Southampton Business School, U. of Southampton, United Kingdom
Recent research on dynamic capabilities has focused on investigating the micro-foundations of dynamic capabilities. Among these micro-foundations are the decision making approaches of managers. In this study, we aim to answer the question of whether heuristic reasoning or analytical, effortful reasoning characterizes the deployment of dynamic capabilities in highly dynamic environments and how the use of either approach affects firm performance by conducting computer-aided text analysis, using data of earnings call transcripts as well as firms’ financial data. The results reveal that managers indeed use less analytical, effortful reasoning (implying a greater use of heuristic reasoning) in their deployment of dynamic capabilities when facing high dynamism and that less use of analytical, effortful reasoning has a positive effect on firm performance. The novel approach used in this study helps us shed light on how firms perform and succeed in a dynamic, contemporary business environment. More broadly, we contribute to the growing literature on the micro-foundations of dynamic capabilities and strategy research.