The management of organizational capabilities: A microeconomic analysis

This dissertation uses microeconomic theory to study how firms manage the organizational capabilities that arise from the know-how of their workforce. The management issues addressed are the development of a long-run strategic direction, the choice of a portfolio of capabilities, the sources of firm heterogeneity, and the development of high ability managers.;The first essay studies two types of heterogeneity among competing firms, heterogeneity with respect to organizational capabilities and with respect to organizational flexibility, which determines the speed with which firms can learn new capabilities. The essay shows that both types of heterogeneity can arise as a rational response of firms to competitive pressures. The essay offers a novel perspective on several issues of interest to the resource-based view of strategic management.;The second essay seeks to develop a framework that predicts the content of the long-run strategic direction of a firm. The framework starts with the observation that sticking to a strategic direction decreases the flexibility a firm has to adjust its strategy over time. The essay shows that such reduced flexibility can be a valuable spur to employee investment in human capital and the creation of organizational capabilities. The setting is one where firms use promotion tournaments to provide incentives for employees to acquire "strategy-specific" human capital. The essay shows that too much strategic flexibility can result in a high level of wasteful influence activities and it can create the possibility of self-fulfilling expectations of strategic failure within a firm.;The third essay studies the promotion of employees to managerial positions in a firm where know-how is transferred from managers to other employees via mentoring and where employees have different types (e.g. cultural background or gender). Employee type is important because mentoring is assumed to be more effective when managers are mentoring someone of the same type. The essay shows that such a firm does not promote simply based on productivity, but rationally introduces a bias based on type. The focus of the essay is on the firm's optimal bias and on the evolution of management diversity over time.