Cognition and Hierarchy: Rethinking the Microfoundations of Capabilities’ Development

Abstract

This article identifies gaps in the microfoundations of capabilities research, particularly in work that is based on the framework of evolutionary economics. It argues that such research has focused excessively on the quasi-automatic, routine-based aspects of capability development, and largely neglected the roles played by cognition and organizational hierarchy. By deriving a model of search that jointly considers how routine-based and cognitive logics of action coexist within an organizational hierarchy to affect capability development, this article offers three contributions. First, it delineates the traits of a microfoundational structure for research on capabilities that begins to address these gaps. Second, based on this structure, it highlights previously neglected causal mechanisms that contribute to our understanding of how capabilities develop. The model shows that managers’ cognitive representations of their strategic decision problem fundamentally drive organizational search, and therefore the accumulation of capabilities. Furthermore, it shows that the accuracy of the representations a manager chooses might vary according to where she is situated in the organizational hierarchy. This more refined perspective leads to a set of propositions regarding how different hierarchical arrangements influence capability development and organizational performance. Finally, the paper sets an agenda for future research in this area.