How Do Organizational Capabilities Shape Industry Dynamics ?

Abstract

This paper aims to reconcile the logic behind stochastic models of firm growth and the notion of organizational capabilities as drivers of economic performance. In the proposed behavioral model of bounded rational firms, two mechanisms drive growth: independent stochastic growth of individual opportunities and the process by which firms capture new opportunities. To extend the stochastic framework, this research incorporates behavioral assumptions about the interactions between the firm and the business environment and the mechanism by which firms sense and seize business opportunities. The model generates statistical regularities in firm size, growth rates, and profit differentials between firms that are consistent with observed patterns in real-world settings. The greater the selective power of organizational capabilities, the more the steady-state distribution of firm size appears to deviate from log normality, which provides a potential explanation of various observed departures from the Law of Proportionate Effect. With regard to firm diversity, the distribution of opportunities per firm is skewed; just a few entities account for most of the business opportunities that arise during the simulation period. Moreover, the interaction between the external environment and the internal structure of firms influences heterogeneity in the value of the opportunities that they capture, as well as the persistence of long-run profits.Organizational Capabilities; Firm Size Distribution; Growth Rates; Profitability