Capability Development in Infrequent Organizational Processes: Unveiling the Interplay of Heuristics and Causal Knowledge

Abstract

We investigated the role of heuristics in decision-making in infrequent and heterogeneous organizational processes. In our multiple-case study, we tracked individual managers' knowledge, how managers collectively articulated and codified knowledge, and how they used it in mergers and acquisitions (M&A) decision-making. We developed a process model that explains (a) the evolution and the interplay between heuristics and causal knowledge and (b) the implications of these processes for decision-making. More precisely, we found that some managers possessed and used rough heuristics – heuristics developed via limited or non-existent firsthand experience. Because rough heuristics were often faulty, they led to errors if used in a different context. In contrast, other managers possessed and used causal knowledge – knowledge explaining causal regularities in the environment. Causal knowledge was associated with higher quality decision-making and better performance in subsequent acquisitions. The problem that our focal companies faced was that causal knowledge often evaporated during attempts at collective articulation and codification, causing the conversion of causal knowledge into rough heuristics. We contribute to the organizational heuristics literature by improving our understanding of the role of heuristics in infrequent and heterogeneous organizational processes. At a more general level, we contribute to the capabilities development literature by identifying three paths that capabilities development can take. We also offer important implications for managers.