The Effect of Capability-Seeking investments on Competition in the Information Technology Services Industry: Coevolution of Capabilities and Corporate Scope

This dissertation examines the evolution of firm capabilities and the resulting effect on competitive dynamics within an industry. Specifically it examines how the development of new capabilities by firms can result in expansion of firms’ corporate scope through vertical integration and ultimately influence their competitiveness. In Chapter 2 an in-depth case study is presented to understand the strategic intent, strategy formulation, and the actual process of dynamic capability development in a leading multinational IT services corporation faced with stiff competition from foreign multinationals in its home nation. In the next chapter using a unique sample of leading publicly listed IT services firms from US and India, an event study is conducted to analyze the impact of various capability-seeking investments made by these firms on their own as well as rivals’ stock market performance. A number of propositions related to the effect of competitive actions of firms and their rivals on their stock market performance are developed and tested. Finally Chapter 4 analyzes how firms acquire complementary capabilities by making various internal investments and then examines the impact of these decisions on performance. Overall this dissertation provides a rich theoretical description of the co-evolution of capabilities and corporate scope and its eventual impact on firm competitiveness. It thus contributes to the literature on firm evolution by bringing together insights from the capabilities-based view, as well as competitive and corporate strategy. In addition using proprietary project-level data, it provides large sample empirical evidence of the impact of various internal capability-seeking investments on firm performance. Finally the dissertation traces the evolution of capabilities within a leading firm in the information technology services industry to understand the process of dynamic capability development and its consequences. Therefore this thesis contributes to the literature on the antecedents and consequences of dynamic capability development and more broadly to the technology strategy and knowledge based view of the firm