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Cognition & Capabilities: A Multi-Level

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Article in The Academy of Management Annals June 2013

DOI: 10.1080/19416520.2013.769318
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COGNITION & CAPABILITIES: A MULTI-LEVEL PERSPECTIVE
J. P. EGGERS
New York University
Stern School of Business
Department of Management and Organizations
40 West 4th Street, Tisch 715
New York, NY 10012
jeggers@stern.nyu.edu
SARAH KAPLAN
University of Toronto
Rotman School of Management
105 St. George St., Room 7068
Toronto, ON, Canada, M5S 3E6
sarah.kaplan@rotman.utoronto.ca
Academy of Management Annals
January 15, 2013
Key words: cognition, capabilities, routines, dynamic managerial capabilities, exaptation,

interpretation, organizational change, assembly of capabilities
The authors are grateful for comments on earlier drafts from Pamela Barr, Gino Cattani,
Constance Helfat, Jennifer Howard-Grenville, John Joseph, Tomi Laamanen, Anita McGahan,
Sven Petersen, Mary Tripsas, and Gianmario Verona, as well as participants at the SMS Annual
Conference (2012). The authors are listed alphabetically. All errors and omissions remain the
authors.
COGNITION & CAPABILITIES: A MULTI-LEVEL PERSPECTIVE
Abstract: Research on managerial cognition and on organizational capabilities has essentially

developed in two parallel tracks. We know much from the Resource Based View about the
relationship between capabilities and organizational performance. Separately, managerial
cognition scholars have shown how interpretations of the environment shape organizational
responses. Only recently have scholars begun to link the two sets of insights. These new links
suggest that routines and capabilities are based in particular understandings about how things
should be done, that the value of these capabilities is subject to interpretation, and that even the
presence of capabilities may be useless without managerial interpretations of their match to the
environment. This review organizes these emerging insights in a multi-level cognitive model of
capability development and deployment. The model focuses on the recursive processes of
constructing routines (capability building blocks), assembling routines into capabilities, and
matching capabilities to perceived opportunities. To date, scholars have focused most attention
on the organizational-level process of matching. Emerging research on the microfoundations of
routines contributes to the micro-level of analysis. The lack of research on capability assembly
leaves the field without a bridge connecting the macro and micro levels. The model offers
suggestions for research directions to address these challenges.
INTRODUCTION
Research on the impact of organizational capabilities on firm performance has been a
centerpiece of strategic management theory in the 1990s and 2000s. But through much of this
research, the role of managers has been conspicuously absent from the conversation (see such
seminal work as Collis, 1994, and Barney, 1991). This has begun to change. Adner and Helfat
(2003) and King and Tucci (2002) have more recently argued that capabilities (and resources)
must be properly utilized by managers in order to be effective at driving firm performance.
Similarly, in Teeces evolving discussion of dynamic capabilities, the focus is particularly
organizational in the early articles (Teece, Pisano & Shuen, 1994, 1997) and decidedly more
managerial later on (Teece, 2007; Augier & Teece, 2009).
Recognizing that strategies for the deployment of capabilities are conceived of and
implemented by managers, researchers have begun to devote more attention to the cognition of
managers and the interpretive processes in which they engage (e.g., Benner & Tripsas, 2012;
Eggers & Kaplan, 2009; Gavetti, 2005; Kunc & Morecroft, 2010). Their initial insights suggest
that managerial cognition plays a central role in capability development and deployment. While
these initial studies are intriguing, they remain fragmented. We sense that they are examining
different parts of the elephant without an appreciation of the whole animal. This article seeks to
draw together the different bits and pieces in order to provide a sketch of the elephant. In doing
so, we offer a detailed review, a dynamic model, and a roadmap for future research on the
interconnections between cognition and capabilities.
Intellectual history of cognition and capabilities
Starting with Lawrence and Lorschs (1967) seminal work on organizations responses to
Cognition and Capabilities -1-

their environments and Learned, Christensen, Andrews and Guths (1965) introduction of the
SWOT (strengths, weaknesses, opportunities, threats) framework, research in strategic
management focused primarily on the match that organizations made with exogenously given
parameters established by the environment in which they operated.
Since that time, two streams of research emerged one examining organizational
capabilities and the other managerial cognition. The capabilities approach (and the Resource
Based View) problematized the organization by showing that heterogeneous capability
endowments across organizations could lead to differential performance even in the same
environment (Barney, 1991; Henderson & Cockburn, 1994; Henderson & Clark, 1990; Nelson &
Winter, 1982; Prahalad & Hamel, 1990; Wernerfelt, 1984). Managerial cognition scholars
problematized the environment by suggesting that it is not purely exogenous; instead, managerial
interpretations of the environment shape how organizations respond to it (Barr, Stimpert & Huff,
1992; Daft & Weick, 1984; Lant, Milliken & Batra, 1992; Ocasio, 1997; Porac, Thomas &
Baden-Fuller, 1989; Reger & Palmer, 1996).
Both of these approaches capabilities and cognition were useful correctives to the
then-prevailing assumptions in strategic management. And they each spawned tremendously rich
streams of research that continue to this day. However, they have essentially developed along
parallel but separate paths (Laamanen & Wallin, 2009).1 That is, the cognition scholars have for
the most part foregrounded managerial interpretations of the environment while black boxing or
at least backgrounding the routines, skills and capabilities of the organization. And, the
capabilities scholars have focused on capabilities as a source of inertia or adaptation to the
environment without considering how the interpretation of the possibilities presented by the
1
Laamanen and Wallins (2009) search of 20 years of the top 10 management journals in the ISI Web of Knowledge
identified 426 research articles referring to cognition and 586 to capabilities, but only 30 that addressed both, of
which only 10 focused on the relationships between them.

environment might matter for outcomes.
It is only recently that scholars have begun to link the two sets of insights. This has come
primarily in the form of studies that examine organizational response to change in the operating
environment. These studies highlight, for example, how the match between capabilities and the
market cannot be made if managerial beliefs are not aligned with the opportunity (Eggers &
Kaplan, 2009; Tripsas & Gavetti, 2000) or how forward-looking managerial attention to new
opportunities can even compensate for a lack of needed capabilities in spurring the organization
to take action (Gavetti, 2005). While most of the work has focused on the match made between
the organization and its environment, other research has shifted the focus to the
microfoundations of capabilities in order to shed light on how they are developed. Here, scholars
have suggested that routines and capabilities emerge from particular understandings about how
things should be done (Coriat & Dosi, 1998; Kaplan & Henderson, 2005) and that the nature and
usefulness of these capabilities is subject to interpretation over time (Danneels, 2011).
A plan for this study
To reflect on these recent developments and build a tighter link between research on
capabilities and that on cognition, this paper explores the possible interconnections at various
levels of analysis from routines to capabilities to organizations.2 It blends previously
unconnected or only partially connected literatures that together shed light on important
questions about how cognition and capabilities are reciprocally intertwined.
The literature points to three processes by which cognition and capabilities recursively
2
It is not within purview of this study, nor would it be feasible, to provide comprehensive reviews of each of the
separate domains of cognition and capabilities. For deeper considerations of these areas, see Walsh (1995) and
Kaplan (2011) on managerial cognition, and Becker (2004), Felin and Foss (2009), Parmagiani and Howard-
Grenville (2011), and Gavetti et al (2012) on routines and/or capabilities.

interact. First, the process of construction addresses the ways in which cognition is implicated
in the development and maintenance of routines, which are the building blocks of capabilities.
Second, the process of assembly addresses how these building blocks are assembled based on
managerial interpretations of the potential value of the resulting capabilities. Third, the process
of matching addresses how choices about the application of capabilities to the environment are
shaped by managers interpretations of the match between them. A variety of literatures offers
glimpses into these three processes and, collectively suggest a model of capability development
and deployment that considers the role of cognition across the levels of routines, capabilities, and
organizations.
This review first discusses why incorporating cognition should be valuable in updating a
basic model of capability development and deployment. The review then analyzes existing
studies that inform each of the three cognitive processes that generate a more complete model of
the relationship between capabilities and performance, and reflects on the recursive links that
identify the interdependencies in these processes. The model helps classify the literature into
meaningful categories and also identify gaps and open questions that should be useful in guiding
future research.
COGNITION AND CAPABILITIES: A BASELINE MODEL
A central argument of many streams within strategic management is that capabilities and
resources are built through experience, and that these capabilities and resources in turn drive
organizational performance. The latter is the central contribution of the Resource Based View of
the firm, which views heterogeneity in organizational resources as an explanatory factor for
heterogeneity in performance (Barney, 1991; Wernerfelt, 1984). The concept that these

capabilities and resources are accumulated through experience builds on concurrent work in
organizational learning (Argote, Beckman & Epple, 1990) and asset accumulation (Dierickx &
Cool, 1989). From an empirical perspective, experience-based measurements are often used as a
proxy for the resources and capabilities possessed by the organization (e.g., Klepper & Simons,
2000; Zollo, Reuer & Singh, 2002). A few studies (exemplified by King and Tucci, 2002)
highlight the managerial choice of a strategy moderates the link between capabilities and
performance, but in the majority of studies managerial choice is not explicitly modeled or
measured. Managers are seen as seamless and rational conduits in the deployment of capabilities.
The implied model of capability development and deployment therefore looks like Figure 1a
below organizations accumulate experience that leads to the creation of capabilities, and those
capabilities are deployed (implicitly through managerial choices) to generate organizational
outcomes.
-- Insert Figure 1a about here --
Yet, such a model connecting experience to organizational performance makes three
assumptions that elide important processes. The first assumption is that the origins and
emergence of capabilities are unproblematic experience consistently and predictably leads to
capability development. Organizational capabilities are seen as given from initial endowments of
the organization, are fixed at any one point in time, and evolve based on a path dependent
process of local search (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984).
A return to the original evolutionary theories that inform the resource-based view (Nelson
& Winter, 1982; and, more recently, Winter, 2000; Zollo & Winter, 2002) emphasizes the
cognitive underpinnings of capabilities. These theories conceptualize routines as building blocks
of capabilities and the source of routines as organizational truces around understandings of

how things are done and what motivates people to act (Cohendet & Llerena, 2003; Coriat &
Dosi, 1998; Kaplan & Henderson, 2005; Zbaracki & Bergen, 2010). This literature proposes that
routines (capability building blocks) emerge through a collective process of developing beliefs
about what is in peoples interests and what activities should be done. Thus, an understanding of
the cognitive aspects affecting the translation of experience into routines that are ultimately
assembled into capabilities would improve the model of capability development and deployment.
Therefore, constructing routines is the first additional process that is useful to update Figure 1a.
Second, the model represented in Figure 1a assumes that managers are fully aware of
their organizations existing and potential capabilities. In reality, however, we know very little
about how managers understand what the organization is capable of and how the capability
building blocks are assembled into capabilities to be deployed in particular contexts.
Evolutionary theories are silent about how these building blocks are transformed into capabilities
(Abell et al., 2008), but an implication of the idea of routines as building blocks is that some
assembly is required. Research suggests that cognition could play a role in the assessment and
assembly of capabilities through two potential paths. One comes from a signal-plus-noise
perspective (Swets & Pickett, 1982) in which the organization possesses underlying capabilities
that could be used to create value, but managers develop only noisy perceptions of those
capabilities. These perceptions are subject to classic biases of interpretation (Garbuio, King &
Lovallo, 2011). By this logic, the best managers would be the ones with the most accurate
mental representations of their organizations capabilities. As Alchian and Demsetz (1972: p.
793) state, efficient production with heterogeneous resources is a result not of having better
resources but in knowing more accurately the relative productive performances of those
resources.

An alternate view emerges from Helfat and Winters (2011: p. 1244) definition of a
capability as having a specific and intended purpose: as an example, the capability to
manufacture a car has the specific and intended purpose to produce a functioning automobile
(see also Amit & Schoemaker, 1993; Dosi, Nelson & Winter, 2000; Helfat et al., 2007; Winter,
2003). In this case, the development of an understanding or interpretation of that purpose must
be central to the assembly of the capability. This argument implies that capabilities exist in
part as managers interpret them (Daft & Weick, 1984; Weick, 1969). Until there is an
interpretation of a capabilitys purpose, the organization possesses only a set of routines,
knowledge, and assets and not capabilities per se. Cognition is a mechanism by which routines
are transformed into capabilities. By this logic, there is no difference between the organizations
capabilities and the managers interpretations of those capabilities. Under either assumption
signal-plus-noise or intended purpose an articulation of capability assembly is a second process
needed to update Figure 1a. This would provide a better understanding of how cognition affects
the assembly of capabilities from the building blocks of routines.
The third assumption in the basic model of capability development and deployment is
that the path from capabilities to performance is unproblematic. As Barney and Arikan (2001, p.
174) state, resource-based theory has a very simple view about how resources are connected to
the strategies that a firm pursues. The matching between capabilities and the opportunities
created by the environment is often seen as a set of implicit though rational strategic
choices (King & Tucci, 2002; Klepper & Simons, 2000; Lambkin, 1988). Yet, recent work on
the resource based view points out that what a firm does with its resources is at least as
important as which resources it possesses (Hansen, Perry & Reese, 2004, p. 1280). The
implication is that the mere possession of capabilities does not affect performance outcomes

are contingent on what managers decide to do with their organizations capabilities.
Managers, of course, do not always make perfectly rational decisions and deploy
capabilities optimally to maximize performance. Further, even if managers rationally deployed
capabilities, this might lead to resource allocation that is ex post inadequate for the opportunity
or threat at hand (Henderson, 1993). Research has shown that managers possess incomplete
views of the external competitive landscape (Porac et al., 1989) and are subject to a number of
biases that affect decision making (March & Shapira, 1987; Miller & Shapira, 2004; March
1994). A focus on managerial choices as a process linking capabilities and performance pushes
us to recognize that managerial choices will be made based on the opportunities created in the
environment only as perceived by organizational participants. Thus, matching (when managers
assess matches between perceived capabilities and perceived opportunities) is the third process
needed to update Figure 1a.
This study seeks to uncover and investigate these hidden assumptions underpinning
Figure 1a, and builds from existing work to explore what we currently know or need to know
about these three processes that implicate cognition in the relationship between capabilities and
performance. The articulation of these three processes constructing, assembling, and matching
helps us to develop a revised model that both sheds light on these typically implicit or ignored
cognitive processes and serves as roadmap for a review of the literature. This revised model
(Figure 1b) provides a first revision to the standard model of the capability-performance
relationship. It is important to note that Figure 1b as drawn here is linear, suggesting that
experience flows through to performance in one direction only. This, of course, is also an
oversimplification that will be corrected after reviewing the literature and identifying the core
recursive processes that further complicate this model.

-- Insert Figure 1b about here --
CONSTRUCTING CAPABILITY BUILDING BLOCKS:

THE MICROFOUNDATIONS OF ROUTINES
How do capabilities emerge? The literature in strategic management has suggested that
prior experience forms the basis of organizational capabilities (Helfat & Lieberman, 2002). The
pre-histories of organizations create potential capabilities that can be leveraged in new sets of
activities (such as entry into new markets) (Eggers, 2012a; Holbrook, Cohen, Hounshell &
Klepper, 2000; King & Tucci, 2002; Klepper & Simons, 2000). Even startups possess historical
roots through the experiences that founders and early members bring to the organization (Burton,
Sorensen & Beckman, 2002; Gong, Baker & Miner, 2005; Klepper, 2002; Klepper & Sleeper,
2005; Shane & Khurana, 2003). How exactly these experiences are transformed into capabilities
is a more difficult question, and most proposed answers center on the concept of routines.
Routines are important because they form the building blocks of capabilities (Dosi,
Nelson & Winter, 2001: p. 4; see also Nelson & Winter, 1982; Teece, Pisano & Shuen, 1997;
Winter, 2000). Routines are patterns of actions that constitute organizational skills:
organizational because they require coordination and cooperation across multiple actors, and
skills because they can be repeated reliably over time (Cohen & Bacdayan, 1994; Feldman &
Pentland, 2003; Miner, 1991; Nelson & Winter, 2002; Parmigiani & Howard-Grenville, 2011).
As such, routines are conceptualized as truces amongst the conflicting interests of these actors,
which embody understandings about how things are done as well as motivations based in what
actors believe to be their interests (Cohendet & Llerena, 2003; Dosi, Levinthal & Marengo,
2003; Gibbons, 2006; Kaplan & Henderson, 2005; Nelson & Winter, 2002; Zbaracki & Bergen,
2010).

As Gavetti (2005) suggests, any consideration of the encoding of routines requires
attention to their cognitive microfoundations. This view suggests that human cognition plays a
major role in sensing, interpreting, encoding, and retrieving prior experiences to use in the
construction of organizational routines. As Kogut and Zander (1996: p. 515) argue:
Firms differ in what they can do. Some produce cars by highly flexible production lines;
others mass-produce. The capabilities to do one or the other is not the choice variable of
classic decision theory. The limitations are not simply that incentives are too weak, or
that people too selfish, to motivate changing capabilities. The roots of this inertia lie in
the wiring of human cognition to acquire tacit procedural knowledge as the basis of
interaction with other individuals.
Research at the individual level has identified procedural memory as the means by which actors
form routines. In experiments, Cohen & Bacdayan (1994) found that paired players in a card
game developed interlocked patterns for performing tasks (and continued to apply them even
when the game changed). They argue that such procedural memory is the means for selecting
and storing routines. Similarly, Chassang (2010) demonstrated that even without complete
information, actors in a repeated game can learn routines to coordinate their actions simply
through the accumulation of history together. Translated to the organizational level, according to
Kogut and Zander (1996: p. 508), such procedural memory provides the conceptual
underpinning to understanding the generation of routines as arising out of sustained
interactions. That which is retained in organizational memory can be deployed at a later time for
the advantage of the organization (Garud & Nayyar, 1994; Hargadon & Sutton, 1997).
The question is, which experiences are encoded into routines for potential future use?
Research on pre-adaptive capabilities (Cattani, 2005: p. 563) suggests that a firms prior
experience is accumulated without anticipation of subsequent uses. Similarly, from a real
options perspective, organizations may develop and store routines without knowledge of their
value nor their eventual deployment (Kogut & Kulatilaka, 2001; Miller, 2002). One risks
Cognition and Capabilities - 10 -

assuming that the retention of routines in organizational memory is purely mechanical. However,
given the plethora of experiences that organizations accumulate, and the compelling evidence of
organizational forgetting (Argote & Epple, 1990; Engestrm, 1990; Holan & Nelson, 2004),
there is evidence to suggest that the selection of some experiences over others to encode into
routines is not mechanical but rather a product of cognitive processes (Levitt & March, 1988).
We consider several different cognitive processes by which experiences are encoded into
routines first, processes with behavioral bases, and, second, the mindful generation and
encoding of experiences (see Table 1 for a summary of the relevant research).
-- Insert Table 1 about here --
Encoding experience into routines
Scholars have identified three behavioral mechanisms that are likely to affect the
encoding of experiences into routines the degree of success, familiarity, and regularity of
experiences. First, Levitt and March (1988: p. 320) suggest that routines are based on
interpretations of the past, which for them means that actors in an organization select and adapt
routines based on the perceived success of outcomes. This behavioral perspective emphasizes
performance relative to aspiration levels as a source of cues that actors use to determine which
experiences to encode into organizational memory. The implication is that successful
experiences are more likely to be encoded than unsuccessful ones (Levinthal & March, 1993: p.
110), which is consistent with research on the difficulty of learning from failure (Baumard &
Starbuck, 2005; Cannon & Edmondson, 2001; Eggers, 2012b; Shepherd, Patzelt & Wolfe, 2011).
Second, experiences that have links with existing routines, knowledge and capabilities
are easier to encode and thus more likely to be stored. This is the premise of absorptive capacity
(Cohen & Levinthal, 1990; Zahra & George, 2002; Lewin, Massini & Peeters 2011) it is easier

to learn new things that are similar to things already known. Cohen and Levinthal (1990, pp.
129-131) build this assertion based on the cognitive psychological insight that associative
concepts facilitate learning activities. Gavetti, Levinthal and Rivkin (2005) extend the idea of
associative learning in explaining how analogies function to enable the recollection and reuse of
past experience. Thus, experiences that are similar to existing knowledge are more likely to be
encoded.
Third, experiences that are repeated are easier to encode and remember than rare events.
The cognitive underpinnings of the learning curve suggest that repetition is an element to
improvement in performance (Argote, 1999; Argote & Epple, 1990). By contrast, learning from
rare or infrequent events is seen as difficult because these rare events provide uncertain
(Starbuck, 2009) and difficult-to-interpret cues (Rerup, 2009). Once exception to this
generalization is rare events, such as the space shuttle disasters and nuclear power plant crises
that have such a significant impact that managers cannot avoid encoding learnings (see Starbuck,
2009, and Rerup, 2009), though they may struggle to draw useful inferences from such rare
events. Thus, even if managers and organizations attempt to store and encode data from
infrequent experiences, this information may be improperly encoded and rendered useless, or
even harmful (Zollo & Reuer, 2010). As a result, experiences that are repeated are more likely to
be encoded into routines.
Mindfulness and the intentional creation of routines
The three behavior factors affecting the encoding experience and creation of routines
discussed above success, similarity, and repetition may occur without any conscious effort on
the part of organizational participants. But there is evidence that managerial intention and

volition may also have significant effects on the encoding of experience. As discussed later in
this paper, managers may perceive the need for new routines to construct desired capabilities,
and this process of intended routine creation may play an important role in altering the
organizations stock of available routines. Salvato (2009) proposes that mindfulness to all sorts
of cues from the internal and external organizational environment (not just performance signals)
can shape how routines are formed and changed. Organizational actors replicate past
experiments by mindfully formalizing a selection of them into organizational routines (Salvato,
2009: p. 400; see also Levinthal & Rerup, 2006). Such mindfulness suggests that managers,
while having little direct control over experiences themselves, may have more control over
which experiences become encoded, presumably targeting experiences that meet desired needs
for the organization.
Thus, backward-looking attention to cues would appear to be complemented by forward-
looking cognition in the selective encoding of experiences into routines (Gavetti & Levinthal,
2000). Actors cognitive frames or schemata of interpretation influence their actions regarding
which experiences to retain and which to discard (Gavetti & Rivkin, 2007). Laamanen and
Wallin (2009: p. 965) describe this instrumental cognition as central to the process of
capability development. Indeed, Helfat and Peteraf (2003, p. 1000) argue that having a central
objective is the starting point for capability development. Frames shape the development of
routines but as experience with these routines accumulates, the frames are refined into heuristics
(Bingham, Eisenhardt & Furr, 2007; Bingham & Haleblian, 2012), which then reciprocally shape
which future experiences get incorporated into routines.
The development of routines as capability building blocks involves the interplay between
actions to perform the routines and understandings of what those actions and experiences mean

(Feldman & Pentland, 2003). In one study, Knott, Gutpa and Hoopes (2011) identify the
intentional process of modifying existing routines to perform new tasks that better suit
organizational needs, and outline this modification or tricking process as a means of
intentionally changing the organizations routine structure. However, Pentland and Feldman
(2008), in documenting failed attempts at routine creation, highlight that intentionally creating
routines may be difficult at best, and impossible at worst.
At the extreme, routines and cognitive frames or schemata about routines are
coconstituted (Rerup & Feldman, 2011: p. 578; see also Howard-Grenville, 2005), where
interpretations of potential routine usage affect how managers encode new routines and alter
existing ones. This co-constitution involves intentions of actors as well as performances of the
routines that may lead to the retention of routines that deviate in some ways from intentions
(Rerup & Feldman 2011). That is, routines have performative and ostensive aspects where the
intention shapes the performance but the improvisation of the performance may influence
intention (Feldman & Pentland 2003). Further, the degree to which mindfulness matters in
encoding routines will vary by the type of routine (Becker et al 2005).
The various perspectives on the microfoundations of capabilities suggest that experience
is the source of organizational capability building blocks, but only as it is selected and encoded
into organizational memory and then repeated in organizational routines. The process by which
this happens is at least in part cognitive. That is, it involves procedural memory, attention to
cues, and cognitive frames that shape the interpretations of the value and usefulness of
experiences. Overall, the existing research in this area suggests that cognition at various levels
of the organization will have a dynamic relationship with routine formation (which then affects
which capabilities the organization possesses). That capability building blocks (i.e., routines) are

based in cognitive processes has important implications for organizational inertia or adaptation in
the face of change, as any organizational response will require the breaking and remaking of the
truces that support organizational routines (Zbaracki & Bergen, 2010). We return to this
insight in the discussion and conclusion.
ASSEMBLING CAPABILITIES FROM THEIR BUILDING BLOCKS
If routines are the building blocks of capabilities, how are they assembled? The literature
is nearly silent on this process. We are missing an articulation of the connection between the
micro foundations of routines and the macro-level organizational analysis of the match of
capabilities to the environment. This missing link in the capabilities literature can be at least
partly filled using cognitive explanations for the assembly of capabilities from their building
blocks.
Helfat and Peteraf (2003) argue that the development of capabilities comes through an
iterative process of trials and reflection by management. Tripsas and Gavettis (2000) and
Laamanen and Wallins (2009) longitudinal analyses of capability evolution are initial empirical
efforts to unpack these dynamics. They show that in each of the organizations they studied,
cognition affected how capabilities were built by shaping choices about what capability
development actions to take. As an example, Laamanen and Wallin (2009) find that because the
leaders of the software firm they studied paid most attention to client needs, they chose to
develop programming capabilities and license external software to improve their offering. This
set of actions in turn provoked efforts to establish a strong capability in branding that would
allow them to position their increasingly standardized products in the market. At Polaroid,
Tripsas and Gavetti (2000) found that attention to new technologies enabled the company to

develop leading-edge skills in digital imaging, but the belief in the razor/razor blade business
model meant that these skills were never combined effectively with capabilities in marketing and
manufacturing to allow Polaroid to develop profitable products.
In tracing such capability development paths, these scholars powerfully demonstrate that
capabilities are assembled form different sets of routines. Conversely, they also find that
capabilities are not developed if assembly does not take place. Yet, they do not give us a sense
for how the assembly from routines happens. Lavies (2006) theoretical argument about
capability reconfiguration highlights the role of managerial cognition in identifying the ideal
capabilities given the environment in which the organization operates. From his standpoint,
managerial cognition enables organizations to break apart capabilities into their constituent
elements and then reconfigure them through substitution, evolution or transformation. Despite
the lack of research on the assembly process itself, related clues emerge from diverse literatures.
Prior studies suggests that the transformation of routines into capabilities could be supported by
two interrelated sets of cognitive processes: identifying the purpose for which capabilities might
be applied and making interpretations of what the organization can or might be able to do.
Helfat and Winters (2011; see also Helfat & Peteraf, 2003) definition of a capability as
having a specific purpose provides a useful anchor. An essential component of the assembly
process would therefore be to identify that purpose. Seeing the identification of the purpose as
somehow separate from the interpretation of what the organization can do is a potentially
artificial separation of actions that occur concurrently or iteratively. Similarly, the assembly of
capabilities also happens in the matching between them and the environment (the subject of the
next section). However, because so little attention has been paid by scholars to the assembly
process, and because the studies of matching have assumed capabilities to be somewhat fixed,

it is worth drawing out some of the underlying processes (see Table 2 for a summary of the
related literature). Given that few studies speak directly to the assembly of capabilities, this area
is ripe for future research.
Identifying a purpose
As theorized by Helfat & Peteraf (2003), the identification of a purpose is the initial step
in the capability life cycle. This is in line with Penroses (1959/1995) foundational suggestion
that capabilities (or services in her language) imply a designated purpose (p. 25). While the
encoding of experiences into routines may occur without clear intentions, the value of
introducing the idea of the assembly of routines into capabilities is precisely that it highlights
the role of a defined purpose. Purposes typically arise because managers perceive an
organizational shortcoming or a strategic opportunity external to the organization. A substantial
portion of the research on managerial cognition has focused on managers interpretations of the
environment (see Kaplan, 2011; Walsh, 1995, for reviews). The essential idea is that a managers
interpretations of the external landscape will affect how they see their own organizations
abilities to respond to it (Milliken, 1987).
A good deal of this work examines whether managers see the environment as posing
either threats or opportunities (Dutton & Jackson, 1987; Gilbert, 2006; Jackson & Dutton, 1988;
Milliken, 1990), where perceived threats are more likely to anchor managers in their current
understandings of internal capabilities (Bateman & Zeithaml, 1989; Thomas, Clark & Gioia,
1993; Thomas & McDaniel, 1990) while perceived opportunities can relax the rigidity of
routines (Gilbert, 2005). Relatedly, other scholars have shown that the direction of managerial
attention (Ocasio, 1997), either towards new opportunities or instead towards existing markets or

technologies, affects what capabilities are seen to be salient (Barr, 1998; Garud & Rappa, 1994;
Kaplan, 2008a). This section concentrates on how managers become aware of these challenges
or opportunities, and translate them into purposes that orient capability creation.
The learning literature on problem sensing (also called problem finding, problem
identification, problem recognition, etc.) helps draw out the processes involved with identifying
threats. This research indicates that managers must be aware of a failure or gap in performance
relative to aspirations in order to generate learning about the nature of a problem (Baumard &
Starbuck, 2005; Cannon & Edmondson, 2001; Eggers, 2012b; Haunschild & Sullivan, 2002).
Problem sensing is a starting point for creative action (Unsworth, 2001) and a central dynamic in
learning and education (Hmelo-Silver, 2004). Kiesler & Sproulls (1982) model of problem
sensing suggests a process by which managers attempt to infer causality behind perceived
problems in order to interpret and categorize them. Further, they argue that analogical reasoning
(the process of noting similarities between current problems and prior problems) is one means by
which managers perceive and understand the problems they face. Their model does not,
however, deal directly with how managers become aware of the existence of a problem in the
first place managers are presumed to receive negative (performance) stimuli that alert them to
the existence of the problem.
Research in entrepreneurship has focused instead on opportunities (and not threats),
seeking to understand how entrepreneurs identify which alternatives to pursue. Scholars have
argued that the ability to find market imperfections that might lead to profitable new businesses
is a core aspect of entrepreneurship (Shane & Venkataraman, 2000). This particular stream of
research is useful in thinking about capability assembly because, as Klein (2008: p. 187) argues,
entrepreneurship is about the exercise of judgment over the arrangement of heterogeneous

capital assets. Specifically, individuals that are more entrepreneurially alert are said to have
flexible schemas as the environment changes (Gaglio & Katz, 2001; Kirzner, 1973).
As articulated by Ardichvili, Cardozo and Ray (2003), entrepreneurial alertness is seen
as a multi-stage process: individuals first perceive an unmet market need, then discover a fit
between the need and available resources, and finally create a new business concept to match the
two. Individuals are heterogeneous in their abilities based on their genetic makeup, background
and experience, and/or the amount and type of information they possess about a particular
opportunity (p. 110). Such alertness takes the form of pattern recognition, and the ability to
recognize such patterns in the environment is a skill built through experience (Baron & Ensley,
2006). While these visions of entrepreneurial alertness are relatively passive individuals either
do or do not perceive opportunities (e.g., Shane, 2000) they offer a starting point for an
exploration of purposeful interpretive processes that the revised model of capability development
and deployment would suggest are likely to be present.
Note that the theories behind opportunity identification and threat (or problem) sensing
differ in their underlying assumptions. As Lai and Grnhaug (1994) suggest, problems may be
seen to exist objectively, waiting to be discovered, or they can be seen to be constructed through
managerial action (Agre, 1982; Nadler, 1983). Similarly most of the research on opportunities
sees them as exogenously determined, though some scholars have portrayed opportunities as
created through entrepreneurial action (Alvarez & Barney, 2007). Gregoire, Barr and Shepherd
(2010) offer just such a purposeful view in suggesting that awareness increases as managers
build on prior knowledge to diagnose potential opportunities. In either case, the identification of
the purpose for the deployment of capabilities should be central in the process by which
capabilities are assembled from their building blocks. The process of identifying a purpose also

provides inputs further downstream to the matching process (through the labeling and
identification of a given capability) and upstream to the processes of intentional coding of new
routines to fill gaps in the portfolio.
Understanding what the organization can do
The other cognitive aspect of capability assembly is in understanding what the building
blocks are, or said differently, in finding out what the organization can do. While academics and
practitioners both acknowledge the importance of managers understanding of their
organizations resources and capabilities (Danneels, 2011; Marino, 1996), it seems that doing so
is not straightforward. Managers in the same organization can have very different views about
the capabilities present within that organization (Birkinshaw & Arvidsson, 2004). For example,
Denrell, Arvidsson and Zander (2004) found via a large scale empirical survey that the interrater
reliability of respondents from the same organization in their assessment of the organizations
proficiency in strategic capabilities was only 0.28, suggesting significant internal disagreement
about the presence of certain capabilities. This variance in perception implies that studying the
differences in those interpretations is an important part of understanding how capabilities are
assembled. The process by which managers recognize what the organization can do is neither
straightforward nor linear it is inherently iterative, building on feedback about efficacy and
usefulness from attempts to use the capabilities being assembled.
The literature suggests two basic mechanisms by which actors learn about their own
organizations skills. The first is through their direct experience in the organization. Rulke,
Zaheer and Anderson (2000) introduce the term organizational self-knowledge to capture the
extent to which managers understand the strengths of their own organization, and show that such

knowledge derives largely from direct personal interactions with people and activities within the
organization. Denrell, Arvidsson & Zander (2004) found that when managers agreed about their
organizations capabilities, it was in cases of the greatest familiarity with the activities and
performance of the division or business unit where the capability was located. Similarly, Miner,
Gong, Baker and OToole (2011) argue that prior managerial experience with specific routines
and capabilities increases the likelihood that they are both well understood and redeployed
consciously or unconsciously to solve new problems.
The exact process by which direct managerial experience translates into understanding of
their organizations capabilities, however, is still somewhat unclear. One potential explanation is
based on transactive memory, which has been used to identify how individuals learn about the
skills possessed by others, especially team members (Argote & Ren, 2012; Ren & Argote, 2011;
Wegner, 1986). Transactive memory is built through interpersonal interactions and the
observation of the skills and actions of other individuals (Liang, Moreland & Argote, 1995). To
the extent that the routines and knowledge that form the building blocks of capabilities reside in
individuals within the organization, the transactive memory perspective may be applicable. A
second perspective that may be helpful is based on procedural memory, which captures the way
in which individuals build learned skills or nondivisible cognitive operations (Kogut &
Zander, 1996). Such memory is build through sustained interaction, and represents a form of
automatic, tacit knowledge about how to complete a task (Cohen & Bacdayan, 1994). Therefore,
managers can come to know what an organization can do through their own experiences in
executing routines. Transactive memory and procedural memory provide possible processes by
which experience helps managers understand the capabilities of the organization.
Another mechanism for understanding capabilities is through comparison with other

organizations (often, competitors). Benchmarking is a well-known procedure through which
managers can interpret their own organizations strengths and weaknesses (Drew, 1997).
Managerial cognition research points out that the selection of those competitors is itself an
interpretive process, where the relevant competitive strategic groups should be understood as
cognitive strategic groups (Baum & Lant, 2003; Giaglis & Fouskas, 2011; Porac et al., 1989;
Reger & Huff, 1993; Sutcliffe & Huber, 1998). Managers will notice and imitate those
organizations that they perceive to be in their industry (Benner & Tripsas, 2012). Further, the
identification of which aspects of these competitors activities to copy is also cognitive (Greve,
1998; Greve & Taylor, 2000). The sources of a competitors success (or failure) may not be
obvious, and thus managers must sort through noisy signals or make interpretations about what
might be worth copying (or worth avoiding).
The above studies on interpretations of the environment and interpretations of capabilities
suggest that the assembly of capabilities from routines happens through the intersection of these
two cognitive processes, where there is no strict temporal sequencing. Laamanen and Wallins
(2009: p. 977) conclusion from their analysis of capability development paths echoes this insight:
Managerial cognition and capability paths develop as distinct but mutually intertwined co-
evolutionary processes that over time condition each others evolution. The interpretation of the
environment (as an opportunity to seize or a problem to be solved) should be seen as an essential
part of the process by which managers interpret and assemble capabilities. This sense of purpose
provides some structure to the process of understanding what an organizations capabilities are.
MATCHING CAPABILITIES TO OPPORTUNITIES
The final process in the updated model of capability development and deployment is the
cognitive process by which managers match capabilities and opportunities. This matching

process affects what managers actually do with the capabilities that organizations possess (Foss,
2011; Hansen et al., 2004). Penrose (1959/1995) argues that capabilities are bundles of resources
that are deployed based on their match with perceived opportunities, where the environment is an
image in the entrepreneurs mind (p. 42). While capability assembly has received little
attention, studies of the match managers make between capabilities to opportunities have been
more plentiful (see Table 3 for a summary of the relevant research).
The insight of managerial cognition scholars such as Barr, Stimpert and Huff (1992),
Tripsas and Gavetti (2000) and Gilbert (2006) is that it is not enough for managers to develop
interpretive schema of their marketplace or to assemble a set of capabilities, they must mobilize
those capabilities in taking strategic action. More specifically, cognitive frames are seen to have
diagnostic and prognostic dimensions such that any strategic choice stems from interpretations
about the environment as well as about what actions should be taken (Kaplan, 2008b). Frames,
therefore, shape the organizations dedication of scarce resources to one capability or another
(Laamanen & Wallin 2009). This resource allocation process is the central task of strategic
management (Bower, 1970).
There are many disparate streams of research that make this point interpretive schema
shape resource allocation and capability deployment. For example, Prahalad & Bettis (1986)
have suggested that resource allocation is cognitive in that it is based in a dominant logic.
They define dominant logic as the way in which managers conceptualize the business and make
critical resource allocation decisions (p. 500). The essential point is that the dominant logic
represents a collective cognition about the strategy and objectives of the organization, and that
this shared cognition affects what opportunities the organization will choose to pursue. As

summarized by Bettis and Prahalad (1995) in their ten year retrospective, dominant logic has
been used to explain a large number of observed patterns of organizational change, including
diversification and learning (Ginsberg, 1990) and adaptation and inertia (Prahalad & Hamel,
1994). Subsequent research has focused on extending the effects of dominant logics to other
corporate activities, including the strategy creation of new ventures (e.g., West, 2007) and on the
international expansion patterns of large organizations (e.g., Levy, Schon, Taylor & Boyacigiller,
2007). The common thread has been that initial choices create a dominant logic that then dictates
the perceived suitability of future options in a path dependent fashion.
Relatedly, scholars examining organizational identity describe it as the perceptual lens
through which strategic choices are made (Milliken 1990; Dutton & Dukerich, 1991; Gioia &
Thomas, 1996; Gioia, Patvardhan, Hamilton & Corley, 2013). Researchers studying business
models describe them as the heuristic logic that connects technical potential with the realization
of economic value (Chesbrough & Rosenbloom, 2002: p. 529) and thus shape the degree to
which organizations can mobilize their resources to pursue new opportunities (Chesbrough,
2010; Chesbrough & Rosenbloom, 2002; Tikkanen, Lamberg, Parvinen & Kallunki, 2005).
Observing matching: inertia & adaptation, diversification & growth
The phenomena most amenable to observing the matching process have been in studies
of organizational inertia and adaptation to change and in studies of diversification and growth. It
is such moments of change that reveal cognitive dynamics that might otherwise be
indistinguishable from the standard operating procedures of the organization.
A central focus of the research on managerial cognition has been in understanding why
organizations tend to do a poor job of adapting to change in the environment (Milliken & Lant,

1991). As Barr, Stimpert & Huff (1992: p. 16) suggest, managers mental models both facilitate
and limit attention to and encoding of salient information about changes in organizational
environments and may lead managers to overlook important environmental changes so that
appropriate action at the organizational level is not taken. Their early study in this area
compared two railway companies and showed that it was not enough for the managers to see
changes in the environment, it was the ability to translate those insights into changes in the
organization that made the difference in eventual performance.
A series of studies have followed this approach, each establishing a link between
managers interpretations of the environment, their choices about strategic action and the
performance of their organizations. For example, Barrs (1998) study of pharmaceutical firms
showed that managers interpretations of an external shock (increases in regulation) varied across
organizations and changed over time. The insight here was that these interpretations did not lead
to a shift in resource deployment until the environmental shift was seen to have a meaningful
impact on performance (see also Nadkarni & Barr, 2008). Osborne, Stubbart and Ramaprasad
(2001) found that pharmaceutical firms fell into different cognitive strategic groups depending
on their views of various themes (such as overseas expansion). Affiliation with these groups
was associated both with differences in such strategic actions as facilities expansion or
introduction of new products and with reports about the performance impact of those activities.
Kaplan, Murray and Henderson (2003) found that pharmaceutical firms efforts to build new
capabilities in the emerging field of biotechnology (as evidenced by patenting and scientific
publication) were preceded by shifts in managerial attention toward this new market.
Related studies on organizational identity find that persistent and strong identities can
restrict the ability to adapt organizational capabilities to new environmental conditions and new

opportunities (Kogut & Zander, 1996; Zucker & Darby, 1997; Gioia et al, 1994; Gioia et al,
2013). That is, even if some capabilities are present, they may not be leveraged to address a
market threat or opportunity if it is inconsistent with the organizations identity. Tripsas (2009)
study of a flash memory company demonstrated how identity shaped managers interpretations of
external events. As a result, they filtered out changes that might challenge their organizational
identity. Further, because the organizations identity was an underpinning of their routines and
capabilities, the company could not change the organization without changing the identity and
vice versa: it was difficult to change the identity without changing the organizational capabilities
(see also, Nag, Corley & Gioia, 2007 on this last point).
The message of much of this research is that organizations will fail to adapt when they
cannot adequately match their capabilities to the opportunities or threats seen in the market.
Often the source of inertia is not a lack of capabilities, but rather managers failures to connect
these capabilities to the possibilities created in the environment (Eggers & Kaplan, 2009; Tripsas
& Gavetti, 2000). Their cognitive frames are stuck in an old understanding of the environment.
As Lavie (2006: p. 160) says, A timely recognition of technological change, an accurate
evaluation of its implications for incumbent capabilities, and, in particular, an estimation of the
value-maximizing capability configuration require significant monitoring, information
accumulation, and evaluation costs. Decision makers need to possess sufficient managerial
insight and cognitive abilities in order to analyze changes in the firms external environment.
Thus, possession of the requisite capabilities but without appropriate managerial
awareness may be insurmountable for the firm. The opposite, however, appears not to be true
when firms lack the needed capabilities but managers are attuned to the threat or opportunity,
the cognitive framing can actually compensate for missing capabilities in spurring action.

Managerial attention can direct the organization (through the mindful processes discussed
earlier) to build up new capabilities that would be better suited to the evolving market (Kaplan,
2008a; Rosenbloom, 2000).
A second research stream where the matching of capabilities to the environment is salient
is in studies of diversification and growth. The focus of most research on capabilities has been on
how capabilities, resources, and assets might be profitably redeployed towards new opportunities
(Penrose, 1959; Prahalad & Hamel, 1990; Teece, 1982). The implication is that the purpose for
which a capability is ultimately used need not always be the one for which it was initially
encoded. Resources and capabilities are fungible in that they are amenable to use in a diverse
set of applications (Danneels, 2007: p. 516). For organizations that are able to grow (and adapt to
change), managers find ways to create new capabilities or recombine old capabilities in new
ways. Managers can renew, redeploy, reapply, recombine, retrench or retire capabilities over the
course of the capability life cycle (Helfat & Peteraf 2003). This reuse or recombination has been
described as exaptation (or sometimes pre-adaptation) (Cattani, 2005; Dew, 2007; Marquis
& Huang, 2010). Borrowed from evolutionary theory (Gould & Vrba, 1982), the concept of
exaptation highlights the fact that traits that evolved for one purpose could be used later for
another (new) purpose. As adopted by management theory, it focuses attention on how
capabilities developed for one product market could be used in another.
While most of this research views fungibility as an inherent aspect of the capability itself,
some scholars have suggested that exaptation is a cognitive process. Most notable is Danneels
(2011), who introduces the concept of resource cognition to describe how managers
understand the organizations existing resources and their potential to be deployed in new tasks.
The implication is that managers with different perspectives on the possible applications of their

existing capabilities will look to recombine them in different ways. Similarly, Taylor and Helfat
(2009) focus on the process by which managerial cognition affects the ability to use existing
complementary assets in support of a new technological opportunity. They argue that such
redeployment is evidence of organizational ambidexterity (see also O'Reilly & Tushman, 2004;
Smith & Tushman, 2005), stating that, articulation by top management of a common vision and
values that bridge dual contexts increases the likelihood of ambidexterity (p. 725). Additionally,
Regnrs (2008) analysis of the relationship between strategy process research and dynamic
capabilities argues that managerial cognition and action affect organizational development of
new capabilities and capability redeployment in new contexts. The cognitive context the lens
through which existing capabilities and potential opportunities are interpreted in which
managers conceive of and craft strategies has implications for what new capabilities will be
developed.
Capabilities may be fungible, but their (re)deployment depends on managers cognitive
frames. What has been perceived in the past as core rigidities (Leonard-Barton 1997; Levinthal
& March, 1993; Tushman & Anderson 1986) may rest to a certain extent in managerial cognition
rather than in the organizational capabilities themselves. While this relationship between
capabilities and cognition is certainly interesting and provocative, more work is needed,
particularly on the boundary conditions under which managerial cognition can compensate for a
lack of capabilities and encourage organizational change and growth.
Identifying matching processes
If the prior section focused on the extent to which matching between capabilities and
opportunities occurs, comparatively less is known about the processes by which such matching

between capabilities and perceived opportunities takes place. We can infer some mechanisms,
however, from research on individual and social cognition. These can be grouped loosely into the
categories of attention and search.
Attention-based theories suggest that decisions about resource allocation are shaped by
how organizations channel managers attention (Ocasio, 1997: p. 188), What decision makers
do depends on what issues and answers they focus their attention on. Attention signals the
managers willingness to pursue a course of action, serving as a sign-post for the organizations
employees and stakeholders about the focus and orientation of the organization (Eggers &
Kaplan, 2009; Ocasio, 1997). DAveni and McMillans (1990: p. 650) study of managerial
attention in organizations that subsequently fail highlight the role of crisis-induced perceptual
shifts among top managers in influencing turnaround success. Joseph and Ocasios (2012) study
of General Electric showed how the channels of attention influenced the degree to which the
organization pursued adaptive moves such as commercializing products in new markets,
establishing distribution partnerships, or acquisitions of organizations. In each case, the potential
adaptation involved shedding old capabilities or building new ones, therefore implying that
channeling attention can shape how capabilities are developed and which potential matches are
uncovered.
Studies of top management teams have suggested that attention is shaped by team
demographics and collaborative processes. Researchers have found, for example, that top teams
with greater tenure resist change because they get wedded to the organizations traditional way
of doing business (Finkelstein & Hambrick, 1990; Hambrick, Geletkanycz & Fredrickson, 1993).
The degree of consensus amongst top team members affects what opportunities they perceive as
salient and which are not attractive or feasible (Ginsberg, 1989, 1990; Kazanjian & Drazin,

1987). When top teams fail to recognize change (Barr et al., 1992; Cho & Hambrick, 2006;
Kaplan et al., 2003; Milliken, 1990; Wiersema & Bantel, 1992), their organizations exhibit
inertia.
Cho and Hambrick (2006) explicitly address the links between top team demographics
and direct measures of attention. In their study of deregulation in the airline industry, they
showed first that the industry tenure, the functional experiences and the heterogeneity of the
team were all associated with strategic change and adaptation. Second, they found that shifts in
the top teams attention from an engineering to an entrepreneurial orientation were also
associated with subsequent changes in strategic actions and these attention shifts partially
mediated the effects of the top team characteristics. These results suggest a top teams
knowledge and interactions work in part to channel attention towards some matches between
opportunities and capabilities and not others.
A second category of cognitive matching processes is that of search. Tripsas and Gavetti
(2000, p. 1157), in their detailed study of Polaroids failure to adapt to the new digital
photography technologies, state that search processes in a new learning environment are deeply
interconnected to the way managers model the new problem space and develop strategic
prescriptions premised on this view of the world. They show in their map of the evolution of
capabilities and beliefs over several time periods that Polaroid did not have difficulties in
developing new digital technological capabilities. They failed, instead, to make the match
between those capabilities to the changing environment. The set of beliefs of top management
in the primacy of technology and in the razor and blade business model in which hardware was
not seen as a source of profits shaped the degree and direction of their search activities.
Analogical reasoning is another search process by which matching of opportunities and

capabilities occurs. With roots in cognitive psychology (Gick & Holyoak, 1980), studies of
organizational analogical reasoning suggest that it is key to strategic decision making (Gavetti,
2013; Gavetti et al., 2005). First, managers assess the similarity between a focal new option and
prior opportunities pursued by the organization. If the new opportunity is perceived as a close
match, and the prior decision was successful, then the new opportunity is more likely to be seen
as a match. If, conversely, the new opportunity is perceived as closely matching a prior action
that was unsuccessful, the likelihood of perceiving a match decreases. Comparative analogues
between current and past opportunities act as a means by which search is conducted and filtered.
We suspect that there is more going on in the matching process than only attention and
search. Prior research says very little about whether, for example, managers might evaluate
potential matches through experimentation (akin to the online search discussed by Gavetti &
Levinthal, 2000), either through adopting potentially reversible courses of action or testing
possible matches in beta or pilot form. Given recent interest in crowdsourcing (Surowiecki,
2005), do (and should) managers turn to polling or voting by managers, employees, or
shareholders to evaluate potential matches? Future research might explore these and other
processes.
A RECURSIVE MODEL
This review uncovered three dynamics by which cognition is implicated in capability
development and deployment: constructing (forming the microfoundations of routines),
assembling (shaping how managers assemble and understand the organizations capabilities),
and matching (driving how managers see a fit between internal capabilities and external
opportunities). Adding these cognitive processes to the model of capability development and

deployment (as in Figure 1b above) enriches the standard view in the capabilities literature.
However, research suggests that these processes are not as linear as presented in Figure 1b.
Indeed, scholars have highlighted several ways that the relationships are recursive. Figure 1c
documents these recursive relationships and represents a more comprehensive cognitive model
of capability development and deployment. Having already discussed the three central cognitive
processes included in Figure 1b, this next section identifies the recursive relationships included
in Figure 1c. We also highlight different perspectives on the temporal ordering of these
relationships.
-- Insert Figure 1c about here --
Five iterative processes
To start, experience is often portrayed as the initial input to the development of routines
while performance is shown to be the central outcome of interest. However, this outcome is also
a potential contribution to experience, as organizational performance in the current period
becomes prior experience that drives capability development in a future period (recursive link 1
in Figure 1c). This highlights an iterative pattern of feedback-based learning as actions and
outcomes are (given the limitations discussed above) encoded into future routines. This circular
pattern plays out in two ways. First, positive performance is more likely to result in knowledge
that managers are willing and able to encode into routines for future reuse (Levinthal & March,
1993). Failed experiences, therefore, are less likely to result in the development of new routines
than successful ones (Cannon & Edmondson, 2001; Eggers, 2012b; Starbuck & Hedberg, 2001).
Second, prior organizational performance provides one set of aspiration levels that affect the
likelihood of managers engaging in active search processes to develop new routines and
capabilities (Gavetti & Rivkin, 2007; Greve, 2003). This relationship is not necessarily linear

performance below aspirations may increase search activities, but poor performance that
increases the risk of bankruptcy (March & Shapira, 1992; Miller & Chen, 2004) or occurs in
unfamiliar domains (Denrell & March, 2001; Eggers, 2012b; Eggers & Suh, 2012) may dampen
search activities. Thus, experience that is transformed into routines does not only come from
learning by doing (Levitt & March, 1988), but also from learning that is triggered by prior
performance.
The next two feedback loops shape the encoding of experience into routines. As Huff,
Huff & Barr (2000) suggest in their cognitively anchored model of strategic change, feedback
may initiate in the assembly process (recursive link 2 in Figure 1c), as managers realize that they
lack the building blocks to assemble the desired capability, or in the matching process (recursive
link 3 in Figure 1c), as managers perceive external opportunities that require the creation of new
capabilities. Thus, it may be the very matching process that triggers or enables the assembly of
capabilities from their building blocks, and the resulting revised goals also instigate the
construction of new routines.
Such triggers lead to the intentional absorption of new experiences to augment the
knowledge stock of the organization. Experiences can also result from intentional actions to
augment the knowledge stock of the organization. Such intentional processes include internal
search and development (Gavetti, 2005), learning from others (Haunschild & Miner, 1997),
learning through hiring (Rosenkopf & Almeida, 2003; Song, Almeida & Wu, 2003), or learning
through alliances and mergers (Khanna, Gulati & Nohria, 1998; Koza & Lewin, 1998). Such new
knowledge and skills can then be encoded into organizational memory, repeated and retained as
new routines. Gavetti and Levinthal (2000), in their simulation work, applied this general insight
to show that cognitive representations guide organizational search and experiential learning.

Assembly and matching are therefore iterative processes that shape the organizations portfolio
of routines. Managers may become aware of an opportunity, but if the organization lacks the
capabilities to take full advantage of it, managers might instigate search processes to build or
acquire the necessary capabilities.
With regard to assembly itself, the distinction between the identification of a purpose and
the diagnosing of organizational routines is analytically useful but likely unrealistic in practice.
Helfat & Peteraf (2003) make a temporal distinction between identifying a purpose and the
process of actually building a new capability, but are silent about diagnosing the existing
capability building blocks beyond suggesting that the endowments present at founding set the
stage for further capability development by preconditioning the emergence of a capability (p.
1001). From this, one could infer that managers must understand the existing routine base before
developing a plan for a new capability. Conversely, the identification of a purpose has been
argued to precede the intentional creation of new routines (in order to know which routines to
create), but even this process is muddied by the potential that the results of any intentional
routine creation processes may not perfectly match the intended outcome (Rerup & Feldman
2001; Howard-Grenville 2005). This might necessitate further updates to the purpose of the
capability.
As a result, the two parts of the assembly process (identification of a purpose and
diagnosing existing routines) should be seen as interacting (recursive link 4 in Figure 1c) as
managers use their perceptions of an organizations goals to shape their understanding of the
potential value of the routines that the organization possesses. Thus, there likely is not a strict
temporal sequencing in aggregating routines into capabilities. Routines are building blocks that
can be taken apart and assembled in new ways based on new interpretations. That said, there is

so little existing research on the assembly process that future research specifically on the
interplay between these two activities would be useful in providing more detail and context.
Just as cognition has been shown to shape the development of capabilities, capabilities
can influence the interpretations that managers apply (recursive link 5 in Figure 1c). This is the
underpinning of the concept of organizational myopia (Levinthal & March, 1993) in which
routines and capabilities cannot be changed to respond to changes in the environment.
Capabilities can be codified in manuals or guidelines (Zollo & Winter, 2002) or transformed into
shorthand rules of thumb (Eisenhardt & Martin, 2000) which become the schema through
which subsequent interpretations are made. As Verona (1999, p. 139) argues, capabilities
contribute to structuring the attention of each agent shaping organizational behavior and,
therefore, affect his or her performance over time. As capabilities get refined in their use, they
become part of well-oiled systems that involve not just day-to-day operations but also managers
understanding of markets and technologies. The smooth functioning of this system maybe useful
in stable contexts, but may block adaptation when the environment changes (Kaplan, 2008b;
Siggelkow, 2001).
This view of capabilities affecting interpretive schema is also related to the idea of
situated attention. According to Ocasio (1997: p. 188), what issues and answers decision-
makers focus on, and what they do, depends on the particular context of situation they find
themselves in (see also Ocasio, 2011) Under this perspective, organizational capabilities
provide important context that affects how managers perceive and interpret the complex array of
routines that the organization possesses. This filtered interpretation process implies that
differences in context may alter the way two different managers perceive the same foundational
building blocks.

Thus, the presence of these recursive dynamics offers an explanation for sources of
organizational stability and change. If capabilities become tightly intertwined with schema, the
organization can get locked into an existing way of doing business and become unable to shift
their capabilities when such a move might be required. On the other hand, changes in
interpretations, perhaps provoked by performance feedback or by poor matches between the
environment and existing capabilities, can lead to the development of new capabilities over time.
Inside-Out versus Outside-In?
The temporal sequencing and underlying logic of the recursive processes identified in
Figure 1c may occur from the inside out or from the outside in. The views of organizational
growth espoused by Penrose (1959) and Barney (1986), as well as Danneels concept of resource
cognition (2011), focus on understanding the firms existing routines and capabilities first before
considering external opportunities. Under this logic, managers would be likely to engage in the
assembly of routines into potentially useful capabilities before seeking to match those
capabilities to the set of perceived opportunities. This process functions inside-out, with the
initial focus being on the existing capabilities (the inside) before turning to consider the
external (outside) opportunities.
A contrasting perspective of the process builds on cognitive mechanisms such as identity
(Tripsas, 2009) and dominant logic (Prahalad & Bettis, 1986). In this perspective, these
mechanisms are seen as filters that affect how senior managers view specific opportunities. The
presumption is that managers are actively searching for external opportunities, and then engaging
in a matching process (driven by the understanding of the firms routines and capabilities) that
assesses the feasibility of building new capabilities to address the perceived opportunities. This

process is outside-in, where the perception of a potentially attractive external opportunity (the
outside) encourages managers to look within the firm (inside) to assess whether resources
and capabilities can be cost-effectively marshaled to exploit the opportunity.
Relatedly, Stevenson and Gumpert (1985) contrast typical and entrepreneurial
strategy processes. The typical (of the large, established organization) begins with an
understanding of the resources controlled by the organization in order to decide where to apply
them. The entrepreneurial process begins with the identification of an opportunity before
considering what resources the firm has and (more importantly) where to acquire the resources
that the firm lacks. Both of these two temporal sequences (inside-out or typical and outside-in or
entrepreneurial) are ideal types the reality of organizational behavior and managerial action
will be a complex of both. But, to the extent that (for example) large incumbent organizations
may follow the inside-out method, while entrepreneurs may be more prone to follow an outside-
in approach, taking a cognitive perspective on capability development and deployment may
create a useful meeting point for entrepreneurship and strategic management research.
A RESEARCH AGENDA ON COGNITION AND CAPABILITIES
This review allowed us to build a conceptual model that highlights the importance of
cognition in capability development and deployment. The first part of the multi-level model
articulated the cognitive microfoundations of routines that are the building blocks of
organizational capabilities, namely by exploring what is known about the encoding of experience
as routines are constructed. The second part of the model addressed the cognitive processes by
which managers assemble routines into capabilities in response to interpretations of the
environment. The third part of the model detailed the matching process by which managers make

strategic choices about whether and when to deploy organizational capabilities towards potential
opportunities. This model extends the existing framework by which capabilities are presumed to
lead to organizational performance and identifies how cognition about experience, capabilities,
and opportunities affects the capability-performance relationship. By highlighting the recursive
relationships amongst these processes, we also emphasize the dynamic, iterative relationship of
cognition and capabilities. Cognition shapes capabilities just as capabilities shape cognition.
In integrating across several previously unconnected literatures, this study has fleshed out
many aspects of a cognitive model of capability development and deployment while at the same
time identifying lacunae to be filled. The recursive model is necessarily complex: no individual
research project could or should endeavor to analyze the entire process. The most fruitful way
forward will continue to be to examine parts of the whole elephant. But the model sensitizes the
scholar to the complexity of the full system and helps make explicit what is being black boxed
while other dynamics are being explored. In using the multi-level model as a foil for analyzing
the existing literature, this review identifies a number of avenues for future research on the role
of cognition in the emergence and assembly of capabilities, in organizational change and
growth, and in dynamic (managerial) capabilities.
The emergence and assembly of capabilities
Recent inquiries into the microfoundations of strategy have dramatically increased
understanding of the origins of capabilities. Despite this work, how experiences are encoded into
routines and then assembled into capabilities is less understood. Prior research offered a number
of suggestions about which types of experience are more likely to be encoded into routines and
capabilities (much of which has been based on laboratory experiments), but few studies have

tested these ideas within real-world organizations.
There is ample opportunity to develop a more comprehensive and organizationally-
situated approach to questions about which experiences are actually encoded, stored, and
retrieved. In addition, it would be helpful to investigate how managerial action can affect this
process. Scholars could study whether managers, through purposeful action, can increase the
volume, direction or efficiency of experience encoding potentially through mechanisms such as
knowledge management systems and managerial rotations. Alternatively, it may be that there is a
limit to how much organizations can process and store. Recent work has begun to explore these
questions (Laamanen & Wallin, 2009; Rerup & Feldman, 2011; Salvato, 2009), but the field is in
the early stages of understanding these dynamics.
In addition, we need to know more about how managers become aware of and understand
their organizations capabilities (existing and potential). We know that managers disagree about
organizational capabilities (e.g., Denrell et al., 2004; Rulke et al., 2000), but the processes
underlying this effect are not well understood. Without such a perspective, it is hard to diagnose
the exact role played by managers in the creation of organizational capabilities. What actions can
managers take to increase awareness and agreement, and to what extent does this lack of
agreement lead either to costly infighting over a single organizational frame or the inefficient
allocation of resources as different managers pull capabilities in different directions?
Most importantly, the process of capability assembly remains a nearly unexplored
topic. If routines are the building blocks of capabilities, what are the actions that managers (at
any level of the organization) take to assemble routines into capabilities? To the extent that
capabilities are assembled from routines to address a particular opportunity, this question relates
to work on strategic implementation. Recent research on resource orchestration suggests that

managerial decisions about the deployment of assets plays a role in creating competitive
advantage (e.g., Sirmon, Hitt, Ireland & Gilbert, 2011), but neglects the cognitive dynamics that
the revised model would suggest are important. This question is a space where scholars of
routines and scholars of capabilities can, and should, meet. We suggest that cognition is the
bridge between these two hitherto poorly connected domains.
Organizational change and growth
Of all of the topics discussed in this review, scholars know the most about the role of
managerial cognition (and related concepts) in affecting strategic change and inertia. In part this
is because organizational actions and outcomes at this level are relatively observable, facilitating
empirical research and case study identification. At the most general level, there is an already
sizable stream of research about the relationship between cognition and strategic change. Prior
research has investigated how managers perceive and become aware of threats brought about by
technological change (e.g., Kaplan, 2008b), and how entrepreneurs identify potential
opportunities (e.g., Gaglio & Katz, 2001). Less is known, however, about the cognitive aspects
of how organizations identify and pursue opportunities for expansion in situations other than
those brought about by radical environmental change.
There is room for additional work on the matching process itself, where managers
consider potential alternatives and weigh uncertainty and organizational risk as they evaluate
matches. While existing research has shown that matching occurs, our understanding of exactly
what managers do during this matching process is limited. Attention and search are two
candidates, but as suggested above, other possible processes such as experimentation or
crowdsourcing should be explored in order for the field to have a better sense of the mechanisms

at play. Moreover, recent research has pointed out that cognition may be able to substitute for a
lack of capabilities in spurring organizational action (Kaplan, 2008a; Eggers & Kaplan, 2009;
Gavetti, 2005), but less is known about how this works in practice.
Research on exaptation (Cattani, 2006; Dew, 2007; Marquis & Huang, 2010) has begun
to explore how resources and capabilities may be redeployed to serve new purposes, but most
(with the notable exception of Danneels, 2011) give little consideration to the cognitive
processes that underlie this matching process. Given recent work highlight the importance of pre-
entry experience as potential driver of organizational performance (Eggers, 2013; Helfat &
Lieberman, 2002; Sosa, 2013), understanding how managers perceive and (re)deploy existing
capabilities towards new potential uses would seem to be an extremely promising direction for
future research. Further, exaptation must surely be recursive with the process of assembling the
capabilities themselves. Research, likely in-depth field studies, to unpack the iterations between
these two processes might be particularly useful.
Cognition as a capability: Dynamic managerial capabilities
The model offered in this paper has implications for thinking about cognition as a
capability, which may inform the ongoing puzzle about how dynamic capabilities operate
(Eisenhardt & Martin, 2000; Lavie, 2006; Peteraf, Di Stefano & Verona, 2013; Teece et al.,
1997). Consistent with the work of prior scholars in situating dynamic capabilities in managers
abilities to build, integrate and reconfigure organizational resources and competences (Adner
& Helfat, 2003: p. 1012), managerial cognition can be seen as a dynamic managerial capability
(see also, Eggers & Kaplan, 2009). This highlights the potential for the purposeful action of
managers to interpret the environment in new ways, reconfigure organizational capabilities to

match those opportunities (Bingham et al., 2007; Gavetti & Levinthal, 2000), and build
organizational flexibility (Zollo & Winter, 2002). Such a view is also aligned with recent
research on organizational ambidexterity (OReilly & Tushman 2004; Smith & Tushman 2005).
There are three ways the discussion of dynamic managerial capabilities may be advanced by a
cognitive model of capability development and deployment.
First, bringing in the perspective of cognition as a pillar in the microfoundation of
routines (Dosi et al., 2000; Gavetti & Rivkin, 2007; Kaplan & Henderson, 2005) helps to identify
what efforts might be involved in reconfiguring capabilities. The implication is that the cognitive
and motivational truce (Nelson & Winter, 1982) that is represented in a routine would have to be
broken and remade in another form (Zbaracki & Bergen, 2010). Future research could
investigate how purposeful action including the initiation of search to accumulate new and
useful routines affects the availability of potential capability building blocks and thus improves
chances for adaptation. This is one place where attention to the cognition of people at different
levels of the organizational hierarchy might matter most. Routines are executed by the front line
in many cases, but changes in routines might be initiated by either those workers through their
everyday practice (Howard-Grenville 2005; Rerup & Feldman 2011) or perhaps by the top
management team in a deliberate attempt to create new truces (Zbaracki & Bergen, 2010). To
date, research on deliberate managerial action in relation to the creation of routines is
underdeveloped.
Second, by focusing on the role of cognition in the assembly of capabilities and
opportunities, we argue that managerial awareness both internally and externally shapes how
organizations pursue new opportunities. Managerial cognition has a significant impact on how
building blocks are assembled into capabilities, on the comprehension of the potential value of

those capabilities (Danneels, 2011; Rulke et al., 2000), and on the breadth of opportunities
considered (Barr, 1998; Jackson & Dutton, 1988). Future research could explore how managers
experiment with potential building blocks in order to create new capabilities. Scholars could also
investigate at a more granular level how managers familiarize themselves with the organizations
existing capabilities and the opportunity set.
Third, by showing that the process of matching capabilities to the environment is
cognitive, this study highlights the degree to which perceived matches result in positive
outcomes for the organization (Eggers & Kaplan, 2009; Taylor & Helfat, 2009). It also brings
into relief the opportunities that are missed due to perceived lack of fit (Tripsas & Gavetti, 2000).
The iterative nature of the matching process also drives managerial decisions to explore less
understood opportunities and to build or reconfigure capabilities.
A cognitive model of capability development and deployment therefore offers specific
ideas for future empirical research to explore the operation of dynamic capabilities and
organizational ambidexterity. Further, it suggests that such capabilities are resident in managerial
cognition and thus are perhaps best characterized as dynamic managerial capabilities.
Conclusion
The purpose of this article has been to review the various literatures that link capabilities
and cognition in organizations. The model that emerged proposed three central processes in
capability development and deployment: the construction of routines, the assembly of routines
into capabilities, and the matching of (perceived) capabilities to (perceived) opportunities. While
the role of cognition in the matching process and (to a lesser extent) the role of cognition in the
microfoundational development of routines have both been studied through various empirical

and theoretical approaches, the processes by which managers assemble routines into capabilities
have been largely overlooked. As such, the connection between the microfoundations work and
organizational performance is tenuous. Attention to the assembly process should help build the
macro-micro bridge in strategic management. Further, our mapping of the whole elephant in a
cognitive model of capability development and deployment enables future researchers to focus
on individual aspects while remaining sensitive to the entire animal.

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Figure 1a: Capabilities and performance the standard model
Figure 1b: Cognition and capabilities a linear model
MATCHING
CONSTRUCTING ASSEMBLING
CAPABILITIES TO
ROUTINES CAPABILITIES
THE ENVIRONMENT
Identify a purpose Make interpretation

Mindful for which of match between
selection of capabilities would capabilities and the
experience be assembled environment
Capability
building Strategic
Experience Capabilities Performance
blocks choice
(routines)
Encode Understand
experience what the
organization
is capable of
Figure 1c: Cognition and capabilities a recursive model
MATCHING
CONSTRUCTING ASSEMBLING
CAPABILITIES TO
ROUTINES CAPABILITIES
THE ENVIRONMENT
Identify a purpose Make interpretation

Mindful 2 for which 3 of match between
selection of capabilities would capabilities and the
experience be assembled environment
Capability 4
building Strategic
Experience Capabilities Performance
blocks choice
(routines)
Encode Understand 5
experience what the
organization
is capable of
1

Table 1: Constructing capability building blocks (routines)
Topics References Key insights

Overall: Cognition in Cohen & Bacdayan (1994); Kogut Cognition plays a role in creation
microfoundations & Zander (1996); Kogut & of routines
Kulatilaka (2001); Miller (2002);
Nelson & Winter (2002); Dosi,
Levinthal & Marengo (2003);
Cattani (2005); Gavetti (2005);
Kaplan & Henderson (2005);
Gibbons (2006); Zbaracki &
Bergen (2010)
Encoding based on
success Levitt & March (1988); Levinthal Successes are more likely to be
& March (1993); Cannon & encoded than failures
Edmondson (2001); Baumard &
Starbuck (2005); Shepherd,
Patzelt & Wolfe (2011); Eggers
(2012b)
similarity Cohen & Levinthal (1990); Zahra Experiences similar to existing

& George (2002); Gavetti, memories are easier to encode and
Levinthal & Rivkin (2005); retrieve
Lewin, Massini & Peeters (2011)
repetition Argote & Epple (1990); Argote Infrequent and unrepeated

(1999); Starbuck (2009); Rerup experiences are difficult to encode
(2009); Zollo & Reuer (2010) properly
mindfulness Helfat & Peteraf (2003); Experiences generated through

Levinthal & Rerup (2006); mindful action are more likely to
Gavetti & Rivkin (2007); be encoded
Laamanen & Wallin (2009);
Salvato (2009); Knott, Gupta &
Hoopes (2011)

Table 2: Assembling capabilities

Overall: Cognition in Helfat & Peteraf (2003); Lavie Cognition plays a role in the
assembly process (2006) movement from routines to
capabilities
Identifying a purpose
via problem sensing Keisler & Sproull (1982); Lai & Poor performance can create
Grnhaug (1994); Haunschild & awareness of a problem that needs
Sullivan (2002); Greve (2003) to be addressed
via opportunity awareness Kirzner (1973); Shane & Individuals vary in their ability to
Venkataraman (2000); Gaglio & perceive potentially unmet market
Katz (2001); Ardichvili, Cardozo needs that represent
& Ray (2003); Baron & Ensley entrepreneurial opportunities
(2006); Gregoire, Barr &
Shepherd (2010)
Understanding capabilities
via experience Liang, Moreland & Argote Managers with greater experience
(1995); Kogut & Zander (1996); with a capability have a more
Rulke, Zaheer & Anderson refined understanding of its
(2000); Denrell, Arvidsson & potential (through transactive or
Zander (2004); Miner, Gong, procedural memory)
Baker & OToole (2011); Ren &
Argote (2011); Argote & Ren
(2012)
via benchmarking Greve & Taylor (2000); Greve Managers will imitate and
competition (1998); Baum & Lant (2003); benchmark themselves against
Benner & Tripsas (2012) firms that they view as similar and
relevant to their firm

Table 3: Interpreting the match between capabilities and the environment

Overall: matching Penrose (1959/1995); Barr, Stimpert & Capabilities are bundles of resources that
Huff (1992); Tripsas & Gavetti (2000) are deployed based on a match with
perceived opportunities.
Interpretive schema
Cognitive frames Barr, Stimpert & Huff (1992); Tripsas Cognitive frames are both diagnostic of
& Gavetti (2000); Gilbert (2006); the environment and prognostic about
Kaplan (2008b); Laamanen & Wallin what organizational capabilities should
(2009) be deployed
Dominant logic Prahalad & Bettis (1986); Ginsberg Organizations create dominant logics
(1990); Bettis & Prahalad (1995); that screen out potential opportunities
Levy, Schon, Taylor & Bogacigiller that do not match with capabilities
(2007); West (2007)
Identity Milliken (1990); Dutton & Dukerich Organizational identity is a lens through
(1991); Gioia, Thomas, Clark & which potential matches are assessed
Chittipeddi (1994); Gioia & Thomas
(1996)
Business models Chesbrough & Rosenbloom (2002); Organizational perception of business

Tikkanen, Lamberg, Parvinen & models for value creation affect which
Kallunki (2005); Chesbrough (2010) opportunities are seen as viable
Inertia
Attention Milliken & Lant (1991); Barr, Stimpert Managerial attention to new
& Huff (1992); Barr (1998); Osborne, opportunities increases likelihood of
Stubbart & Ramaprasad (2001); organizational action
Kaplan, Murray & Henderson (2003);
Kaplan 2008a
Identity Kogut & Zander (1996); Zucker & Potential opportunities that do not fit
Darby (1997); Tripsas & Gavetti with the organizations identity are
(2000); Nag, Corley & Gioia (2007); typically disregarded
Tripsas (2009); Gioia et al (2013)
Adaptation
Exaptation Cattani (2005); Dew (2007); Marquis Organizations will expand based on
& Huang (2010) reusing and repurposing existing
capabilities
Fungibility Regner (2008); Taylor & Helfat Cognition about the applicability of
(2009); Danneels (2011) existing capabilities to new
environments affects growth patterns

Processes
Attention Kazanjian & Drazin (1987); Ginsberg The focus of managerial attention affects
(1989, 1990); DAveni & McMillan strategic action and adaptation. Senior
(1990); Milliken (1990); Milliken & managers tend to be inert in their frames
Lant (1991); Wiersema & Bantel and must be replaced in order for the
(1992); Ocasio (1997); Cho & organization to shift attention.
Hambrick (2006); Eggers & Kaplan
(2009); Joseph & Ocasio (2012)
Search Tripsas & Gavetti (2000); Gavetti Conscious efforts to build new
(2005); Gavetti, Levinthal & Rivkin capabilities will lead to exploratory
(2005); Gavetti (2013) action. Managers reason and search for
new opportunities based on analogies
with existing knowledge
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Cognition & Capabilities: A Multi-Level

Article in The Academy of Management Annals June 2013

J.P. Eggers Sarah Kaplan

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Academy of Management Annals

January 15, 2013

Key words: cognition, capabilities, routines, dynamic managerial capabilities, exaptation,

Abstract: Research on managerial cognition and on organizational capabilities has essentially

Research on the impact of organizational capabilities on firm performance has been a

must be properly utilized by managers in order to be effective at driving firm performance.

Similarly, in Teeces evolving discussion of dynamic capabilities, the focus is particularly

managerial later on (Teece, 2007; Augier & Teece, 2009).

interconnections between cognition and capabilities.

Intellectual history of cognition and capabilities

Cognition and Capabilities -1-

SWOT (strengths, weaknesses, opportunities, threats) framework, research in strategic

parameters established by the environment in which they operated.

Based View) problematized the organization by showing that heterogeneous capability

Baden-Fuller, 1989; Reger & Palmer, 1996).

capabilities scholars have focused on capabilities as a source of inertia or adaptation to the

Cognition and Capabilities -2-

usefulness of these capabilities is subject to interpretation over time (Danneels, 2011).

A plan for this study

levels of analysis from routines to capabilities to organizations.2 It blends previously

questions about how cognition and capabilities are reciprocally intertwined.

Cognition and Capabilities -3-

COGNITION AND CAPABILITIES: A BASELINE MODEL

Cognition and Capabilities -4-

capabilities are deployed (implicitly through managerial choices) to generate organizational

-- Insert Figure 1a about here --

Yet, such a model connecting experience to organizational performance makes three

emergence of capabilities are unproblematic experience consistently and predictably leads to

process of local search (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984).

cognitive underpinnings of capabilities. These theories conceptualize routines as building blocks

of capabilities and the source of routines as organizational truces around understandings of

Cognition and Capabilities -5-

building blocks are assembled into capabilities to be deployed in particular contexts.

mental representations of their organizations capabilities. As Alchian and Demsetz (1972: p.

Cognition and Capabilities -6-

capability as having a specific and intended purpose: as an example, the capability to

interpretation of a capabilitys purpose, the organization possesses only a set of routines,

signal-plus-noise or intended purpose an articulation of capability assembly is a second process

the assembly of capabilities from the building blocks of routines.

Cognition and Capabilities -7-

capabilities optimally to maximize performance. Further, even if managers rationally deployed

environment only as perceived by organizational participants. Thus, matching (when managers

needed to update Figure 1a.

recursive processes that further complicate this model.

Cognition and Capabilities -8-

CONSTRUCTING CAPABILITY BUILDING BLOCKS:

Cognition and Capabilities -9-

construction of organizational routines. As Kogut and Zander (1996: p. 515) argue:

underpinning to understanding the generation of routines as arising out of sustained

experience is accumulated without anticipation of subsequent uses. Similarly, from a real

Cognition and Capabilities - 10 -

encoding of experiences (see Table 1 for a summary of the relevant research).

-- Insert Table 1 about here --