Capability creation: Heuristics as microfoundations

Research Summary While much research suggests that capabilities are critical for firms, little is known about the individual-level origins (microfoundations) of capabilities. Using in-depth nested case studies, we explore how firms develop an internationalization capability. The setting is six entrepreneurial firms from three culturally distinct countries. Our data show that executives begin by seeding the process with imperfect heuristics and then managers continue development by elaborating their understanding of what task to perform and how to perform it. Importantly, managers across hierarchical levels support the development of their firm's internationalization capability by abstracting key heuristics away from any one experience such that the capabilities become less routine over time. Overall, we contribute to the microfoundations movement in strategy and to the literature on organizational learning. Managerial Summary Firm capabilities are not just important to strategy, but often are the strategy of firms, especially in dynamic markets. Popular examples include Cisco's acquisition capability, Hewlett-Packard's alliance capability, Starbuck's internationalization capability, and Apple's product development capability. Unfortunately, it is often unclear to executives how to build a firm capability. We explore how entrepreneurial firms develop their own internationalization capability over time. Our data show that these capabilities develop through a process of seeding, elaborating, and abstracting key heuristics for internationalization. Importantly, we show that this process is shaped by extensive communication within and across multiple hierarchical levels. In this way, heuristics move from individual-level rules of thumb for action to firm-level understandings for fueling growth and creating competitive advantage.