Mid-Range Management Theory

Competence Perspectives on Modularity and Dynamic Capabilities

Ron Sanchez, Aimé Heene, Seçkin Polat, Umut Asan, Ron Sanchez, Aimé Heene, Seçkin Polat, Umut Asan

• Publisher: Emerald Publishing Limited
• Year: 2017
• Print ISBN: 9781787144040
• eBook ISBN: 9781787149236
• Topic: Business
• Subtopic: Management
• Index: Business

This volume presents an epistemological argument for the essential function of mid-range theory in advancing management concepts that can be usefully applied by managers. Authors analyse two examples - modularity and dynamic capabilities.

BUILDING SUSTAINABILITY COMPETENCE FROM THE TOP DOWN: A MODEL FOR RESEARCHING AND IMPROVING BOARDS OF DIRECTORS’ INFLUENCE ON FIRMS’ SUSTAINABILITY PERFORMANCE

Ron Sanchez, Jeremy Galbreath and Gavin Nicholson

ABSTRACT

In this paper we develop a model for researching the influence that a board of directors can have on improving an organization’s sustainability performance. Our model explores sources of cognitive flexibility of boards needed to recognize and respond to the need for improved sustainability performance. We first define concepts of sustainability, sustainability competence, and sustainability performance. We then analyze two forms of board capital (a board’s human capital and its social capital) and three aspects of a board’s information processing (its patterns of information search, discussion and debate, and information absorption) that we suggest affect a board’s cognitive flexibility and thereby influence whether a board decides to adopt sustainability performance goals. Our model also suggests that an organization’s strategic flexibility – as represented by its current endowments of resource flexibilities and coordination flexibilities – will moderate the relationship between a board’s decision to adopt sustainability performance goals and an organization’s subsequent achievement of those goals. We also suggest that our model is generally relevant to any research seeking to predict the influence of boards on strategic change in many forms, not just to research focused on sustainability issues.

Keywords: Sustainability; boards of directors; board capital; information processing; strategic flexibility; resource flexibility; coordination flexibility

1. INTRODUCTION

Competence-Based Management (CBM) theory has long emphasized the importance of the cognitive processes of managers as a key strategic factor affecting organizational performance (Sanchez, Heene, and Thomas, 1996; Sanchez and Heene, 1997). Managers’ cognitive processes fundamentally determine the resources an organization seeks to attract and use, the capabilities it seeks to develop, the management processes it uses to coordinate its resources and capabilities, and the strategic logics it may adopt for competing and cooperating in its environment. Moreover, the breadth and depth of the cognitive processes an organization’s managers are able and willing to undertake will profoundly influence the ability of their organization to sense and respond to new developments in its environment (Sanchez, 2004).

The ideas that motivate and shape an organization’s capabilities, management processes, and strategic logic tend to become deeply engrained into the way people in the organization think and act, leading to “core rigidities” that make it difficult for an organization to recognize the need for change or to undergo change (Leonard-Barton, 1992). As a result, as Sanchez and Heene (1996) have observed, it commonly takes a much longer time for an organization to change the ideas it uses than the things it uses.

The evident and increasingly urgent need for organizations of all kinds to assess and improve the social and environmental sustainability of their activities poses a serious challenge to organizations whose patterns of thought and activities have been formed in an earlier era in which sustainability was not a recognized or serious concern. Retooling an organization’s resources, capabilities, management processes, and strategic logics to substantially improve their social and environmental sustainability performance will call for significant cognitive flexibility on the part of many managers – especially at the most senior level – who must lead their organizations in improving sustainability performance.

While much of the research reported in the CBM literature to date has been focused on the cognitive flexibilities of senior managers facing various demands for change, it is important to remember that boards of directors are ultimately responsible for the performance of their organizations. Boards of directors therefore need to have the cognitive flexibility to fulfill their vital role in identifying the need for strategic change, in setting strategic goals for the development of new competences in their organizations, and in initiating competence-building initiatives that respond effectively to identified needs for strategic change (Sanchez and Heene, 2004). To help assure that boards of directors can play an effective leading role in improving the sustainability performance of their organizations, researchers need to help shareholders and other forms of owners of organizations understand better how their boards of directors can be composed and managed to be most effective in launching and governing the building of essential new sustainability competences.

In this paper we draw on prior research into the ways in which boards may influence their organizations to develop a model for researching how the composition of a board and the ways in which a board processes information may affect the extent to which an organization adopts strategic goals for developing new sustainability competences and improving its sustainability performance. We also draw on prior research into the strategic flexibilities of organizations as open systems to suggest the extent to which firms whose boards have set goals for development of sustainability competences may actually achieve subsequent improvements in sustainability performance.

Our discussion is structured as follows.

In Section 2 we define the concepts of sustainability, sustainability competences, and sustainability performance that are central to this paper’s discussion.

In Section 3 we provide an overview of and the theoretical grounding for our model for researching how boards of directors may improve their cognitive flexibility and hence their ability to lead their organizations in improving their sustainability performance.

Section 4 explains four assumptions we have made in building our model that suggest why sustainability is a strategic concern of organizations today and why boards may play an important role in influencing a firm’s sustainability performance.

Section 5 elaborates our model by first drawing on governance theory and behavioral theory to elaborate concepts of a board’s human and social capital and information processing that are likely to influence directors’ cognitive processes and determine whether a board adopts goals for improving an organization’s sustainability performance. Section 5 also draws on CBM theory to elaborate concepts of resource flexibility and coordination flexibility that determine a firm’s overall strategic flexibility (Sanchez, 1995, 2004) to undergo strategic change. We also suggest how each form of flexibility may exert a moderating influence on the ability of a firm to actually implement goals for sustainability competence building set at the board level.

Section 6 suggests some implications of our model for both current management practice and future research into how boards can influence organizations to set goals for sustainability performance and to initiate processes for building sustainability competence.

Section 7 offers conclusions, including our suggestion that the model we present in this paper may also be useful as a general model for studying how board composition and information processing may be managed to improve a board’s ability to detect and initiate needed strategic change of all types in an organization.

2. DEFINITIONS OF KEY CONCEPTS

In this section we seek to clarify the concepts of sustainability, sustainability competence, and sustainability performance that are the basis of this paper’s analyses and the model we develop here.

Although the term sustainability is increasingly prominent in both academic and popular management discourse, there is no general consensus as to the exact conceptual meaning of the term. For the purposes of the analyses presented in this paper, we draw on the open systems view of organizations in CBM theory to define sustainability (Sanchez and Heene, 1996) in the following way.

All organizations are open systems that depend on inward flows of resources to support their activities. To obtain inward resource flows, an organization must be able convert its inward resource flows into some kind of outputs (outward resource flows) that can be exchanged in the organization’s environment for the kind of inward resource flows the organization needs to sustain its ongoing activities of resource conversion. The exchange of an organization’s outward resource flows for inward resource flows is normally facilitated by using money that an organization obtains for its outward resource flows in markets for products and services to purchase inward resource flows in resource markets. The mediating role of money in an organization’s processes for exchanging resources means that an economic perspective on an organization’s resource exchanges is essential to understanding and assessing the ability of an organization to sustain its essential resource conversion activities. In essence, unless an organization’s outward resource flows can be exchanged for money or other financial assets whose market value is at least as great as the market value of inward resource flows the organization needs in order to sustain its resource conversion activities, the organization is not an economically viable, sustainable open system able to survive in its environment.¹

Nevertheless, an economic perspective that considers only the monetary or financial aspects of the sustainability of an organization’s resource exchange activities would be a very narrow and overly simplistic view of an organization as an open system that must continue to transact with its environment to survive. Both social and environmental aspects of an organization’s resource conversion and exchange activities must also be considered in order to compose an adequate economic representation of the sustainability of those activities.

The economic concept of externalities is the key to understanding how social and environmental factors can affect the ability of an organization to sustain its resource conversion and exchange activities – as well as its ability to create real economic value. An externality is any cost associated with an organization’s resource conversion activities that the organization can avoid by “transferring” the cost to its external social or physical environment.

An example of a social externality would be a firm that transfers all or part of the long-term economic costs of an on-the-job injury to...

Table of contents

• Title
• Introduction
• Building Theory for Management Science and Practice: An Epistemological Perspective from Competence-Based Management Theory
• Overcoming Path Dependency and “Lock-In” in Competence Building and Competence Leveraging Processes
• Identifying Competences and Their Sources in A Not-For-Profit Organization: The Case Of A Humanitarian Relief Organization
• Building Sustainability Competence from The Top Down: A Model for Researching and Improving Boards Of Directors’ Influence On Firms’ Sustainability Performance
• Roadmap-Based Methodology for The Forecasting Of Competences Within Automotive Product Development
• Modularity in New Market Formation: Lessons for Technology and Economic Policy and Competence-Based Strategic Management