It is frequently observed that many firms, especially those that are successful in the current environment, fail to change quickly enough when the environment changes significantly. One potent explanation for these observations is a phenomenon of learning called a ‘competency trap’. In this article we briefly describe what competency traps are, the factors that lead to them, the consequences for the firm, including reduced adaptability and missed opportunities, and, finally, the various means through which a firm can avoid falling into the competency traps.
KeywordsFocal Firm Venture Capital Fund Corporate Venture Corporate Venture Capital Middle Managerial Level
Competency trap is a pathology of learning wherein an actor persists with current practices and does not learn alternatives that are superior in the long term because previous experience makes continued use of current practices more attractive than adopting new ones that yield smaller returns in the short term.
Definition and Relevance
It has been frequently observed by scholars that many firms that are quite competent in their current activities falter and fail to change quickly enough when the environment around them changes significantly. Furthermore, this propensity to fail in changed circumstances seems correlated with their success in the earlier environment (Barnett and Pontikes 2008). One potent explanation for these observations is a phenomenon of learning called a ‘competency trap’ (Levitt and March 1988). An entity falls into a competency trap when it persists with its current practices or procedures, even in the presence of superior alternatives, because its prior experience with the current practices makes their continued use more attractive than adopting new ones which yield smaller returns in the short term. A competency trap can also be thought of in theoretical terms as an organization being stuck with a locally optimum configuration of decisions where moving to a better optimum entails adjusting the configuration in a way that could eventually yield better results but reduces the entity’s performance in the short term (March 1991). Here we briefly list the antecedences and consequences of competency traps and the means to counter them.
Entities other than firms can also fall into competency traps. Individuals, through a process of experiential learning, can develop expertise with certain technologies or practices and then refrain from gaining experience in different but potentially more efficient technologies because continuing to utilize current skills can be more beneficial in the short term. Similar effects can be observed for other entities such as governments and even societies and other economic systems (consider, for instance, the persistence of the QWERTY keyboard even in the presence of superior ones). Given the differences in goals and the resources at the disposal of these entities, the factors that cause them to fall into competency traps, the consequences of falling into these traps and the means that can be employed to come out of the trap are likely to be considerably different across these entities. Owing to considerations of length, here we limit our scope to for-profit firms.
Factors Leading to Competency Traps
One of the primary reasons why firms are trapped into persisting with their current set of competencies is the process through which they learn and adapt. Most learning is local. Firms learn by making and evaluating changes close to their current set of activities (Nelson and Winter 1982). Because predicting the consequences of radical changes in complex conditions is very difficult, firms prefer to make only incremental changes that do not destabilize the organization. This propensity to experiment with only proximate changes tends to increase the facility with current practices and routines and prevents the firm from gaining radically different competencies. This propensity for proximate changes is also reflected in firms’ tendency to ignore the consequences that are distant in time (Levinthal and March 1993). Short-term survival and the unpredictability of the long term leads firms to sacrifice long-term competitiveness for short-term gains (Levinthal and March 1993). Consequently, firms are less inclined to shift resources from learning and improving their current competencies in the interest of building new competencies that can yield superior returns in the future.
A number of organizational factors are also instrumental in trapping the firm into persisting with its current set of competencies and routines instead of developing and moving towards new ones. A firm’s various competencies are based on various bundles of routines developed within the firm. Indeed, a firm can be thought to consist of these routine-bundles linked together in a complex interdependent system (Nelson and Winter 1982; Winter 2003). Avoiding the competency trap and building new competencies involves developing new routines, disrupting some of the existing routines and incorporating the new routine into the existing system. This disrupts the existing system of routines and, in an interdependent system, can cause unpredictable consequences far from the actual locus of change. This increases the cost of dramatically changing the status quo; disruptions from small incremental improvements can be contained and controlled. Interdependent routines therefore usually favour the deepening of existing competencies over developing new ones. The structure of the firm — the way different units are grouped together and communicate with each other and how the authority and decision-making is distributed among the units — also restricts the pattern of information flow and shapes the pattern of attention within the firm (Ocasio 1998). This restriction of attention and information thereby constrains the firm from recognizing the importance of new sets of competencies, especially those that require a new configuration of activities and a new arrangement of the components of the system (Henderson and Clark 1990). In this way the current structure of the firm, by hiding the potential of new competencies, can keep the firm trapped in its current set of competencies. Another organizational factor preventing the firm from developing new sets of competencies is politics: certain influential organizational members may have vested interests in continuing with the old competencies and prevent the firm from adopting new competencies (Taylor 2010).
Firms also fall into competency traps in response to the demands placed on them by the environment. The expectations of many external constituents: customers, capital providers and institutions, as well as competitive pressures, focuses the firm on the short term and on fulfilling the current demands reliably, a focus that supports maintaining and improving the current competencies rather than taking the risk of building new and different capabilities. Christensen and Bower (1996) demonstrate the impact of the needs of a firm’s major customers on its inability to allocate resources towards developing new markets through new technologies. Ahuja and Lampert (2001) identify three sets of traps that emerge from such ‘rational’ constraints on organizations – maturity traps, propinquity traps and familiarity traps. Similarly, scholars have shown that pressures from financial markets to produce financial results in the short term prevent firms from investing in R&D and thus building future technological capabilities (Bushee 1998). Other scholars (Barnett and Hansen 1996) have argued that competitive pressures force a firm to continually fine-tune their current set of competencies and make them efficient vis-à-vis the current environment, in effect ignore investing in developing a new set of competencies that can make them more flexible.
Consequences of Competency Traps
Adaptability to Changes
The most obvious and perhaps the most pernicious consequence of falling into a competency trap is that it makes a firm vulnerable to changes in the environment and thus can prove lethal in the long term. A competency trap slows a firm’s response to adverse changes in the environment not only because superiority in the current practices increases the costs of moving away from them but also because increased competence in current practices delays the adverse impacts of external changes. Initially the superiority in current competencies may still continue to provide satisfactory returns until the adverse changes gather potency over time and then it may be too late for the firm to change; the incumbents’ fallibility to disruptive technologies (Christensen and Bower 1996) is one example of this malignancy.
Another related but subtly different consequence of competency traps is that they cause firms to miss out on many opportunities. Continuing with current competencies and unwillingness to invest in developing new ones can lead the firms to ignore many technologies that may exist within the firm itself, technologies that might later turn out to yield far greater returns than the original competencies (for instance, given the computer technologies developed in Xerox labs, Xerox could have dominated the computer revolution but its inability to invest in new markets caused it to lose out). Although missing out opportunities to enter new markets and fully utilize its latent resources may not necessarily kill a firm (unless the missed opportunities can evolve and later compete with a firm’s current area of business), it does lead the firm to perform below its potential and be more vulnerable to exogenous shocks.
Means to Avoid or Escape Competency Traps
As discussed earlier, a firm’s structure considerably influences the patterns of communication and attention within a firm, thereby leading it to incrementally improve its current set of routines and systematically ignore new competencies. One way to break out of this competency trap is to change the structure within the firm (Siggelkow and Levinthal 2003), forcing the organization to pay attention to different configurations of resources and develop new competencies. Another structural mechanism is to create separate units with different structures (such as skunk works) with the explicit mandate to develop different competencies (Fosfuri and Rønde 2009).
Breadth of Search
Competency traps arise from the localness of search for improvements. Firms can escape and avoid the traps by engaging in distant searches for solutions, such as by scanning technologies and competencies in different domains and in scientific communities such as universities (Ahuja and Katila 2004). Another organizational means of forcing the organizational members to look beyond their current competencies is raising the aspirations of the organization so that incremental proximate solutions are not enough to meet the aspirations (Levinthal and March 1993). Another means is to allow autonomous search processes at lower and middle managerial levels (Burgelman 1983). This allows the firm to explore different possibilities and discover many different competencies that can be potentially invested in. In effect, such a strategy allows ‘multiple flowers to bloom’ and enables the firm to identify new competencies that can be developed. Similarly, creating a corporate venture capital fund which invests in multiple different strategically relevant areas can also enable the firm to discover the new competencies that it needs to acquire (Dushnitsky and Lenox 2005).
Hiring and Collaborating with Partners
Firms can escape the myopia of search and break out of their competency traps by hiring new talent from the external labour market. The ‘imported’ talent brings with it new knowledge and skills which can be used to move the firm to different competence-building trajectories. This strategy, however, is not always successful and many factors, such as the presence of persistent trajectories in the focal firm (Song et al. 2003) and the distribution of power among the focal firm’s existing employees (Tzabbar 2009; Taylor 2010), influence the effectiveness of this strategy. Similarly, collaborating with other firms in the industry also exposes the firm to different competencies and enables it to avoid the dangers of falling into a competency trap.