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process again caught the attention of researchers during 1990s
(Gartner, 1988: Venkatraman,
1989a and 1989b; Bygrave and Hofer, 1991; Shaver and Scott,
1991; and Venkatraman,
1997). The last two decades have witnessed the developments in
the area of EO-performance
relationship and adoption of contingency framework to
EO-performance relationship,
where it has been acknowledged that EO-performance relationship
is affected by the
organilational environment and industrial turbulence (Covin and
Slevin, 1989: Zahra,
1991; Wiklund, 1999; Zarua and Garvis, 2000; Lee and Penning,
2001; Yusaf, 2002;
Oimitratos er aI., 2004; Kraus e! aI., 2005; Wiklund and
Shepherd, 2005; Starn and Elfring, 2008; Kreiser and Davis, 2010;
Grande et aI., 2011).
Entrepreneurial Orientation EO has emerged as a major construct
within the strategic management and entrepreneurship literature
over the recent years. [t can be viewed as a characteristic of
organizations, which can be measured by looking at tOp management's
entrepreneurial style, as evidenced by the firms' strategic
decisions and operating management philosophy (Mme~ 1983). EO
should
be distinguished from entrepreneurship. The essence of
entrepreneurial orientation depends
on how entrepreneurs Implement entrepreneurship in the course of
realizing their career ambition. On the other hand,
entrepreneurship focuses on new entry. New entry can be
accomplished by entering either into new or established markets
with new or existing goods orservices (Burgelman, 1983). Covin and
Slevin (1988) argued that an organization's
EO is the summation of the extent to which top managers are
inclined to take business
related risks, to favor change and innovation in order to obtain
a competitive advantage for their firm and to compete aggressively
with other firms. They proposed that EO should
be considered as the strategic dimension which can be observed
from the fi~' strategic
posture running along a continuum from a fully conservative
orientation to a completely entrepreneurial one. They suggest that
firms with a propensity to engage in relatively high levels of
risk-taking. innovative and proactive behaviors have EO, while
those engaging in relatively low levels of these behaviors have
conservative orientation (Covin and Slevin,
1991). According to Lumpkin and Dess (1996), EO refers to the
processes, practices and
decision-making activities that lead to new entry. They
considered EO as a process
construct, which is concerned with the methods, practices, and
decision-making styles
used by the managers. However, the term EO is also used to refer
to the set of personal psychological trairs, values, attributes and
attitudes that are strongly associated with a motivation to engage
in entrepreneurial activities (Kilby, 1971: Mintzberg, [973;
Miller
and Toulouse, 1986; Kreiser er al., 2002; and Poon er aI.,
2006). EO is an imporrant measure of the way a firm is organized.
It has been conceptualized as the process and decision-making
activities used by entrepreneur to act entrepreneurially (Lumpkin
and Dess, 2001; Rauch
er a!., 2006: Kreiser and Davis, 2010; and Ullah er al., 2011).
In gist, EO refers to a firm's strategic orientation and it is
usually seen as [he extent to which a fum innovates, takes risks to
compete aggressively and acts autonomously and proactively.
-
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EO is a key ingredient for organizational success. Three types
of models are evident in the EO literature:
The construct model, in which the dependent variable is EO and
the researchers focus on its antecedents (Lachman, 1980; Miller and
Toulouse, 1986; Stevenson and Jaillo, 1990; Zahra. 1991; Zahra er
aI., 1999; Uttunen, 2000; Poon er aI., 2006; and HoltetaL,
2007).
The EO.Strategy model, which aligns the level of EO with
different strategies (Mlntzberg, 1973; Khandwalla, 1977; Mmer and
Friese, 1982; Burgelman, 1983; Galbraith and Kazanjin., 1986;
O:)Vin and Slevin, 1988; Zahra, 1993; Covin ot a!., 1994; lumpkin
and Dess, 1996; ness etal., 1997; Frese etal., 2002; and
lrelanderal., 2009).
The perfoonanee model, in which the EO-perfoonanee linkage is
explored, ohen including not only bivariate relationship, but also
multivariate relationship by considering moderating and mediating
variables related to external environment andlor organizarional
environment and by looking at the main effect between the two
variables as well as interaction effect with moderating or
mediating variables. (Covin and Slevin, 1989; Zahra, 1991; Wiklund,
1999; Zahra and Gatvis, 2000; Lee and Penning, 2oo!; Yusaf, 2002;
Dimitratos er al., 2004; Kraus er aI., 2005; Wiklund and Shepherd,
2005; Starn and Elfring. 2008; Ireland er aI., 2009, Kreiser and
DaviS, 2010; Grande er aI., 2011; and Soininen et aI., 2011).
Dimensions of Entrepreneurial Orientation EO has often been
operationalised in terms of three dimensions identified by Covin
and Slevin (1989), building upon the earlier work ofKhandwal1a
(1976) and Miller and Friesen (1982)1 viz" 'innovativeness\
'risk-taking' and lproactiveness', to characterize and test
entrepreneurship. Later, Lumpkin and Dess (1996) identified two
more dimenSions, 'autonomy' and 'competitive aggressiveness" to
conceptualize EO. However; it has sometimes been argued that
'autonomy' is an internal organizational driver of
entrepreneurship, which influences the organizational climate for
entrepreneurship (Hadji er a!., 2007; and Hough and Scheepers,
20(8). Secondly, some researchers claimed that 'Competitive
Aggressiveness' forms a part of the proactiveness dimension and
does not represent a separate dimension (Hough and Scheepers, 2008;
and Chang and Lin, 2011).
lunovariveness of entrepreneurs is measured by the propensity by
which they innovate their business (Milter and Friesen, 1982);
their willingness to tty new ways which are different from the
existing; the ~nthusias';; to adopt new ideas or new methods to
their business operation; and the eagerness to implement the
innovation strategy in their business
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creative, extraordinary or strange solutions to problems and
needs. Schumpeter ([934) considered entrepreneurship to be
essentially a creative activity and entrepreneur as an innovator
who carries out new combinations in the field of men, money,
material, machine and management. According to him, entrepreneur is
an economic man who tries to maximize his profits by making
innovations in anyone of the following fields: (1) new products;
(2) new production methods; (3) new markets; or (4) new forms
oforganization. The degree of an entrepreneur's innovativeness will
decide how far and how deep the innovation will go in business in
order to meet both the strategic goal formulated for the business
and the requirements from the environment (Hult er 01., 2004).
Innovativeness represents a basic willingness to depart from
existing technologies or practices and venture beyond the current
state-of-che-arc (Covin or 01.,20(6). An innovative strategic
posture can be Unked to firm performance as it increases the
chances that a firm will realize fIrst mover advantage, stay ahead
of their competitors, gain a competitive advantage and capitalize
on emerging market opportunities thac lead to improved financial
results (Kreiser er al., 2002; Hult er al., 2004; aad Kreiser and
Davis, 2010).
Risk-taking refers to the tendency to take bold actions such as
venturing into unknown new markets and committing a large portion
ofresources to ventures with uncertain outcomes. Cantillon (1730)
desctibed entrepreneur to be a rational decision maker "who assumes
risk and provides the management of the fum". In the 1800s, John
Stuart Mill argued that risktaking is the paramount attribute of
entrepreneurship. Risk-taking implies willingness for committing
huge resources to opportunities which involve probability of high
failure (Minrzberg, 1973; Zahra, 1991; aad Wikluad and Shepherd,
2003). Risk handling is the process in which potential risks to a
business are identified, analyzed, mitigated and prevented, along
with the process of balancing the COSt of protecting the company
against a risk versus the cost of exposure to that risk. The ideal
way to cope with risk is to perceive risk at its inception, and
taking risk under control right from its inception scage (Cornelia.
1996). Entrepreneurs, in actuality, tend to proactively deal with
the risks. Risk-taking has a curviUnear relationship with
performance ofentrepreneurial firms. Research suggests that
entrepreneurial firms exhibiting moderate levels of risk-taking
would outperform in market as compared to firms exhibiting either
vety high or very low levels of risk.taking (Begley and Boyd, 1987;
Kreiser et aI., 2002; Tanger 01., 2008; and Kreiser aad Davis,
2010). Factors such as process of forming a risk problem (Baird and
Thomas, 1985; and Stewart and Roth, 2001); results of past
risk-taking (Covin and Slevin. 1989; Goll and Rasheed 1997; and
Swierczek aad Ha, 2003); and the ability to pertorm underrisky
conditions (Brockhaus. 1980; Lichtenstein and Brush, 2001;
Dimltratosetal., 2004; aad Soininen etal., 2011) affect the
risk-raking ability of entrepreneur.
Proactivenoss is an opportunity-seeking, forward-looking
perspective involving introducing new products or services ahead of
the competition and acting in anticipation of future demand to
create, change aad shape the environment (Lumpkin and Dess, 1996;
and Kreiser er aI., 2002). Proactiveness is manifested in: (I)
aggressive behavior directed at rival firms; and (2) the
organizational pursuit of favorable business opportunities. It is
simply the
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ability to take initiative, whenever the situation demands.
Porter (1985) suggested that in certain situations, firms could
utilize proactive behavior in order to increase their competitive
position in relation to other firms. Proactiveness is concerned
with first mover and other actions aimed at seeking to secure and
protect market shate and with a forward-looking perspective
reflected in actions taken in anticipation offuture demand
(Venkatraman, 1989a and 1989b; Naman and Slevin, 1993; Lee and
Penning, 2001; and Dimitratos et al" 2(04). It is not only in
deferue, but in offence as well. It refers to processes aimed at
anticipating and acting on future needs by seeking new
opportunities which mayor may not be related to the present line of
operatioru, introduction of new products and brands ahead of
competition, strategically eliminating operations which are in the
mature or declining stages of life cycle (Swiercrek and Ha, 2003;
Green etal., 2008; Starn and Elfring, 2008; Clercq etal., 2010; and
Kreiser and Davis, 2010). Thus, proactiveness pertains to a
willingness to initiate to which competitors then respond.
Competitive aggressiveness refers to a firm's propensity to
directly and intensely challenge its competitors to achieve entry
or improve position, that is, to outperform industty rivals in the
marketplace (Kraus er aI., 2005). It also reflects the willingness
of a firm to be unconventional rather than rely on traditional
methods of competing. This aspeCt is used to measure how
entrepreneurial firms deal with threats, and it also refers to the
firm responsiveness directed toward achieving competitive advantage
(Lump king and Dess, 2001; Frese oral., 2002; and Grande ef a!.,
2011). In literature, the terms proactiveness and competitive
aggressiveness are often used interchangeably but there is a
difference between both terms. Proactiveness states how a fir:m
relates to market opportunities in the process of creating demand,
while competitive aggressiveness refers to how finns relate to
competitors, that is, how finns respond to trends and demand that
already exist in the marketplace (Lumpkin and .Dess, 2(01).
Autonomy refers to the independent action of an individual or a
team in bringing forth an idea or a vision and carrying it through
to completion (Lumpkin and Dess, 1996). In general, it means the
ability and will to be self-directed in the pursuit of
opportunities. In an organizational context, it refers to freely
taken action, irrespective of organizational constraints, for
establishment and smooth running of a venture (Shrivasrava and
Grant, 1985; Stevenson and Jaillo, 1990; and Kraus or a!., 2005).
Autonomy in fums may vaty with the size of organization, management
style, or ownership (Lumpkin and Dess, 1996).
There are diverse opinions to the issue whether"various
dimensions of entrepreneurial
orientation are independent of each other or not. Covin and
Slevin (1989) argued that entrepreneurial orientation is best
viewed as a unidimensional concept. On the contrary, Lumpkin and
Dess (\996) opined that various dimensions of EO may occur in
different combinations and hence, it is a multidimensional
construct. The basic premise underlying this argument is that each
of these subdimensions of EO may have a differential relationship
with entrepreneurial outcomes. For example, risk-taking has shown a
curvilinear relationship with performance, while innovation and
proacriveness have a positive and direct relationship with
performance (Kreiser er al., 2002; Tang er al., 2008; and Kreiser
and Davis, 2010).
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Business Performance Literature on the construct of perfurmance
reveals that there is no consensus among the researchers on the
appropriate measures of business performance indicators. As a
result, a wide diversity of performance measures, i.e., objective
and subjective measures, as well a financial and nonfinancial
measures were used across studied, which leads to high diversity in
EO-performance relationship (Chakravarthy, 1986; Venkataraman and
Ramanujam, 1986;. Murphy or a!., 1996; and Combs or aI., 2005).
Research that considers only a single dimension or a narrow range
of the perfurmance indicators may produce misleading results.
Therefore, the question arises as to what is the appropriate form
ofperformance measurement. Should it be financial? e.g., ,ales
growth, return on investment, income growth or profitability; or
nonfinancial, e.g., satisfaction level of stakeholders or positive
response in community; or both. It has heen widely accepted by the
researchers that objective measures of performance are more
appropriate than subjective measures of performance. Objective
data, howeve~ is very difficult to obtain as respondents are
reluctant to release sensitive information to the outsiders (Dess
and Priem, 1995). On the other hand, owners and managers are
generally inclined to proVide subjective evaluation of their firm
performance, which lacks strong reliability (Wiklund, 1999; and
Wiklund and Shepherd, 2005). Alternatively, performance can be
viewed to be multidimensional in nature and therefore it is
advantageous to integrate various subjective and objective measures
of performance for accurate measurement of performance (Lumpkin and
Dess, 1996; Murphy er aI., 1996; Yusaf, 2002; Combs et a!., 2005;
and WIldund and Shepherd, 2005).
Entrepreneurial Orientation - Performance Relationship The
relationship between entrepreneurship and fl!11\ perfurmance has
received considerable attention in the organizational and
entrepreneurial literature over the last two decades. Scholars have
theorized that the incidence of fl!11\level entrepreneurial
behaviors, i.e., the propensiry to engage in relatively high leve
Is of risk-taking, innovative and proactive behaviors is positively
associated with organizational profitability and growth (Covin and
Slevin, 1991; Lumpkin and Dess, 1996; Wiklund and Shepherd, 2003;
Covin et aI., 2006; Ireland et al., 2009; and Soininen et aI.,
2011). However, the magnitude of this relationship seems to vary
across studies. While some studies found that businesses that adopt
a strong EO perform better than firms that do not adopt an EO
(Covin and Slevin, 1988; Wiklund and Shepherd, 2003; Hult et aI.,
2004; Kraus et aI., 2005. and Kreiser and Davis, 2010), studies
also report of lower correlations between EO and performance
(Zahra, 1991; Dimitratos et aI., 2004; and William and Sinkula,
2009). Other set of studies failed to find a significant
relationship between EO and performance (Covin etal., 1994; George
et aI., 2001; and Tang and Keveos, 2004). Some studies have shown
that the relationship between EO and perfurmance is not that
straightforward, rather it is shaped like inverted U (Bhuian et
al., 2005; and Tang et aI., 2008), .which means that a high degree
of EO is not always desirable in certain market and structural
conditions. Thus there is a considerable variation in the reported
relationships between EO and business performance. The reasons for
variation in results can be attributed
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to factors like difference in the scales of entrepreneurial
orientarion being used, difference in methodology being adopted,
opinion regarding moderating variables and different indicator
components of performance being measured.
Literature suggests that the relationship between EO and
performance is not that straightforward, rather it is influenced by
the interference of various elements of organizational and
industrial environment. Venkatraman (l989b) suggested the
moderating effects, mediating effects, independent effects and
interacrion effects models for investigating the impact of third
variables as a means of exploring contingency relationships.
In the moderating-effects model, the form or strength ofthe
EO-performance relationsrip varies with organizational structure.
Covin and Slevin (1988) suggested that organizations are arrayed
along a mechanistic .. organic continuum. which constitutes "two
formally contrasted forms of management system". 'Organic
organizations' typically are decentralized and informal, and have
emphasis on lateral interaction and an equal distribution
ofknowledge throughout the organizational network. On the contrary,
'mechanistic organizations' tend to be highly centralized and
formal. Many researchers argue that EO needs to be associated
with the low structural formalization. decentralization and low
complexiry inherent in the organic organization strUctures for
better performance (Khandwalla, 1977; Covin and Slevin, 1991; Naman
and Slevin, 1993; Kreiser and Davis, 2010; and Krause! al.,
2011).
The mediating-effects model considers EO to be an antecedent
variable, fum performance to be the outcome, and integration of
organizational activities to be the mediating variable. Effectively
integrating activities and processes intervene in the relationship
between EO and performance. Miller (1983) suggested that such
integrating activities would include the "extensive use of
structural integration devices such as committees and task forces,
Porter
(1985) suggested the term horizontal organization, which
consists of horizontal structures, horizontal systems and
horizontal human resource practices to integrate activities across
business units within a corporation.
In independent-effects models, EO and environmental munificence
are depicted as having independent effects on the firm perlOrmance.
Environmental munificence refers to the avaiiabUity of resourceS
and the amount of extemal opportunities that are present in a
specific environmental setting and can also be considered as the
profitability or growth rates of the industry in which a fum
competes (Mintzberg, 1973; Miller and Frieses, 1978; Miller, 1983;
Dess and Beard, 1984; and Covin and Slevin, 1988). This
relationship is consistent with the traditional industrial
organization paradigm which suggests that the industry within which
a firm competes has a critical impact on its performance (Porter,
1985).
Lastly, in interaction-effects mndels, various elements of
organizational and industrial environment are believed to interact
with EO to influence firm performance (Naman and Slevin, 1993; and
Lumpkin and Dess, 1996). Wiklund (1999) indicated that increase in
fIrm
performance related to EO is sustainable over long perinds of
time, but this relationship may be contingent on the environmental
context in which the firm operates. Wiklund and Sheperd
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(2005) suggested that studying multivariate configurations ofan
entrepreneurial orientation and other important constructs may
provide a more complete understanding of the entrepreneurial
orientation.perfurmance relationship than bivariate models. Other
variables, in addition to EO. could also influence performance
directIyor may moderate the relationship between EO and
performance. Rauch et a!. (2006) claimed chat relationship between
entrepreneurial orientation and performance is moderated by
national culture, size of business organization, and technology
intensity of the firm. Starn and Elfring (2008) have
highlighted
the role of network centrality in EOperfurmance relationship.
Kreiser and Davis (2010) suggested that no single structure is
universally appropriate for an organization. The contingent factors
upon which the appropriate structure depends may include
organizational factors like strategy. size, support, resources,
etc., and environmental factors like dynamism, munificence,
regulations and industry turbulence, etc. Contingency theory
further suggests that congruence or 'fit' among key variables such
as industry conditions and organizational processes is critical for
obtaining optimal performance and the relationship between two
variables is dependent
upon the interference of a third variable, therefore, by
introdUCing moderators into EO.performance relationships, the
misleading inferences can be reduced and more precise and specific
understanding about EOperformance relationship can be developed
(CoVin and Slevin. 1989; Zahra. 1991; Zabra and Gatvis, 2000;
Jogaratnam. 2002; Dimitratos er aI. 2004; Hult or al., 2004;
Wiklund and Shepherd, 2005; Rauch et al., 2006; Green er aI., 2008;
Kreiser and Davis, 2010; Grande el aL, 2011; and Scininenet aI.
2011).
Conclusion and Suggestions EO is an important measure of the way
a firm is organized, and it is often conceptualized as the process
and decision-making activities used by managers to act
entrepreneurially. On the basis ofextensive review ofliterature and
by considering the arguments ofvarious researchers, the paper
acknowledges EO as a key ingredient for organizational success. The
review suggests that EO is a multidimensional construct
operationalized in terms of the variables linnovativeness\
'risk#taking't 'proactiveness\ (autonomy' and 'competitive
aggressiveness'. The literature on business performance reveals
that a variety of performance measures, i.e., objective and
subjective measures (financial and nonfinancial), are used across
the studied, which results in high variation in EOperformance
relationship. It is observed that the objective measures of
performance are more appropriate than subjective measures of
perfurmance. However. respondents are generally reluctant to
release sensitive inrormation to outsiders. Therefore, a
combination ofsubjective and objective measures of performance is
recommended for accurate measurement of performance. The paper
suggests that a strong EO results in high business performance. The
review also highlights the importance of contingency and
configuration framework to understand a more accurate picture of
EO'performance relationship. Instead of focusing on bivariate
relation, future research on EO.performance relation should adopt
contingency and configuration approach (which emphasizes two and
three.way interaction effect) by introducing various organizational
and environmental elements as moderating and mediating v~riables.
0
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Please read the following article and answer the question.
4\ Write a summary of this article in Chinese. (50%)
lNTRODUCTION
. Despite more than a decade of strategic management research on
dynamic capabilities,
important conceptual issues remain. A critical, unresolved issue
that research has yet to address
involves the distinction between dynamic and operational (or
ordinary) capabilities. In particular,
we often encounter the view that capabilities only qualifY as
dynamic if they aim to promote
seemingly large amounts of change in a short period of time.
This stance may reflect a desire to
draw a bright line between dynamic and operational capabilities.
In what follows, we explain why
the line between these capabilities is unavoidably blurry, and
why capabilities that promote
economically important yet gradual change are in fact dynamic.
We begin with an explanation of
the sense in which we use the terms 'capability' and 'dynamic
capability,' as background for the
ensuing analysis. Then we discuss several factors that cause the
line between operational and
dynamic capabilities to blur, including the existence of
dual-purpose and' multiple-variant
capabilities. As part of this discussion, we explain why it is
critical to bring costs into the analysis.
We conclude with recommendations for future research.
TERMINOLOGY
We focus here on the organizational capabilities of for-profit
firms. Capabilities can be
analyzed at other levels
-
MJillIT : ii':~~!JI!~ N : ~~x:ltX
a!., 2000; Winter, 2000, 2003). The repeated and reliable
capacity is a particularly important feature
of a capability; otherwise, almost by definition, a firm caIUlot
be said to have a 'capacity' to do
something. We take 'minimally satisfactory performance' to imply
that the output of an activity is
recognizable as such, and functions at least minimally as
intended (Helfat et aI., 2007). Success at
that level implies nothing about economic viability, much less
superior performance.
Important concepts rarely have edges that are entirely sharp,
and this case is no exception. We
briefly take note of some of the issues that have been
identified in the literature, where different
discussions (even by the same authors) may tilt the usage in
somewhat different directions. First, it
is obvious that an important 'matter of degree' issue lurks in
the words 'minimally satisfactory' and
also in 'reliable.' Historical contexts and prevruling
competitive standards are generally relevant to
the practical interpretation here, and this contextual aspect is
central when we move on to discuss
the economic viability of a capability. Second, the ability to
perform' is understood to inhere in the
organization and is in substantial part the fruit of its
experience; it is not simply a skill of a single
individual or feature of a single machine, or an ability to
access market opportunities in a
straightforward way, or an ability to painstakingly enact a
highly codified recipe created somewhere
else. Capabilities theorists view capabilities as a key
dimension of firm heterogeneity (Nelson and
Winter, 1982), and, in some cases, of the kind of idiosyncrasy
or inimitability that confers
competitive advantage. The understanding of capability as being
substantially 'home grown' is
central to that perception. Finally, we generally have in mind
substantial units of activity with
significant consequences for financial performance and other
outcomes-the ability to operate a
network of scheduled airline flights rather than a single
flight, the whole supermarket or the whole
supermarket chain rather than the produce department of a single
store. But, as we have suggested,
usage in all these respects may vary somewhat depending on the
question at hand.
Moving to the specific subject of this essay, prior research has
distinguished between perational
(or ordinary) and dynamic capabilities (see, e.g., Winter, 2003;
Helfat et aI., 2007). We understand
operational capabilities to be those that enable a firm to make
a living in the present (see Winter,
2003). Thus, an operational capability enables a firm to perform
an activity on an on-going basis
using more or less the same techniques on the same scale to
support existing products and services
for the same customer population. Such a capability is ordinary
in the sense of maintaining the
status quo (that is, not out of the ordinary; Winter [2003] and
Collis [1994] refer to these as zero
order capabilities).
In contrast, a dynamic capability is one that enables a firm to
alter how it currently makes its
living. This is the sense in which Teece, Pisano, and Shuen
(1997) introduced the term, and this
general usage has continued to this day (see e.g., Ejsenhardt
and Martin, 2000; Zollo and Winter,
2002; Zott, 2003; Winter, 2003, 2007; Teece 2007; Helfat et aI.,
2007; Helfat and Peteraf, 2009;
Easterby-Smith, Lyles, and Peteraf, 2009; Di Stefano, Peteraf,
and Verona, 2010; Winter,
forthcoming). Firms can use dynamic capabilities to extend or
modify how they make a living in
many ways, as the examples in the following discussion
illustrate. This can include altering
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operational capabilities (Winter, 2003), or what Helfat et al.
(2007) call the resource base of the
organization (broadly denoting those things on which firms draw
to perform activities), or features
of the external environment or ecosystem (Teece, 2007).
As for any sort of organizational capability, to say that a firm
has a dynamic capability implies
reliable patterned behavior (Winter, 2003; Helfat et aI., 2007).
Examples of dynamic capabilities
include those for conducting acquisitions, alliances, and new
product development, which alter the
ways in which firms eam their living (lansiti and Clark, 1994;
Helfat, 1997; Dosi et aI., 2000;
Eisenhardt and Martin, 2000; Kale, Dyer, and Singh, 2002; Capron
and Mitchell, 2004; Zollo and
Singh, 2004; Helfat et aI., 2007).4 These dynamic capabilities
have very specific purposes and
support very specific activities (Winter, 2003; Helfat et aI.,
2007). Although we sometimes
encounter a more expansive use of the term dynamic capabilities
to connote a generic capacity to
undertake change, we worry that this risks making the concept so
broad as to have little meaning.
THE BLURRY LINE BETWEEN DYNAMIC AND OPERATIONAL CAPABILITIES
Dynamic and operational capabilities differ in their purposes
and intended outcomes. But as we
next explain, it is impossible to draw a bright line between
these two sorts of capabilities because: 1)
change is always occurring to at least some extent; 2) we cannot
distinguish dynamic from
operational capabilities based on whether they support what is
perceived as radical versus
non-radical change, or new versus existing businesses; and 3)
some capabilities can be used for
both operational and dynamic purposes.
Change is always occurring to some extent
Nothing ever stays exactly the same, so 'one does not step into
the same river twice'
(Heraclitus). Yet we often say that 'there is nothing new under
the sun' (Ecclesiastes). As Bimbolz,
Cohen, and Hoch (2007: 316) put it, this is the 'paradox of the
(n)ever-changing world.' If
everything is changing all the time, what then is the basis of
the impression that some things do not
change at all?
Part of the answer to this conundrum lies in one's perspective.
If you examine small details
close in, you see. much more change than if you attend to large
phenomena or high-level
descriptions, or perceive from afar. Bimbolz et al. (2007)
observe that in a summer camp for
children, the overall 'character' of the camp (a large
phenomenon) endured despite substantial
turnover in personnel each year (smaller details). Similarly, if
we attend to descriptions at a high
level of abstraction, such as the overall Jorm of an
organization (as in the distinction between
generalists and specialists) and observe that it remains the
same over time, this may mask important
changes in the strategy or capabilities of the organization. In
turn, a close look at the features of a
capability may reveal substantial change, whereas a distant view
may not.
The time period over which one assesses the extent of change
matters as well. Change often
takes time, and slow change takes time to build something
readily perceptible. Levinthal's (1998)
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analysis of the development of wireless telephony provides an
instructive example, Ifl which
incremental changes in fits and starts over many years
ultimately resulted in a completely new
communication technology. Examining only a snapshot of time
during this period would not have
revealed the enormity of the eventual change. This issue arises
with respect to technological
innovation within companies as well. For example, dynamic
capabilities to enga,ge in process
research and development (R&D) enable firms to fine-tune
their operational capabilities for
manufacturing. But if we examine the capacity to manufacture a
particular good over too short a
period of time, we may observe no change in this capacity and
incorrectly conclude that the firm
lacks dynamic capabilities.
As these examples illustrate, whether or not one observes
capabilities that promote change may
depend on the granularity of observation; what looks from a
distance like no change masks more
granular change close up. Moreover, some of the activities are
both highly intentional and gradual
in effect, as in wireless telephony. Because things are always
changing to at least some extent,
identifYing a precise threshold level of change that separates
an operational capability from a
dynamic one is likely to be fruitless, or to produce answers
that vary erratically across cases. fnstead,
it may be more useful to assess the nature and speed ofchange
that a capability enables.
Radical versus non-radical change and new versus existing
businesses
Teece et al. (1997) originally defined dynamic capabilities as
those enabling adaptation to
external environments characterized by rapid or discontinuous
change. Although Eisenhardt and
Martin (2000) subsequently noted the im~ortance of dynamic
capabilities in 'moderately dynamic'
environments, we frequently encounter the view that unless an
organizational capability promotes a
seemingly radical change in how a company makes a living, it is
not dynamic.
The fact that radical change is difficult to define with
precision suggests the difficulty of using
it (or similar concepts such as disruptive or discontinuous
change) to demarcate when a capability is
dynamic. Moreover, to echo a point made earlier, assessment of
the extent of change is likely to be
a matter of perspective, expertise, and degree. Across wide
ranges of human activity (including
academic scholarship), qualified experts quite often disagree on
whether an acclaimed performance
is path-breaking or not. Moreover, a litmus test requiring that
a dynamic capability be one that
makes possible a very large amount of change (at least in the
eye of the beholder) would rule out
inquiry into capabilities that underpin change that is
economically important, difficult to accomplish,
and yet arguably far from radical when viewed one step at a
time.
As an example, consider new product development at Intel. This
company repeatedly
developed new generations of semiconductor chips for personal
computers every 18-24 months, for
years on end. Ralph Gomory, then vice president of R&D at
IBM, once responded as foHows to a remark on innovation in the
semiconductor industry; 'Innovation in semiconductors? I am not
sure
there is innovation in semiconductors. They just keep doing the
same thing over and over.' At a
high level of abstraction, this has some truth. Intel and other
firms did, in fact, keep developing
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faster and faster chips year after year. But at a more granular
level of observation, we see a capacity
for repeatedly modifying and improving the design of an
enormously complex product. Not only
did this dynamic capability create new semiconductor designs,
and thereby augmentcompany
resources, but also the repeated successes generated through
this capability were hardly a foregone
conclusion-despite the superficially non-radical changes in
product design(Henderson, 1995).
Creating new semiconductor designs involves the organization of
a large number of scientists and
engineers working on multiple interconnected tasks, with a
challenging mandate to obtain an order
of magnitude greater processing speed and low defect rates. It
also requires managing complex
relations with equipment suppliers and customers, to address
crucial issues of manufacturing
feasibility and market acceptance. Arguably, without this
product development capability, which
enabled Intel to ward off potential competitors and trounce
actual competitors, the company never
would have been as profitable as it was (see also Turner,
Mitchell, and Bettis 2010). And, if the
astonishing reductions in the cost of computation had not been
complemented by massive J::hange in
the use made of computing power, the trajectory would have been
a disaster iIi profitability
terms-underscoring again the extent of the novelty involved. As
another example, consider outlet
proliferation by chain retailers such as Walmart and Starbucks,
and lodging chains such as Marriott.
Outlet proliferation has a critical impact on the economic
fortunes of these companies, providing
growth at low cost if implemented well. The basis for this
outlet proliferation rests on a capability
for replication that entails a complex and interwoven set of
organizational routines, which are used
in conjunction with resources such as blueprints for new outlets
and a functioning template (an
outlet) that enables observation of tacit elements (Winter and
Szulanski, 2001). This capability for
chain outlet expansion qualifies as a dynamic capability in that
it is a repeated and reliable capacity
for the extension of the resources of the company in the form of
physical outlets. This holds true
even though, when viewed from afar, each incidence of expansion
may give the misleading
impression of more of the same-despite the fact that a company
like Starbucks hardly resembles
its humble roots as a coffee shop in Seattle,
Yet another ,example comes from the upstream oil industry.
Because oil and gas fields deplete
once production begins, companies would fail to survive in the
upstream exploration and
production business without replenishing these assets. Locating
oil and gas reserves on a repeated
basis is a technologically difficult and organizationally
complex activity, involving teams of
geologists, engineers, information technologists, and managers.
This capability has much in
common with Intel's capability to design semiconductor chips;
both provide the capacity to perform
technologically challenging resource augmentation activities,
underpinned by routines, using highly
skilled personnel and advanced information technology. Like
Intel's product design capability, a
reserve replenishment capability may look from afar like more of
the same (and therefore, an
operational capability), in the sense that oil companies have
sought new reserves since the industry
began. Nevertheless, by definition this capability is dynamic,
because it enables companies to
repeatedly add to their assets through the discovery of new and
different geologic formations that
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contain reserves.
As these examples illustrate, capabilities that support existing
businesses or seemingly
nonradical change may have important dynamic attributes. These
capabilities also entail costs to
develop and maintain the capability, and to obtain the requisite
inputs or resources. For example,
Intel's dynamic capability to design new semiconductors entails
a durable commitment of funds to
support highly skilled personnel, along with investments in
specialized facilities and equipment.
Because the requisite training, physical investments, and
development of routines often have a high
degree of organization specificity, much of the upfront cost is
likely to be sunk (nonrecoverable
through sale).
These sunk costs make dynamic capabilities costly bets that can
payoff only through new or
improved production and sale of goods and services. Revenues
must cover not only the costs of
production but also the costs ofdeveloping and maintaining
dynamic capabilities. This implies that
firms may need to repeatedly deploy a dynamic capability in
order to generate sufficient revenues
from new and improved products and services to cover costs
(Winter, 2003). Not surprisingly, in
the thrce preceding examples, the companies have used their
dynamic capabilities more or less
continuously. Further, they are large enough to realize the
benefits of the intrinsic scale economics
in the utilization of new knowledge. Smaller companies, by
contrast, need to avoid the overhead
burdens of such costly dynamic capabilities. They frequently do
this by temporarily diverting
resources from ordinary capabilities to change-oriented project
teams (Obstfeld, forthcoming). The
diverse applications of this familiar way of organizing again
illustrate the 'blurry line,' since they
range from plainly ad hoc efforts to address isolated problems
to recurreni episodes of similar
responses to similar problems, and the latter practice borders
on full dynamic capability-reducing
and disguising, but not fully eliminating, its costs.
In sum, dynamic capabilities often support far from radical
change in the short run, and not
necessarily in rapidly changing enviromnents--to which the
example of outlet proliferation, which
occurred in relatively placid enviromnents, attests. Firms also
may profit most from dynamic
capabilities through repeated application. These observations
reinforce our earlier point that
relegating some capabilities to the non-dynamic category,
because in the short run they have not
generated what are perceived as radical shifts, may obscure the
full potential of these capabilities.
Notably, all three of the examples ~bove are characterized by
smaller amounts of change in the
short run but large amounts of change when viewed in the longer
rnn. Moreover, even though
creating new product designs or new outlets or finding new
reserves may be a well-practiced
exercise for the performing organization, these actions often
represent significant change for
competitors and customers.
Dual-purpose and m'ultiplc-variant capabilities
A further complication arises because some types of capabilities
can be used for both
operational and dynamic purposes, either because they have
different variants (some more
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operationally oriented and some more dynamic), or because one
capability simultaneously serves
both dynamic and operational purposes. This again makes it
difficult to draw a sharp line between
dynamic and operational capabilities.
Consider, for example, capabilities that provide what we term
'market access,' such as those
for distribution, marketing, and sales. These capabilities can
promote new product introductions as
well as existing products. The consumer products company Procter
& Gamble is renowned for its
ability to develop and maintain brands, having pioneered an
approach to brand management that has
diffused widely. In this approach, the brand manager has
complete responsibility for a brand. Like
other aspects of a marketing capability used to promote both old
and new products, it is difficult to
divide brand management neatly into operational and dynamic
components. For example, an
individual brand manager may have responsibility for more than
one brand, some of which may be
established brands and some of which may be new brands.
Moreover, brand managers are likely to
rely on many of the same company routines and processes to
promote both new and old products
suggesting that brand management is a dualpurpose capability,
subject to economies of scope in its
application.
Microsoft provides another example of a dualpurpose
market-access capability. Bresnahan and
Yin (2005, 2007) show that Microsoft came to dominate the
personal computer (PC) Internet
browser market in part through intentional and sustained efforts
to build demand. Microsoft
targeted adoption by end users, Web site builders, developers,
and 'influentials' (pundits, the trade
press, etc.), so as to create a positive feedback loop in which
product adoption by key players led to
mass market adoption. This sustained and nontraditional
marketing effort suggests an underlying
dynamic capability for market access. Microsoft combined this
capability with strategic use of
distribution, whereby the company imposed contractual conditions
on personal computer
manufacturers that required them to put the Microsoft Internet
Explorer on PCs, making this the
default browser for PC customers. In these ways, Microsoft
altered the external environment
(ecosystem) to its advantage. Moreover, Microsoft's
market-access capability served a dual purpose
of sustaining sales of existing versions of its browser and
promoting new generations of the browser,
leading to Microsoft's long-term dominance of the market.
In addition to dual-purpose capabilities, some types of
capabilities may have mUltiple variants.
Consider integrative capabilities that enable communication and
coordination across organizational
units and firms (Helfat and Campo-Rembado, 2010; Fortune and
Mitchell, forthcoming). These
capabilities can serve an operational purpose, for example by
facilitating shared activities that
produce economies of scope across stages of production or
product lines. Other types of integrative
capabilities can make change possible, such as through the
coordination of design and manufacture
in new product introduction (Iansiti and Clark, 1994). Thus, an
integrative capability may be
dynamic or operational, depending on the nature of the
capability and its intended use.
An integrative capability also may serve a dual purpose, such as
its use in ambidexterity to
manage both new and existing businesses (Tushman and O'Reilly,
1996). O'Reilly and Tushman
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(2008) observe that ambidexterity relies in part on dynamic
capabilities of top managers (Adner and
Helfat, 2003) to perform targeted integration of emerging and
mature businesses. In this way,
managerial capabilities may contribute to an organization-level
integrative capability in
ambidexterity.
CONCLUSION
In a (n)ever-changing world, dynamic capabilities assume prime
importance. But as we have
argued, the line between dynamic and operational capabilities is
unavoidably blurry. With this in
mind, we offer the following three general suggestions for
research on dynamic capabilities.
Judiciously utilize categories of capabilities with regard to
change
Because the world is always changing to some extent, it is
important to assess the extent, nature,
and speed of change that a capability enables. Capabilities that
promote economically significant
change are dynamic, even if the pace of change appears slow or
undramatic. Some capabilities also
have primarily operational purposes, and should be acknowledged
as such. In addition,
dual-purpose and multiple-variant capabilities that have both
operational and dynamic purposes
deserve greater attention.
Include non-radical change (in the short run), ongoing
businesses, and relatively placid
external environments in research on dynamic capabilities
Dynamic capabilities are not restricted to new-tothe-world
businesses or fast-paced
environments or what is perceived as radical change. For
example, dynamic capabilities often
support existing businesses. Many quintessential examples of
dynamic capabilities, such as new
product development at Intel, corne from ongoing businesses.
Another quintessential example,
namely, outlet proliferation at Starbucks and Walmart, occurred
in a gradual fashion in a relatively
placid external environment, yet the eventual outcomes
irrevocably altered the scale and scope of
company resources as well as the ecosystems of the industries
involved and the environments of
many communities.
Be aware of one's own perspective and biases
These may determine how much change one observes. What appears
to be dynamic (or not)
may change when one's perspective changes. At the very least, it
behooves us to be forthcoming
about the level of granularity and time frame of observation,
and what this may imply for any
conclusions regarding dynamic capabilities.
Adapted from: Helfat, C. E. and Winter, S. G., 2011.
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1. Please read the arti91e and complete the following questions:
(1) Give a title for this study. (5%) (2) Draw the conceptual
framework of this study. (10%) (3) Complete all of the hypotheses.
(35%)
Many finns are trying to capitalize on the power of client
reference behavior as part of their general marketing and
sales efforts to encourage new customer adoption. For
business-to-business (B2B) finns especially, the use of
referencing behavior is often the only alternative for
leveraging the value of current clients on new customer
adoption
through social influences. For B2B fums, the use of referencing
behavior is important because, unlike for
business.to-consumer (B2C) firms, the purchase decision process
often does not rely on other social influences such as
word of mouth (WOM) or referrals from other businesses. For
example, Micr~soft has created a Customer Reference
Program to influence prospects to adopt their products and
services.' The fum does so by directing prospects to a
website that contains case studies and white papers from a
sample of current clients, selected by Microsoft to represent
what its sales executives believe are the best examples of
successful implementations of Microsoft products and
services. These case studies serve as references from current
clients that Microsoft uses to influence prospects to adopt.
To date, there has been limited research explaining the social
influences present in B2B settings (Libai et al. 2010).
Therefore, it is not yet clear how seller fums can quantify the
value that these references provide, whether seller firms
are able to determine which clients are likely to be the most
valuable references for new customer acquisition, or which
reference formats are the most effective at influencing
prospects to adopt. In this study, we focus on further
understanding the role and value of client references,
specifically in a B2B selling context. We aim to anSwer the
following four key research questions:
I. Can we measure the value of a business reference from a
client?
2. What are the key drivers, both in terms of the referencing
client 'and the fonnat of reference, of the value of the
reference?
3. Are clients that generate valuable references the Same ones
that are the most profitable in terms of their own
purchasing behavior to the seller firm?
4. What types of elients tend to generate high-value
references?
Our goal is to understand the key drivers of reference selection
by the seller finn and the drivers of BRV for each
client reference. Specifically, we argue that fmns strategically
select as references current client finns that are likely to
maximize the profitability from potential client firm purchase
behavior. In addition, we argue that potential client fums
make decisions to adopt to maximize the benefit they receive
from the relationship with the seller finn. Both situations
are driven by similar theoretical constructs. Research suggests
that a potential client fum's decision to adopt (i.e., build
a strategic alliance) is driven by examining the current
alliances that the seller fum has built (Gul.ti and Gargiulo
1999).
Moreover, the strength of these current alliances depends on the
"trusted informants" (or references) provided by the
seller firm and the degree to which those infonnants are
embedded in the seller finn. In addition, the ability of the
information transferred from the trusted infonnant to the
potential client firm to be understood and relatable depends on
the richness of the communication and the degree to which the
infonnation provided is similar to the business situation
the potential client firm faces. Thus, seller firms should
select trusted informants to pass along the most valuable
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information to potential client ftrms.
From this discllssion, we believe that there are four key
drivers of reference selection and reference value: (I) the
degree to which the client firm can be viewed as a trusted
informant through client finn size, (2) the degree to which the
client ftrm has built a strategic alliance with the seller
f1l111 through length of client relationship, (3) the ability of
the
communication to convey information to the potential client firm
through reference media format, and (4) the degree to
which the information provided is relatable to the potential
client ftrm through reference congruency.
To use client references to influence prospect adoption, the
ftrst step a seller ftrm must take is to select which
firms from its current client database are the best candidates
to be references. We anticipate that seller firms select these
clients strategically to maximize the impact of the influence of
the reference. The seller firm aims to reduce the
information cost of search and information asymmetry, with the
goal of making the decision to purchase easier for the
prospect (Spence 1973). Reducing information asymmetry by
providing information that is not otherwise available (i.e.,
prospects cannot experience the benefits of the product or
service until adoption) at a relatively low cost (e.g., through
a
reference) can be an effective signaling strategy (Connelly et
al. 2011). In addition, this infurmation is likely more
valuable when tbe ftrm is trusted or has a good reputation in
the marketplace (Morgan and Hunt 1994). Moreover, large
firms tend to receive more public scrutiny than small firms
(Fombrun and Shanley 1990) ..However, even if this
information does not always put the ftrm in a positive view, the
mere availabillty of information about and familiarity
with large ftrms tends to inflate people's opinion of the larger
firms' activities (Tversky and Kahneman 1974). As a
result, we expect that current client firms whose attributes are
visible in the marketplace and are perceived as valuable
to the marketplace (e.g., significant size) are more likely to
provide an effective reference to prospects through their
reputation. Here, we derme "client firm size" as the size of the
firm in the marketplace, whether it is based on labor
force or scale of operations. As a result, we expect that it is
in the best interest of the selling ftrm to strategically
select
larger client firms to be references. Thus:
Hla:
When consumers rely on external information to help in purchase
decisions, they often rely on the credibility of
the source as well as the information that is being passed along
(Gershoff, Broniarczyk, and West 2001). The source of
the rererence offers a signal to the prospect about the type of
firms that currently purchase from the selling ftrm (Herr,
Kardes, and Kim 1991). Research has shown that the credibility
of the source of the WOM in both B2C and B2B cases
matters (Wangenheim and Bay6n 2007). In addition, in many
instances, especially those such as celebrity endorsements
(McCracken 1989), the perceived value of the product or service
is directly tied to the source. Research has also shown
through interviews with managers that source often plays a
significant role in the effectiveness of business references
(Godes 2008). Moreover, recent research has suggested that the
value of the .client ftrm's reputation is often passed
along to the seller firm through the reference (Helm and
Salminen 20 I 0), where higher reputations tend to be linked to
larger ftrms (Tversky and Kahneman 1974). Thus, we anticipate
that the client featured in the reference provides a
valuable signal to the prospect merely through its identity in
the marketplace, such that larger current clients offer a
positive signal to prospects about the quality ofthe products or
services and the quality ofthe selling ftrm. Thus:
Hlb:
We expect seller firms to strategically select client references
according to the level of embeddedness the client
has with the seller ftrm, where the embeddedness is often
stronger when the relationship between the seller and client
-
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firm is longer. Here we defme length of client relationship as
the total expected time of the relationship between the
seller and client firm, which includes not only the length of
the past relationship but also the expected length of the
future relationship. The structure and quality of ties between
the referencing client and the seller fll1ll, where a more
integrated structure and a higher quality relationship lead to
higher expectations of relationship length. Research has
shown that longer relationships between organizations increase
the likelihood of new product selection (Kaufman,
Jayachandran, and Rose 2006). To relate this research to
reference selection, it suggests that tirms with longer
relationships are more likely to be selected as client
references. However, research on buyer-seller relationships
indicates that overembeddedness (too much relationship length
and depth) actually creates a dark side to relationships
(Wuyts and Geyskens 2005), suggesting that seller firms are most
likely to select clients with a moderate level of
relationship length as references. Thus:
H2a:
We also anticipate that the client's behavior with the seller
firm in particular, and not just its firm size, can signal
to the prospect about the quality of the seller firm. For
example, Heide and John (1990) find that prospects can view a
closer relationship between a seller firm and current client as
a way to reduce the ambiguity of purchase. However,
research in the management literature also suggests that
overembeddedness beyond a certaln threshold can be
problematic because it may indicate to the prospect that the
referencing fU111 is unfamiliar with potential alternatives
(Uzzi 1997). As a result, we anticipate that the longer the
relationship between the referencing client and the seller
fU111,
the more positive (to a threshold) the signal will be to the
prospect. Thus:
H2b:
Research has shown that the way the content is delivered and the
quality of the information of any marketing
communications can playa significant role in for industrial
purchasing (Moriarty and Spekman 1984). Thus, the
medium and specific format of the reference should also playa
key role in determining the value of the reference. We
define "reference media format" as the type of reference
provided such that different media formats change (I) the
amount of information that can be conveyed and (2) the amount of
uncertainty of the message content that can be
alleviated (Daft and Lengel 1986). For example, research has
shown that richer modes of communication are more
likely to infiuence customers to purchase (Venkatesan and Kumar
2004) because they are perceived to have more
valuable information content, convey a greater effort by the
firm to communicate with the consumer, and potentially
provide a more customizable opinion from the c\lent. We
anticipate that a reference that provides information in a
richer
medIa format is likely to be more effective in influencing a
prospect to purchase. Thus:
H3:
Another key factor to consider is whether the referencing client
is congruent with the prospect. Here we detine
"reference congruency" as the degree to which there are
similarities between the referencing client and the potential
client. For example, we observed from the qualitative interviews
that prospects may be interested in references from "
firms from the same industry, fU111S that purchased similar
products or services, or even references from people who
hold the same role within their firm (e.g., marketing,
operations). Recent research has shown that seilers can benetit
from selecting specific referrals for prospects that have a high
level of congruency (Hada, Grewal, and Lilien 20 II).
This homophUy between the client providing the reference and the
prospect is likely to generate trust and reciprocity
(Goldenberg et aL 2009) and strengthen the bond (Le., tie
strength) between the two parties (Brown and Reingen 1987).
-
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As a result, we anticipate that references from clients with
greater congruency with the prospect are more influential in
getting the prospect 10 adopt. Thus:
H4:
Research on commitmcnt and trust suggest that when both
commitment and trust are present, "they produce
outcomes that promote efficiency, productivity, and
effectiveness' (Morgan and Hunt 1994, p. 22). We predict that
larger fIrms are a more trusted reference in terms of a stronger
signal of quality. to the prospect. This suggests that not
only should larger fIrms'send a positive signal to the prospect,
which serves to reduce the uncertainty of the purchase
decision, but they should incrementally strengthen the other
drivers of the value of the reference. Thus, after controlling
for the main effect of firm size, we hypothesize the
following:
H5:
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In general. the interaction between service employees and
customers is considered an essential part of both cUSw tamers'
assessments of service quality and their relation ship with the
service provider (Bitner 1990; Gwinner, Gremler, and Bitner 1998;
Parasuraman, Zeithaml, and Berry 1985). Despite the considerable
amount of empirical research on service relationsbips and customer
assessment'i of service quality. several aspects of the service
interaction have remained unexplored. An are. of particular
interest is the role of emotions in service encounters. Although
the ootion of having a friendly serviee staff and providing
"service with a smile"' has become a generally unquestioned mantra
for service flI11lS. empirical research about how employees'
emOtional sta[e..'i affect cus~omers and their
ThoIster> HennVJ'Thurau is Professor of Marketing and Media
Research ("!TOil: [email protected]>weimar.del, and ",jchael Paul is
a doctoral SI!J' dent (..mail: [email protected]).
Oeparorent of Mar keting and Media Researeh, College 01 Media,
Bauhaus-University 01 Weimar, Germany.Markus Groth is a senior
_rer. 0epar1men10l Orga. nizational Behavior, AuslraJian GmciJale
School of Management, University of New Soulh Waios (s-maiI:
[email protected]). Dwayne D, Gremlar is AssociaW Professor 01
Marketing, Depar1merlt 01 Marketing, College of Business
Administration. Bowling Green Sillte UnM!rsity (e""il:
[email protected]).The authors thank the students invoMld in tl1e
deta colection lor tl1eir support, espeelally Johanna Pauge,
Farnovsh f'ourehrahimzadeh, and Vmcent Charles lor their acting
performances. They also tha'li< the tl1ree anonymous JM
ravie"""" Alicia Grandey, Doug Pugh, and Anna Mattila lor their
helpful and construcliWl comments on pravious """,ions of tl11s
article. They are (Tatelul to CineStar and Coo rorde Home
Erlertainment Io! confJiOOling the iweimar.del
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A second contribution of this study is our use of an
experimental research design that enables us to assess the
cause-effect nature of emotional contagion processes more
precisely. The extant services literature on emotional conta gion
has not answered the question whether customers really catch
employee emotions. Responding to Pugh's (2001, p. 1026) statement
that "in the absence of a true ex.perimental design. it is not
possible to conclude that cootagion alone is re!\ponsihle [for the
variation in customer consequences}:- our research establishes such
causal relationships and fills an important gap in the
customeremployee-emotions literature.
We flISt review the concepts that are central to our study~
namely, emotional/contagion. emotional labor, and customer
consequences of service interactions, and then we present a
conceprual model and discuss the relationships among the model
elements. Next, we describe the design of our experiment, which
enables us to examine the relationships of the conceptual model
using a two-way repeated measures analysis of variance (ANOYA) and
partial least squares (PLS) structurdl equarion modeling. Finally,
we present the findings and their implications for services
research and management
The Role of Emotions in Service Interactions
Emotional Contagion Research on emotional contagion attempts to
explain how emotions are transmitted among people in social
interactions and how "catching" another person's emotions affects
the dynamics of the social interaction. Emotional contagion can
occur at both subconscious and conscious levels (Barsade 2002).
That is, the proces., of emotional contagion can be '!ltributed to
people's "tendency to automatically mimic and synchronize facial
expressions. vocalizations. and movements with those of another
person and, conse~ quently, to converge emotionally" (Hatfield,
Cacioppo, and Rapson 1994, p. 5) and to more con$cious social
comparison processes between people (Ban;ade 2002).
With "primitive emotional contagion" (Hatfield, Cacioppo, and
Rapson (994), the Imnsfer of emotions from one person to another is
the result of the receiver's unconscious, emotive processes. This
rype of emotional contagion is driven by a two~step mimicry
process. in which a person (I) spontaneously imitates another
person's facial expres~ sions and other nonverbal cues, which (2)
leali, the person to experience the corresponding emotions through
physiological links. Although the pelllon feels the emotions that
result from mimicry, the processes that lead to this emotion are
often "subconscious and automatic" (Barsade 2002, p. (48), A..~ a
consequence. emotional contagion theories sug~ gest that primitive
emotional contagion is spurred by the extent to which the sender
displays emotions; a greater emotional display by the sender
results in higher levels of emotional contagion in the
receiver.
In contrast, "conscious emotional contagion" is based on social
comparison processes in which people actively search for emotions
a"" a type of social infonnation (Saian M
cil< and Pfeffer 1978). This search activity is considered a
fundamental human behavior, which grows particularly strong in
situations perceived as ambiguous (Gump and Kulik (997).
SpecificaUy, conscious emotional contagion theory argues that
people compare their mood with another person's mood and adopt the
sender's emotive level when it appears appropriate (Barsade 2002).1
For example, in the absence of other social informatiol4 people
visiting an attorney for the first time can be expected to observe
the attorney's emotional display and then to adopt his or her
emotions as a result of their desire to search for social infor~
mation and reduce perceived ambiguity. Unljke primitive emotional
contagion, conscious emotional contagion is determined less by
th';; extent to which the sender displays emotions during an
interaction (e.g., frequency of smiling) and more by the
authenticity with which the emotions are displayed (e.g.,
genuineness of a smile). When the receiver perceives the sender's
emotional dispJay as fake or djsin~ genuous, he Or she will not
interpret the emotional display as adequate for reducing perceived
ambiguity, so conscious emotional contagion is less likely to
occur.
Emotlons/Labor
The concept of emotional labar, which we consider a potential
driver of customers' emotional states and subsequent assessments of
serVice interactions, refers to the "effort, planning, and control
needed 10 express organizationally desired emotions during
interpeISOoal transactions" (Morris and Feldman 1996, p. 987).
Recent management literature has considered emotional labor in an
effort to better understand how service oIganizations can manage
employees' positive displays to customelll. Furthermore, it is
linked to the existence of either explicit or implicit
organizational display rules (Rafaeli and Sutton (987) that define
which emotions employee,. are expected to display and which they
should suppress in the course of interacting with customers.
In general, service employees are expected to align their
displayed emotions with organiZ3tionally desired emotioos through
their choice of emotional labor strategies (Hochschild 1983). With
regard to specific emotionallabot strategies, scbolars have drawn
00 Hochschild's (1983) distinction between surface acting and deep
acting as the pri_ mary framework for service employees. In
"surface acting," an employee tries to change only his or her
outward behavior to e:dUbit the required emotions. Thus. sutface
acting refers to the act of displaying an emotion that is not felt
and could involve both suppression of felt emotions and faking of
unfelt emotions. For example, when dealing with an angry or
annoying customer, an employee may simply put on a smile and
pretend to be cheerful and friendly without actually feeling the
emotions. In other words, surface acting consrirures the expression
of feigned emotions and lacks authenticity (Orandey 2003), With
"deep acting," however, employees express expected (or required)
emotions by attempting to create tllese emotions within themsel
ves. This
lThis lYpe of emotional contagion is sometimes referred to as
"emotional comparison" in the li.[eralure (e.g . Bartel and Saavedm
2000)
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strategy is similar to the method-acting technique developed by
Russian director Constantin Stanislavski (1965), in which actors
are taught to create self-induced true emotions by using their
emotional memory and recalling prior experiences and emotions
(Hochschild 1983). As an example of deep acting in the context of
service delivery, Hochschild reports on flight atteodants who are
trained to deal with angry p .."engers by thinking of them as
frightened, firsttime fliers. This process enables the flight
attendants to change their inner feelings toward the customer from
annoyance [0 pity and sympathy_ Thus, the distinction between
surface acting and deep acting is conceptually aligned with the
"service-as-theater" metaphor, which postulateI' the interaction
between service employees and customers as a dramaturgical
interaction i~ which actors (ie. employees) perform (i.e., provide
service) on stage (Le., the service environment) in front of an
audience (i.e., customers) (Grove and Fisk (992).
Consequences of Service Interactions
The display of employee emotions and the resultant customer
emotiorls likely affect various outcomes of interest to marketing
managers. We focus on three major customer. consequences of service
interactions that are considered particularly relevant to service
companies: customer satis~ faction. customer-employee rappoI1 t and
customers' future loyalty intentions. . .
"Customer satisfaction" is widely regarded as the cogrutive
assessment of a customer's emotional experience (Hunt 1993). As
Oliver (1981) discusses, satisfaction is consumption specific; that
is, it is related to a singJe consuf!lption experience. This
transaction-related characteristic is often considered the main
difference between satisfaction and similar evaluative concepts,
such as con.wmer attitude and perceived service quality, whicb are
regularly modeled as overall construct~ or general evaluations of a
service and are unrelated to a specific consumption episode
(HennigThuran and Klee 1997).
"Customer-employee rapport" is "a cus~mer's percep~ tion of
having an enjoyable interaction with a service provider employee,
characterized by a personal connection between the two
interactants" (Gremler and Gwinner 2000. p. 92). As a relational
concept applicable to service settings, rapport depends on one or
more interactions between employees and customers. Similar to
satisfaction, customer-employee rapport represents a customer's
cogni~ tive asseSsment of an affective state. It also is important
to stress that rapport can be cultivated through a single service
interaction and does not depend on a shared long~term history.
Customer-employee rapport has been identified as a salient issue
for service organizations because rapport exerts a strong influence
on customer perceptions of service delivery and service
organizations (DeWitt and Brady 2003; Gremler and Gwinner
2000).
FinaUy, customers' "future loyalty intentions" constitute a
ccntral component of service loyalty (Oliver 1997), which itself is
defined in various ways. Most definitions focus on a customer's
willingness to visit a particular fum again because of his oC her
positive emotions and cognitions (Oliver 1999). In empirical
research, future intentions repre
sent a frequently studied component of loyalty, when loyalty is
dWined andIor measured as future intentions (e.g_, Farnell 1992;
Rust and Zahorik 1993; Zeithaml, Berry, and Parasuraman 1996). We
emphasize future loyalty intentions because we believe that, in
general, the future behavior of customers i~ of more interest to
service marketerS than cur~ rent consumer attitudes (Le.,
atlirudinalloyalty) andlor prior behavior.
A Conceptual Model of the Impact of Employee Emotions on
Customers in Service Interactiolls The impact of different
facets of employees' emotional displays on customer emotions and
their consequences for customers constitute the focus of this
research. In Figure 1. We sbow the conceptual medel and the
specific hypothcses tested herein. Irl the foHowing section, we
discuss the pro~ posed relationships in detail.
Impact of Employee Emotions on Customer Emotions
Drawing on emotional contagion and emotional labor theories~ we
contend that in interpersonal interactions between employees and
customers, the likelihood that 'n employee's emotions affect
customer emotions is facilitated by two key variables: the extent
of an employee's smiling and the authenticity of his or her
emotional labor display. Although prior research has found that
employees who deliver "service with a smile" increase a customer's
service experience (e.g., Rafaeli and Sutton 1989; Tsai and Huang
2(02), liltle is known about how or why an employee's display of
emotions is related to customer consequences. Emo~ tional contagion
theory (Hatfield, Cacioppo, and Rapson 1994) suggests thaI people's
expression of positive emo-' dons facilitate..~ a corresponding
emotional state in others. McHugo and cOUeagues (1985) demonstrate
that exposure to images of smiling faces produces corresponding
observed and self-reported emotions in study participants.
Furthermore, as we discussed previously. primitive (Lc.,
subconscious) emotional contagion suggests that the extent of a
service employee's positive emotional display (e.g., amount of
smiling) is the key driver of emotional contagion (Hatfield,
Cacioppo, and Rapson 1994). Thus, on the basis of the assumption
that customers perceive employee smit:. ing, we argue that if an
employee: increases his or her amount of smiling, customers are
more likely to mimic these facial expressions subconsciously during
the encounter~ thus altering their own emotional state. We Use the
term "customer positive affect for this positive emotional stale
(DeWitt atld Lin 2002; Watson and Tellegen 1985).
We also expect that the authenticity of the service employee's
emotional labor display influences the cus[orner's emotional state.
As we indicated previously. deep acting and surface acting are
alternative strategies that
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Customer Consequences of Employee Emotions
In addition to the proposed effects on customer positive affect,
we also expect that the independent variables (i.e., extent of
employee smiling and aumenticity of the emotional labor display)
directly affect bom customer satisfaction with the transaction and
customer-employee rapport. Regarding customer satisfaction,
customers often interpret an employee's emotional display as part
of the service itself (i.e., the notion of service as theater;
Grove and Fisk 1992), which suggests that they hold expectations
about the display of positive emotions (i.e., smiling) that
influence meir level of satisfaction (Tsai 200 I). Regarding
customeremployee rapport, an employee's smiling may be an
antecedent of rappor4 in that it increases the receiver's enjoyment
of the personal1nteraction (Gillis, Bernieri, and Wooten 1995;
Tickle-Degnen and Rosenthal 1990).
Similarly. we expect that the provision of authentic emotions as
part of employee deep acting leads to greater customer satisfaction
and rapport than does an inauthentic emotional labor display (i.e.,
surface acting). Grandey (2003) finds that employees' 11'" of deep.
acting leads to higher ratings of service delivery than does the
use of surface acting. and Grandey and colleagues (2005) report
that customer sati;:;faction is higher when customers perceive
employee behavior as authentic. Grandey (2003) also provides
support for the direct impact of the type of emotional labor
strategy on cu.'Homer-perceived rapport. In her study,
employees'deep acting is related to perceptions of friendliness and
warmth, both of which are considered characteristics of rapport
(GremIer and Gwinner 2000).
Relationships Between Customer Emotions and Customer
Consequences
Theoretical suppott for the impact of a customer's emotional
state on his or her satisfaction comes from service research. which
suggests that customer satisfaction with a service encounter is
strongly influenced by customer erno
tions (Oliver 1997). [n particular, when customers assess a
specific consumption experience (i.e form their le\-'Cl of
satisfaction wim the service), they draw strongly on meir current
emotional state and ask themselves questions such as "How do I feel
about it?" Thus, a change in a customer's emotions due to an
employee's emotional display should influence the customer"s
satisfaction. This impact is consistent with the
affect-...-infonnation model from social psychology (Schwartz and
Clore 1988), which suggests that people rely on their moods as
information cues when they make evaluative judgments. Consequently.
a change in customer emotions facilitated by an employee's
emotional display should lead to a change in customer satisfaction)
such that an increase in customer positive affect results in higher
levels of satisfaction.
We further hYPothesize that an increase io customer positive
affect as a result of employee emotions will influ~ cnce customers'
perceptions of their rapport with the employee. Specifically, when
a customer is "infected" by an employee's positive emotions as a
result of a service interaction, the customer likely will enjoy the
interaction with the service emp10yee to a greater extent. Because
an enjoyable interaction is a key characteristic of
customeremployee rapport (Gremler and Gwinner 2000), an increase in
customers' positive emotions should ultimately lead to higher
levels of rapport.
The services literature also indicates relationships among
customer-employee rapport, customer satisfaction wim the
transaction, and future loyalty intentions. Specifically, we argue
that rapport is positively related to customer satisfaction because
an enjoyable interaction with a high degree of customer-employee
rapport is usually one in which customers reveal personal
information, wbich enables employees to customize the service
offering to the customer's needs (GremIer and Gwinner 2000); bom of
these elements are considered integral parts ofcustomer sat~
isfaction. Furthermore, we expect that customer satisfaction is
positively related to customers' future loyalty intentions through
the creation of positive attitudes toward the service provider (Yi
1990), a claim we base on both attitude theory (Fishbein and Ajzen
1975) and exit-voice theory (Hirschman 1970). Finally, because
customers who personally like a service employee and have rapport
with him or ber can be expected to fonn positive expectations about
a future service experience with mis employee (Gremler and Gwinner
20(0). we propose that customer-employee rap~ port has a positive
relationship to customers' future loyalty intentions.
H.,: Cmtomer-employee rapport if: positively related (0 cus~
tomer satil'faction with the tran.~action.
RIO: Cusromc:r-empioyee rappon iF: positively related to cus*
tomers' future loyalty intentions.
HI1 : Cu/:tomer $atis:faction with the ttatI/:acuon is
positively related to custOftle!1i' future loyalty intentions.
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Self-determination theory and work
motivation
MARYLENE GAGNE 1* AND EDWARD L. DECe IDepartment of Management,
.101m MoLl'on School oj Business, Concordia University, MOl!treal,
Quebec, Canada 2Department ofClinical and Social Science.! in
Psychology, University ofRochester; Rochester; New York, USA.
Introduction
Building on Vroom's (19M) expectancy-valence theory of
motivation. POrler and Lawler (1968) proposed a model of intrinsic
and extrinsic work motivation. Intrinsic motivation invoJ vcs
people doing all activity because they find it interesting and
derive Rpontancolls satisfaction from the activity itselF.
Extrinsic motivation, in contrast! requires an instrumentality
between the activity ,md somc separable consequences such as
tangible or verbal rewards, so satisfaction comes not ti'OlTI the
activity itself but rather from tile extrinsic consequences to
which the activity leads.
Pmtcr and Lawler (19(i8) Ildvocated structuring the work
environment so thm effcctive performance would lend to both
intrinsic and extrinsic rewards, which would in turn produce total
job satisfaction. This W:IS to be accomplished by enlarging jobs to
make them Illorc interesting, and thus more intrinsically
rewarding, and by making extrinsic rewards sllch as higher pay and
promotions clearly contingent upon effective performance. Implicit
in this model is the assumption that intrinsic and cxtrin,ic
rewards arc additive, yiclding total job satisfaction.
Porter and Lawler's model, Vroom's theory, and other
expectuncy-valence formulations generated considerabLe research,
much of which confirmed and relined aspects of thc approach (sec
MitchoI!,
1974). However, one strand of rescarch cOl1ccming the additivity
of intrinsic and extrinsic motivation was potentially problematic
and controversial. Specifically, early stuuics testing thc
additivity hypothesis found that tangible extrinsic rewards
undermincd intrinsic motivation wliereas verbal rewards enhanced it
(Ded, 197[), tIm, implying that intrinsic and extrinsic motivation
can be both positively and negativcly interactive ralher than
additive, Based on several early experiments, cognitive evaluation
thcory (CET; Oeci, 1975; Oed & Ryan, 1980) was pmpm;ed to
explain the clrcets or extrinsic moti Valors on intrinsic
motivation.
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Cognitive Evaluation Theory
Cognitivc evaluation theory suggested first that extemnl factors
such as tangible rewards, deadlines (Amabile. Dejong. & Lepper,
1(76). surveillance (Lepper & Greene. 1975). and evaluations
(Smith, 1(75) tend to diminish feelings of autonomy. prompt a
change in perccived locus of causality (PLOC) from internal to
external (deCharms, 1968; Heider. 1(58). and undennine intrinsic
motivation. [n contrast, some cxtcmal factors such as providing
choicc about aspects of task engagement tcnd to enhance feelings of
autonomy, prompt a shift in PLOC from external to internal. and
increase intrinsic motivation (Zuckennan ct al.. 1978). .
CET further suggested th,lt feelings of competence as well as
feelings of autonomy arc important lor intrinsic motivation.
Studies showed that optimally challenging activities were highly
intrinsically motivating (e.g .. Dunner & Lonky, 1981) and that
positive feedback (Deci, 1971) facilitated intrinsic motivation by
promoting a sense of competence when people relt responsible for
their successful perfonm1l1ce (Fisher, 1978; Ryan, 1982). Further,
negative feedback which decreased perceived competence was found to
Itndernlinc both intrinsic and extrinsic motivation. leaving people
lIn1otil'(lted (Dcci & Ryan, 1985a).
Underlying these CET propositions was the assumption that people
need to feel autonomous and competent. SO social-colllcxtual
factors thIlt promote feelings of autonomy and competence enhance
intrinsic motivation, whereas factors that diminish these fcclings
undermine intrinsic motivation, leaving people either controlled by
contingencies or amotivated.
Spirited debatc ensued concerning hotb the undermining effect
and CET (e.g., Calder & Staw, 1975; Deci. 1976; Decl, Cascio,
& Krusell, 1975; Scot I. 1975). leading to numerous laboratory
experiments and field studies intended to support, refine,
exten