific about the actual content of firm
A related contribution is the insight that opportu- capabilities. Thus, a core contribution of our study
nity-capture heuristics are also central to capabili- is that opportunity-capture heuristics are central to
ties. Although there is much debate on capabilities the structure of capabilities, especially in dynamic
in the literature, there is convergence on several markets and among entrepreneurial firms.
themes. First, capabilities rely extensively on orga- Another contribution is expanding the role of cog-
nizational processes (Amit and Schoemaker, 1993; nition in the creation of capabilities. While prior
Eisenhardt and Martin, 2000; Helfat et al., 2007; work highlights how cognitive phenomena such
Teece et al., 1997). For example, Stalk and col- as threat vs. opportunity framing (Gilbert, 2006),
leagues (1992: 62) stated that a capability is a set analogy (Gavetti, Levinthal, and Rivkin, 2005), and
of business processes strategically understood, identity (Tripsas and Gavetti, 2000) can influence
while Eisenhardt and Martin (2000: 1106) noted that capability development, we contribute heuristics to
dynamic capabilities consist of specific strategic this emergent cognitive emphasis. In particular, we
and organizational processes . . . Second, capabili- show how the creation of heuristics involves active
ties are learned from experience. Therefore, while cognitive engagement and results in the formation
preexisting endowments (e.g., human capital of of a robust organizational memory needed for effec-
founding team) may set the stage for capability cre- tively coping in dynamic markets. Memory is asso-
ation (Gavetti, 2005; Helfat and Lieberman, 2002), ciated with the brains efforts to impose structure
capabilities are primarily learned through doing on experience (Edelman, 1992). Numerous studies
as firm members enhance their understanding of in the cognitive sciences show that memory perfor-
causal relationships with accumulated experience mance is highly influenced by the encoding of expe-
(Chang, 1995; Helfat and Peteraf, 2003; Martin and rience (Broadbent, 1958; Miller, 1956). Without
Salomon, 2003). Finally, there is consensus on the some form of encoding, individuals often reflect less
need for high performance if a capability is to exist. on their experiences and thus retain only incom-
Thus, several studies show how the presence of a plete and impoverished recollections of what they
capability results in increased effectiveness (Zollo have done and how they did it (Schachter, 1996).
and Winter, 2002), productivity (Galunic and Eisen- This in turn increases the likelihood that short-term
hardt, 2001; Makadok, 2001) or efficiency (Collis, experiential lessons will not make it to longer-term
1994). In short, a central purpose of capabilities memory and be inaccurately recalled (if at all) in
is to improve performance (Maritan, 2001: 514). the future (Braddeley and Hitch, 1974; Broadbent,
Yet while there is convergence on these aspects of 1958). Intriguingly however, research also suggests
capabilities, their actual content is unclear. Some that only a certain type of encoding generates high
empirical research equates the content of capabili- long-term memory performance a cognitively
ties with outcomes such as measures of firm per- sophisticated encoding consisting of simple (not
formance (e.g., abnormal stock market returns) or elaborate) lessons that allow individuals to combine
non-financial measures of process performance new information with existing knowledge (Bradd-
(e.g., subjective measures of project development eley and Hitch, 1974; Broadbent, 1958). Heuristics
performance) (for a review see Ethiraj, Kale, and provide such an encoding because their semi-struc-
Krishnan, 2005). But this approach focuses on the ture gives shape to organizational processes, but
results of capabilities, not their actual content. Some also leaves room for heedful cognitive engagement
theoretical research argues that capabilities consist such as improvisation. Encoding of experience into
of resources, but lacks specifics about content (e.g., generalizeable heuristics may, therefore, not only
types of resources, organization of tacit knowledge) improve the quantity of organizational memory, but
(Barney, 1991; Helfat and Peteraf, 2003). Still also its quality such that firms are better able to adapt
other research points to the content of capabilities to uncertain situations. Overall, while prior work
as being best practice (Szulanski, 1996) or codified on heuristics in the entrepreneurship domain often
knowledge (Kale and Singh, 2007; Zollo and Singh, points to their maladaptive nature (Busenitz and
2004; Zollo and Winter, 2002), but also generally Barney, 1997), we spotlight their adaptive nature as
neglects details about content (e.g., structure and simple, deep, and flexible knowledge structures that
types of codified knowledge). In contrast, by using underpin capabilities.
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
42 C. B. Bingham, K. M. Eisenhardt, and N. R. Furr

Implications for strategy: extending the firms heuristics focused on using U.S. venture capi-
strategic logic of opportunity talists for insight (e.g., as the Japan country manager
stated, We have American investors, like DFJ and
Our work also contributes to strategy. Recent theory Walden International. They gave us some great
has sketched a typology of theoretical logics leading advice about who to work with, what to do, and
to competitive advantage: position, leverage and what to start with.) In contrast, a second firm relied
opportunity (Bingham and Eisenhardt, 2007). Yet on the local subsidiaries of multi-national corpora-
while strategic logics of position (Porter, 1996; tions (e.g., their Japan country manager noted, We
Rivkin, 2000) and leverage (Barney, 1991; Peteraf talk to quite a few people such as IBM Japan . . . It
1993) are well-known, the strategic logic of oppor- gave us a very good sense of the Japanese market.)
tunity is less well-developed. Although this logic The third company watched the moves of promi-
is implicit in empirical research (Burgelman, 1996; nent competitors. Overall, the uniqueness (and likely
Rindova and Kotha, 2001) and explored by simu- inimitability) of heuristics reinforces the key point
lation (Davis et al., 2007), this study is the first that organizational processes such as internation-
to validate the logic empirically. Specifically, we alization and their related heuristics are not just
confirm the theory underpinning the strategic logic of relevant for strategy, but perhaps are the strategy,
opportunity i.e., superior performance in dynamic especially in dynamic markets and among entrepre-
markets and among entrepreneurial firms comes neurial firms.
from choosing one or a few key organizational pro-
cesses that put the firm in abundant and attractive
Implications for entrepreneurship: opportunity
opportunity flows, and developing simple heuristics
capture and the role of structure
to guide the effective capture of those opportunities.
While past empirical research reveals that firms learn Our work contributes to entrepreneurship in several
opportunity capture heuristics from accumulating ways. One contribution is sharpening understand-
experience (Bingham et al., 2007), this study ties ing of opportunity capture in dynamic markets.
those heuristics to performance. That is, we support Prior research debates whether opportunities
the strategic logic of opportunity that links heuristics are discovered or created (Kirzner, 1997; Shane,
(i.e., their number and types) to effective opportu- 2000). In contrast, we note that our entrepreneurs
nity capture (and thus, high performance) through had a super-abundance of opportunities (e.g., many
an improvisational mix of efficient rule adherence potential countries). For example, one leader said
and flexible action. his firm could potentially sell in 139 countries.
At a broader level, this study may begin to reveal Since abundant opportunities imply that opportuni-
the essence of strategy in dynamic markets. As ties are readily discovered, entrepreneurs can be dis-
Porter (1996) notes, strategy is about being differ- criminating and pick the most promising. Moreover,
ent. But while he focuses on different positions although we saw many easily discovered opportuni-
in stable markets, we focus on different heuris- ties, these opportunities were also ill-formed, and so
tics in dynamic markets i.e., the distinctive set of were more effectively captured when firm members
heuristics developed by firms as their idiosyncratic relied on heuristics. Heuristics appeared to guide
decisions for how to compete. Although some heu- the extensive improvisational behavior needed to
ristics may relate to best practices (e.g., conduct adjust to the unique aspects of each opportunity.
due diligence when entering a country through an As a whole, these arguments suggest that opportu-
acquisition mode), most are unique choices about nity capture for firms in dynamic markets may be
how to be different in a competitively advanta- more about appropriate selection and execution of
geous way. Hence, while all of our firms identified opportunities, and less about discovery or creation.
the internationalization process as being vital and Since these environments are opportunity-rich, dis-
possessed the same types of heuristics (i.e., selec- covery is not difficult, and creation can be inefficient
tion, procedural, temporal, and priority), the specific when it leads to the under-exploitation of present
detail of their heuristics varied by firm and formed possibilities. Rather, the imperative for managers in
the basis of their strategy for being different. For these unpredictable settings is using organizational
example, three Singapore-based firms had different heuristics as improvisational referents to provide a
procedural heuristics for entering countries, even flexible constraint within which opportunity capture
when they entered the same country (Japan). One may unfold.
Copyright 2007 Strategic Management Society Strat. Entrepreneurship J., 1: 2747 (2007)
DOI: 10.1002/sej
What Makes a Process a Capability? 43

Another contribution is insight into the fundamen- that heuristics are at the heart of high-performing
tal value of more structure for entrepreneurial firms. processes, and thus firm capabilities. Experience
While cutting structure is often vital for established per se is not enough. Rather experience must be
firms entering dynamic markets (Gilbert, 2005), articulated into opportunity capture heuristics to
our findings suggest that the reverse is actually true achieve high-performance. At a broader level, we
for new firms in these settings. They need to add offer support for the view that strategy in dynamic
structure, especially since new firms lack the coher- markets and among entrepreneurial firms rests on
ence, direction and control that structure brings. For a strategic logic of opportunity, and may well be
example, a leader in a Finnish security software firm distinctive heuristics and organizational processes.
lacking heuristics remarked that there was No clear Most important, we add heuristics to the increas-
picture of the major countries that we should target. ingly influential cognitive paradigm in organization
In several country entries, leaders in this firm relied theory, strategy, and entrepreneurship.
on only a few procedural heuristics, and suffered
uniformly poor performance across countries. By
contrast, in a Singapore security firm, leaders quickly ACKNOWLEDGEMENT
developed many and different types of heuristics
including selection and procedural heuristics such as Support for this research was generously provided by the
Restrict internationalization to Asia, Target gov- National Science Foundation (IOC Award #0323176),
ernment and financial institutions, Target the IT the Robert H. Smith Schools Business and International
Education grant, and the Stanford Technology Ventures
group within customer organizations to get sales,
Program.
and Always use a partnership entry mode when
entering new countries. Over time, they added more
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