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process again caught the attention of researchers during 1990s (Gartner, 1988: Venkatraman,

1989a and 1989b; Bygrave and Hofer, 1991; Shaver and Scott, 1991; and Venkatraman,

1997). The last two decades have witnessed the developments in the area of EO-performance

relationship and adoption of contingency framework to EO-performance relationship,

where it has been acknowledged that EO-performance relationship is affected by the

organilational environment and industrial turbulence (Covin and Slevin, 1989: Zahra,

1991; Wiklund, 1999; Zarua and Garvis, 2000; Lee and Penning, 2001; Yusaf, 2002;

Oimitratos er aI., 2004; Kraus e! aI., 2005; Wiklund and Shepherd, 2005; Starn and Elfring, 2008; Kreiser and Davis, 2010; Grande et aI., 2011).

Entrepreneurial Orientation EO has emerged as a major construct within the strategic management and entrepreneurship literature over the recent years. [t can be viewed as a characteristic of organizations, which can be measured by looking at tOp management's entrepreneurial style, as evidenced by the firms' strategic decisions and operating management philosophy (Mme~ 1983). EO should

be distinguished from entrepreneurship. The essence of entrepreneurial orientation depends

on how entrepreneurs Implement entrepreneurship in the course of realizing their career ambition. On the other hand, entrepreneurship focuses on new entry. New entry can be accomplished by entering either into new or established markets with new or existing goods orservices (Burgelman, 1983). Covin and Slevin (1988) argued that an organization's

EO is the summation of the extent to which top managers are inclined to take business

related risks, to favor change and innovation in order to obtain a competitive advantage for their firm and to compete aggressively with other firms. They proposed that EO should

be considered as the strategic dimension which can be observed from the fi~' strategic

posture running along a continuum from a fully conservative orientation to a completely entrepreneurial one. They suggest that firms with a propensity to engage in relatively high levels of risk-taking. innovative and proactive behaviors have EO, while those engaging in relatively low levels of these behaviors have conservative orientation (Covin and Slevin,

1991). According to Lumpkin and Dess (1996), EO refers to the processes, practices and

decision-making activities that lead to new entry. They considered EO as a process

construct, which is concerned with the methods, practices, and decision-making styles

used by the managers. However, the term EO is also used to refer to the set of personal psychological trairs, values, attributes and attitudes that are strongly associated with a motivation to engage in entrepreneurial activities (Kilby, 1971: Mintzberg, [973; Miller

and Toulouse, 1986; Kreiser er al., 2002; and Poon er aI., 2006). EO is an imporrant measure of the way a firm is organized. It has been conceptualized as the process and decision-making activities used by entrepreneur to act entrepreneurially (Lumpkin and Dess, 2001; Rauch

er a!., 2006: Kreiser and Davis, 2010; and Ullah er al., 2011). In gist, EO refers to a firm's strategic orientation and it is usually seen as [he extent to which a fum innovates, takes risks to compete aggressively and acts autonomously and proactively.

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EO is a key ingredient for organizational success. Three types of models are evident in the EO literature:

The construct model, in which the dependent variable is EO and the researchers focus on its antecedents (Lachman, 1980; Miller and Toulouse, 1986; Stevenson and Jaillo, 1990; Zahra. 1991; Zahra er aI., 1999; Uttunen, 2000; Poon er aI., 2006; and HoltetaL, 2007).

The EO.Strategy model, which aligns the level of EO with different strategies (Mlntzberg, 1973; Khandwalla, 1977; Mmer and Friese, 1982; Burgelman, 1983; Galbraith and Kazanjin., 1986; O:)Vin and Slevin, 1988; Zahra, 1993; Covin ot a!., 1994; lumpkin and Dess, 1996; ness etal., 1997; Frese etal., 2002; and lrelanderal., 2009).

The perfoonanee model, in which the EO-perfoonanee linkage is explored, ohen including not only bivariate relationship, but also multivariate relationship by considering moderating and mediating variables related to external environment andlor organizarional environment and by looking at the main effect between the two variables as well as interaction effect with moderating or mediating variables. (Covin and Slevin, 1989; Zahra, 1991; Wiklund, 1999; Zahra and Gatvis, 2000; Lee and Penning, 2oo!; Yusaf, 2002; Dimitratos er al., 2004; Kraus er aI., 2005; Wiklund and Shepherd, 2005; Starn and Elfring. 2008; Ireland er aI., 2009, Kreiser and DaviS, 2010; Grande er aI., 2011; and Soininen et aI., 2011).

Dimensions of Entrepreneurial Orientation EO has often been operationalised in terms of three dimensions identified by Covin and Slevin (1989), building upon the earlier work ofKhandwal1a (1976) and Miller and Friesen (1982)1 viz" 'innovativeness\ 'risk-taking' and lproactiveness', to characterize and test

entrepreneurship. Later, Lumpkin and Dess (1996) identified two more dimenSions, 'autonomy' and 'competitive aggressiveness" to conceptualize EO. However; it has sometimes been argued that 'autonomy' is an internal organizational driver of entrepreneurship, which influences the organizational climate for entrepreneurship (Hadji er a!., 2007; and Hough and Scheepers, 20(8). Secondly, some researchers claimed that 'Competitive Aggressiveness' forms a part of the proactiveness dimension and does not represent a separate dimension (Hough and Scheepers, 2008; and Chang and Lin, 2011).

lunovariveness of entrepreneurs is measured by the propensity by which they innovate their business (Milter and Friesen, 1982); their willingness to tty new ways which are different from the existing; the ~nthusias';; to adopt new ideas or new methods to their business operation; and the eagerness to implement the innovation strategy in their business

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creative, extraordinary or strange solutions to problems and needs. Schumpeter ([934) considered entrepreneurship to be essentially a creative activity and entrepreneur as an innovator who carries out new combinations in the field of men, money, material, machine and management. According to him, entrepreneur is an economic man who tries to maximize his profits by making innovations in anyone of the following fields: (1) new products; (2) new production methods; (3) new markets; or (4) new forms oforganization. The degree of an entrepreneur's innovativeness will decide how far and how deep the innovation will go in business in order to meet both the strategic goal formulated for the business and the requirements from the environment (Hult er 01., 2004). Innovativeness represents a basic willingness to depart from existing technologies or practices and venture beyond the current state-of-che-arc (Covin or 01.,20(6). An innovative strategic posture can be Unked to firm performance as it increases the chances that a firm will realize fIrst mover advantage, stay ahead of their competitors, gain a competitive advantage and capitalize on emerging market opportunities thac lead to improved financial results (Kreiser er al., 2002; Hult er al., 2004; aad Kreiser and Davis, 2010).

Risk-taking refers to the tendency to take bold actions such as venturing into unknown new markets and committing a large portion ofresources to ventures with uncertain outcomes. Cantillon (1730) desctibed entrepreneur to be a rational decision maker "who assumes risk and provides the management of the fum". In the 1800s, John Stuart Mill argued that risktaking is the paramount attribute of entrepreneurship. Risk-taking implies willingness for committing huge resources to opportunities which involve probability of high failure (Minrzberg, 1973; Zahra, 1991; aad Wikluad and Shepherd, 2003). Risk handling is the process in which potential risks to a business are identified, analyzed, mitigated and prevented, along with the process of balancing the COSt of protecting the company against a risk versus the cost of exposure to that risk. The ideal way to cope with risk is to perceive risk at its inception, and taking risk under control right from its inception scage (Cornelia. 1996). Entrepreneurs, in actuality, tend to proactively deal with the risks. Risk-taking has a curviUnear relationship with performance ofentrepreneurial firms. Research suggests that entrepreneurial firms exhibiting moderate levels of risk-taking would outperform in market as compared to firms exhibiting either vety high or very low levels of risk.taking (Begley and Boyd, 1987; Kreiser et aI., 2002; Tanger 01., 2008; and Kreiser aad Davis, 2010). Factors such as process of forming a risk problem (Baird and Thomas, 1985; and Stewart and Roth, 2001); results of past risk-taking (Covin and Slevin. 1989; Goll and Rasheed 1997; and Swierczek aad Ha, 2003); and the ability to pertorm underrisky conditions (Brockhaus. 1980; Lichtenstein and Brush, 2001; Dimltratosetal., 2004; aad Soininen etal., 2011) affect the risk-raking ability of entrepreneur.

Proactivenoss is an opportunity-seeking, forward-looking perspective involving introducing new products or services ahead of the competition and acting in anticipation of future demand to create, change aad shape the environment (Lumpkin and Dess, 1996; and Kreiser er aI., 2002). Proactiveness is manifested in: (I) aggressive behavior directed at rival firms; and (2) the organizational pursuit of favorable business opportunities. It is simply the

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ability to take initiative, whenever the situation demands. Porter (1985) suggested that in certain situations, firms could utilize proactive behavior in order to increase their competitive position in relation to other firms. Proactiveness is concerned with first mover and other actions aimed at seeking to secure and protect market shate and with a forward-looking perspective reflected in actions taken in anticipation offuture demand (Venkatraman, 1989a and 1989b; Naman and Slevin, 1993; Lee and Penning, 2001; and Dimitratos et al" 2(04). It is not only in deferue, but in offence as well. It refers to processes aimed at anticipating and acting on future needs by seeking new opportunities which mayor may not be related to the present line of operatioru, introduction of new products and brands ahead of competition, strategically eliminating operations which are in the mature or declining stages of life cycle (Swiercrek and Ha, 2003; Green etal., 2008; Starn and Elfring, 2008; Clercq etal., 2010; and Kreiser and Davis, 2010). Thus, proactiveness pertains to a willingness to initiate to which competitors then respond.

Competitive aggressiveness refers to a firm's propensity to directly and intensely challenge its competitors to achieve entry or improve position, that is, to outperform industty rivals in the marketplace (Kraus er aI., 2005). It also reflects the willingness of a firm to be unconventional rather than rely on traditional methods of competing. This aspeCt is used to measure how entrepreneurial firms deal with threats, and it also refers to the firm responsiveness directed toward achieving competitive advantage (Lump king and Dess, 2001; Frese oral., 2002; and Grande ef a!., 2011). In literature, the terms proactiveness and competitive aggressiveness are often used interchangeably but there is a difference between both terms. Proactiveness states how a fir:m relates to market opportunities in the process of creating demand, while competitive aggressiveness refers to how finns relate to competitors, that is, how finns respond to trends and demand that already exist in the marketplace (Lumpkin and .Dess, 2(01).

Autonomy refers to the independent action of an individual or a team in bringing forth an idea or a vision and carrying it through to completion (Lumpkin and Dess, 1996). In general, it means the ability and will to be self-directed in the pursuit of opportunities. In an organizational context, it refers to freely taken action, irrespective of organizational constraints, for establishment and smooth running of a venture (Shrivasrava and Grant, 1985; Stevenson and Jaillo, 1990; and Kraus or a!., 2005). Autonomy in fums may vaty with the size of organization, management style, or ownership (Lumpkin and Dess, 1996).

There are diverse opinions to the issue whether"various dimensions of entrepreneurial

orientation are independent of each other or not. Covin and Slevin (1989) argued that entrepreneurial orientation is best viewed as a unidimensional concept. On the contrary, Lumpkin and Dess (\996) opined that various dimensions of EO may occur in different combinations and hence, it is a multidimensional construct. The basic premise underlying this argument is that each of these subdimensions of EO may have a differential relationship with entrepreneurial outcomes. For example, risk-taking has shown a curvilinear relationship with performance, while innovation and proacriveness have a positive and direct relationship with performance (Kreiser er al., 2002; Tang er al., 2008; and Kreiser and Davis, 2010).

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Business Performance Literature on the construct of perfurmance reveals that there is no consensus among the researchers on the appropriate measures of business performance indicators. As a result, a wide diversity of performance measures, i.e., objective and subjective measures, as well a financial and nonfinancial measures were used across studied, which leads to high diversity in EO-performance relationship (Chakravarthy, 1986; Venkataraman and Ramanujam, 1986;. Murphy or a!., 1996; and Combs or aI., 2005). Research that considers only a single dimension or a narrow range of the perfurmance indicators may produce misleading results. Therefore, the question arises as to what is the appropriate form ofperformance measurement. Should it be financial? e.g., ,ales growth, return on investment, income growth or profitability; or nonfinancial, e.g., satisfaction level of stakeholders or positive response in community; or both. It has heen widely accepted by the researchers that objective measures of performance are more appropriate than subjective measures of performance. Objective data, howeve~ is very difficult to obtain as respondents are reluctant to release sensitive information to the outsiders (Dess and Priem, 1995). On the other hand, owners and managers are generally inclined to proVide subjective evaluation of their firm performance, which lacks strong reliability (Wiklund, 1999; and Wiklund and Shepherd, 2005). Alternatively, performance can be viewed to be multidimensional in nature and therefore it is advantageous to integrate various subjective and objective measures of performance for accurate measurement of performance (Lumpkin and Dess, 1996; Murphy er aI., 1996; Yusaf, 2002; Combs et a!., 2005; and WIldund and Shepherd, 2005).

Entrepreneurial Orientation - Performance Relationship The relationship between entrepreneurship and fl!11\ perfurmance has received considerable attention in the organizational and entrepreneurial literature over the last two decades. Scholars have theorized that the incidence of fl!11\level entrepreneurial behaviors, i.e., the propensiry to engage in relatively high leve Is of risk-taking, innovative and proactive behaviors is positively associated with organizational profitability and growth (Covin and Slevin, 1991; Lumpkin and Dess, 1996; Wiklund and Shepherd, 2003; Covin et aI., 2006; Ireland et al., 2009; and Soininen et aI., 2011). However, the magnitude of this relationship seems to vary across studies. While some studies found that businesses that adopt a strong EO perform better than firms that do not adopt an EO (Covin and Slevin, 1988; Wiklund and Shepherd, 2003; Hult et aI., 2004; Kraus et aI., 2005. and Kreiser and Davis, 2010), studies also report of lower correlations between EO and performance (Zahra, 1991; Dimitratos et aI., 2004; and William and Sinkula, 2009). Other set of studies failed to find a significant relationship between EO and performance (Covin etal., 1994; George et aI., 2001; and Tang and Keveos, 2004). Some studies have shown that the relationship between EO and perfurmance is not that straightforward, rather it is shaped like inverted U (Bhuian et al., 2005; and Tang et aI., 2008), .which means that a high degree of EO is not always desirable in certain market and structural conditions. Thus there is a considerable variation in the reported relationships between EO and business performance. The reasons for variation in results can be attributed

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to factors like difference in the scales of entrepreneurial orientarion being used, difference in methodology being adopted, opinion regarding moderating variables and different indicator components of performance being measured.

Literature suggests that the relationship between EO and performance is not that straightforward, rather it is influenced by the interference of various elements of organizational and industrial environment. Venkatraman (l989b) suggested the moderating effects, mediating effects, independent effects and interacrion effects models for investigating the impact of third variables as a means of exploring contingency relationships.

In the moderating-effects model, the form or strength ofthe EO-performance relationsrip varies with organizational structure. Covin and Slevin (1988) suggested that organizations are arrayed along a mechanistic .. organic continuum. which constitutes "two formally contrasted forms of management system". 'Organic organizations' typically are decentralized and informal, and have emphasis on lateral interaction and an equal distribution ofknowledge throughout the organizational network. On the contrary, 'mechanistic organizations' tend to be highly centralized and formal. Many researchers argue that EO needs to be associated

with the low structural formalization. decentralization and low complexiry inherent in the organic organization strUctures for better performance (Khandwalla, 1977; Covin and Slevin, 1991; Naman and Slevin, 1993; Kreiser and Davis, 2010; and Krause! al., 2011).

The mediating-effects model considers EO to be an antecedent variable, fum performance to be the outcome, and integration of organizational activities to be the mediating variable. Effectively integrating activities and processes intervene in the relationship between EO and performance. Miller (1983) suggested that such integrating activities would include the "extensive use of structural integration devices such as committees and task forces, Porter

(1985) suggested the term horizontal organization, which consists of horizontal structures, horizontal systems and horizontal human resource practices to integrate activities across business units within a corporation.

In independent-effects models, EO and environmental munificence are depicted as having independent effects on the firm perlOrmance. Environmental munificence refers to the avaiiabUity of resourceS and the amount of extemal opportunities that are present in a specific environmental setting and can also be considered as the profitability or growth rates of the industry in which a fum competes (Mintzberg, 1973; Miller and Frieses, 1978; Miller, 1983; Dess and Beard, 1984; and Covin and Slevin, 1988). This relationship is consistent with the traditional industrial organization paradigm which suggests that the industry within which a firm competes has a critical impact on its performance (Porter, 1985).

Lastly, in interaction-effects mndels, various elements of organizational and industrial environment are believed to interact with EO to influence firm performance (Naman and Slevin, 1993; and Lumpkin and Dess, 1996). Wiklund (1999) indicated that increase in fIrm

performance related to EO is sustainable over long perinds of time, but this relationship may be contingent on the environmental context in which the firm operates. Wiklund and Sheperd

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(2005) suggested that studying multivariate configurations ofan entrepreneurial orientation and other important constructs may provide a more complete understanding of the entrepreneurial orientation.perfurmance relationship than bivariate models. Other variables, in addition to EO. could also influence performance directIyor may moderate the relationship between EO and performance. Rauch et a!. (2006) claimed chat relationship between entrepreneurial orientation and performance is moderated by national culture, size of business organization, and technology intensity of the firm. Starn and Elfring (2008) have highlighted

the role of network centrality in EOperfurmance relationship. Kreiser and Davis (2010) suggested that no single structure is universally appropriate for an organization. The contingent factors upon which the appropriate structure depends may include organizational factors like strategy. size, support, resources, etc., and environmental factors like dynamism, munificence, regulations and industry turbulence, etc. Contingency theory further suggests that congruence or 'fit' among key variables such as industry conditions and organizational processes is critical for obtaining optimal performance and the relationship between two variables is dependent

upon the interference of a third variable, therefore, by introdUCing moderators into EO.performance relationships, the misleading inferences can be reduced and more precise and specific understanding about EOperformance relationship can be developed (CoVin and Slevin. 1989; Zahra. 1991; Zabra and Gatvis, 2000; Jogaratnam. 2002; Dimitratos er aI. 2004; Hult or al., 2004; Wiklund and Shepherd, 2005; Rauch et al., 2006; Green er aI., 2008; Kreiser and Davis, 2010; Grande el aL, 2011; and Scininenet aI. 2011).

Conclusion and Suggestions EO is an important measure of the way a firm is organized, and it is often conceptualized as the process and decision-making activities used by managers to act entrepreneurially. On the basis ofextensive review ofliterature and by considering the arguments ofvarious researchers, the paper acknowledges EO as a key ingredient for organizational success. The review suggests that EO is a multidimensional construct operationalized in terms of the variables linnovativeness\ 'risk#taking't 'proactiveness\ (autonomy' and 'competitive aggressiveness'. The literature on business performance reveals that a variety of performance measures, i.e., objective and subjective measures (financial and nonfinancial), are used across the studied, which results in high variation in EOperformance relationship. It is observed that the objective measures of performance are more appropriate than subjective measures of perfurmance. However. respondents are generally reluctant to release sensitive inrormation to outsiders. Therefore, a combination ofsubjective and objective measures of performance is recommended for accurate measurement of performance. The paper suggests that a strong EO results in high business performance. The review also highlights the importance of contingency and configuration framework to understand a more accurate picture of EO'performance relationship. Instead of focusing on bivariate relation, future research on EO.performance relation should adopt contingency and configuration approach (which emphasizes two and three.way interaction effect) by introducing various organizational and environmental elements as moderating and mediating v~riables. 0

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Please read the following article and answer the question.

4\ Write a summary of this article in Chinese. (50%)

lNTRODUCTION

. Despite more than a decade of strategic management research on dynamic capabilities,

important conceptual issues remain. A critical, unresolved issue that research has yet to address

involves the distinction between dynamic and operational (or ordinary) capabilities. In particular,

we often encounter the view that capabilities only qualifY as dynamic if they aim to promote

seemingly large amounts of change in a short period of time. This stance may reflect a desire to

draw a bright line between dynamic and operational capabilities. In what follows, we explain why

the line between these capabilities is unavoidably blurry, and why capabilities that promote

economically important yet gradual change are in fact dynamic. We begin with an explanation of

the sense in which we use the terms 'capability' and 'dynamic capability,' as background for the

ensuing analysis. Then we discuss several factors that cause the line between operational and

dynamic capabilities to blur, including the existence of dual-purpose and' multiple-variant

capabilities. As part of this discussion, we explain why it is critical to bring costs into the analysis.

We conclude with recommendations for future research.

TERMINOLOGY

We focus here on the organizational capabilities of for-profit firms. Capabilities can be

analyzed at other levels

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a!., 2000; Winter, 2000, 2003). The repeated and reliable capacity is a particularly important feature

of a capability; otherwise, almost by definition, a firm caIUlot be said to have a 'capacity' to do

something. We take 'minimally satisfactory performance' to imply that the output of an activity is

recognizable as such, and functions at least minimally as intended (Helfat et aI., 2007). Success at

that level implies nothing about economic viability, much less superior performance.

Important concepts rarely have edges that are entirely sharp, and this case is no exception. We

briefly take note of some of the issues that have been identified in the literature, where different

discussions (even by the same authors) may tilt the usage in somewhat different directions. First, it

is obvious that an important 'matter of degree' issue lurks in the words 'minimally satisfactory' and

also in 'reliable.' Historical contexts and prevruling competitive standards are generally relevant to

the practical interpretation here, and this contextual aspect is central when we move on to discuss

the economic viability of a capability. Second, the ability to perform' is understood to inhere in the

organization and is in substantial part the fruit of its experience; it is not simply a skill of a single

individual or feature of a single machine, or an ability to access market opportunities in a

straightforward way, or an ability to painstakingly enact a highly codified recipe created somewhere

else. Capabilities theorists view capabilities as a key dimension of firm heterogeneity (Nelson and

Winter, 1982), and, in some cases, of the kind of idiosyncrasy or inimitability that confers

competitive advantage. The understanding of capability as being substantially 'home grown' is

central to that perception. Finally, we generally have in mind substantial units of activity with

significant consequences for financial performance and other outcomes-the ability to operate a

network of scheduled airline flights rather than a single flight, the whole supermarket or the whole

supermarket chain rather than the produce department of a single store. But, as we have suggested,

usage in all these respects may vary somewhat depending on the question at hand.

Moving to the specific subject of this essay, prior research has distinguished between perational

(or ordinary) and dynamic capabilities (see, e.g., Winter, 2003; Helfat et aI., 2007). We understand

operational capabilities to be those that enable a firm to make a living in the present (see Winter,

2003). Thus, an operational capability enables a firm to perform an activity on an on-going basis

using more or less the same techniques on the same scale to support existing products and services

for the same customer population. Such a capability is ordinary in the sense of maintaining the

status quo (that is, not out of the ordinary; Winter [2003] and Collis [1994] refer to these as zero

order capabilities).

In contrast, a dynamic capability is one that enables a firm to alter how it currently makes its

living. This is the sense in which Teece, Pisano, and Shuen (1997) introduced the term, and this

general usage has continued to this day (see e.g., Ejsenhardt and Martin, 2000; Zollo and Winter,

2002; Zott, 2003; Winter, 2003, 2007; Teece 2007; Helfat et aI., 2007; Helfat and Peteraf, 2009;

Easterby-Smith, Lyles, and Peteraf, 2009; Di Stefano, Peteraf, and Verona, 2010; Winter,

forthcoming). Firms can use dynamic capabilities to extend or modify how they make a living in

many ways, as the examples in the following discussion illustrate. This can include altering

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operational capabilities (Winter, 2003), or what Helfat et al. (2007) call the resource base of the

organization (broadly denoting those things on which firms draw to perform activities), or features

of the external environment or ecosystem (Teece, 2007).

As for any sort of organizational capability, to say that a firm has a dynamic capability implies

reliable patterned behavior (Winter, 2003; Helfat et aI., 2007). Examples of dynamic capabilities

include those for conducting acquisitions, alliances, and new product development, which alter the

ways in which firms eam their living (lansiti and Clark, 1994; Helfat, 1997; Dosi et aI., 2000;

Eisenhardt and Martin, 2000; Kale, Dyer, and Singh, 2002; Capron and Mitchell, 2004; Zollo and

Singh, 2004; Helfat et aI., 2007).4 These dynamic capabilities have very specific purposes and

support very specific activities (Winter, 2003; Helfat et aI., 2007). Although we sometimes

encounter a more expansive use of the term dynamic capabilities to connote a generic capacity to

undertake change, we worry that this risks making the concept so broad as to have little meaning.

THE BLURRY LINE BETWEEN DYNAMIC AND OPERATIONAL CAPABILITIES

Dynamic and operational capabilities differ in their purposes and intended outcomes. But as we

next explain, it is impossible to draw a bright line between these two sorts of capabilities because: 1)

change is always occurring to at least some extent; 2) we cannot distinguish dynamic from

operational capabilities based on whether they support what is perceived as radical versus

non-radical change, or new versus existing businesses; and 3) some capabilities can be used for

both operational and dynamic purposes.

Change is always occurring to some extent

Nothing ever stays exactly the same, so 'one does not step into the same river twice'

(Heraclitus). Yet we often say that 'there is nothing new under the sun' (Ecclesiastes). As Bimbolz,

Cohen, and Hoch (2007: 316) put it, this is the 'paradox of the (n)ever-changing world.' If

everything is changing all the time, what then is the basis of the impression that some things do not

change at all?

Part of the answer to this conundrum lies in one's perspective. If you examine small details

close in, you see. much more change than if you attend to large phenomena or high-level

descriptions, or perceive from afar. Bimbolz et al. (2007) observe that in a summer camp for

children, the overall 'character' of the camp (a large phenomenon) endured despite substantial

turnover in personnel each year (smaller details). Similarly, if we attend to descriptions at a high

level of abstraction, such as the overall Jorm of an organization (as in the distinction between

generalists and specialists) and observe that it remains the same over time, this may mask important

changes in the strategy or capabilities of the organization. In turn, a close look at the features of a

capability may reveal substantial change, whereas a distant view may not.

The time period over which one assesses the extent of change matters as well. Change often

takes time, and slow change takes time to build something readily perceptible. Levinthal's (1998)

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analysis of the development of wireless telephony provides an instructive example, Ifl which

incremental changes in fits and starts over many years ultimately resulted in a completely new

communication technology. Examining only a snapshot of time during this period would not have

revealed the enormity of the eventual change. This issue arises with respect to technological

innovation within companies as well. For example, dynamic capabilities to enga,ge in process

research and development (R&D) enable firms to fine-tune their operational capabilities for

manufacturing. But if we examine the capacity to manufacture a particular good over too short a

period of time, we may observe no change in this capacity and incorrectly conclude that the firm

lacks dynamic capabilities.

As these examples illustrate, whether or not one observes capabilities that promote change may

depend on the granularity of observation; what looks from a distance like no change masks more

granular change close up. Moreover, some of the activities are both highly intentional and gradual

in effect, as in wireless telephony. Because things are always changing to at least some extent,

identifYing a precise threshold level of change that separates an operational capability from a

dynamic one is likely to be fruitless, or to produce answers that vary erratically across cases. fnstead,

it may be more useful to assess the nature and speed ofchange that a capability enables.

Radical versus non-radical change and new versus existing businesses

Teece et al. (1997) originally defined dynamic capabilities as those enabling adaptation to

external environments characterized by rapid or discontinuous change. Although Eisenhardt and

Martin (2000) subsequently noted the im~ortance of dynamic capabilities in 'moderately dynamic'

environments, we frequently encounter the view that unless an organizational capability promotes a

seemingly radical change in how a company makes a living, it is not dynamic.

The fact that radical change is difficult to define with precision suggests the difficulty of using

it (or similar concepts such as disruptive or discontinuous change) to demarcate when a capability is

dynamic. Moreover, to echo a point made earlier, assessment of the extent of change is likely to be

a matter of perspective, expertise, and degree. Across wide ranges of human activity (including

academic scholarship), qualified experts quite often disagree on whether an acclaimed performance

is path-breaking or not. Moreover, a litmus test requiring that a dynamic capability be one that

makes possible a very large amount of change (at least in the eye of the beholder) would rule out

inquiry into capabilities that underpin change that is economically important, difficult to accomplish,

and yet arguably far from radical when viewed one step at a time.

As an example, consider new product development at Intel. This company repeatedly

developed new generations of semiconductor chips for personal computers every 18-24 months, for

years on end. Ralph Gomory, then vice president of R&D at IBM, once responded as foHows to a remark on innovation in the semiconductor industry; 'Innovation in semiconductors? I am not sure

there is innovation in semiconductors. They just keep doing the same thing over and over.' At a

high level of abstraction, this has some truth. Intel and other firms did, in fact, keep developing

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faster and faster chips year after year. But at a more granular level of observation, we see a capacity

for repeatedly modifying and improving the design of an enormously complex product. Not only

did this dynamic capability create new semiconductor designs, and thereby augmentcompany

resources, but also the repeated successes generated through this capability were hardly a foregone

conclusion-despite the superficially non-radical changes in product design(Henderson, 1995).

Creating new semiconductor designs involves the organization of a large number of scientists and

engineers working on multiple interconnected tasks, with a challenging mandate to obtain an order

of magnitude greater processing speed and low defect rates. It also requires managing complex

relations with equipment suppliers and customers, to address crucial issues of manufacturing

feasibility and market acceptance. Arguably, without this product development capability, which

enabled Intel to ward off potential competitors and trounce actual competitors, the company never

would have been as profitable as it was (see also Turner, Mitchell, and Bettis 2010). And, if the

astonishing reductions in the cost of computation had not been complemented by massive J::hange in

the use made of computing power, the trajectory would have been a disaster iIi profitability

terms-underscoring again the extent of the novelty involved. As another example, consider outlet

proliferation by chain retailers such as Walmart and Starbucks, and lodging chains such as Marriott.

Outlet proliferation has a critical impact on the economic fortunes of these companies, providing

growth at low cost if implemented well. The basis for this outlet proliferation rests on a capability

for replication that entails a complex and interwoven set of organizational routines, which are used

in conjunction with resources such as blueprints for new outlets and a functioning template (an

outlet) that enables observation of tacit elements (Winter and Szulanski, 2001). This capability for

chain outlet expansion qualifies as a dynamic capability in that it is a repeated and reliable capacity

for the extension of the resources of the company in the form of physical outlets. This holds true

even though, when viewed from afar, each incidence of expansion may give the misleading

impression of more of the same-despite the fact that a company like Starbucks hardly resembles

its humble roots as a coffee shop in Seattle,

Yet another ,example comes from the upstream oil industry. Because oil and gas fields deplete

once production begins, companies would fail to survive in the upstream exploration and

production business without replenishing these assets. Locating oil and gas reserves on a repeated

basis is a technologically difficult and organizationally complex activity, involving teams of

geologists, engineers, information technologists, and managers. This capability has much in

common with Intel's capability to design semiconductor chips; both provide the capacity to perform

technologically challenging resource augmentation activities, underpinned by routines, using highly

skilled personnel and advanced information technology. Like Intel's product design capability, a

reserve replenishment capability may look from afar like more of the same (and therefore, an

operational capability), in the sense that oil companies have sought new reserves since the industry

began. Nevertheless, by definition this capability is dynamic, because it enables companies to

repeatedly add to their assets through the discovery of new and different geologic formations that

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contain reserves.

As these examples illustrate, capabilities that support existing businesses or seemingly

nonradical change may have important dynamic attributes. These capabilities also entail costs to

develop and maintain the capability, and to obtain the requisite inputs or resources. For example,

Intel's dynamic capability to design new semiconductors entails a durable commitment of funds to

support highly skilled personnel, along with investments in specialized facilities and equipment.

Because the requisite training, physical investments, and development of routines often have a high

degree of organization specificity, much of the upfront cost is likely to be sunk (nonrecoverable

through sale).

These sunk costs make dynamic capabilities costly bets that can payoff only through new or

improved production and sale of goods and services. Revenues must cover not only the costs of

production but also the costs ofdeveloping and maintaining dynamic capabilities. This implies that

firms may need to repeatedly deploy a dynamic capability in order to generate sufficient revenues

from new and improved products and services to cover costs (Winter, 2003). Not surprisingly, in

the thrce preceding examples, the companies have used their dynamic capabilities more or less

continuously. Further, they are large enough to realize the benefits of the intrinsic scale economics

in the utilization of new knowledge. Smaller companies, by contrast, need to avoid the overhead

burdens of such costly dynamic capabilities. They frequently do this by temporarily diverting

resources from ordinary capabilities to change-oriented project teams (Obstfeld, forthcoming). The

diverse applications of this familiar way of organizing again illustrate the 'blurry line,' since they

range from plainly ad hoc efforts to address isolated problems to recurreni episodes of similar

responses to similar problems, and the latter practice borders on full dynamic capability-reducing

and disguising, but not fully eliminating, its costs.

In sum, dynamic capabilities often support far from radical change in the short run, and not

necessarily in rapidly changing enviromnents--to which the example of outlet proliferation, which

occurred in relatively placid enviromnents, attests. Firms also may profit most from dynamic

capabilities through repeated application. These observations reinforce our earlier point that

relegating some capabilities to the non-dynamic category, because in the short run they have not

generated what are perceived as radical shifts, may obscure the full potential of these capabilities.

Notably, all three of the examples ~bove are characterized by smaller amounts of change in the

short run but large amounts of change when viewed in the longer rnn. Moreover, even though

creating new product designs or new outlets or finding new reserves may be a well-practiced

exercise for the performing organization, these actions often represent significant change for

competitors and customers.

Dual-purpose and m'ultiplc-variant capabilities

A further complication arises because some types of capabilities can be used for both

operational and dynamic purposes, either because they have different variants (some more

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operationally oriented and some more dynamic), or because one capability simultaneously serves

both dynamic and operational purposes. This again makes it difficult to draw a sharp line between

dynamic and operational capabilities.

Consider, for example, capabilities that provide what we term 'market access,' such as those

for distribution, marketing, and sales. These capabilities can promote new product introductions as

well as existing products. The consumer products company Procter & Gamble is renowned for its

ability to develop and maintain brands, having pioneered an approach to brand management that has

diffused widely. In this approach, the brand manager has complete responsibility for a brand. Like

other aspects of a marketing capability used to promote both old and new products, it is difficult to

divide brand management neatly into operational and dynamic components. For example, an

individual brand manager may have responsibility for more than one brand, some of which may be

established brands and some of which may be new brands. Moreover, brand managers are likely to

rely on many of the same company routines and processes to promote both new and old products

suggesting that brand management is a dualpurpose capability, subject to economies of scope in its

application.

Microsoft provides another example of a dualpurpose market-access capability. Bresnahan and

Yin (2005, 2007) show that Microsoft came to dominate the personal computer (PC) Internet

browser market in part through intentional and sustained efforts to build demand. Microsoft

targeted adoption by end users, Web site builders, developers, and 'influentials' (pundits, the trade

press, etc.), so as to create a positive feedback loop in which product adoption by key players led to

mass market adoption. This sustained and nontraditional marketing effort suggests an underlying

dynamic capability for market access. Microsoft combined this capability with strategic use of

distribution, whereby the company imposed contractual conditions on personal computer

manufacturers that required them to put the Microsoft Internet Explorer on PCs, making this the

default browser for PC customers. In these ways, Microsoft altered the external environment

(ecosystem) to its advantage. Moreover, Microsoft's market-access capability served a dual purpose

of sustaining sales of existing versions of its browser and promoting new generations of the browser,

leading to Microsoft's long-term dominance of the market.

In addition to dual-purpose capabilities, some types of capabilities may have mUltiple variants.

Consider integrative capabilities that enable communication and coordination across organizational

units and firms (Helfat and Campo-Rembado, 2010; Fortune and Mitchell, forthcoming). These

capabilities can serve an operational purpose, for example by facilitating shared activities that

produce economies of scope across stages of production or product lines. Other types of integrative

capabilities can make change possible, such as through the coordination of design and manufacture

in new product introduction (Iansiti and Clark, 1994). Thus, an integrative capability may be

dynamic or operational, depending on the nature of the capability and its intended use.

An integrative capability also may serve a dual purpose, such as its use in ambidexterity to

manage both new and existing businesses (Tushman and O'Reilly, 1996). O'Reilly and Tushman

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(2008) observe that ambidexterity relies in part on dynamic capabilities of top managers (Adner and

Helfat, 2003) to perform targeted integration of emerging and mature businesses. In this way,

managerial capabilities may contribute to an organization-level integrative capability in

ambidexterity.

CONCLUSION

In a (n)ever-changing world, dynamic capabilities assume prime importance. But as we have

argued, the line between dynamic and operational capabilities is unavoidably blurry. With this in

mind, we offer the following three general suggestions for research on dynamic capabilities.

Judiciously utilize categories of capabilities with regard to change

Because the world is always changing to some extent, it is important to assess the extent, nature,

and speed of change that a capability enables. Capabilities that promote economically significant

change are dynamic, even if the pace of change appears slow or undramatic. Some capabilities also

have primarily operational purposes, and should be acknowledged as such. In addition,

dual-purpose and multiple-variant capabilities that have both operational and dynamic purposes

deserve greater attention.

Include non-radical change (in the short run), ongoing businesses, and relatively placid

external environments in research on dynamic capabilities

Dynamic capabilities are not restricted to new-tothe-world businesses or fast-paced

environments or what is perceived as radical change. For example, dynamic capabilities often

support existing businesses. Many quintessential examples of dynamic capabilities, such as new

product development at Intel, corne from ongoing businesses. Another quintessential example,

namely, outlet proliferation at Starbucks and Walmart, occurred in a gradual fashion in a relatively

placid external environment, yet the eventual outcomes irrevocably altered the scale and scope of

company resources as well as the ecosystems of the industries involved and the environments of

many communities.

Be aware of one's own perspective and biases

These may determine how much change one observes. What appears to be dynamic (or not)

may change when one's perspective changes. At the very least, it behooves us to be forthcoming

about the level of granularity and time frame of observation, and what this may imply for any

conclusions regarding dynamic capabilities.

Adapted from: Helfat, C. E. and Winter, S. G., 2011.

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1. Please read the arti91e and complete the following questions: (1) Give a title for this study. (5%) (2) Draw the conceptual framework of this study. (10%) (3) Complete all of the hypotheses. (35%)

Many finns are trying to capitalize on the power of client reference behavior as part of their general marketing and

sales efforts to encourage new customer adoption. For business-to-business (B2B) finns especially, the use of

referencing behavior is often the only alternative for leveraging the value of current clients on new customer adoption

through social influences. For B2B fums, the use of referencing behavior is important because, unlike for

business.to-consumer (B2C) firms, the purchase decision process often does not rely on other social influences such as

word of mouth (WOM) or referrals from other businesses. For example, Micr~soft has created a Customer Reference

Program to influence prospects to adopt their products and services.' The fum does so by directing prospects to a

website that contains case studies and white papers from a sample of current clients, selected by Microsoft to represent

what its sales executives believe are the best examples of successful implementations of Microsoft products and

services. These case studies serve as references from current clients that Microsoft uses to influence prospects to adopt.

To date, there has been limited research explaining the social influences present in B2B settings (Libai et al. 2010).

Therefore, it is not yet clear how seller fums can quantify the value that these references provide, whether seller firms

are able to determine which clients are likely to be the most valuable references for new customer acquisition, or which

reference formats are the most effective at influencing prospects to adopt. In this study, we focus on further

understanding the role and value of client references, specifically in a B2B selling context. We aim to anSwer the

following four key research questions:

I. Can we measure the value of a business reference from a client?

2. What are the key drivers, both in terms of the referencing client 'and the fonnat of reference, of the value of the

reference?

3. Are clients that generate valuable references the Same ones that are the most profitable in terms of their own

purchasing behavior to the seller firm?

4. What types of elients tend to generate high-value references?

Our goal is to understand the key drivers of reference selection by the seller finn and the drivers of BRV for each

client reference. Specifically, we argue that fmns strategically select as references current client finns that are likely to

maximize the profitability from potential client firm purchase behavior. In addition, we argue that potential client fums

make decisions to adopt to maximize the benefit they receive from the relationship with the seller finn. Both situations

are driven by similar theoretical constructs. Research suggests that a potential client fum's decision to adopt (i.e., build

a strategic alliance) is driven by examining the current alliances that the seller fum has built (Gul.ti and Gargiulo 1999).

Moreover, the strength of these current alliances depends on the "trusted informants" (or references) provided by the

seller firm and the degree to which those infonnants are embedded in the seller finn. In addition, the ability of the

information transferred from the trusted infonnant to the potential client firm to be understood and relatable depends on

the richness of the communication and the degree to which the infonnation provided is similar to the business situation

the potential client firm faces. Thus, seller firms should select trusted informants to pass along the most valuable

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information to potential client ftrms.

From this discllssion, we believe that there are four key drivers of reference selection and reference value: (I) the

degree to which the client firm can be viewed as a trusted informant through client finn size, (2) the degree to which the

client ftrm has built a strategic alliance with the seller f1l111 through length of client relationship, (3) the ability of the

communication to convey information to the potential client firm through reference media format, and (4) the degree to

which the information provided is relatable to the potential client ftrm through reference congruency.

To use client references to influence prospect adoption, the ftrst step a seller ftrm must take is to select which

firms from its current client database are the best candidates to be references. We anticipate that seller firms select these

clients strategically to maximize the impact of the influence of the reference. The seller firm aims to reduce the

information cost of search and information asymmetry, with the goal of making the decision to purchase easier for the

prospect (Spence 1973). Reducing information asymmetry by providing information that is not otherwise available (i.e.,

prospects cannot experience the benefits of the product or service until adoption) at a relatively low cost (e.g., through a

reference) can be an effective signaling strategy (Connelly et al. 2011). In addition, this infurmation is likely more

valuable when tbe ftrm is trusted or has a good reputation in the marketplace (Morgan and Hunt 1994). Moreover, large

firms tend to receive more public scrutiny than small firms (Fombrun and Shanley 1990) ..However, even if this

information does not always put the ftrm in a positive view, the mere availabillty of information about and familiarity

with large ftrms tends to inflate people's opinion of the larger firms' activities (Tversky and Kahneman 1974). As a

result, we expect that current client firms whose attributes are visible in the marketplace and are perceived as valuable

to the marketplace (e.g., significant size) are more likely to provide an effective reference to prospects through their

reputation. Here, we derme "client firm size" as the size of the firm in the marketplace, whether it is based on labor

force or scale of operations. As a result, we expect that it is in the best interest of the selling ftrm to strategically select

larger client firms to be references. Thus:

Hla:

When consumers rely on external information to help in purchase decisions, they often rely on the credibility of

the source as well as the information that is being passed along (Gershoff, Broniarczyk, and West 2001). The source of

the rererence offers a signal to the prospect about the type of firms that currently purchase from the selling ftrm (Herr,

Kardes, and Kim 1991). Research has shown that the credibility of the source of the WOM in both B2C and B2B cases

matters (Wangenheim and Bay6n 2007). In addition, in many instances, especially those such as celebrity endorsements

(McCracken 1989), the perceived value of the product or service is directly tied to the source. Research has also shown

through interviews with managers that source often plays a significant role in the effectiveness of business references

(Godes 2008). Moreover, recent research has suggested that the value of the .client ftrm's reputation is often passed

along to the seller firm through the reference (Helm and Salminen 20 I 0), where higher reputations tend to be linked to

larger ftrms (Tversky and Kahneman 1974). Thus, we anticipate that the client featured in the reference provides a

valuable signal to the prospect merely through its identity in the marketplace, such that larger current clients offer a

positive signal to prospects about the quality ofthe products or services and the quality ofthe selling ftrm. Thus:

Hlb:

We expect seller firms to strategically select client references according to the level of embeddedness the client

has with the seller ftrm, where the embeddedness is often stronger when the relationship between the seller and client

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firm is longer. Here we defme length of client relationship as the total expected time of the relationship between the

seller and client firm, which includes not only the length of the past relationship but also the expected length of the

future relationship. The structure and quality of ties between the referencing client and the seller fll1ll, where a more

integrated structure and a higher quality relationship lead to higher expectations of relationship length. Research has

shown that longer relationships between organizations increase the likelihood of new product selection (Kaufman,

Jayachandran, and Rose 2006). To relate this research to reference selection, it suggests that tirms with longer

relationships are more likely to be selected as client references. However, research on buyer-seller relationships

indicates that overembeddedness (too much relationship length and depth) actually creates a dark side to relationships

(Wuyts and Geyskens 2005), suggesting that seller firms are most likely to select clients with a moderate level of

relationship length as references. Thus:

H2a:

We also anticipate that the client's behavior with the seller firm in particular, and not just its firm size, can signal

to the prospect about the quality of the seller firm. For example, Heide and John (1990) find that prospects can view a

closer relationship between a seller firm and current client as a way to reduce the ambiguity of purchase. However,

research in the management literature also suggests that overembeddedness beyond a certaln threshold can be

problematic because it may indicate to the prospect that the referencing fU111 is unfamiliar with potential alternatives

(Uzzi 1997). As a result, we anticipate that the longer the relationship between the referencing client and the seller fU111,

the more positive (to a threshold) the signal will be to the prospect. Thus:

H2b:

Research has shown that the way the content is delivered and the quality of the information of any marketing

communications can playa significant role in for industrial purchasing (Moriarty and Spekman 1984). Thus, the

medium and specific format of the reference should also playa key role in determining the value of the reference. We

define "reference media format" as the type of reference provided such that different media formats change (I) the

amount of information that can be conveyed and (2) the amount of uncertainty of the message content that can be

alleviated (Daft and Lengel 1986). For example, research has shown that richer modes of communication are more

likely to infiuence customers to purchase (Venkatesan and Kumar 2004) because they are perceived to have more

valuable information content, convey a greater effort by the firm to communicate with the consumer, and potentially

provide a more customizable opinion from the c\lent. We anticipate that a reference that provides information in a richer

medIa format is likely to be more effective in influencing a prospect to purchase. Thus:

H3:

Another key factor to consider is whether the referencing client is congruent with the prospect. Here we detine

"reference congruency" as the degree to which there are similarities between the referencing client and the potential

client. For example, we observed from the qualitative interviews that prospects may be interested in references from "

firms from the same industry, fU111S that purchased similar products or services, or even references from people who

hold the same role within their firm (e.g., marketing, operations). Recent research has shown that seilers can benetit

from selecting specific referrals for prospects that have a high level of congruency (Hada, Grewal, and Lilien 20 II).

This homophUy between the client providing the reference and the prospect is likely to generate trust and reciprocity

(Goldenberg et aL 2009) and strengthen the bond (Le., tie strength) between the two parties (Brown and Reingen 1987).

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As a result, we anticipate that references from clients with greater congruency with the prospect are more influential in

getting the prospect 10 adopt. Thus:

H4:

Research on commitmcnt and trust suggest that when both commitment and trust are present, "they produce

outcomes that promote efficiency, productivity, and effectiveness' (Morgan and Hunt 1994, p. 22). We predict that

larger fIrms are a more trusted reference in terms of a stronger signal of quality. to the prospect. This suggests that not

only should larger fIrms'send a positive signal to the prospect, which serves to reduce the uncertainty of the purchase

decision, but they should incrementally strengthen the other drivers of the value of the reference. Thus, after controlling

for the main effect of firm size, we hypothesize the following:

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In general. the interaction between service employees and customers is considered an essential part of both cUSw tamers' assessments of service quality and their relation ship with the service provider (Bitner 1990; Gwinner, Gremler, and Bitner 1998; Parasuraman, Zeithaml, and Berry 1985). Despite the considerable amount of empirical research on service relationsbips and customer assessment'i of service quality. several aspects of the service interaction have remained unexplored. An are. of particular interest is the role of emotions in service encounters. Although the ootion of having a friendly serviee staff and providing "service with a smile"' has become a generally unquestioned mantra for service flI11lS. empirical research about how employees' emOtional sta[e..'i affect cus~omers and their

ThoIster> HennVJ'Thurau is Professor of Marketing and Media Research ("!TOil: Iht@matlen.un>weimar.del, and ",jchael Paul is a doctoral SI!J' dent (..mail: michael.peul@mediao.un.weimar.de). Oeparorent of Mar keting and Media Researeh, College 01 Media, Bauhaus-University 01 Weimar, Germany.Markus Groth is a senior _rer. 0epar1men10l Orga. nizational Behavior, AuslraJian GmciJale School of Management, University of New Soulh Waios (s-maiI: markusg@agsm.edu.au). Dwayne D, Gremlar is AssociaW Professor 01 Marketing, Depar1merlt 01 Marketing, College of Business Administration. Bowling Green Sillte UnM!rsity (e""il: gremler@bgsu.edu).The authors thank the students invoMld in tl1e deta colection lor tl1eir support, espeelally Johanna Pauge, Farnovsh f'ourehrahimzadeh, and Vmcent Charles lor their acting performances. They also tha'li< the tl1ree anonymous JM ravie"""" Alicia Grandey, Doug Pugh, and Anna Mattila lor their helpful and construcliWl comments on pravious """,ions of tl11s article. They are (Tatelul to CineStar and Coo rorde Home Erlertainment Io! confJiOOling the iweimar.del

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A second contribution of this study is our use of an experimental research design that enables us to assess the cause-effect nature of emotional contagion processes more precisely. The extant services literature on emotional conta gion has not answered the question whether customers really catch employee emotions. Responding to Pugh's (2001, p. 1026) statement that "in the absence of a true ex.perimental design. it is not possible to conclude that cootagion alone is re!\ponsihle [for the variation in customer consequences}:- our research establishes such causal relationships and fills an important gap in the customeremployee-emotions literature.

We flISt review the concepts that are central to our study~ namely, emotional/contagion. emotional labor, and customer consequences of service interactions, and then we present a conceprual model and discuss the relationships among the model elements. Next, we describe the design of our experiment, which enables us to examine the relationships of the conceptual model using a two-way repeated measures analysis of variance (ANOYA) and partial least squares (PLS) structurdl equarion modeling. Finally, we present the findings and their implications for services research and management

The Role of Emotions in Service Interactions

Emotional Contagion Research on emotional contagion attempts to explain how emotions are transmitted among people in social interactions and how "catching" another person's emotions affects the dynamics of the social interaction. Emotional contagion can occur at both subconscious and conscious levels (Barsade 2002). That is, the proces., of emotional contagion can be '!ltributed to people's "tendency to automatically mimic and synchronize facial expressions. vocalizations. and movements with those of another person and, conse~ quently, to converge emotionally" (Hatfield, Cacioppo, and Rapson 1994, p. 5) and to more con$cious social comparison processes between people (Ban;ade 2002).

With "primitive emotional contagion" (Hatfield, Cacioppo, and Rapson (994), the Imnsfer of emotions from one person to another is the result of the receiver's unconscious, emotive processes. This rype of emotional contagion is driven by a two~step mimicry process. in which a person (I) spontaneously imitates another person's facial expres~ sions and other nonverbal cues, which (2) leali, the person to experience the corresponding emotions through physiological links. Although the pelllon feels the emotions that result from mimicry, the processes that lead to this emotion are often "subconscious and automatic" (Barsade 2002, p. (48), A..~ a consequence. emotional contagion theories sug~ gest that primitive emotional contagion is spurred by the extent to which the sender displays emotions; a greater emotional display by the sender results in higher levels of emotional contagion in the receiver.

In contrast, "conscious emotional contagion" is based on social comparison processes in which people actively search for emotions a"" a type of social infonnation (Saian M

cil< and Pfeffer 1978). This search activity is considered a fundamental human behavior, which grows particularly strong in situations perceived as ambiguous (Gump and Kulik (997). SpecificaUy, conscious emotional contagion theory argues that people compare their mood with another person's mood and adopt the sender's emotive level when it appears appropriate (Barsade 2002).1 For example, in the absence of other social informatiol4 people visiting an attorney for the first time can be expected to observe the attorney's emotional display and then to adopt his or her emotions as a result of their desire to search for social infor~ mation and reduce perceived ambiguity. Unljke primitive emotional contagion, conscious emotional contagion is determined less by th';; extent to which the sender displays emotions during an interaction (e.g., frequency of smiling) and more by the authenticity with which the emotions are displayed (e.g., genuineness of a smile). When the receiver perceives the sender's emotional dispJay as fake or djsin~ genuous, he Or she will not interpret the emotional display as adequate for reducing perceived ambiguity, so conscious emotional contagion is less likely to occur.

Emotlons/Labor

The concept of emotional labar, which we consider a potential driver of customers' emotional states and subsequent assessments of serVice interactions, refers to the "effort, planning, and control needed 10 express organizationally desired emotions during interpeISOoal transactions" (Morris and Feldman 1996, p. 987). Recent management literature has considered emotional labor in an effort to better understand how service oIganizations can manage employees' positive displays to customelll. Furthermore, it is linked to the existence of either explicit or implicit organizational display rules (Rafaeli and Sutton (987) that define which emotions employee,. are expected to display and which they should suppress in the course of interacting with customers.

In general, service employees are expected to align their displayed emotions with organiZ3tionally desired emotioos through their choice of emotional labor strategies (Hochschild 1983). With regard to specific emotionallabot strategies, scbolars have drawn 00 Hochschild's (1983) distinction between surface acting and deep acting as the pri_ mary framework for service employees. In "surface acting," an employee tries to change only his or her outward behavior to e:dUbit the required emotions. Thus. sutface acting refers to the act of displaying an emotion that is not felt and could involve both suppression of felt emotions and faking of unfelt emotions. For example, when dealing with an angry or annoying customer, an employee may simply put on a smile and pretend to be cheerful and friendly without actually feeling the emotions. In other words, surface acting consrirures the expression of feigned emotions and lacks authenticity (Orandey 2003), With "deep acting," however, employees express expected (or required) emotions by attempting to create tllese emotions within themsel ves. This

lThis lYpe of emotional contagion is sometimes referred to as "emotional comparison" in the li.[eralure (e.g . Bartel and Saavedm 2000)

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strategy is similar to the method-acting technique developed by Russian director Constantin Stanislavski (1965), in which actors are taught to create self-induced true emotions by using their emotional memory and recalling prior experiences and emotions (Hochschild 1983). As an example of deep acting in the context of service delivery, Hochschild reports on flight atteodants who are trained to deal with angry p .."engers by thinking of them as frightened, firsttime fliers. This process enables the flight attendants to change their inner feelings toward the customer from annoyance [0 pity and sympathy_ Thus, the distinction between surface acting and deep acting is conceptually aligned with the "service-as-theater" metaphor, which postulateI' the interaction between service employees and customers as a dramaturgical interaction i~ which actors (ie. employees) perform (i.e., provide service) on stage (Le., the service environment) in front of an audience (i.e., customers) (Grove and Fisk (992).

Consequences of Service Interactions

The display of employee emotions and the resultant customer emotiorls likely affect various outcomes of interest to marketing managers. We focus on three major customer. consequences of service interactions that are considered particularly relevant to service companies: customer satis~ faction. customer-employee rappoI1 t and customers' future loyalty intentions. . .

"Customer satisfaction" is widely regarded as the cogrutive assessment of a customer's emotional experience (Hunt 1993). As Oliver (1981) discusses, satisfaction is consumption specific; that is, it is related to a singJe consuf!lption experience. This transaction-related characteristic is often considered the main difference between satisfaction and similar evaluative concepts, such as con.wmer attitude and perceived service quality, whicb are regularly modeled as overall construct~ or general evaluations of a service and are unrelated to a specific consumption episode (HennigThuran and Klee 1997).

"Customer-employee rapport" is "a cus~mer's percep~ tion of having an enjoyable interaction with a service provider employee, characterized by a personal connection between the two interactants" (Gremler and Gwinner 2000. p. 92). As a relational concept applicable to service settings, rapport depends on one or more interactions between employees and customers. Similar to satisfaction, customer-employee rapport represents a customer's cogni~ tive asseSsment of an affective state. It also is important to stress that rapport can be cultivated through a single service interaction and does not depend on a shared long~term history. Customer-employee rapport has been identified as a salient issue for service organizations because rapport exerts a strong influence on customer perceptions of service delivery and service organizations (DeWitt and Brady 2003; Gremler and Gwinner 2000).

FinaUy, customers' "future loyalty intentions" constitute a ccntral component of service loyalty (Oliver 1997), which itself is defined in various ways. Most definitions focus on a customer's willingness to visit a particular fum again because of his oC her positive emotions and cognitions (Oliver 1999). In empirical research, future intentions repre

sent a frequently studied component of loyalty, when loyalty is dWined andIor measured as future intentions (e.g_, Farnell 1992; Rust and Zahorik 1993; Zeithaml, Berry, and Parasuraman 1996). We emphasize future loyalty intentions because we believe that, in general, the future behavior of customers i~ of more interest to service marketerS than cur~ rent consumer attitudes (Le., atlirudinalloyalty) andlor prior behavior.

A Conceptual Model of the Impact of Employee Emotions on

Customers in Service Interactiolls The impact of different facets of employees' emotional displays on customer emotions and their consequences for customers constitute the focus of this research. In Figure 1. We sbow the conceptual medel and the specific hypothcses tested herein. Irl the foHowing section, we discuss the pro~ posed relationships in detail.

Impact of Employee Emotions on Customer Emotions

Drawing on emotional contagion and emotional labor theories~ we contend that in interpersonal interactions between employees and customers, the likelihood that 'n employee's emotions affect customer emotions is facilitated by two key variables: the extent of an employee's smiling and the authenticity of his or her emotional labor display. Although prior research has found that employees who deliver "service with a smile" increase a customer's service experience (e.g., Rafaeli and Sutton 1989; Tsai and Huang 2(02), liltle is known about how or why an employee's display of emotions is related to customer consequences. Emo~ tional contagion theory (Hatfield, Cacioppo, and Rapson 1994) suggests thaI people's expression of positive emo-' dons facilitate..~ a corresponding emotional state in others. McHugo and cOUeagues (1985) demonstrate that exposure to images of smiling faces produces corresponding observed and self-reported emotions in study participants. Furthermore, as we discussed previously. primitive (Lc., subconscious) emotional contagion suggests that the extent of a service employee's positive emotional display (e.g., amount of smiling) is the key driver of emotional contagion (Hatfield, Cacioppo, and Rapson 1994). Thus, on the basis of the assumption that customers perceive employee smit:. ing, we argue that if an employee: increases his or her amount of smiling, customers are more likely to mimic these facial expressions subconsciously during the encounter~ thus altering their own emotional state. We Use the term "customer positive affect for this positive emotional stale (DeWitt atld Lin 2002; Watson and Tellegen 1985).

We also expect that the authenticity of the service employee's emotional labor display influences the cus[orner's emotional state. As we indicated previously. deep acting and surface acting are alternative strategies that

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Customer Consequences of Employee Emotions

In addition to the proposed effects on customer positive affect, we also expect that the independent variables (i.e., extent of employee smiling and aumenticity of the emotional labor display) directly affect bom customer satisfaction with the transaction and customer-employee rapport. Regarding customer satisfaction, customers often interpret an employee's emotional display as part of the service itself (i.e., the notion of service as theater; Grove and Fisk 1992), which suggests that they hold expectations about the display of positive emotions (i.e., smiling) that influence meir level of satisfaction (Tsai 200 I). Regarding customeremployee rapport, an employee's smiling may be an antecedent of rappor4 in that it increases the receiver's enjoyment of the personal1nteraction (Gillis, Bernieri, and Wooten 1995; Tickle-Degnen and Rosenthal 1990).

Similarly. we expect that the provision of authentic emotions as part of employee deep acting leads to greater customer satisfaction and rapport than does an inauthentic emotional labor display (i.e., surface acting). Grandey (2003) finds that employees' 11'" of deep. acting leads to higher ratings of service delivery than does the use of surface acting. and Grandey and colleagues (2005) report that customer sati;:;faction is higher when customers perceive employee behavior as authentic. Grandey (2003) also provides support for the direct impact of the type of emotional labor strategy on cu.'Homer-perceived rapport. In her study, employees'deep acting is related to perceptions of friendliness and warmth, both of which are considered characteristics of rapport (GremIer and Gwinner 2000).

Relationships Between Customer Emotions and Customer Consequences

Theoretical suppott for the impact of a customer's emotional state on his or her satisfaction comes from service research. which suggests that customer satisfaction with a service encounter is strongly influenced by customer erno

tions (Oliver 1997). [n particular, when customers assess a specific consumption experience (i.e form their le\-'Cl of satisfaction wim the service), they draw strongly on meir current emotional state and ask themselves questions such as "How do I feel about it?" Thus, a change in a customer's emotions due to an employee's emotional display should influence the customer"s satisfaction. This impact is consistent with the affect-...-infonnation model from social psychology (Schwartz and Clore 1988), which suggests that people rely on their moods as information cues when they make evaluative judgments. Consequently. a change in customer emotions facilitated by an employee's emotional display should lead to a change in customer satisfaction) such that an increase in customer positive affect results in higher levels of satisfaction.

We further hYPothesize that an increase io customer positive affect as a result of employee emotions will influ~ cnce customers' perceptions of their rapport with the employee. Specifically, when a customer is "infected" by an employee's positive emotions as a result of a service interaction, the customer likely will enjoy the interaction with the service emp10yee to a greater extent. Because an enjoyable interaction is a key characteristic of customeremployee rapport (Gremler and Gwinner 2000), an increase in customers' positive emotions should ultimately lead to higher levels of rapport.

The services literature also indicates relationships among customer-employee rapport, customer satisfaction wim the transaction, and future loyalty intentions. Specifically, we argue that rapport is positively related to customer satisfaction because an enjoyable interaction with a high degree of customer-employee rapport is usually one in which customers reveal personal information, wbich enables employees to customize the service offering to the customer's needs (GremIer and Gwinner 2000); bom of these elements are considered integral parts ofcustomer sat~ isfaction. Furthermore, we expect that customer satisfaction is positively related to customers' future loyalty intentions through the creation of positive attitudes toward the service provider (Yi 1990), a claim we base on both attitude theory (Fishbein and Ajzen 1975) and exit-voice theory (Hirschman 1970). Finally, because customers who personally like a service employee and have rapport with him or ber can be expected to fonn positive expectations about a future service experience with mis employee (Gremler and Gwinner 20(0). we propose that customer-employee rap~ port has a positive relationship to customers' future loyalty intentions.

H.,: Cmtomer-employee rapport if: positively related (0 cus~ tomer satil'faction with the tran.~action.

RIO: Cusromc:r-empioyee rappon iF: positively related to cus* tomers' future loyalty intentions.

HI1 : Cu/:tomer $atis:faction with the ttatI/:acuon is positively related to custOftle!1i' future loyalty intentions.

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Self-determination theory and work

motivation

MARYLENE GAGNE 1* AND EDWARD L. DECe IDepartment of Management, .101m MoLl'on School oj Business, Concordia University, MOl!treal, Quebec, Canada 2Department ofClinical and Social Science.! in Psychology, University ofRochester; Rochester; New York, USA.

Introduction

Building on Vroom's (19M) expectancy-valence theory of motivation. POrler and Lawler (1968) proposed a model of intrinsic and extrinsic work motivation. Intrinsic motivation invoJ vcs people doing all activity because they find it interesting and derive Rpontancolls satisfaction from the activity itselF. Extrinsic motivation, in contrast! requires an instrumentality between the activity ,md somc separable consequences such as tangible or verbal rewards, so satisfaction comes not ti'OlTI the activity itself but rather from tile extrinsic consequences to which the activity leads.

Pmtcr and Lawler (19(i8) Ildvocated structuring the work environment so thm effcctive performance would lend to both intrinsic and extrinsic rewards, which would in turn produce total job satisfaction. This W:IS to be accomplished by enlarging jobs to make them Illorc interesting, and thus more intrinsically rewarding, and by making extrinsic rewards sllch as higher pay and promotions clearly contingent upon effective performance. Implicit in this model is the assumption that intrinsic and cxtrin,ic rewards arc additive, yiclding total job satisfaction.

Porter and Lawler's model, Vroom's theory, and other expectuncy-valence formulations generated considerabLe research, much of which confirmed and relined aspects of thc approach (sec MitchoI!,

1974). However, one strand of rescarch cOl1ccming the additivity of intrinsic and extrinsic motivation was potentially problematic and controversial. Specifically, early stuuics testing thc additivity hypothesis found that tangible extrinsic rewards undermincd intrinsic motivation wliereas verbal rewards enhanced it (Ded, 197[), tIm, implying that intrinsic and extrinsic motivation can be both positively and negativcly interactive ralher than additive, Based on several early experiments, cognitive evaluation thcory (CET; Oeci, 1975; Oed & Ryan, 1980) was pmpm;ed to explain the clrcets or extrinsic moti Valors on intrinsic motivation.

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Cognitive Evaluation Theory

Cognitivc evaluation theory suggested first that extemnl factors such as tangible rewards, deadlines (Amabile. Dejong. & Lepper, 1(76). surveillance (Lepper & Greene. 1975). and evaluations (Smith, 1(75) tend to diminish feelings of autonomy. prompt a change in perccived locus of causality (PLOC) from internal to external (deCharms, 1968; Heider. 1(58). and undennine intrinsic motivation. [n contrast, some cxtcmal factors such as providing choicc about aspects of task engagement tcnd to enhance feelings of autonomy, prompt a shift in PLOC from external to internal. and increase intrinsic motivation (Zuckennan ct al.. 1978). .

CET further suggested th,lt feelings of competence as well as feelings of autonomy arc important lor intrinsic motivation. Studies showed that optimally challenging activities were highly intrinsically motivating (e.g .. Dunner & Lonky, 1981) and that positive feedback (Deci, 1971) facilitated intrinsic motivation by promoting a sense of competence when people relt responsible for their successful perfonm1l1ce (Fisher, 1978; Ryan, 1982). Further, negative feedback which decreased perceived competence was found to Itndernlinc both intrinsic and extrinsic motivation. leaving people lIn1otil'(lted (Dcci & Ryan, 1985a).

Underlying these CET propositions was the assumption that people need to feel autonomous and competent. SO social-colllcxtual factors thIlt promote feelings of autonomy and competence enhance intrinsic motivation, whereas factors that diminish these fcclings undermine intrinsic motivation, leaving people either controlled by contingencies or amotivated.

Spirited debatc ensued concerning hotb the undermining effect and CET (e.g., Calder & Staw, 1975; Deci. 1976; Decl, Cascio, & Krusell, 1975; Scot I. 1975). leading to numerous laboratory experiments and field studies intended to support, refine, exten