Capability Creation

CAPABILITY CREATION: HEURISTICS AS MICROFOUNDATIONS
CHRISTOPHER B. BINGHAM
Kenan-Flagler Business School
The University of North Carolina at Chapel Hill
4600 McColl Building
Chapel Hill, NC 27599
Email: cbingham@unc.edu
TRAVIS HOWELL
Email: Travis_Howell@kenan-flagler.unc.edu
TIMOTHY OTT
Email: Timothy_Ott@kenan-flagler.unc.edu
Keywords:
Heuristics, Capabilities, Microfoundations, Learning, Strategy Formation
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version and the Version of Record. Please cite this article as doi: 10.1002/sej.1312
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Research Summary
While much research suggests that capabilities are critical for firms, little is known about the individual-
level origins (“microfoundations”) of capabilities. Using in-depth nested case studies, we explore how
firms develop an internationalization capability. The setting is six entrepreneurial firms from three
culturally distinct countries. Our data show that executives begin by seeding the process with imperfect
heuristics and then managers continue development by elaborating their understanding of what task to
perform and how to perform it. Importantly, managers across hierarchical levels support the
development of their firm’s internationalization capability by abstracting key heuristics away from any
one experience such that the capabilities become less routine over time. Overall, we contribute to the
microfoundations movement in strategy and to literature on organizational learning.
Managerial Summary
Firm capabilities are not just important to strategy, but often are the strategy of firms, especially in
dynamic markets. Popular examples include Cisco’s acquisition capability, Hewlett- Packard’s alliance
capability Starbuck’s internationalization capability and Apple’s product development capability.
Unfortunately, it is often unclear to executives how to build a firm capability. We explore how
entrepreneurial firms develop their own internationalization capability over time. Our data show that
these capabilities develop through a process of seeding, elaborating, and abstracting key heuristics for
internationalization. Importantly, we show that this process is shaped by extensive communication
within and across multiple hierarchical levels. In this way, heuristics move from individual-level “rules
of thumb” for action to firm-level understandings for fueling growth and creating competitive
advantage.

Organizational capabilities are central to firms and their performance. Scholars argue that firms
possessing particular capabilities hold a competitive advantage over firms that do not, thus improving
firm performance relative to competitors (Barney, 1991; Helfat & Winter, 2011). Yet, while much
research highlights the essential role of capabilities, surprisingly little empirical research examines the
process of capability creation (Eggers & Kaplan, 2013; Felin, Foss, and Ployhart, 2015). Rather,
research generally examines capabilities after they have been formed and then focuses on their path
dependent evolution over time (Helfat and Lieberman, 2002; Nelson and Winter, 1982). For example,
several empirical studies infer capability development based on performance outcomes such as
productivity (Epple, Argote, and Devadas, 1991), quality (Levin, 2000), and profitability (Haleblian and
Finkelstein, 1999; Hayward, 2002) and so make inferences regarding the development process that
might have occurred. While a few theoretical articles exist describing how capabilities might emerge,
(e.g., Helfat and Peteraf, 2015; Winter, 2003; Zollo and Winter, 2002), they are generally not grounded
in data and often revert back to traditional high-level learning curve assumptions such as experience
accumulation and “learning-by-doing”.
This lack of in-depth understanding of how capabilities come to exist has recently prompted
scholars to issue repeated calls for more research on the “microfoundations” of capabilities (see Table
1). By microfoundations, we refer to the underlying individual-level and group-level actions that shape
strategy and organization (Eisenhardt, Furr, and Bingham, 2010: 1263). Work in this area suggests that
in order to understand capabilities at the organizational level, scholars must understand the micro
factors that lead to those capabilities (Felin and Foss, 2005).
To better understand the origins of organizational capabilities, some scholars study the impact of

individual factors such as diversity of knowledge or individual network positions on performance
(Morris et al., 2014; Paruchuri and Eisenman, 2012). However, while these studies offer valuable
insight into capability creation, they generally gloss over the intervening process of how individual
factors become firm capabilities. This is because such studies are generally theoretical or set in larger
scale empirical settings, obscuring the key granular activities associated with emergence. Yet, given
how capabilities are central to competitive advantage and firm performance (Barreto, 2010; Helfat,
1997), understanding how capabilities come to exist is essential to theory in strategic management.
Understanding capability creation is also practically relevant as some scholars suggest that
organizational capabilities are not just crucial to strategy, but rather may be the strategy of firms,
especially in entrepreneurial settings and dynamic markets (Bingham and Eisenhardt, 2011). Overall,
understanding the origins and emergence of capabilities is of fundamental importance to both theory
and practice.
Our paper seeks to complement and extend existing microfoundations theory by exploring these
unanswered questions. Specifically, we ask what are the individual-level origins of organizational
capabilities, and what is the process by which they become a firm-level capability? In this paper we
focus on how firms develop an internationalization capability. We define an internationalization
capability as a firm’s ability to repeatedly enter new countries based on an understanding of where to
enter and how to act. Our definition of an internationalization capability is thus in line with broader
definitions of capabilities as a firm’s capacity to accomplish a key task in a reliable manner (Helfat and
Winter, 2011).
To address our questions of interest, we use a multiple-case inductive study approach. The

setting is six technology-based entrepreneurial firms with headquarters in three culturally distinct
countries (i.e., Finland, United States, and Singapore). Given the presence of extant theory but the
general lack of empirical research on capability development, we combine theory elaboration (Lee,
1999) and theory generation (Eisenhardt, 1989) in our analysis. The major outcomes are theoretical
insights regarding how firms build their own internationalization capability over time through a process
of seeding, elaborating, and abstracting key heuristics. First, our case data reveal that capabilities begin
from rough and often flawed initial heuristics that entrepreneurs use to seed experience. Second, these
capabilities further develop as managers add detail to their understanding of what tasks to perform as
well as how to perform them. Third, data show that abstraction, not just elaboration, is key. In other
words, the development of a firm capability relies on executives’ collective and cumulative
understanding to change key heuristics from being more concrete and detailed to less concrete and
detailed over time. Overall, our findings contribute to microfoundations theory by shedding light on the
individual origins of organizational capabilities, as well as the intervening process of how these
individual-level origins become firm-level capabilities. We also contribute to literature on
organizational learning by showing that as firms gather heterogeneous experience, capabilities evolve to
become less, not more routine.
THEORETICAL BACKGROUND
Microfoundations of capabilities
Several literatures provide insight into our research question. First, the microfoundations
literature points to the importance of understanding the lower-level origins of organizational
capabilities. The microfoundations literature suggests that to understand any collective phenomenon one

must understand the constituent parts that compose it (e.g., individuals and their actions and
interactions) (Barney and Felin, 2013). Microfoundations scholars argue that focusing on the collective
and ignoring individuals creates several problems for research on capabilities. For example, it makes the
implicit assumption that individuals are homogenous, malleable, and randomly distributed into
organizations (Abell et al., 2008) such that their abilities and motivation are unimportant to the
theoretical explanation (Felin and Foss, 2009). However, individuals have diverse preferences and
beliefs which cause them to not be distributed at random but rather to self-select into certain
environments and organizations (Makela et al., 2012). Thus, focusing on the collective is problematic
because it places all of the explanatory burden on the organization’s context and environment instead of
on individual causation (Felin and Foss, 2005).
Recognizing these issues, some scholars focus on the role of individual managers in the
development of organizational capabilities (Adner and Helfat, 2003; Eggers and Kaplan, 2013; Helfat
and Peteraf, 2015). This work has been valuable, but largely theoretical. For example, using
argumentation Gavetti (2005) develops a conceptual model showing how managers’ cognitive
representations can fundamentally drive organizational search, and therefore the accumulation of
capabilities. Relatedly, Hodgkinson and Healy (2011) employ a model from social cognitive
neuroscience (controlled versus automatic processing) to argue that capabilities are based on a mix of
effortful forms of analysis as well as less deliberate processes, such as emotion and intuition. More
recently, Helfat and Peteraf (2015) argue conceptually that a manager’s capacity to perform mental
activities such as perception, attention, problem-solving, and communication, all represent the cognitive
underpinnings of capabilities.

The scant empirical work that exists on microfoundations suggests individual knowledge and
cognition does affect firm capabilities, but it generally does not explain the transition from the
individual level to the firm level. For example, Morris et al. (2014) examine 97 projects performed by
Globalconsult, a consulting firm specializing in internationalization strategies. They suggest that
individuals within multinational corporations (MNCs) draw on three distinct knowledge resources
(codified knowledge, local outsiders, and global insiders) when developing an internationalization
capability. Knowledge diversity from individuals increases the global efficiency, local responsiveness,
and continual learning of firms, suggesting that it helps form an internationalization capability. In
another example, Paruchuri and Eisenman (2012) examine the microfoundations of R&D capabilities
through their empirical study of the merger between Bristol-Myers and Squibb. They explore how
mergers and acquisitions cause disruption that changes the impact of different inventors and their
networks within the firm, thus hindering the ability of the buyer to acquire the R&D capabilities of the
target. Both these studies add by offering evidence that individual-level factors affect the firm’s ability
to complete tasks. But, neither addresses the transition between individual-level factors and a firm-level
capability. Hence, how an organizational capability is developed remains largely unanswered – a point
of view shared by many scholars (see Table 1).
Organizational learning
In a separate literature, scholars suggest how capabilities develop over time by studying how
(and what) organizations learn from experience. One strand of research often invokes the concept of
organizational routines to explain what firms learn when they accumulate experience. Routines
represent patterns of action that form repositories for lessons learned from experience (Nelson and

Winter, 1982; Levitt and March, 1988). Routine action generally relies on the familiar, focuses on
particular solutions, and involves consistent actions over time (Narduzzo et al., 2000; Feldman, 2000).
The underlying goal of a routine is often to reduce variance and increase repeatability, which then leads
to improvements in the efficiency, reliability, and speed of task performance (Cohen et al., 1996; Helfat
and Peteraf, 2003). In general, this research argues that routines represent the “building blocks” that are
eventually assembled and combined to form a capability (Eggers and Kaplan, 2013).
Several empirical studies find that organizational processes become more routinized (i.e., more
detailed and quasi-automatic) with increased experience (Dosi et al., 2000; Helfat and Peteraf, 2003;
Winter, 1986). For internationalization specifically, some work suggests that firms become increasingly
likely to reinforce prior behaviors in new country entry (Autio et al., 2000; Chang, 1995; Lu and
Beamish, 2001), ultimately becoming “calcified in their routines” (Sapienza et al., 2006: 923). Eriksson
et al. (1997), for example, examine 362 Swedish service firms engaged in international operations. They
posit that when entering a foreign market, experiential knowledge about internationalization is stored in
the firms’ routines based on past experience. This accumulated knowledge influences country entry and
constitutes a firm’s standard “way of going international” (Eriksson et al., 1997:345). Although this and
other studies suggest that processes often become more routinized with experience, it is still not clear
how routines form or how they transition to being a firm-level capability.
Other literature in organizational learning suggests that firms learn heuristics from repeated
experience (Bingham and Eisenhardt, 2011). Heuristics represent cognitive shortcuts that come about
when information, time, and processing capacity are limited (Newell and Simon, 1972; Pearl, 1984).
Heuristics are thus distinct from routines. Routines are generally more detailed, analytic, and semi-

automatic, and are thereby able to provide firms with solutions to specific problems. In contrast,
heuristics provide few details regarding specific solutions, yet are simple and useful enough to be
applied across a range of similar problems (Bingham and Eisenhardt, 2011; Busenitz and Barney,
1997). Heuristics can be fast and accurate for the specific task, but flexible since they leave executives
room to adapt solutions to the particular opportunity (Bingham and Eisenhardt, 2011; Bingham et al.,
2007; Davis et al., 2009). Thus, heuristics allow executives to repeatedly and quickly perform a task at a
high level, and if they are applied throughout the firm they may constitute a capability (Bingham,
Eisenhardt and Furr, 2007).
For example, Gary and Wood (2011) use experimental methods to study 63 MBA students
making repeated production decisions in a business simulation. They find that some individuals quickly
formed basic heuristics for the number of products that they would produce and kept with these decision
rules over time. Students were more likely to perform well when they used heuristics based on a basic
causal understanding of the relationships between variables in the simulation. Thus, the heuristics were
the source of advantage for the simulated firm, constituting a production capability. While this study
and others provide some understanding about how firms may benefit from the use of heuristics by
individuals, they provide less insight into how heuristics go from an individual to firm capability.
In sum, the existing literature suggests that (1) individual-level behaviors are important in
understanding the origins of organizational capabilities, (2) experiential knowledge that is important for
capability creation is often stored in organizational routines, and (3) executives often learn heuristics
through experience and, in some situations, these can be advantageous and contribute to capability
development. But, despite the importance of this work, we lack an understanding of which individual-

level activities lead to firm-level capability creation and how this accumulation process occurs over
time.
METHODS
The research design is a multiple-case, embedded study. This method is particularly appropriate
when the research question involves a longitudinal process like ours (Eisenhardt et al., 2016). Multiple
cases also allow scholars to use a replication logic which generates theoretical insights that are typically
more generalizable and better grounded than those of single case studies. In contrast to a pooled logic,
in which each observation is part of a larger sample, a replication logic allows researchers to compare
cases against each other, with each case serving to confirm or disconfirm the inferences drawn from the
others (Yin, 1994). This study also uses an embedded design - that is, multiple units of analysis that
include: (1) the country entry; and (2) the firm. Although complex, using an embedded design improves
the probability of inducting richer and more reliable models (Yin, 1994).
The focal capability of this study is internationalization, a critical activity in the increasingly
global economy. Internationalization is a good setting to explore capability development for two
specific reasons. First, each country entry during internationalization can be viewed both as a discrete
and discernable event that can be explored as a single unit of analysis and as part of a larger sequence of
experiences (Bingham, 2009). This allows for more accurate understanding of how capabilities emerge
and evolve. Second, since each country typically varies in its similarity and timing relative to other
country entries, the effects of variance in experience on capability development may be better analyzed.
The research setting is entrepreneurial firms in the high-tech industry. Entrepreneurial firms
represent an attractive setting for several reasons. First, their smaller size enables better observation of

the development process. Second, their newness allows tracking of the effects of experience from firm
inception, and thus more accurately depicts how capabilities emerge and evolve over time (Argote,
1999)1. Finally, from a practical perspective entrepreneurial firms are crucial drivers of growth within
the world economy (Schoonhoven and Romanelli, 2001). The high technology industry represents an
attractive research setting due to the abundance of new ventures and the importance of foreign market
entry for growth (Zahra et al., 2000; Sapienza et al., 2006; Bingham, 2009). Similarly, the dynamic
nature of the high technology industry suggests that the rapid development of an internationalization
capability is necessary in order for a firm to compete effectively.
Our sample consists of six ventures headquartered in Singapore, U.S., and Finland2. Consistent
with inductive multi-case methods, we used theoretical sampling as opposed to random sampling. In
theoretical sampling, the purpose is not to select a sample that enhances empirical generalizability to a
broader population, but rather to draw samples of concepts (Corbin and Strauss, 1990). In other words,
theoretical sampling means selecting the incidents and events that are most relevant to the concepts
being studied (Eisenhardt and Graebner, 2007). Accordingly, we selected firms for which the focal
phenomenon (i.e., the creation of an internationalization capability) is relevant and critical. For
example, to increase the likelihood that an internationalization capability was seen as essential, we
1
There is some debate as to whether there are “learning advantages of newness” (Autio et al., 2000) that help young firms to
quickly learn new capabilities, or if young firms actually may be constrained in learning due to a lack of absorptive capacity
(Hughes et al., 2014). We claim only that entrepreneurial firms provide a positive setting to explore capability creation.
2
We focus on these three countries for several reasons. First, Singapore, the U.S., and Finland are culturally distinct
(Hofstede, 2001). Second, these three countries each have clusters of technology-based firms, thus allowing us to compare
patterns among similar technology-based firms across multiple regions. Third, from a methodological point of view,
focusing on Singapore, U.S., and Finnish entrepreneurial firms is important as managers in each country speak English
fluently. Fluency in English is useful as it improves candor and depth of comments, and also mitigates the loss of data that
often occurs through translation and then back-translation of interviews.

sampled firms with goals of having more than 50 percent of their revenue from foreign markets. The
high importance placed on internationalization made it more likely that we would observe the creation
of an internationalization capability and also improves the accuracy of recollection (Huber and Power,
1985). Further, we sampled firms that had entered3 at least four countries and that were currently
entering at least one additional country at the time of data collection. This number of entries facilitates
more reliable tracking of how internationalization capabilities develop over time, while their
composition (i.e., past and current) enables a study that is both retrospective and real-time. The
combination of retrospective and real-time data enables more efficient data collection of observations
(leading to better grounding and higher external validity) while also creating deeper understanding of
how events evolve (leading to better opportunities to establish cause and effect and improve internal
validity) (Leonard-Barton, 1990). In addition, we chose firms where all country entries took place
within the five years prior to data collection. This time period is consistent with other multi-case studies
(Hallen and Eisenhardt, 2012; Bingham and Kahl, 2014) and improves the likelihood that current
management can accurately recall events surrounding country entries.
Also, given our focus on entrepreneurial firms, we selected firms that met several criteria that
past research has used to characterize entrepreneurial firms (Autio et al., 2000; Bingham, 2009). First, at
the start of data collection, all firms were seven years old or less, with a median of three and a half
years, which is consistent with prior research on entrepreneurial firms (Zahra, Ireland, and Hitt, 2000).
In addition, all firms were relatively small in terms of employees (median of 87.5) and revenue (median
of $5.85 million). Also, all firms still had the active presence and management of their founders, and
3
Defined as institutional arrangements to make possible the sale of a company’s products in a foreign country (Yip, 1992).

none were the subsidiary of another firm.
Data Sources
We used four data sources: (1) quantitative and qualitative data from semi-structured interviews
with company leaders; (2) e-mails, phone calls, and follow-up interviews to track the real-time
internationalization process; (3) quantitative data on companies’ internationalization performance from
public and private sources; and (4) archival data including company websites, business publications,
and other materials produced inside the firm.
The main source of data came from semi-structured interviews with multiple informants within
each of the six firms (see Table 2). We conducted over 50 interviews on three different continents.
Initial entry into each firm was made through the CEO or Chairman. We then used “snowball
sampling”. This high-level contact identified other employees who had been actively involved in the
country entry process, and then these employees identified others, as needed. Informants were at
multiple hierarchical levels including both upper-level executives who oversaw global expansion and
country managers directly involved in a particular country entry. The interviews were 60-90 minutes
and followed a guide that had variations for the two types of informants. The interview with executives
focused on gaining a general understanding of the firm’s process for internationalization and the lessons
learned within each and across all country entries, while the interview with country-level informants
focused on gathering deep qualitative and quantitative histories of entry into a specific country. If data
required clarification, we sent follow-up emails and conducted more interviews. Interview data were
supplemented with archival data.
As informant bias is an important consideration in case study research, we addressed this issue

in several ways. First, we combined both real time and retrospective data. Retrospective data enables
efficient data collection of more observations (thus enabling better grounding) and real-time data allows
further depth in understanding how capabilities evolve (Leonard-Barton, 1990). Second, we used
interview techniques (e.g., “courtroom” questioning, event tracking, non-directive questioning) that
prior research has shown to typically yield accurate and convergent information among informants and
archival data (e.g., Brown and Eisenhardt, 1997; Galunic and Eisenhardt, 2001). Third, we relied on
informants at multiple levels of hierarchy (corporate and country-level) for which country entries were
quite important events. This improves the likelihood of yielding a more complete and accurate picture
of events due to complementary perspectives. Finally, to the extent possible, we supplemented data with
archival information from the time period in question. In sum, the combination of these steps improves
the likelihood of rich, detailed, and accurate accounts of the capability development process.
Data Analysis
We relied on prescribed guidelines for multiple case inductive methods (Eisenhardt, 1989;
Eisenhardt and Graebner, 2007). Data analysis began by synthesizing all the interview data and the
archival data of a focal firm and building individual case histories. Each case history described the
internationalization chronology, focusing on the actions of leaders and managers throughout the
process. A key feature of writing the histories was triangulation among interview and archival sources
of data in order to generate a more precise and reliable account of internationalization within each firm
(Jick, 1979).
The individual case histories were used for two types of analysis: within-case and cross-case.
Within-case analysis concentrated on developing generalizable constructs and unique patterns that

emerged for each firm and proceeded in an iterative fashion with data collection in order to better
ground and thus improve resultant theory. Here, we focused on repeated county entry as prior work on
capabilities has shown the ability to repeat a process is a key feature of a capability (Helfat & Winter,
2011). However, our interpretation of internationalization capabilities emerged from our data4. In
describing their firm’s internationalization, informants discussed both which countries they chose to
enter and how they approached entering those countries in terms of heuristics or simple rules for those
actions. Following prior literature (Bingham & Eisenhardt, 2011), we coded each heuristic as a
“boundary rule” if the simple rule related to choosing opportunities (countries), and we coded it as a
“how-to” rule if it related to executing the opportunity. This combined set of rules is representative of
the firm’s understanding of the internationalization process at any given point in time. A second
researcher read through all original interviews and formed an independent perspective of each case to
provide a stronger and better-grounded summary for each firm during within-case analysis.
After building all cases histories, we began cross-case analysis of how these sets of rules
emerged over time. Typical with this type of analysis, we looked for the emergence of similar themes
and constructs across multiple cases in different ways (e.g., headquarter country, industry, and
internationalization patterns) (Eisenhardt, 1989). To facilitate cross-case analysis we also employed the
extensive use of charts, tables, and other cell designs to compare several categories at once (Miles and
4
Thus, given the presence of extant theory but the general lack of empirical research on capability development, we combine
theory elaboration (Lee, 1999) and theory building (Eisenhardt, 1989) in our analysis. In other words, we were aware of the
existing literature on capability development and microfoundations and examined our data for constructs relevant to those
theories, but also looked for unexpected types of constructs and processes by which learned content developed over time and
became institutionalized as a new capability. This combination of theory elaboration and theory building is appropriate when
there is some theory in place around core constructs (e.g. capabilities, heuristics) but a lack of theory on other key aspects of
the process (Bingham & Davis, 2012; Zott & Huy, 2007).

Huberman, 1994). We performed the analysis using constant comparison and by creating theoretical
arguments that connected the constructs (Eisenhardt et al., 2016). From the patterns that emerged, we
formed tentative propositions. We refined initial propositions through a replication logic, continually
revisiting data to systematically compare and verify the occurrence of specific themes within each
separate case. This constant iteration between theory and data helped sharpen constructs, strengthen the
internal validity of findings, and improve the richness of the resulting theory by enabling more frequent
comparison of emergent theory with concepts and constructs from the extant literature. This cross-case
analysis resulted in a theoretical framework for how firms develop internationalization capabilities.
HOW FIRMS DEVELOP INTERNATIONALIZATION CAPABILITIES
Seeding
The research on organizational learning suggests that capability content develops through
experience, or through “doing” (Leavitt and March, 1988; Helfat and Peteraf, 2003). “Doing” would
seem to be an especially likely mechanism for the early development of a capability given that the fast
pace of many environments reduces the value of pre-action deliberation (Bird, 1988). In addition, many
executives, particularly entrepreneurs, possess attributes that cause them to make decisions as they “go
along” rather than beforehand through planning (Allinson, Chell, and Hayes, 2000). Thus, according to
the logic of prior research, organizational capabilities could emerge through direct experience with a
task. An internationalization capability therefore should begin to emerge after the firm enters a new
country.
However, data in this study suggest that rather than relying solely on experiential learning,
leaders intentionally seed their experience with a few rough heuristics. While prior research suggests

cognitive representations formed in advance of action are often vague mental models (Holland,
Holyoak, Nisbett, and Thagard, 1986), derived from related experience (Huber, 1991; Helfat and
Lieberman, 2002), and beneficial when accurate (Gavetti and Levinthal, 2000), we saw a different
pattern. These rough heuristics were simple, specific, and took the form of a few rules for choosing
opportunities (“boundary” rules) and a few rules for executing them (“how-to” rules) (see Table 3).
Additionally, our case data show that these rules originated not only from the prior experiences of
seasoned executives, but also from managerial foresight, including that of neophyte founders. Finally,
our case data show that these heuristics were beneficial to the development of an internationalization
capability even though they were often fundamentally flawed. We coded a firm as “seeding” a
capability if multiple informants reported the use of heuristics or simple rules in the initial country
entry.
One illustration of seeding is Singapore-based Echo. Two people founded Echo with the goal of
creating a company that would assist customers in managing information technology security. Both
founders had significant industry and international experience. Prior to their first country entry, the
founders decided to restrict the scope of internationalization to Asia (boundary rule). This decision was
based on extensive understanding of the region from their prior experience that led to the belief that
Asia was the next growth market for information security. One stated, “We believed that with that type
of service we needed to educate the market because none existed in the region.”
Likewise, the founders at Echo believed their firm’s value was in protecting information, but
they also realized that their services were expensive. Combining this understanding with the observation
that government and financial institutions in Singapore placed the most value on protecting their

information and had the largest budgets for the technology, executives reasoned that government and
financial customers outside Singapore would also have high demand for their product. Thus, Echo
executives decided prior to their first country entry that they would target government and financial
institutions (boundary rule). The CEO recalled, “Look at who cherishes the information more. If we talk
to small solo enterprises they don’t even bother, but banks and government care… That one we
predicted would happen.” Another executive added: “Banks have the money to spend, so you got to
focus on them. Government is again by design…If so much is going through the IT infrastructure, then
protection is needed…we know our services, we know who needs it, and who can pay for it.”
Echo management also decided (before internationalization) that country entry should take place
through joint venture partnerships with large mature local firms (how-to rule). They reasoned that since
their technology focused on protecting the proprietary information of customers who valued
information security, it was vital to ensure customer trust when entering a new country. Yet, because
their firm lacked an established track record, Echo executives realized that creating this trust based on
the company’s merits was challenging. Therefore, management decided that country entry needed to
rely on well-known local partners who could act as proxies for trust. As the CEO stated:
“We are selling trust. When you outsource info security, that is very sensitive stuff, you must
trust that party. All the JV and franchise partners we have must command trust in that country.
We’ve built the technology and the process, and the skill. That’s our forte. We know that… We
strongly believe that the people must understand the local laws, the local culture, and speak the
local language. That’s why when we go in, we must find a partner.”
While Echo founders were highly experienced and so not surprisingly formed some of their
initial heuristics based on prior internationalization experience at other firms, our case data show that
even inexperienced founders create heuristics prior to country entry. For these founders, however, initial

heuristics often came out of logic and foresight rather than past experience. One example is Crest,
where the three young founders had recently graduated from Helsinki University of Technology and had
little industry or international experience. As one confessed, “I didn’t have any relevant business
experience.” The founders started Crest with the intention of creating a software solution to expedite
drug discovery. More specifically, they developed technology that allowed patients and research
professionals to quickly and accurately report clinical data via PDAs, cellular phones, and PCs during
phase-three clinical trials.
Despite their inexperience, Crest founders agreed that they “couldn’t just be a Finnish
company.” Rather, based on their anticipation of globalization trends in the pharmaceutical industry,
they foresaw the need to establish an international presence. One explained, “Even before we did our
business plan, we decided there is no way to just focus on Scandinavia, we wanted to be a global
company.” Another added, “Internationalization has been a necessity.” Prior to their first country
entry, executives decided that they would focus their efforts in countries with significant pharma
activity (boundary rule).
Although Crest executives anticipated the need for internationalization, they had few resources.
This dilemma encouraged active dialogue within the team and resulted in a creative solution to start
internationalization with a “bare bones” approach. Specifically, they decided to enter new countries by
sending in a young, inexperienced, and inexpensive Finn who would assertively “cold-call” local
pharma companies (how-to rule). As one founder said, “We wanted an enthusiastic, outward-oriented
person. Sales and marketing, cold calling, that’s what it was in the very beginning. Also, not too senior
a person because we didn’t want to spend too much money.” Forming this how-to rule encouraged the

firm to begin the internationalization process rather than continue planning for it. As another founder
articulated:
“Some firms like to have a person from the local area that is experienced, and has contacts in
the area, and speaks the local language…We just had a phone book and then started cold
calling…one guy to start cold calling very aggressively instead of constantly planning.”
Why is seeding important?
Our case data suggest two ways in which seeding experience with rough heuristics is useful for
the development of a capability (internationalization in our study). First, the specific nature of these
initial heuristics gives executives the confidence to act under conditions of uncertainty. When situations
are new and unfamiliar, individuals frequently procrastinate and delay action. Intriguingly, research
shows that mental frameworks, even if flawed, help people mobilize in such situations. Weick (1993),
for example, described how a map helped an army that was lost in the Swiss Alps be decisive enough to
find its way back to base camp even though the map was of the Pyrenees. Rudimentary but specific
heuristics provide a sense of control (Langer, 1975), which in turn provides confidence to act when
executives are just beginning to learn an organizational process. To illustrate, when executives at U.S.-
based Block were approached by a third party in Australia who wanted to bring the company’s products
into that country, Block’s preexisting boundary rule of entering English speaking markets helped
leaders respond quickly, with confidence even though they were unfamiliar with Australia. As one VP
commented, “It was one of those opportunistic things. We had already decided that we were going to
attack the English-speaking markets first. That was a no-brainer….(Australia) was just too good an
opportunity to miss.”
Second, seeding the internationalization process with heuristics structures the decision making

of executives to be more like experts. Research on expertise finds that experts spend more time
developing cognitive representations of the problem (Chi et al., 1981; Gitomer, 1988) and preliminary
plans (Eysenck and Keane, 1995) prior to taking action. Conversely, when this structure is absent
decision making can be disorganized (Okhuysen and Eisenhardt, 2002) and slow because individuals
must rely on trial and error. Our case data reveal that both experienced and inexperienced entrepreneurs
relied on this early structure. While experienced entrepreneurs (e.g. Echo) could form heuristics
partially based on their prior internationalization knowledge, both they and novice entrepreneurs (like at
Crest) formed other heuristics based on forethought, vicarious learning, and logic. Although the initial
heuristics were subject to inaccuracies and would later be updated, they focused managerial attention on
key parts of the internationalization process to better structure decision making. This suggests that the
content of early heuristics may be less important than the structure they provide.
How seeding helps transition from the individual level to the firm level
Additionally, seeding sets the stage for the transition from individual-level factors to a firm-
level capability. Initial heuristics represent the foundation of a firm-level capability by forming a
rudimentary outline of the task. These initial heuristics were not just created and used by individuals,
but rather collectively developed by multiple members of the executive team. For example, Block’s rule
for entering English speaking markets mentioned above was noted by multiple executives, including a
second executive saying that the “international expansion plan was just starting to formulate…
culturally similar, English-speaking [markets].” Similarly, Echo’s rule for targeting governments and
financial institutions was also collectively understood and used with separate executives in the above
quotes saying “we predicted” or “we know who needs it.” As such, the simple rules served as a

foundational structure that encouraged executives to collectively reflect on how to pursue country entry
opportunities. That is, the heuristics began to link “what to do” and “how to do it” such that executives
together could converge on a common understanding of the current process (e.g. “we use Taiwan for
R&D”), recognize where problems were occurring, and categorize new opportunities in similar ways
(e.g. types of countries, customers, mode of entry). For our firms, this structure allowed for the
interaction and knowledge sharing that later occurred in the elaboration process, discussed in more
detail next.
Elaborating
Our data show that while rough heuristics were useful for spurring and guiding country entry,
they were often faulty. For some firms, heuristics for choosing opportunities (boundary rules) were
wrong. For others, heuristics for executing opportunities (how-to rules) were wrong. Still other firms
suffered from a combination of errors. In general, executives’ initial rough heuristics led to at least one
major error early on. However, executives often quickly incorporated the knowledge from these errors
to fortify and extend the emerging capability content. This pattern, which we term “elaboration,” is
consistent with prior literature on experiential learning by doing (Anand and Khanna, 2000; Helfat and
Peteraf, 2003; Levitt and March, 1988) but adds needed light on how it learning cumulates. In essence,
managers added to the complexity of country entry heuristics by adding new rules or adding detail to
existing rules. They did so in order to make their initial boundary and how-to rules more accurate,
refined, and complete. We coded elaboration as an addition, change, or added detail to the boundary and
how-to rules (Table 4).
Echo’s heuristics, for example, were initially flawed. After the first country entry into Hong

Kong, the CEO realized that the sales approach of targeting IT groups (how-to rule) was ineffective.
Because new guidelines required senior executives to understand the risks of their technology, many
Hong Kong corporations had shifted responsibility for information security away from IT and into
audit. He said, “There are a lot of organizations, including banks, which have transitioned from info-
security under IT to info-security under the audit group…So we changed.” This realization (which
resulted from their first country entry) caused them to change their rule from “target the IT group” to
“target the audit group.”
Additionally, when trying to close deals in Hong Kong, the country manager at Echo discovered
that the “features” sales approach he expected to work was also wrong. Hong Kong firms preferred a
“consultative” approach that involved creating custom solutions to match unique needs. A founder
noted, “It’s more consultative selling, meaning that it’s not ‘hey this is a very good technology.’” This
error was relayed from the country manager to the founders, allowing them to collectively, quickly and
accurately revise their heuristics. The sales how-to rule thus went from targeting IT groups with
“features selling” to targeting audit groups with “consultative selling.” The new rule avoided similar
problems in later entries. As the CEO said, “Malaysia is one year later… so they didn’t make the same
mistakes.”
Use of Crest’s heuristics likewise revealed unexpected problems and the need for elaboration.
After noticing increasing clinical trials in Eastern Europe, managers followed their boundary rule of
entering countries with lots of pharma activity when they entered the Czech Republic. One founder
noted, “We thought it would be a good idea to open a customer service and sales office in that region.”
But, soon after entry, the young Finn who was sent to open the market realized the error. While the

Czech Republic did have significant pharma activity and potential customers were enthusiastic about
Crest’s solutions, they had little money to pay for Crest’s technology. He explained:
“They were very interested in the technology and services we were offering. When we contacted
the companies, they were very willing to meet and interested, and we gave a lot of educational
presentations to potential customers. But, when we entered negotiations with potential
customers… they actually didn’t have enough money for the services and technology we were
offering.”
After six months of poor results and consultation with the manager on the ground, the executives
realized that aspects of their boundary rule needed alteration. While they still needed to enter countries
with lots of pharma activity, they also agreed that those countries should be the headquarters of rich
pharmaceutical firms. The executives together added detail to the rule by changing it from “countries
with lots of pharma activity” to “countries with lots of pharma activity and the headquarters of a rich
pharma firm.” Consistent with this revised boundary rule, Crest next entered Germany.
Likewise, the same problems with customer finances in the Czech Republic prompted
executives to alter their how-to rules to more effectively screen potential customers. Before the Czech
Republic, the rule for qualifying customers was: “Have they used a patient diary?” After, the rule was
expanded to, “Look at the exact study volume by therapeutic area, their related budget, and their ability
to pay.” As the country manager described:
“The key lesson was how important it is to analyze all the customer needs when we are doing
sales work…but also qualifying the customer in a way that you don’t spend too much time on
customers who are not potential [buyers].”
Consequently, the executives as a group elaborated both boundary and how-to rules to be more
detailed, accurate, and better linked to one another based on knowledge shared from country managers.
Alta also shows how experience and foresight interact in elaboration. Prior to

internationalization, Alta executives decided to enter countries through acquisition (how-to rule). They
then elaborated this rule over their next several country entries. After the first entry, Sweden, the
country managers explained to the CEO that a key to their Swedish success was the support of target
company managers. The executives therefore elaborated the existing how-to rule to include a step for
pre-acquisition integration. Hence, the original rule of “enter new countries through acquisition”
became “when entering new countries through acquisition, ensure that target’s management is 100
percent committed to the deal.”
Prior to entering their third country (France), Alta executives elaborated the rule again. Based on
their observed differences between France and Sweden, executives anticipated that a French acquisition
would be much larger than past acquisitions and so would require more pre-acquisition due diligence.
Coupled with the observation that the poor acquisition results of some competitors were partly due to
lack of due diligence, this belief prompted executives to alter their heuristics to ensure that the target
was clear of unknown liabilities. One executive recounted, “Our due diligence was much tougher in
France because it (acquisition target) was a much bigger company than in Sweden.” He also noted the
importance of due diligence that included discussion “with their biggest customers to get their opinion
about us.” Thus, combining vicarious learning and foresight, executives further elaborated the how-to
rule to become “when entering new countries through acquisition, ensure that the target’s management
is 100 percent committed to the deal, and do extensive due diligence.”
Executives also elaborated their acquisition rule after entering Germany, the fourth country.
Problems from prior expansions signaled the need to pay attention to motivating target managers. This
trial-and-error learning prompted the company to hire a seasoned executive to improve the post-

acquisition integration procedure. Based on his foresight and discussion with other firm leaders who had
been on the ground for prior expansions, he advised a revised rule that included heavy investment in
post-acquisition integration. This elaboration added detail about cultural and systems integration to the
existing how-to rules. Consistent with the elaboration, he noted, “I spent a lot of time in Germany after
we made the two additional acquisitions…to make sure that we integrated them and explained our
values to them and how they would address new markets.” Overall, what began as a simple heuristic for
executing opportunities (i.e., “enter new countries through acquisition”) evolved four entries later into
an elaborated set of actions that provided more structure for each subsequent entry.
Why is elaborating important?
Elaboration supports the development of a capability in two ways. First, firms use elaboration to
correct mistakes from their initial seeding process, thereby creating a more accurate understanding of
what to do and how to do it. For all the firms in our sample, regardless of whether their founders were
experienced (e.g. Echo) or inexperienced (e.g. Crest), several initial heuristics led to errors. While
experienced entrepreneurs could form heuristics based on their prior internationalization knowledge,
these heuristics were not always well-suited to a new firm in a new environment. Thus, even though
some of the founders in our sample had prior internationalization experience, the heuristics they carried
over to their new firms were still subject to biases and inaccuracies5. Through elaboration, however,
firms refined their initial strategies through trial-and-error. This made the heuristics better fit the
specific opportunity being addressed and so allowed for more effective action in that environment
5
This is consistent with past literature on heuristics explaining that although certain heuristics may lead to success in one
firm, those same heuristics may not be “ecologically rational”, or in other words, may not be well-suited to a different firm in
a different environment (Artinger et al., 2015).

(Gigerenzer, 2007). Indeed, our data showed that firms generally made their most significant changes to
seeding heuristics based on early country entries, implying that the environmental suitability of the
heuristics improved over time.
Second, elaboration supports the development of a capability by making the accomplishment of
the task more repeatable, a key role of a capability. Through elaboration, executives introduced more
rules to their internationalization process and added more details to existing rules, allowing the
organization to more accurately transfer that experience to new situations. This increased the
repeatability of country entry (the task in question) by making it more routine (Cohen et al., 1996;
Helfat and Peteraf, 2003). Interestingly, our data also show that as the rules became more detailed they
also often became more intertwined as multiple rules were updated based on the same experiences (e.g.,
Crest’s elaboration experience). Hence, elaboration made internationalization more repeatable by
making guidelines for behavior more tightly coupled. As a result, firms reduced variance in task
performance, leading to improvements in the efficiency, reliability, and speed of future
internationalization activities.
How elaborating helps transition from the individual level to the firm level
Elaboration appears crucial for the transition from individual-level processes to a firm-level
capability. Whereas the seeding stage generally involved discussions among executive team members,
elaboration occurred as executives began to collect and disseminate knowledge from individuals across
multiple hierarchal levels. Our data show that elaboration was neither just a bottom-up nor top-down
process. Rather, it blended the two. Elaboration resulted from corporate and country managers using the
initial structure offered by rough heuristics to discuss what had gone wrong in country entries. Through

this interaction, heuristics that once resided with a few executives were refined and updated based on
lessons that were learned first-hand by various individuals at multiple hierarchal levels. In many of our
cases, knowledge sharing happened daily through informal conversations between managers. For
example, one country manager at Alta explained “I would communicate quite frequently with HQ.
Sometimes daily, sometimes weekly. Email and phone.” Similarly, managers at Block explained that
they exchanged emails and phone calls daily. Other executives at Grand described how they operated in
a flat structure where calls happened between managers multiple times a day (see Table 6). This degree
of regular communication allowed the on-the-ground experience of managers to be reconciled against
the seeding heuristics of executives. Also, involving multi-hierarchical groups improved the accuracy of
information and helped to triangulate the understanding of events. Overall, heuristics were elaborated
collectively, resulting in greater dissemination and accuracy of the rules being used.
Abstracting
After beginning their capability content with rough boundary and how-to rules (i.e., seeding)
and then updating those heuristics through experience (i.e., elaborating), our data show that executives
then continue to develop their internationalization capability through abstraction. The concept of
abstracting emerged from the data and is defined as managers creating a broader, more general
conceptualization of a heuristic that disassociated it from a particular instance. Rather than continuing to
become more elaborated, many heuristics become less specific over time as managers thoughtfully raise
the abstraction level of rules. The overall effect is to introduce varied generality into the capability,
increasing the robustness and flexibility of organizational action. Broadly, abstracting suggests the
unexpected insight that capabilities evolve to become less routine over time, not more routine as prior

research indicates (Nelson and Winter, 1982; Feldman, 2000). In our analysis, we coded a firm as
abstracting if the executives change the heuristics for internationalization to become more general
(Table 5).
Echo illustrates. As discussed previously, the founders of Singapore-based Echo initially
decided to target government and financial institutions (a boundary rule). However, after having success
with this heuristic in their first expansion country (Hong Kong), the firm struggled to gain customers
upon entering their second expansion country (Malaysia). Malaysian government accounts were
reluctant to turn over IT security to Singaporean firms because of tenuous cross-border relations. Rather
than ceasing Malaysian operations, the TMT reflected on the company’s narrow target customer and
reevaluated their boundary rule. They became more thoughtful regarding both the value of their firm to
customers (i.e., protection of extensive proprietary information) and the source of attractiveness of
customers to the firm (i.e., ability to pay). While government and financial institutions did value the
protection of information assets and could usually pay, a more abstract category (i.e., large and
financially stable firms with proprietary information) encompassed all those customers and more. Thus,
instead of targeting governments and banks, management raised the abstraction of their boundary rule to
“large organizations with proprietary information and the ability to pay”. This more general rule
provided guidance regarding target customers, but allowed managers to flexibly pursue a variety of
customers depending on country specifics. As a result, the firm was able to “cater to the region” as one
leader stated. This allowed them to take advantage of opportunities with big insurance companies in
Malaysia, giant manufacturing firms in Japan, state-owned enterprises in China, and multi-national
energy firms in Saudi Arabia.

Echo later raised the abstraction level of another key heuristic that they had previously
elaborated. When the firm entered Malaysia, the country manager was surprised that few companies
wanted to purchase the company’s 24x7 security monitoring solutions. After discussions with local
customers, executives realized that the problem was Malaysia’s weak technology infrastructure. As one
executive said, “Malaysia is basically still a developing country and there is a lot of security
infrastructure that was not set up…Therefore, there was nothing for us to monitor.” The country
manager and HQ executives counseled together and decided to elaborate on their original boundary rule
– that is, change it from “sell 24x7 security monitoring” to “sell 24x7 security monitoring, software
security products, and security systems integration”. This elaborated rule worked for Malaysia, but
when the firm next entered Japan and then China, executives realized the rule was not generalizable to
these countries. This experience prompted executives to adjust this heuristic to the more abstract “sell
security” rule. This enabled selling software products and integration in Malaysia, security-related
hardware products in China (a difficult country for selling software), and later sales of the original
security monitoring services in these countries.
Crest executives also raised abstraction in several of their heuristics. When executing their
second country entry (U.S.), founders relied on an established how-to rule: “hire strong locals based on
online resources”. This heuristic was highly effective in Sweden (prior country entry) for hiring local
employees with both clinical development and technical skills. But in the U.S., following this heuristic
led to several poor hires. Like at Echo, the failure of a previously successful heuristic made the founders
more attentive to the heuristic and its underlying rationale. The team in charge of the U.S. counseled
with colleagues at HQ, and together they realized that while effective local hiring was core to their prior

success, the source was not. Executives raised the level of abstraction of the heuristic from “hire strong
locals based on online resources” to the more general “hire strong locals.” This new heuristic focused
attention on the overarching aim regarding hiring, but did not prescribe how it should occur. This
created both greater attentiveness about hiring (e.g., forced thinking about how to achieve the aim), and
greater autonomy for improvising hiring specifics according to the circumstances of each country. In the
U.S., management turned to its seasoned board of directors to find strong local hires, while in Germany
they used headhunters (not online resources, not board of directors) to do the same.
Why is abstracting important?
Abstracting heuristics aids in the development of capabilities in several ways, beyond what
elaboration alone can do. The logic for elaborating is clear - executives add increasing action steps to
early heuristics, creating a more accurate and repeatable capability. Yet the logic for abstracting is
distinct. First, through abstraction of key heuristics firms form a more generalizable capability. While
elaboration makes heuristics more specific and detailed, it can also make them become too specific and
too detailed. That is, elaboration may “overfit” heuristics to particular experiences making them
restrictive in terms of the actions managers can take in the future. This is problematic for key strategic
growth processes where variation is expected (e.g., acquisition, alliance, product development), as
previously successful rules become ineffective in new contexts. When firms create a broader
conceptualization of their rules (i.e., make them more abstract) to help address differences among varied
experiences they avoid overfitting by bringing the core intent of the rules to light6. For instance, in the
6
This is consistent with work from organizational learning showing that surprises or errors may stimulate the switch to more
thoughtful mechanisms for organizational action (Levinthal and Rerup, 2006).

Echo example above, targeting governments and banks stemmed from a desire to target customers who
valued information, so broadening the rule to “large organizations with propriety information” removed
country specific restrictions but retained the core intent of the rule. This provided stability but also
opened the door to more opportunities for internationalization. Across our cases, abstraction is
important to capability development because it increases the generalizability of the capability, ensuring
coherence even with increased variety.
Second, abstraction aids in the development of a capability because it elicits less routine
behavior than elaboration. That is, as rules become more general through abstraction individuals
interacting with a process become more thoughtful and purposeful in their behavior (Weick, Sutcliffe,
and Obstfeld, 1999; Levinthal and Rerup, 2006). Abstracted rules provide some guidance about what to
do but require firm members to be take into consideration unique features of the situation (e.g. country)
in order to decide how implementation should take place. As one founder observed, “We have to
understand individual countries – their specific requirements.” For instance, in the Crest example
above, abstracting the hiring rule focused managers in each new country on hiring strong locals, but
encouraged each to find the best way to do that in their country. Hence, abstraction allows the content of
capabilities to be both efficient and flexible rather than either one alone. This thoughtful improvisation
of specifics by executives is crucially distinct from routine action. Routine action generally relies on the
familiar and often invokes acting in a semi-automatic way, resulting in reduced attention, habitualness,
and failure to recognize differences (Narduzzo et al., 2000:43). Abstraction, in contrast, enables firm
members to move beyond the functional and operational fixity of conventional thinking to engage in
more innovative problem solving and avoid mistakes that occur when individuals rely on routine

responses (Hinds et al., 2001). Thus abstraction aids in capability development by encouraging less
routine behavior, which increases the utility of the capability across an increasingly diverse set of
opportunities.
Lastly, abstraction is key to the development of capabilities because it suggests firm-level
expertise in the task. Cognitive science research has shown that expertise is only acquired when the task
is represented in more abstract forms. For example, work on mathematicians (Schoenfeld and
Herrmann, 1982) and computer programmers (Adelson, 1981) shows that as these individuals gain
expertise in their area of study they are likely to search among more abstract notions (e.g.,
computational principles) for appropriate solutions. Consistent with this view, data here suggest that as
executives gain experience with a process like internationalization they collectively rely on more
abstract heuristics to guide action. In our cases it is not an individual executive who drives improved
action across repeated country entries, but rather a set of executives using a set of coherent but flexible
heuristics. That is, the firm becomes more expert in the task beyond any one individual’s knowledge of
that task.
How abstracting helps transition from the individual level to the firm level
Finally, abstraction is also crucial for the transition from individual-level processes to firm-level
capabilities. Our data reveal that abstraction occurs through extensive communication within the
organization (Table 6), often in an effort to make sense of why existing rules fail or underperform.
Although communication happened in all three stages of our theoretical framework, it is particularly
crucial for abstraction. In the first stage (seeding), communication happened mainly between executives
as they collectively created initial heuristics. In the second stage (elaboration), executives continued to

communicate with each other but also communicated extensively with other individuals at lower
hierarchal levels to create shared understandings about particular experiences. In the final stage
(abstraction), organizational communication progressed further as individuals communicated across
hierarchical levels but also across varied experiences to collectively reflect on the core intent of
heuristics. This often occurred in formal settings such as weekly meetings where country managers from
across the firm would compare experiences and help the executives create a broader view of their rules.
For example, one executive at Grand stated: “we have weekly sales calls…we all hear different things,
so we want to put the stories together so that we have a complete picture.” Similarly, another corporate
manager at Crest explained that “The weekly meetings are the main media for sharing knowledge.” This
regular communication allowed groups of individuals within the firm to learn from failed rules by
highlighting both similarities and differences among experiences to better understand causal outcomes.
By so doing, they were then able to develop solutions in the form of heuristics that were more
generalizable and applicable across a broader range of opportunities. Thus, learning was co-created by
multiple individuals discussing actions and outcomes together to create shared understandings and
expertise about the task across the firm rather than isolating it with particular managers. The result was a
firm-level capability.
Overall, firms created a firm-level internationalization capability through the process of seeding,
elaborating, and abstracting a coherent set of efficient but flexible heuristics. This occurred as
individuals worked together to deliberately translate their diverse experiences into increasingly honed
heuristics that applied across multiple country entries. Such a capability permitted executives to
repeatedly perform at or above an acceptable threshold level of performance in new countries (Table 7).

In the final set of heuristics for each firm, some heuristics remained from seeding, some had been
elaborated, and some had been abstracted. Thus, a capability is not strictly a set of high-level guidelines
nor is it an overly detailed “playbook” for entry. Rather, our data suggest it may consist of unique
heuristics at varying levels of detail which allow for coherent but adaptable action by members of an
organization.
DISCUSSION
Capabilities are of fundamental practical and theoretical interest to organizational and strategy
scholars (Anand and Khanna, 2000; Argote, 1999; Edmondson et al., 2001; Hoang and Rothaermel,
2005; Kale et al., 2002; Sampson, 2005). Yet, despite studies indicating that firms develop capabilities
from experience, relatively little empirical work examines how this happens. Using an inductive logic,
we develop an emergent framework for how firms develop an internationalization capability.
Our data suggest that the transition from individual-level heuristics to a firm-level
internationalization capability happens gradually through a process of seeding, elaborating, and
abstracting key heuristics. First, capabilities begin from seeding experience with rough heuristics. These
heuristics are created from founders’ prior experience, but also from vicarious learning and logical
reasoning. Such initial heuristics help executives set a structure and lay the foundation for the rest of the
process by providing a rudimentary outline that links “what to do” and “how to do it” together in a
common understanding for top executives. Thus, the content of these early heuristics appears less
important than the structure they provide. Second, by elaborating key heuristics, firms correct mistakes
from the initial seeding process. Regardless of whether the firm’s founders are experienced or
inexperienced, initial heuristics often contain errors or fail to fit with the given context. Through

elaboration, firms refine their initial heuristics via trial-and-error and the extension and retention of past
behaviors. This occurs as individuals actively and deliberately engage in sharing knowledge from
multiple hierarchical levels and multiple experiences. Firms start developing a capability as managers
add detail to their knowledge of what task to perform as well as to their knowledge of how to perform it.
An internationalization capability further evolves as executives collectively raise levels of
abstraction in key heuristics over time. While elaboration makes heuristics more detailed, the added
detail also makes them restrictive in terms of future actions managers can take. As rules become
abstracted to a higher level they are able to provide direction and guidance for varied country entries
while still providing the necessary flexibility for local adaptation. Together, our data suggest that
capabilities form by developing a set of coherent but flexible heuristics that allow the firm to repeatedly
accomplish a task (internationalization) when each iteration (country entry) may be unique. Such a view
suggests growing sophistication of collective understanding over time and mirrors the process by which
individuals gain expertise (Chi, Feltovich, and Glaser, 1981; Sonnentag, 1998). Overall, our emergent
“expertise” view provides a more empirically grounded and nuanced view of capability development
that goes beyond less descript accounts of ‘learning-by-doing’ (Helfat and Peteraf, 2003; Tsang, 2002).
Contributions to the microfoundations literature
Our study also contributes to the microfoundations literature. First, we answer calls for research
on microfoundations by exploring the individual-level origins of firm-level capabilities (see Table 1).
Data from this study suggest that the underlying initial structure of an internationalization capability
does not reflect unspecified behavioral patterns as often implied under the routines view (Leavitt and
March, 1988; Nelson and Winter, 1982; Williamson, 1999). Rather, it consists of specific heuristics in

specific firms to capture specific opportunities within a larger set of possibilities (e.g., specific countries
from the range of all potential countries). Examples include Block’s “Restrict internationalization to
English speaking markets,” Alta’s “Restrict internationalization to Scandinavia,” and Center’s “Tier-one
countries.” These initial heuristics represent the origins of capabilities.
Second, we contribute to the microfoundations movement by explicitly addressing the transition
from individual-level processes to firm-level capabilities. Prior work on the microfoundations of
capabilities studies the impact of individual factors such as diversity of knowledge or individual
network positions on performance (Morris et al., 2014; Paruchuri and Eisenman, 2012) but generally
glosses over the intervening process of how individual processes become firm capabilities. Our data
reveal that this transition between levels happens via the co-creation of knowledge, rather than the
transfer of knowledge. Past research has often assumed that firms gain collective understanding as an
individual creates knowledge and then transfers this knowledge to other individuals throughout the firm
(Argote and Ingram, 2000). Such transfer is often time consuming, expensive and difficult to achieve
(Szulanski, 2000). In contrast, our theory suggests that capabilities form as multiple individuals
concurrently engage in the co-creation of knowledge. For the firms in our sample, heuristics formed as
groups of individuals regularly discussed actions, outcomes, and causes together. These discussions
fostered a shared understanding of what to do and how to do it. With seeding this occurred within the
executive teams as founders engaged in a collective effort to first create some structure for action prior
to “doing”. As firms moved to elaboration, the executive team co-created additional knowledge as they
communicated with other individuals at lower hierarchal levels to create shared understanding of an
experience. Through a combination of individual observation of errors and frequent communication

across levels of hierarchy, heuristics became more detailed in the specification of action steps. Then,
during abstraction, the co-creation of knowledge continued as individuals involved in various diverse
opportunities (e.g., country managers), and across hierarchical levels, collectively reflected on successes
and failures to uncover the core intent of heuristics. Doing so, they made important modifications to
existing heuristics so as to make them less detailed and more generalizable across a broader range of
opportunities. Overall, co-creation of knowledge among multiple individuals helped facilitate the
formation of a firm-level capability.
Contributions to literature on organizational learning
We also contribute to literature on organizational learning by opening the black box of how
firms learn capabilities. Several strategy studies suggests that organizational capabilities evolve to
become more routinized (Dosi et al., 2000; Helfat and Peteraf, 2003; Winter, 1986) with more granular
or specific steps (Szulanski and Jensen, 2006). While the “routines” view may accurately describe how
organizations learn capabilities from homogeneous experience, it may not accurately describe what and
how they learn from heterogeneous experience. Indeed, our data suggest the insight that capabilities
addressing heterogeneous experience evolve to become less not more routine over time.
Capabilities that focus on heterogeneous experience (e.g., acquisitions, product development,
partnering, internationalization) are often strategically significant, not operational (Zollo and Winter,
2002). That is, they influence a firm’s direction and competitive advantage (Teece, Pisano, and Shuen,
1997) and so focus more on capturing different “variance creating” opportunities than executing similar
“variance reducing” tasks. Learning a capability from heterogeneous experience is also challenging and
distinctive (Autio, Sapienza, and Almeida, 2000; Beckman and Haunschild, 2002; Haunschild and

Sullivan, 2002). While the opportunities that these capabilities address have some commonalities
(suggesting they are amenable to efficiency), they are also likely to have many unique features that
require flexibility and heedful action (March, Sproull, and Tamuz, 1991; Hargadon and Sutton, 1997).
In our study, for example, the country entries of a given firm are undertaken for a variety of reasons,
involve different entry challenges, and present distinct localization issues. As the CEO of Echo
insightfully noted, “There is no unified model (for internationalization). It’s highly
heterogeneous…Different country, different model. It’s got to be very dynamic.” This suggests that what
is learned from heterogeneous experience may not become more complicated and habitual (i.e., more
routine) over time. On the contrary, the ability of executives to have some but not too much structure
enables firms to respond effectively to new opportunities (e.g., entering a new market).
Overall, our data suggest that learning evolves to become less, not more routine since learning a
capability from heterogeneous experience is about creating expertise (i.e., ability to solve a variety of
tasks within a given domain), not honing routines (i.e., ability to solve familiar tasks). Learning starts
as managers spend time creating task-relevant mental representations of a process prior to acting. It
then progresses as executives gain additional declarative knowledge about what to do, and then
incorporate more procedural knowledge about how to do it. Such elaboration of knowledge relies on a
more nuanced understanding of situations. This enables more appropriate choice of focus, concentrates
attention, and creates coherence and efficiency across experiences. Learning further develops through
increasing levels of abstraction. This later-stage learning involves more sophisticated understanding
action-outcome relationships and involves discerning distinctions between surface and embedded
features of events like country entry such that abstract rules become apparent. This is consistent with

studies on expertise which note that mental representations become increasingly abstract as individuals
develop deep understanding of varied situations needed for enabling appropriate choices of action
(Gobet and Simon, 1998; Hinds, Patterson, and Pfeffer, 2001). Abstract rules can then act as referents to
enable improvisation. That is, abstract rules specify the broad outlines of action, but leave the specific
details of execution open to a given situation. The result is coherent and efficient, yet adaptive
improvisational behavior. We thus further contribute to the learning literature since while extant
research notes that organizations use improvisational referents to help “infuse meaning into
improvisational action and provide a constraint” within which real-time learning occurs (Miner, et al.,
2001: 316), this work does not reveal how improvisational referents emerge or what their underlying
structure (if any) might be.
In summary, by examining actual (vs inferred learned content) over time, our data suggest that
learning capabilities from heterogeneous experience is about neither simply accumulating more
experience (Argote, 1999; Anand and Khanna, 2000) nor engaging in similar tasks (Haleblian and
Finkelstein, 1999). Rather it is about building increasingly rich intellectual foundations such that
learning remains fresh, exciting, and relevant. More simply, it is about creating expertise, such that
learned content evolves to become less not more routine.
Boundary conditions and future research
Our work has important boundary conditions. First, our study centers on an internationalization
capability. While we believe that the overall sequence of capability development (i.e., seeding,
elaborating, and abstracting) will hold true for other types of capabilities addressing heterogeneous
experience (e.g., alliances, acquisitions, and product development), it may not apply equally well to

other operational types of capabilities where tasks may be more standardized. Future research is needed
to explore the generalizability of our findings to these other types of capabilities. We also focus on
executives in entrepreneurial firms. Past research suggests that entrepreneurs are more likely to use
heuristics than managers of large organizations (Busenitz and Barney, 1997), and thus our theory may
be most applicable to entrepreneurial settings. But, there is also research suggesting that even managers
of large, established firms often rely extensively on a set of heuristics when making decisions (Bettis,
2017). Hence, more work is needed in this area to fully understand the differences between capability
creation in entrepreneurial firms versus established firms. In addition, future work could sharpen
understanding of how the seeding process may differ for entrepreneurs with little experience versus
entrepreneurs with significant prior experience. While our case data suggest that both groups “seed” the
initial capability with heuristics, future work could explore in greater depth how this is done.
Finally, to more accurately portray the process of capability development, we restricted our
analysis so six firms. All methodological designs involve tradeoffs due to the limitations of data
collection and analysis. A small sample such as ours allows for a rich examination of the origins of
capabilities, but does so at the expense of generalizability to other settings. Hence, a needed next step is
testing the external validity of our process model across a larger number of firms and across a wider
range of industries.
CONCLUSION
While capabilities are of fundamental importance to firms, relatively little is known about the
origins (or “microfoundations”) of these capabilities. Through our inductive research logic and in-depth
nested case studies, we shed light on how firms develop an internationalization capability. The major

outcomes are theoretical insights regarding how firms rely on a process of seeding, elaborating, and
abstracting sets of heuristics over time. Through this process, the content of capabilities moves from
being more concrete and routine to less concrete and less routine. Additionally, we offer insight into the
transition from individual-level processes to firm-level capabilities, an issue which has been neglected
in past research. Overall, we help open the “black box” of capability creation and attempt to provide a
more relevant and accurate view of how capabilities come to exist.
ACKNOWLEDGEMENTS
We appreciate the generous support of the National Science Foundation (IOC Award
#0323176), Stanford Technology Ventures Program and Kenan-Flagler Business School at UNC. We
also thank multiple individuals for their helpful comments, including: Kathy Eisenhardt, Tom Byers,
Connie Helfat, Riitta Katila, and Bob Sutton. Finally, we thank our anonymous reviewers and editor for
their constructive feedback.

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Figure 1:
A model for developing a capability
PHASE 1: PHASE 2: PHASE 3:
Seeding Elaborating Abstracting OUTCOME
Heuristics: Heuristics: Heuristics: Development of an

• Boundary (Selection) • Increase in detail and • Raise abstraction of organizational
• How-to (Procedural) action steps in early key heuristics capability:
experience • A set of “boundary”
and “how-to” rules at
Why Why Why varying levels of
important? important? important? detail which allows
for coherent yet
1. Gives executives the 1. Corrects initial 1. Increases the flexible action
confidence to act in errors by making generalizability of • Allows firms to
uncertain situations heuristics more heuristics and the repeatedly perform a
2. Structures decision accurate capability. strategic task above a
making to be more 2. Makes a task more 2. Requires managers threshold level
like experts repeatable by to be more attentive
making heuristics in action.
more detailed 3. Creates firm-level
expertise
The transition from the individual level to the firm level
• Seeding provides a • Elaboration uses • Abstraction uses

simple but rough initial structure from communication
outline for action seeding as basis for across various
that is shared by communication to experiences and
multiple executives allow heuristics to be hierarchical levels to
collectively refined promote a coherent,
and used across yet flexible strategy
hierarchal levels (i.e., helps to cope
with heterogeneity in
opportunities)

Table 1: Calls for Research
Topic Study Explanation of research gap

Capability development
Abell et al., 2008 "The capabilities-based view… has seen virtually no attempts to build explicit
micro-foundations. As a result, it is unclear how crucial collective or macro-level
constructs, such as routines and capabilities, impact firm-level performance (and it
is unclear how they emerge from individual action and interaction)."
Eggers and Kaplan, 2013 "Given that few studies speak directly to the assembly of capabilities, this area is
ripe for future research."
Felin and Foss, 2005 "The organizational capabilities-based literature in strategic management.. serves
as a specific example of a more general problem of lack of attention to individuals
in strategic organization...Our hope is that this essay will serve as a clarion call of
sorts for strategic organization (and more broadly organizational) scholars to take
individuals and micro-foundations more seriously …"
Felin et al., 2015 "The notion of organizational capability or competence provides an important
opportunity for future theoretical work in the domain of microfoundations. As
discussed previously, capability is generally seen as residing at the organizational
level...Comparatively less attention has been paid to the micro factors that might
constitute or dissipate (in cases of mobility) the capability of organizations."
Gavetti, 2005 "…research on capabilities needs microfoundations that capture more fully what
we know about cognition and action within organizations"
Helfat and Peteraf, 2015 "To date, the cognitive underpinnings of dynamic managerial capabilities remain
largely unexplored"
Laamanen and Wallin, "...there continues to be a scarcity of empirical research on how firms make sense
2009 and plan ex ante for capability development and why they end up choosing the
capability paths that they choose"
Salvato and Rerup, 2011 "There is no clear understanding of how individual-level competencies relate to
firm level routines and capabilities...we suggest that research could advance
significantly by unbundling collective entities, such as routines and capabilities,
into their component elements"
Winter in Murmann et al., "the question of where routines and capabilities come from ... deserves vastly
2003, p. 29 more attention"
Winter, 2012 <when asked what one issue deserves attention in future work on capabilities>:
"When a specific capability first appears at a specific site, where does the requisite
knowledge come from?"
Zollo and Winter, 2002 "As the field progresses in the characterization of the phenomena [capabilities],
however, the need for a better understanding of the origins of capabilities becomes
increasingly apparent."
Heuristics
Baron, 2004 "It is possible that successful entrepreneurs are more proficient than less
successful ones at formulating effective heuristics...Entrepreneurship researchers
may well wish to investigate these predictions, derived from a cognitive
perspective."
Felin et al., 2015 "The specific opportunity vis-a`-vis microfoundations is to study how disparate
individual-level propensities, biases, and heuristics instantiate themselves in
collective, organizational, and strategic contexts..."
Maitland and Sammartino, "Future research should study firms also embarking on their first international

2015 investments, plus investigate how individual-specific heuristics may evolve into
firm-level heuristics through repeated decision processes"
Ott et al., 2017 "Existing research cites the importance of “simple rules” heuristics as central
features of successful strategies ... Major next steps include better understanding
their sources and evolution."

Table 2: Description of Cases
Company HQ Founding Product Actual country Cultural Sales Employees8 Interviews Average age Importance of
country year entries (in order) distance of founder(s) internationalization
from HQ7 # Types9
Crest Finland 2000 Multi channel Sweden 0.74 $9.3M 75 5 2 26 “It’s vital, it’s the
clinical data U.S. 1.37 cornerstone…
capture Czech Republic 1.13 Internationalization as
solutions Germany 1.21 the only way to go
U.K 1.70 forward.”
Alta Finland 1997 Supply chain Sweden $93M 495 6 2 50 “The reason for listing
software for Norway 0.74 was to become
the retail France 0.29 international. Then we
industry Germany 1.22 made the plan for how to
U.K. 1.21 become international.”
U.S. 1.70
1.37
Block U.S. 1996 Real time Australia $8.5M 65 5 2 47 “Ultimately you need to
0.02
analytics U.K. become global.”
0.08
(supply chain, France
1.54
CRMs) Germany
0.41
Korea
3.39
Center U.S. 1999 Wireless chips China $1M 100 4 2 60 “We were founded from
3.01
for mobile Taiwan the beginning to be a
2.80
devices Korea multi-site international
3.39
Japan company.”
2.63
Germany
0.41
7
Cultural distance from HQ calculated using measures from Hofstede (2001) and Kogut and Singh (1988).
8
At time of data collection
9
Corporate and country level

Grand Singapore 2000 Enterprise Taiwan $1.8M 55 6 2 34 “Our business plan has
software U.S. 1.75 always had an
focusing on Malaysia 3.41 international
supply chain Japan 0.85 perspective.”
integration China 5.15
Philippines 0.47
1.02
Echo Singapore 2000 IT security Hong Kong $3.2M 100 4 2 46 “International expansion
monitoring Malaysia 0.28 is one of the key
Japan 0.85 components in our
China 5.15 expansion plan.”
Saudi Arabia 0.47
1.11

Table 3: Seeding
Firm Illustrative starting heuristics Quotes Unexpected heuristic errors

Country # Error
Crest Boundary Rules “Let’s say we are qualifying Czech 3 How-to Rule
• Enter countries with lots of pharma activity a customer…in the early Republic Used the standard criteria of “have
• Target pharmaceutical companies stages one of the guidelines they used a patient diary before” to
• Promote electronic diary solutions to was just to ask if they know qualify customers but this did not
customers what an electronic patient assess customers’ budget for services.
How-to Rules diary is and if they have seen
• Use standard criteria to qualify customers it before.”
• Send in one young aggressive Finn with a
phone book to cold call
• Hire strong locals based on online
resources
Alta Boundary Rules “All these analysts were Norway 2 Boundary Rule
• Restrict internationalization to Scandinavia blaming us that we are too Entered a Scandinavian country that
• Target wholesalers and independent conservative because the was too small to justify a physical
retailers markets are in the US. So we presence
How-to Rules started with Sweden, which is
• Use acquisitions to enter new countries and closest here. I said that we Norway 2 Boundary Rule
gain new technologies have to have the learning Selling to local retailers in Norway
• Focus on three items: reducing stock, process.” was taking too long
controlling inventory, and improving “Our idea was first of all to
replenishment buy the new technology.”
Block Boundary Rules “We had already decided that Australia 1 How-to Rule
• Restrict internationalization to English we were going to attack the Tried to keep too much control over
speaking markets English-speaking sales (direct approach)
• Sell enterprise software to enable real time markets…That was a no-
analytics brainer.”
How-to Rules
• Promote features and functions of
technology
• Use direct sales
Center Boundary Rules “You get companies like Dell, China 1 How-to Rule
• Enter countries that have ODMs and OEMs Apple, Microsoft X-Box, for Need to use China for both
• Sell semiconductor solutions for mobile example. Right now, Dell, manufacturing and RandD
devices Apple, HP, Gateway, these China 1 Boundary Rule
• Focus on PDAs, cell phones, and guys are all channels – Selling chips alone did not lead to
automotive GPS becoming OEM channels.” sales
How-to Rules “Mode of entry is direct
• Use China for manufacturing and Taiwan sales”
for RandD
• Use direct sales
• Sell semiconductors emphasizing low cost
Grand Boundary Rules “We realized from the start Taiwan 1 How-to Rule
• Stay Asia focused that it’s going to be crucial to Tried to sell direct, not with a partner
• Promote B2B e-collaboration software our strategy to start working
• Target large, multinational OEMs with the big boys.”
How-to Rules “We went direct in Taiwan.” U.S. 2 Boundary Rule
• Use direct sales approach Missed chance to sell to the suppliers
of OEMs

Firm Illustrative starting heuristics Quotes Unexpected heuristic errors
Country # Error
Echo Boundary Rules “Look at who cherishes the Hong 1 How-to Rule
• Restrict internationalization to Asia information more. If we talk Kong Targeted the IT groups within
• Target government and financial to small solo enterprises they customer organizations to get sales
institutions don’t even bother, but banks instead of targeting the audit groups
• Sell 24x7 security monitoring and government care…that Hong 1 How-to Rule
How-to Rules one we predicted would Kong Used a features sales approach instead
• Use joint venture partnerships with large happen and it happened.” of a consultative one
mature local firms “That’s why when we go in,
• Target the IT group within organizations to we must find a partner…We
get sales must have a local partner to
• Focus on features selling work with us.”

Table 4: Elaborating
Firm Original rule Elaboration Type Country #
Crest Boundary Rules
Enter countries with lots of pharma Enter countries with lots of pharma activity and where rich pharma firms had New detail Czech 3
activity headquarters Republic
How-to Rules
Use standard criteria to qualify customers Use standard criteria and budget criteria to qualify customers New detail Czech 3
Republic
Send in one young aggressive Finn with a Send in one young aggressive Finn with a phone book to cold call and oversee country New detail U.S. 2
phone book to cold call operations
Send in one young aggressive Finn with a phonebook who speaks the local language to New detail Germany 4
cold call, and oversee country operations
Alta Boundary Rules
Target wholesalers and independent Target wholesalers and global independent retailers New detail Norway 2
retailers
How-to Rules
Use acquisitions to enter new countries When using acquisitions to enter new countries and gain new technologies, ensure that New detail Sweden 1
and gain new technologies target’s management is 100 percent committed to the deal
When using acquisitions to enter new countries and gain new technologies, ensure that New detail France 3
target’s management is 100 percent committed to the deal and do extensive due
diligence
When using acquisitions to enter new countries and gain new technologies, ensure that New detail Germany 4
target’s management is 100 percent committed to the deal and do extensive due
diligence, and invest in post-acquisition integration to ensure enculturation
Block How-to Rules
Promote features and functions of Promote features and functions of technology if country is run by HQ New detail Australia 1
technology
Use direct sales Use indirect sales Rule change Australia 1

Use indirect sales with distributor in non-strategic countries New detail Australia 1
Use indirect sales with distributor in non-strategic and strategic countries New detail U.K. 2
N/A (rule developed after country entry) Corporate maintains strict control of all country entries New rule Australia 1
Center Boundary Rules
Sell semiconductor solutions for mobile Sell total solutions for mobile devices New detail China 1
devices
How to Rules
Use China for manufacturing and Taiwan Use China for manufacturing and R&D Rule change China 1
for RandD Use China for manufacturing and R&D and Taiwan for sales and marketing New detail Taiwan 2
Use direct sales Use direct sales if country culture is known, indirect if it is not New detail Korea 3
Sell semiconductors emphasizing low Sell semiconductors and determine if cost or features is more important New detail Korea 3
cost
N/A (rule developed after country entry) Use consultant to provide intros and insight about local market. New rule China 1
Use consultant and prototypical large customer to provide intros and insight about local New detail Japan 4
market
Grand Boundary Rules
Target large, multinational OEMs Target large, multinational OEMs and their suppliers New detail U.S. 2
N/A (rule developed after country entry Focus on Rosetta Net standard New rule U.S. 2
How-to Rules
Use direct sales approach Use indirect sales approach by identifying partners Rule change Malaysia 3
Use indirect sales approach by identifying one or two partners who share the vision, New detail
understand the product, and who can work closely with firm on first sale
N/A (rule developed after country entry) Create a business case for entry New rule U.S. 2
Create a business case for entry detailing market size, readiness for technology, and New detail Malaysia 3
potential partners

Firm Original rule Elaboration Type Country #
Echo Boundary Rules
Sell 24x7 security monitoring Sell 24x7 security monitoring, software security products and security systems New detail Malaysia 2
How-to Rules integration
Use joint venture partnerships with large Use joint venture partnerships with large mature local firms based primarily on New detail Hong Kong 1
mature local firms personal relationships
Use joint venture partnerships with large mature local firms based primarily on personal New detail Malaysia 2
relationships and reputation for reliability
Target the IT group within organizations Target the auditors within organizations to get sales Rule change Hong Kong 1
to get sales Target the auditors within organizations to get sales and segment customers into New detail Malaysia 2
platinum, gold, or silver accounts
Focus on features selling Focus on consultative selling Rule change Hong Kong 1

Table 5: Abstracting
Company Country # Increased heuristic abstraction Rationale

Crest U.S. 2 Raise abstraction of how-to rule • Gave flexibility in how to hire the best
From hire local salespeople based on online local talent – e.g., board member
resources to hire strong locals contacts in the U.S., headhunters in
Germany 4 Raise abstraction of boundary rule Germany
From focus on being a provider of electrical based • Created greater attention on larger
diaries to becoming the leader in integrated data opportunities that centered around
collection clinical trials
Alta Norway 2 Raise abstraction of boundary rule • Let organization pursue larger
From original focus on Scandinavian retail customer deals
customers to a broader focus on large retail
customers
Block Korea 5 Raise abstraction of boundary rule • Enabled pursuit of serendipitous
From original country target of “English speaking revenue opportunities with
markets” to low cost opportunities to generate distributors in countries without large
revenue capital outlay
Korea 5 Raise abstraction of how-to rule • Provided greater options for
From strict corporate control of all country entries structuring country entry depending
to on and off-balance sheet deals on corporate resources
Center Taiwan 2 Raise abstraction of how-to rule • Allowed managers to flexibly
From original sales approach emphasizing cost to emphasize value proposition that
sales approach clarifying value proposition would be most important for
Taiwan 2 Raise abstraction of boundary rule customers in local market (e.g.,
From focus on being a chip company to a focus on features, time to market)
being a systems solutions company (hardware and • Could address broader range of
software) demands for mobile solutions across
Japan 4 Raise abstraction of boundary rule countries and also provide a “total
From PDAs, cell phones, and automotive GPS to solution”
mobile device that was least competitive in country • Created flexibility to quickly enter un-
entrenched market niches
Grand U.S. 2 Raise abstraction of how-to rule • Created opportunities to work with
From few specific contractual arrangements with U.S. firms in range of unique
partners to a broader repertoire of arrangements partnership arrangements
Malaysia 3 Raise abstraction of boundary rule • Allowed firm to reduce dependency
From focus on Rosetta Net standard to focus on on one particular standard, but still
standards in general use standards to enter new growth
China 5 Raise abstraction of how-to rule markets
From the formation of local partnerships to enter a • Let management avoid bureaucracies
local country to the consideration of local or non- of partnering with local firms in China
local partnerships to enter and create alliances with non-Chinese
firms who had had success in the
country

Company Country # Increased heuristic abstraction Rationale
Echo Malaysia 2 Raise abstraction of boundary rule • Allowed autonomy to pursue different
From original focus on government and financial customers for whom the company’s
institutions to large organizations with proprietary security products provided key value
information and ability to pay • Enabled flexibility in partnering –
Japan 3 Raise abstraction of how-to rule e.g., to gain an exclusive franchise
From joint venture partnerships with large mature partner in Japan and multiple rep
local firms based primarily on personal partners with strong personal
relationships and reputation for reliability to relationships in various sectors in
partnerships based on unique business environment China
China 4 Raise abstraction of boundary rule • Allowed exploitation of a range of
From “sell 24x7 security monitoring” to “sell opportunities based on country
security services” infrastructure and local customer
needs

Table 6: Communication
Company Degree of communication 10 Communication within & between Communication across experiences
hierarchical levels
Crest • Very High - 9/10 “We are very active in having weekly meetings both “They (country managers) participate in the same weekly
• Daily interaction with headquarters at the company level and at the department level” meetings. That is where they share the information…The
and country managers “We communicate at the management level extremely weekly meetings are the main media for sharing
• Weekly meetings across countries actively.” knowledge.”
Alta • Very High – 9.5/10 “Our MD here speaks with the CEO on a daily “I would say daily communication. Mixture of phone or
• Daily interaction with headquarters basis…we also do a lot of videoconferencing” email, or videoconferencing”
and country managers “I would communicate quite frequently with HQ.
• Daily interaction as needed among Sometimes daily, sometimes weekly. Email and
country managers phone.”
Block • Very High - 9/10 “I was speaking with my VP of International, daily” “Our guys in Australia were constantly talking [with the
• Daily interaction with headquarters “We were speaking daily … we pretty much worked US], sharing ideas, operating almost seamlessly”
and country managers the business model …trying to help bring some of that
• Frequent interaction as needed among mentality and approach and experience to the field”
country managers
Center • High – 8/10 “In Germany, we have weekly meetings to basically “We have weekly meetings with all countries involved to
• Weekly meetings between corporate get an update and also to train them. Same thing for get updates and share information. Our changes are
execs and each country manager Japan, weekly.” almost all done together at our weekly meetings…So we all
• Weekly meetings among country “We started weekly meetings with each one of our chat about it. Everything is shared with corporate.”
managers (foreign) teams.”
Grand • High - 8/10 “We operate in a very flat structure so if anyone “We have weekly sales calls and discuss who is talking to
• Frequent informal interaction between needs to call anyone we just call. I’m sure there are who and about what…we all hear different things, so we
HQ and countries calls going on every day” want to put the stories together so that we have a complete
• Weekly interaction among country picture. We all leverage each other as much we can”.
managers
10
Average response to survey question: “Some firms like to encourage communication between HQ and country offices, others do not. How frequently did/do
you personally interact with headquarters and other country managers? (0=never, 1=annually, 3=quarterly, 5=monthly, 7=weekly, 9=daily, 10=more than
once/day)”

Company Degree of communication 10 Communication within & between Communication across experiences
hierarchical levels
Echo • High - 8/10 “With Hong Kong, we are communicating daily. With “We communicate with country leaders all the time. All the
• Daily interaction between headquarters Malaysia, once a day. email a lot. With Japan. country centers share information…We can share things
and country managers Probably minimum is twice a week.” on a collective basis from what we learn.”
• Weekly interaction among country
managers

Table 7: Internationalization capabilities
Company Boundary rules1 How-to rules Country performance
2
Average Representative quotes
Crest • Enter countries with lots of • Use standard criteria and budget High – 9/10 “I think they are very successful”
pharma activity and where criteria to qualify customers “It’s a very well-oiled machine
rich pharma firms had • Send in one young aggressive Finn that works very well with HQ and
headquarters with a phonebook who speaks the other divisions”
• Target pharmaceutical local language to cold call, and “In terms of where we are today,
companies oversee country operations I am very happy”
• Become leader in • Hire strong locals “We pretty much wrapped up the
integrated data collection country”
for clinical trials
Alta • Restrict • Use acquisitions to enter new Moderately “We were a little late going in”
internationalization to countries and gain new technologies, High – 7/10 “We have covered our costs”
large retail customers but ensure that target’s management “We are moving very slowly”
• Target wholesalers and is 100 percent committed to the deal “It’s growing”
global independent and do extensive due diligence, and
retailers invest in post-acquisition integration
to ensure enculturation
• Focus on three items: reducing stock,
controlling inventory, and improving
replenishment
Block • Restrict • Promote features and functions of Moderately “We are the market leader”
internationalization to low technology if country is run by HQ High – 7/10 “Now market performance is very
cost opportunities to • Use indirect sales with distributor in good”
generate revenue non-strategic and strategic countries “We are performing really well”
• Sell enterprise software to • Use on and off-balance sheet deals “The country was not working”
enable real time analytics “Everything proceeded smoothly”
Center • Enter countries that have • Use China for manufacturing and High – 9/10 “Very soon it was growing
ODMs and OEMs R&D and Taiwan for sales and quickly”
• Sell total solutions for marketing “Our solution is in 90% of the
mobile devices • Use direct sales if country culture is retailers”
• Focus on device that is known, indirect if it is not “We have a strong and growing
least competitive in • Sell semiconductors by clarifying business”
country value proposition “The interest in the solution is
• Use consultant and prototypical large quite a success”
customer to provide intros and
insight about local market
Grand • Stay Asia focused • Use partner approach in a broader Moderate – “It clicked from the beginning”
• Promote B2B e- repertoire of contractual 6/10 “We have executed
collaboration software arrangements and consider both disproportionately well”
• Target large, multinational local and non-local partners “As a company we were finding it
OEMs and their suppliers • Create a business case for entry hard”
• Focus on standards detailing market size, readiness for “Not enough customers to have
technology, and potential partners made it a runaway success as an
organization”

Echo • Restrict internationalization • Use joint venture partnerships based High – 8/10 “We have managed to create and
to Asia on unique business environment portray our image and reputation
• Target large • Target the auditors within for being a guru in info security
organizations with organizations to get sales and in such a short period”
proprietary information segment customers into platinum, “We have covered our costs from
and ability to pay gold, or silver accounts the beginning.”
• Sell security services • Focus on consultative selling “It has been a positive progress”
1. Rules are italicized if they were elaborated by the firm. Rules are bolded if they were abstracted by the firm.
2. We asked our informants: ‘On a scale from 0–10 (0 = very poor, 5 = moderate, 10 = excellent), how would you rate your firm’s
overall success in this country?’ Past scholars explain that a capability does not always necessarily lead to high performance, but
rather means that the firm has reached some minimum level of functionality that permits repeated, reliable performance of an activity
(Helfat and Peteraf, 2003). Thus, we use self-reported measures of performance showing that the internationalization performance was
high in terms of their own goals for entering new countries.

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CAPABILITY CREATION: HEURISTICS AS MICROFOUNDATIONS

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accumulation and “learning-by-doing”.

factors that lead to those capabilities (Felin and Foss, 2005).

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focus on how firms develop an internationalization capability. We define an internationalization

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individual-level origins become firm-level capabilities. We also contribute to literature on

become less, not more routine.

literature points to the importance of understanding the lower-level origins of organizational

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on individual causation (Felin and Foss, 2005).

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Globalconsult, a consulting firm specializing in internationalization strategies. They suggest that

of view shared by many scholars (see Table 1).

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how routines form or how they transition to being a firm-level capability.

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Eisenhardt and Furr, 2007).

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capability is necessary in order for a firm to compete effectively.

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management can accurately recall events surrounding country entries.

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internationalization process; (3) quantitative data on companies’ internationalization performance from

and other materials produced inside the firm.

supplemented with archival data.

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HOW FIRMS DEVELOP INTERNATIONALIZATION CAPABILITIES

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phase-three clinical trials.

activity (boundary rule).

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Why is seeding important?

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how-to rules (Table 4).

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“target the audit group.”

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to pay.” As the country manager described:

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percent committed to the deal.”

is 100 percent committed to the deal, and do extensive due diligence.”

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Why is elaborating important?

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heuristics improved over time.

Second, elaboration supports the development of a capability by making the accomplishment of

Crest’s elaboration experience). Hence, elaboration made internationalization more repeatable by

performance, leading to improvements in the efficiency, reliability, and speed of future

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of regular communication allowed the on-the-ground experience of managers to be reconciled against

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Echo illustrates. As discussed previously, the founders of Singapore-based Echo initially

energy firms in Saudi Arabia.

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security monitoring services in these countries.

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Why is abstracting important?

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