Where Do Capabilities Come from and How Do They Matter? A Study in the Software Services Industry

Strategic Management Journal, Vol. 26, No. 1, pp. 25-45, 2005

46 Pages Posted: 3 Jun 2004

See all articles by Sendil K. Ethiraj

Sendil K. Ethiraj

University of Michigan - Stephen M. Ross School of Business

Prashant Kale

University of Michigan at Ann Arbor

Mayuram S. Krishnan

University of Michigan, Stephen M. Ross School of Business

Jitendra Singh

University of Pennsylvania - Management Department

Abstract

Recent years have witnessed a surge of interest in the notion of capabilities as an important source of competitive advantage. This recognition has, in turn, placed emphasis on the question of where and how these capabilities emerge and how they influence firm performance. The present paper is an attempt to address this question. Using a large sample of detailed project level data from a leading firm in the global software services industry, we attempt to empirically study the importance of capabilities. We find that two broad classes of capabilities are significant. The first class, which we label client-specific capabilities, is a function of repeated interactions with clients over time and across different projects. This learning from repeated interactions with a given client reduces project execution costs and helps improve project contribution. The second class, termed project management capabilities, are acquired through deliberate and persistent investments in infrastructure and systems to improve the firm's software development process. Our empirical results suggest that the marginal returns to acquiring different capabilities may be different and an understanding of such trade-offs can improve firm decisions to improve and/or acquire such capabilities. We discuss the key contributions of our paper and the implications for future research on capabilities.

Keywords: Capabilities, software services, strategy

JEL Classification: L23, L86

Suggested Citation

Ethiraj, Sendil K. and Kale, Prashant and Krishnan, Mayuram S. and Singh, Jitendra, Where Do Capabilities Come from and How Do They Matter? A Study in the Software Services Industry. Strategic Management Journal, Vol. 26, No. 1, pp. 25-45, 2005. Available at SSRN: https://ssrn.com/abstract=554644

Sendil K. Ethiraj (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
R4442
Ann Arbor, MI 48109
United States
734-764-1230 (Phone)

Prashant Kale

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States
(734) 764-2305 (Phone)

Mayuram S. Krishnan

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-6749 (Phone)

Jitendra Singh

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

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