Peeking under the hood of public organizational performance
A review of evolutionary economics' and strategic management's exploration of the determinants of organizations’ performance
Often, policy analysts and makers think about organizations in a country or a market as rather homogenous units. They are actors operating under certain conditions shaped by the legal and policy frameworks that determine their actions and decisions through a particular incentive structure. To achieve desired outcomes or change negative ones, policy makers need to intervene at this incentive structure level by changing laws and policies.
While important, and to a large extent explanatory of how the world works, this approach cannot provide a satisfactory answer to the following question: what explains the different performance of organizations operating under the exact same legal and policy framework?
Different strands of thinking have tried to address this shortcoming. One of them is the school of “Evolutionary Economics” pioneered by Robert R. Nelson and Sidney G. Winter, which studies the role of path dependencies, learning processes and organizational routines in explaining the different trajectories of countries and organizations in economic development and business performance.
Connected to this school of thought is the influential Resource-Based View (RBV) of organizations that emerged in the field of strategic management. Some of the early formulations of this theory (see Barney, 1991 or Grant, 1991) focused on how the combination and accumulation of firms’ assets determined their competitive advantage. Early on, it became clear that the focus could not limit to the assets of the organization and needed to extend to its capabilities (Henderson and Cockburn, 1994).
This led to a differentiation between resources assets or inputs to production (tangible or intangible) that an organization owns, controls, or has access to on a semi-permanent basis and organizational capabilities the ability of an organization to perform a coordinated set of tasks, utilizing organizational resources, for the purpose of achieving a particular end result (Helfat and Peteraf, 2003).
Central to the concept of organizational capability is the idea of routines that Nelson and Winter defined as repetitive patterns of activity. An organizational capability refers, according to Winter (2000) to a high-level routine (or collection of routines) that, together with its implementing input flows, confers upon an organization’s management a set of decision options for producing significant outputs of a particular type. For these authors, an organizational routine is the organizational analogue of individual skill.
The concepts developed by evolutionary economists and RBV have deeply influenced organizational thinking and has given way to a literature that distinguishes between operational and dynamic capabilities. Let’s suffice to say here that the latter are capabilities that build, integrate, or reconfigure operational capabilities (Teece et al., 1997). We will explore the concept of dynamic capabilities – including its critics - in more detail in later posts, but we want to highlight here some of the interesting features of organizational capabilities identified by the literature (Piening, 2012; Helfat and Peteraf, 2003; Nelson and Winter, 2002):
o The concept of a capability as a set of routines implies that in order for the performance of an activity to constitute a capability, the capability must have reached some threshold level of practiced or routine activity. At a minimum, in order for something to qualify as a capability, it must work in a reliable manner. Taking a first cut at an activity does not constitute a capability.
o Capabilities need to be developed through their constant exercising. This learning by doing approach is akin to the idea of capabilities as a muscle that needs flexing.
o Over time, the ability of the team to recall the development path may fade and the capability may become more tacit in nature.
o Although some capabilities and their constituent routines may be codified, others will remain tacit. This makes them hardly transferrable.
o Path dependency shapes the underlying routines of dynamic capabilities. In essence, three main factors, namely the historical development of an organization, learning barriers and micropolitics explain why these routines are path-dependent.
o A routine represents a collective agreement about how to carry out a certain task, and thus reduces conflict. Departures from accepted routines provoke heightened anxieties and often involve heightened stakes.
These insights provide an interesting avenue to study public sector organizations, and yet, with a few exceptions, their application in the field of public administration remains rather limited (see for example Bryson et al., 2007; Lee and Whitford, 2013).
Over the last years, however, the idea of dynamic capabilities in public organizations (see Piening 2012 for a literature review) has gotten traction thanks to the work by Rainer Kattel and Mariana Mazzucato and others, but a lot remains to be done. For example, there is a need to further conceptualize, operationalize and measure organizational capabilities. This would enable researchers to identify how organizational capabilities vary across organizations, and how these different combinations, in turn, influence organizations’ performance. Beyond assets and organizational capabilities, other components within
organizations (organizational structure, technological infrastructure and leadership decisions and practices) need also to be factored in. All these components interact with each other as well as with assets and organizational capabilities, and therefore studies will need to capture them, either as explanatory variables or as enabling/constraining conditions.
Given the importance of public organizations’ performance and its heterogeneity across organizations working in equal or very similar contexts, it is paramount to further understand what determines these differences. Vague calls to political will, internal culture and leaders’ role do not take us very far, but a more rigorous analysis of their internal configurations, assets, organizational capabilities, and decisions might do so.