Dynamic Capabilities and Top Management Cognitions

Abstract

Scholars increasingly seek to link environmental conditions and managerial cognition to dynamic capabilities. Environmental conditions affect the use of dynamic capabilities and this use is the outcome of managerial behaviour which rests on psychological foundations. In this paper, we argue that to improve our understanding of how firms deploy dynamic capabilities we need to first understand the specific decision-making approaches (rational reasoning vs. heuristics) that top management teams (TMTs) apply and how environmental conditions (highly vs. moderately dynamic) interact with such decision-making. Building on extensive literature on heuristics-based decision making, we argue that as the degree of dynamism in the environment increases, TMTs encounter less accessibility to valid and accurate information, leading to decreased predictability of decision outcomes. Accordingly, in highly dynamic environments TMTs predominantly rely the heuristics-based deployment of dynamic capabilities, and by doing so, enhance firm performance. This paper contributes to our understanding of the psychological foundations of dynamic capabilities.

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