Capability erosion dynamics

Abstract

The notion of capability is widely invoked to explain differences in organizational performance, and research shows that strategically relevant capabilities can be both built and lost. However, while capability development is widely studied, capability erosion has not been integrated into our understanding of performance heterogeneity. To understand erosion, we study two software development organizations that experienced diverging capability trajectories despite similar organizational and technological settings. Building a simulation-based theory, we identify the adaptation trap, a mechanism through which managerial learning can lead to capability erosion: well-intentioned efforts by managers to search locally for the optimal workload balance lead them to systematically overload their organization and, thereby, cause capabilities to erode. The analysis of our model informs when capability erosion is likely and strategically relevant.