Organizational Learning and Firm Performance The Mediating Role of Dynamic and Substantive Capabilities

Ali, Sadaqat1*

Institute of Management Sciences, University Of Science & Technology Bannu, KPK, Pakistan

What help firms improve and sustain their performance with changing environments? This study empirically investigates the effect of Organizational Learning (OL) on an organization’s performance by elaborating the mediating role of an organization’s dynamic and substantive capabilities in this connection. While researchers have linked and ranked organizational capabilities, the actual process through which organizations develop these capabilities and the way they affect performance is lacking in empirical investigation. Building on Wang & Ahmad (2007) concept and Ali et al (2012) work on the development of the specific item measures for dynamic and substantive capabilities, this paper empirically test the relationship among these newly developed constructs and other established constructs of the OL-performance model. Analysis of UK and Pakistani hotel sector data support the model.

Keywords: Organizational Learning, Dynamic and Substantive Capabilities, Firm Performance, Resource Based View, Hotel sector.

Introduction

What help firms improve and sustain their performance with changing environments? In an

effort to answer this question, internal capabilities view called as Resource Based View (RBV)

or Dynamic Capabilities View (DCV) of the firm has risen in importance as a topic in the fields

of marketing, organizational learning and strategic management (For example Barney, 1991,

Teece et al, 1997; Lopez, 2005 Newbert, 2007 Day, 1994; Srivastava et al, 2000; Hult et al,.

2005; Ketchen et al,. 2007, Foley and Fahy, 2009, Ali et al., 2010, 2012). This internal

capabilities view emphases on internal capabilities analysis of a firm and is an attempt to address

a perceived imbalance with Porter’s (1980, 1985) ‘positioning’ school.

In this connection, in the organizational learning literature, a series of studies have proposed that

a firm’s learning influences organizational performance by facilitating the type of generative

learning that leads to innovations in products, procedures, and systems (Baker and Sinkula,

1999a, b; Day, 1994a; Dickson, 1996; Hunt and Morgan, 1995, 1996; Sinkula et al., 1997; Slater

and Narver, 1995). These studies have referred to learning as the organization-wide activity of

creating and using knowledge to enhance performance/competitive advantage. Similarly

academics and practitioners in the field of modern strategic management are struggling to answer

why firms differ. Because new sources of competitive advantage are keenly sought in the

dynamic and complex environment of global competition, the role of dynamic capabilities in

enhancing organizational performance has particularly attracted the attention of researchers in

the field of strategic management (Easterby-Smith and Prieto, 2007) Dynamic capabilities have

been defined as the capacity of an organization to purposefully create, extend and modify its

resource base (Helfat et al., 2007).

Literature in the field of Organizational Learning and Strategic Management reveal that there is

much literature on what dynamic capabilities are, however, there is very little literature showing

where they come from. In this connection, authors like Teece, Pisano and Shuen (1997),

Eisenhardt and Martin (2000), Zollo and Winter (2002) and Bowman and Ambrosini (2003)

among others have referred to “learning” as a specific type of process underlying the evolution

and development of dynamic capabilities. Similarly scholars like Collis (1994) and Winter

(2003) have tried to address this issue by differentiating a capability hierarchy in which

operational (zero level), dynamic (first-order) and learning (second order) capabilities are

intrinsically linked to one another. Zahra et al. (2006) also distinguished dynamic from

substantive capabilities. Recently Easterby-Smith and Prieto (2007) linked and ranked the

organizational capabilities by proposing key differences between operational, dynamic, and

leaning capabilities. Besides this there is a consensus among scholars, in these fields, like

Eisenhardt and Martin, (2000); Winter, (2003); Zahra et al., (2006); Pavlou and El Sawy, (2005,

2006), Helfat and Peteraf, (2003) and Easterby-Smith and Prieto (2007), Ali et al, (2010) that

competitive advantage/improvement in firm’s performance does not come directly from dynamic

capabilities themselves, rather it lies in using dynamic capabilities to create firm-specific

functional competencies which in turn contribute to that advantage/improvement in performance.

However despite all these the deep connection between dynamic/substantive capabilities and

organizational learning process research has not been adequately appreciated (Helfet et al., 2007.

P. 36). This is because most of the studies have attempted the direct effect of organizational

learning on a firm’s performance neglecting the potential mediating effect of

dynamic/substantive capabilities in this connection. In other words there is a lack of literature

which tests the indirect effect of OL on firm performance and researchers have neglected the

potential mediating effect of firm’s internal capabilities in their OL-performance analyses (Ali et

al, 2010) which may have an important influence in this debate. Also according to Easterby-

Smith and Prieto, (2007) and McGuinness, (2008) this is because researchers tend to make use of

the work from their own field and do not dwell on the discussions in other fields. In this way

they may miss out on opportunities to develop their own research more substantially by not using

concepts from related fields.

According to Prieto et al. (2009) and Hung et al. (2010), this lack of empirical testing of these

relations has not generated any unifying framework which suggests the need to clarify the

antecedents, the nature, and the outcomes of dynamic capabilities. In this regard Ali et al (2010)

made an attempt to minimize the conceptual confusion that often exists between these fields by

providing an integrated approach which addresses common questions in both fields and proposed

an original model that link Market Based Organizational Learning (MBOL) to firm performance

through the mediation of organizational capabilities which needs to be investigated empirically.

The main hurdle in empirical testing is the many conceptualizations of Dynamic Capabilities

among scholars. As according to Wang and Ahmed (2007) previous studies have discovered a

wide range of firm- or industry-specific processes pertinent to dynamic capabilities and

according to Prieto et al (2009) findings remain disconnected, since quantitative studies are

underdeveloped. Therefore these authors (Wang and Ahmed, 2007 and Prieto et al, 2009)

suggested that it is necessary to create and validate a multi-dimensional construct of dynamic

capabilities. Taking all these into account Ali et al, (2012) took an initial and preliminary step

towards developing some measures for dynamic and substantive capabilities and primarily used

Wang and Ahmed (2007) concept of dynamic Capabilities. Accepting Ali et al, (2012) measures

for dynamic and substantive capabilities this paper is an attempt to measure the indirect effect of

organizational learning on firm performance taking on board organizational internal capabilities

view.

Literature Review

Organizational Learning

The importance of organizational learning has a long lineage in the social science literature. It is

a practice that has received attention among academics and practitioners because of the

increasing pressure of change on organizations The concept can be traced backed to Fredrick

Taylor’s (1900s) scientific management philosophy (which involved specialization, repetition,

observation and feedback) and to the work of Gurthrie (1935) and Skinner (1938). However the

idea that an organization could learn in a way that is independent of the individual within it was

the key breakthrough in OL literature which was first articulated by Cyert and March (1963) in

their book that was the product of much discussion and debate which has been going on among

the team at Carnegie Tech during the 1950s.

Cyert and March (1963) defined OL as an adaptive behaviour of organizations over time. They

gave the idea that it is through “Organizational Learning process [that]....... the firm adapts to its

environment” (p. 84). After Cyert and March’s (1963) foundation work on OL a number of

contributions were made to the literature of OL notably by Cangelosi and Dill (1965) who

suggested that although the Cyert and March (1963) model may be appropriate for established

organizations in stable environments, it has limited relevance to organizations developing within

dynamic circumstances. Argyris and Schon’s (1978) work helped to clarify the field as a whole

and the distinction between organizations with and without the capacity to engage in significant

learning received a great deal of attention.

During the 1970s and 1980s a number of scholars added to the OL literature such as Bateson

(1972), Marsh and Olsen (1975), Argyris and Schon (1978) Hedberg (1981), Shrivastra (1983),

Daft and weick (1984), Fiol and Lyles (1985), Cyert and March (1988), Levitt and March

(1988). This work made an important contribution to the definition of terminology and to a

deeper perspective on OL such as the distinction between learning and unlearning. During the

1990s the work of Huber (1991), March (1991) and latter on Easterby Smith (1997) follow a

neo-rationalist tradition which suggest that it is desirable to maximize the efficient use of

knowledge in organizations while recognizing that there are substantial, largely human, obstacles

in its way. Bierly, et al, (2000 p. 597) define “learning is the process of linking, expanding, and

improving data, information, knowledge and wisdom” Zollo and Winter (2002), distinguished

between semi-automatic learning and deliberate types of learning (i.e. knowledge articulation

and codification). Also, Celuch et al. (2002) stated that organizational learning is both an

adaptive and generative process that accommodates ‘fit’ between organizations and their

environments. According to Scott (2011), in recent years, academics exploring learning seek to

explore the highly social, dynamic, and situation--specific context that supports a state of

knowing (e.g. Brown & Duguid, 1991; Cook & Brown, 1991; Lave & Wenger, 1991; Wenger

2006).

Despite the vast research which attempted to understand the concept of OL, contradictions have

emerged and there exists no single standard definition for organizational learning. Perhaps this is

attributed to the variety of conceptualizations of OL Some authors view learning as a change in

behaviours in response to a stimulus (Cyert and March, 1963; March, 1989). But this seems

mostly to be a description of reaction or adjustment, which may be blind, automatic, and

productive of no new knowledge. Other scholars suggest that learning requires some conscious

acquisition of knowledge or insight on the part of organization members (Argyris and Schon,

1978; Hedberg, 1981; Huber, 1991).

Despite this variety of conceptualizations, the OL literature reveals that definitions from a

process perspective were popular. For example, Fiol and Lyles (1985) noted that organization

learning means the process of improving actions through better knowledge and understanding.

Levitt and March (1988) perceived OL as a process that builds on classical observations drawn

from behavioural studies of organizations. Huber (1991) supported Levitt and March (1988) and

took a behavioural perspective defining OL as a process that resulted in behavioural change

through processing of information. His definitions also extend the earlier behavioural theories of

Cyert and March (1988) and highlighted the importance of information sharing in the learning

process. For this paper we agree with Huber (1991) who synthesized and proposed that the OL

process is comprised of the four inter-related factors: Knowledge or Information Acquisition,

Information Distribution or Dissemination, Information Interpretation and Organizational Memory

(Information Codification).

Dynamic and Substantive Capabilities

Similar to organizational learning, modern strategic management theories try to explain why

firms differ. In this regard, until 1990s, the strategic management research has focused on the

competitive forces approach (Porter, 1980), an “outside-in” perspective which provides an

external explanation for a firm’s competitive advantage, based on capitalizing on the relative

imperfections of the sector in which the firm is competing (McGahan and Porter, 1999).

However after 1990 the Resource Based View (RBV) (Wernerfelt, 1984; Barney, 1991) of the

firm emerged which on the other hand is an “inside-out” perspective (Lopez, 2005). It is a

perspective on strategic management with an emphasis on internal analysis, and an attempt to

address a perceived imbalance with Porter’s (1980; 1985) ‘positioning’ school (Brown, 1994). It

means that “the level of analysis has deepened from an explanation of observed inter-firm

profitability differences, through an understanding of the intrinsic firm heterogeneity, to an

understanding of dynamic routines that produce heterogeneous firms” Collis (1994). As such, the

RBV is a complementary aspect of the strategic management process because it recognizes the

need to create products which add value for customers (i.e., market factors) but looks internally

for sources of competitive advantage (Henderson and Cockburn 1994).

Later on the RBV movement led to the Knowledge Based View of the firm (KBV) (Cole 1998:

Spender 1996a, 1996b: Nonaka and Takeuchi 1995) and the Dynamic Capabilities View (DCV)

of the firm. According KBV, competitive advantage comes from intangible assets such as firm-

specific knowledge, the tacit knowledge of its people gained from combining their knowledge,

and the ability to create knowledge (Gehani 2002; Grant 1996; Nonaka and Takeuchi 1995).

While the DCV lays emphasis on the strategic value of certain higher order resources (dynamic

capabilities) for managers, which allow the generation and renewal of core competences as well

as competitive advantages (Lopez 2005). According to Lopez (2005), the Dynamic Capabilities

View (DCV) is thus an evolved strategic trend that emerged from the Resource Base View

(RBV) and the Knowledge Based View (KBV) and which endows them with a more dynamic

nature. The role of DCV in enhancing a firm performance has now particularly attracted the

attention of researchers. (Easterby-Smith and Prieto, 2007). The relevant academic literatures

have evolved in such a way that dynamic capabilities are presently considered a business asset of

the highest order (Lopez, 2005).

Since the mid 1990s a number of authors have contributed theoretical and empirical pieces of

research that have highlighted various aspects of DCV (Ljubljana, 2005) and in an effort to

understand the true nature of dynamic capabilities, several authors have tried to distinguish them

from substantive capabilities. For example Collis (1994) differentiate between first and second

category of capabilities. For him having first category of capabilities means an ability to perform

the basic functional activities of the firm and having second category means capabilities to deal

with the dynamic improvement to the activities of the firm. Teece et al’s. (1997) and Eisenhardt

and Martin (2000) definitions also distinguish between “dynamic” i.e. the capacity to renew

competencies and “capabilities” i.e. expertise in adapting, integrating and reconfiguring internal

and external organizational skills, resources and competencies to match changing environment.

Zollo and Winter (2002), Winter (2003) and Helfat and Peteraf (2003) also classify capabilities

as either ‘operational’ or ‘dynamic’. For Baiter (2004) organizational processes can be seen as

complex chains of individual and organizational routines which when combined towards a

specific functional purpose can lead to specific organizational capabilities such as distribution

capabilities. Vargo and Lusch (2004, 2007) talk on the same bases when they distinguish

between operant and operand resources. For them “Operational capabilities are geared towards

the operational functioning of the firm, including both staff and line activities; these are “how we

earn a living now” capabilities and dynamic capabilities are dedicated to the modification of

operational capabilities and lead, for example, to changes in the firm's products or production

processes” .Moreover Zahra et al (2006) distinguish substantive capability from the dynamic

ability to change or reconfigure existing substantive capabilities, which they term as the firm’s

dynamic capabilities. For Helfat et al. (2007), “operational capabilities enable firms to perform

their everyday living, while dynamic (as all processes are), are used to maintain the status quo.”

(p, 34). For Easterby-Smith and Prieto, (2007), “there is a distinction between dynamic

capabilities and operational capabilities, with changes in the latter being the visible outcome of

dynamic capabilities”. Barreto (2010) in his review of the dynamic capabilities literature has

also acknowledged this difference. Ali et al,. (2010, 2012) in their conceptual model of

organizational learning and firm performance have clearly proposed the differences between

dynamic and substantive capabilities.

Dynamic/Substantive Capabilities and Firm Performance

Regarding the potential effect of dynamic/substantive capabilities on firm performance, it was

believed, previously, that a firm dynamic capabilities directly affect firm performance

(Ηenderson and Cockburn, 1994; Zollo and Singh, 1998; Deeds et al, 1999). In this regard, Zahra

et al (2006) have summarized several studies (Anand, 2001, Rindova and Taylor, 2002, Daniel

and Wilson, 2003, Lee et al., 2002) that have attempted to catalogue and document the various

effects of dynamic capabilities which reflect the general tenor of the literature on the value of

dynamic capabilities to directly creating and sustaining competitive advantage.

However despite this evidence, very few theories investigate the way dynamic capabilities

precisely impact firm performance. Many scholars remain sceptical about the nature and role of

the dynamic capabilities concept (Winter, 2003). Dynamic capabilities have often been criticized

for being tautological (e.g. Mosakowski and Mckelvey, 1997; Priem and Butler, 2001) vague and

nonoperational (Williamson, 1999). In other words, despite the widespread interest, the concept

of dynamic capabilities and the way they precisely affect firm performance still remained

unclear.

However, later on, it is revealed that the effects of dynamic capabilities on organisational

performance work through the development of both functional and operational competencies

(termed substantive capabilities). As according to Eisenhardt and Martin (2000), Winter (2003)

and Zahra et al., (2006), Pavlou and El Sawy (2004) and Helfat and Peteraf (2003), competitive

advantage does not come from dynamic capabilities themselves but from the new configurations

of resources and operational routines resulting from them. The results of a simulation analysis

performed by Zott (2003) confirm the indirect link between dynamic capabilities and firm

performance. Similarly Helfat and Peteraf (2003) also propose that dynamic capabilities

indirectly contribute to the output of the firm in which they reside through an impact on

operational capabilities. Capeda and Vera (2005) have tried to summarise this discussion by

elaborating the dynamic capabilities, their antecedents and consequences. Also, according to

Easterby-Smith and Prieto (2007) “Operational routines or capabilities are the visible outcome of

dynamic capabilities. These capabilities are geared towards the operational functioning of the

firm, and they can affect performance measures and lead to above-average returns.” (p. 245). It

means that potential for enhancing performance/competitive advantage lies in using dynamic

capabilities to create firm-specific functional competences which in turn contribute to that

advantage.

Conceptual Framework and Research Hypothesis

Looking at all these current trends and limitations in the fields of both organizational learning

and strategic management, this paper represents an attempt to advance this research by providing

empirical evidence of the linkages between a firm's organizational learning, dynamic

capabilities, substantive capabilities and performance. While a lot of prior research on OL-

Performance model is conceptual in nature, this study is an empirical attempt for assessing the

effect of OL on firm’s performance. Particularly this study aims to add to our understanding of

the effect of organizational learning on an organization’s performance by elaborating and testing

the mediating role of organization capabilities (Dynamic and substantive capabilities) in this

connection.

Figure 1 Conceptual Framework

Figure 1 displays the proposed conceptual framework for this paper. An understanding of the

indirect effect of OL on organizational performance can be gained within the context of this

framework. The conceptual model has two major components..Organizational Capabilities

(Learning process, Dynamic Capabilities and Substantive Capabilities) and Organizational Performance

Conceptualizing the framework for the indirect effect of OL on a firm’s performance is achieved

in two main stages. First, the direct relationships among different types/levels of an

organization’s capabilities (Organizational Learning, Dynamic Capabilities and Substantive

Capabilities) are established (H1and H2). Also the mediating role of Dynamic Capabilities

between OL and Substantive Capabilities is expected (H4). Second, the direct effect of

Substantive Capabilities on a firm’s performance is elaborated (H3a, H3b). Also the mediating

role of Substantive Capabilities between Dynamic Capabilities and Organization Performance is

expected (H5a, H5b).

Research Hypothesis

Direct Relationships

Bowman and Ambrosini (2003) and Teece et al. (1997) have referred to learning as a specific

type of process underlying the development of dynamic capabilities. Later research by

Eisenhardt and Martin (2000) claimed that the evolution could be more accurately described in

terms of learning mechanisms. Going further, Zollo and Winter (2002) developed a framework

of learning mechanisms that support the development of dynamic capabilities. Further,

according to Mahoney (1995) and Zollo and Winter (2002) the process of learning is a central

element in the creation and renewal of dynamic capabilities. Drawing on these relationships, we

propose:

Hypothesis 1: The Organizational Learning process of a firm is positively related to its

Dynamic Capabilities.

Researchers have differentiated between substantive and dynamic capabilities and urged that

dynamic capabilities alter the substantive capabilities of a firm (e.g. Zahra et al, 2006; Winter,

2003; Helfat and Peteraf, 2003; Collis, 1994; Vargo and Lusch, 2004; Easterby-Smith and Prieto,

2007). According to Day (1994) and Danneels (2002) among others, marketing and

technological competence are two of the most important substantive capabilities. Thus,

considering the differentiation between dynamic capabilities and substantive capabilities and

their interdependence, we propose:

Hypothesis 2: A firm’s Dynamic Capabilities are positively related to its Substantive

Capabilities.

According to Eisenhardt and Martin (2000), Winter (2003), Zahra et al. (2006), Pavlou and El

Sawy (2005), and Helfat and Peteraf (2003), competitive advantage/enhanced firm performance

does not come directly from dynamic capabilities but from the new configurations of resources

and operational routines resulting from them. Day (1994) and Danneels (2002) identified

marketing and technological competence as two of the most important functional competences.

Technological-related capabilities have been shown to enable firms to achieve superior

performance (e.g., Clark and Fujimoto, 1991; Pisano, 1994). In addition, marketing competence

is seen to enable firms to better understand their customers’ current and future needs, to better

serve these needs, and to reach new customers as well as to effectively analyze competitors and

competition. Hence we propose:

Hypothesis 3a: A firm’s marketing related substantive capabilities are positively related to its

Performance.

Hypothesis 3b: A firm’s technology related substantive capabilities are positively related to its

Performance.

Indirect (Mediating) RelationshipsLinking the evidence for an indirect effect of the organizational learning process on firm

substantive capabilities with our second hypothesis (H2) highlighting the influence of dynamic

capabilities on substantive capabilities and keeping Xueming and Bhattacharya’s (2006) rule of

mediation in mind, a mediating role for dynamic capabilities in the organizational learning

process-substantive capabilities relationship might be expected. That is, the organizational

learning process affects dynamic capabilities, which in turn affect the firm’s substantive

capabilities. In other words, dynamic capabilities represent the meditational pathway through

which the learning process affects substantive capabilities. Therefore we propose:

Hypothesis 4: A firm’s Dynamic Capabilities mediates the influence of Organizational Learning

process on its Substantive Capabilities.

Similarly in linking the evidence for an indirect effect of dynamic capabilities on firm

performance with our third hypothesis (H3) highlighting the influence of substantive capabilities

on a firm’s performance and keeping Xueming and Bhattacharya’s (2006) rule of mediation in

mind, a mediating role for substantive capabilities in the dynamic capabilities–firm performance

relationship might be expected. That is, dynamic capabilities affect substantive capabilities,

which in turn affect the firm’s performance. In other words, substantive capabilities represent

the meditational pathway through which dynamic capabilities affect firm performance.

Therefore we propose:

Hypothesis 5a: A firm’s Substantive Capabilities mediate the influence of Dynamic Capabilities

on its Economic Performance.

Hypothesis 5b: A firm’s Substantive Capabilities mediate the influence of Dynamic Capabilities

on its Non Economic Performance.

Methods

Research ContextThis study investigated the effect of OL on the performance of hotels in the United Kingdom and

Pakistan. The United Kingdom and Pakistan hotel sector is an appropriate and relevant area for

this study because this study used Ali et al (2012) conceptualization of dynamic capabilities and

substantive capabilities. Ali et al (2012) study was conducted in the hotel sectors of United

Kingdom and Pakistan and the items for measuring both dynamic and substantive capabilities

were developed and tested in hotel sector of these countries. As one of the aims of this study is to

empirically test the relationship among these newly developed constructs of dynamic and

substantive capabilities and other established constructs of the OL-performance model, it was

considered of value and importance to do so in the same sector and context (Hotel sector of

United Kingdom and Pakistan). Also given the scope of the study, the time limit and the limited

financial resources available, we have selected the hotel sector in the United Kingdom among the

developed countries because of the connivance, low cost and easy access to research data

Moreover, research on learning and its impact on a firm’s performance is abundant, however it

is noteworthy that most of the past studies mainly focused on manufacturing sectors, consumer

goods and industrial markets with few works in service markets (Sin et al. 2005; Qu et al. 2005;

Quintana-Deniz et al., 2007). Similarly, reviewing the literature on dynamic capabilities (in the

field of strategic management) reveals that most of these studies, regarding dynamic capabilities

and their effect on business performance, are conducted in established companies (Zahra et al,

2006), mostly in manufacturing companies, of developed countries with very few studies in the

service sector context. This lack of studies in service sectors also called for a need to assess the

hypothesized OL-performance relationship in service environments..

Survey In this study, quantitative data was required to facilitate hypotheses testing derived from the

literature review and the conceptual framework presented in Figure 1. The data was collected

from managers in hotels in the United Kingdom and Pakistan and was analysed statistically using

SEM PLS techniques. The sampling frame for this study was a subset or list of hotels in the

United Kingdom and Pakistan. Members of the “Institute of Hospitality” and Pakistani hotels

selected list obtained from Ministry of Tourism Pakistan, Pakistan hotel directory and our

personnel contacts are the main sources of sampling frame used in this study. The sampling unit

in this study was the hotel managers who are currently employed and have at least 5 years of

experience. We used non-probability purposive and convenience sampling methods instead of

probability sampling because of the inability to adequately estimate the target population.

The “Institute of Hospitality” is a professional body for individual managers and aspiring

managers working and studying in the hospitality, leisure and tourism (HLT) industry in the

United Kingdom. It has been in existence since the 1930s when it began in the United Kingdom

and has more than 700 members (hotels managers) throughout the United Kingdom. The head of

the Institute expressed his keen interest in the research and kindly agreed to distribute the survey

to his members through their e mail addresses. Also we obtained the e mail addresses of

managers in the Pakistan hotel sector from different resources (e.g. Ministry of Tourism, through

the hotel directory and our personnel contacts) who agreed to fill in the questionnaire. The self

administered online style of questionnaire -based survey method was used in order to collect

quantitative data from many respondents because the targeted managers use the internet

regularly, cost and time restriction on the study and ease of simplifying data processing

procedures

Measures This study developed the preliminary instruments from the related literature. The process of

instrument development was: first the different research constructs were defined by investigating

related measurements and literature. The scales for variables were adopted as were in the

literature. Second the final questionnaire was developed after consulting with academics and

field experts and revising the content or syntax repeatedly. Although items/questions for these

variables have been generated from previous empirical studies, yet we reworded some of the

items/questions in order to adapt them for the hotel sector context. The variables used in this

study are Organizational Learning, Dynamic Capabilities, Substantive Capabilities, Economic

and Non Economic Performance.

For this study, after reviewing literature (Armstrong and Foley, 2003; Day, 1994a; Kululanga et

al., 2001; Schneider and Angelmar, 1993; Snell et al., 1996; Nonaka et al., 1994; Goh and

Richards, 1997; Hult and Ferel, 1997; Mcgraw et al., 2001) and accepting the theoretical

classification of Huber (1991) for organizational learning process, we have used the

“Organizational Learning” scale from the study of López et al., (2004) who measure learning in

terms of the process of knowledge acquisition, distribution, interpretation and organizational

memory.

Also for this study, we agree with Ali et al, (2012) who took the definition of “Dynamic

Capabilities” from Eisenhardt and Martin (2000); Teece et al.(1997); Zahra and George (2002);

Zahra et al. (2006); Wang and Ahmad, (2007) among others as the ability to build, integrate and

reconfigure both external and internal resources and routines. Like Wang and Ahmed (2007) and

Ali et al., (2012) we conceived dynamic capabilities as a broader latent construct encompassing

three lower-order factors. These three, yet not exhaustive factors which jointly define the

dynamic capabilities construct are highly interrelated and include integration capabilities,

reconfiguration capability and renewal/recreation capabilities. Ali et al (2012) paper shows

Operational definitions and measurement items used for dynamic capabilities.

According to Day (1994) and Danneels (2002) among others, marketing and technological

competence are two of the most important “Substantive Capabilities” (functional/operational

competences).

Marketing-related capabilities have been established as important resources for market-driven

organizations. For this study, we agree with Ali et al (2012) who took the definitions for

marketing-related capabilities from Day (1990,1994); Fowler et al. (2000); Danneels (2002) and

Vohries and Harker (2000, 2005), These authors classifies capabilities, depending on the

orientation and focus of the defining processes, into inside-out, outside-in and spanning

capabilities. Beside Day’s (1994) classification discussed above researchers like Vohries and

Harker (2000, 2005) have recognized selling, marketing implementation, marketing planning,

marketing communication, channel management, product development, pricing and market

information management as marketing capabilities effecting firm performance. Ali et al (2012)

paper shows Operational definitions and measurement items used for marketing-related

capabilities.

Technological-related capabilities are important substantive capabilities. For this study, we agree

with Ali et al (2012) who took the definitions for marketing-related capabilities from Day

(1994); Danneels (2002); Clark and Fujimoto (1991); Pisano (1994); Song et al. (2005): Lokshin

et al. (2008); and Pavlou and Sway (2006). These authors have used manufacturing process

know-how, seeking IT infrastructure improvement, prototype execution or sample product

testing and evaluating the technical feasibility of new product development as a measure of firm

technology related capabilities. Ali et al (2012) paper shows Operational definitions and

measurement items used for technological-related capabilities.

Finally, in this study, while measuring “Firm Performance”, the fundamental ``orientation'' and

``industry context'' of the hotels were considered. After synthesizing different measurement

indices of hotel performance and keeping in mind the orientation and industry context, we

adapted Fornell et al. (1996), Vorhies and Harker (2000); Farell (2000), Gold et al. (2001);

Geller (1985) and Umbreit and Eder (1987) conceptualisation of organizational performance

proposing that the organizational performance construct composed of three distinct components:

economic performance, customer satisfaction and innovation. Specifically four indicators/items

are used to measure the “Economic Performance” of hotels in the United Kingdom and Pakistan.

Occupancy Rate, Return on Investment (ROI), Gross Operating Profit and Cash Flow. Moreover

the economic performance is measured by first order formative construct as against all other

constructs in this study which are measured reflectively. As against the economic performance

construct which is a first order formative construct, the “Non Economic Performance” construct

is a second order reflective construct consisting of two first order components, customer

satisfaction and innovation which are in turn measured by two reflective items/indicators each.

Data Analysis

Hypotheses Testing After preliminary data analysis using SPSS (sample characteristics, descriptive statistics and test

of measures to verify the suitability of the collected data), we used a Structural Equation

Modelling (SEM) approach to test the hypothesis proposed in the conceptual model of this study.

The SEM was used not only because the proposed model was complex and the sample size was

low but also the model has both reflective and formative latent variables/constructs. According to

Henseler et al. (2009) analysts usually encounter identification problems when using covariance-

based structural equation modeling (CBSEM) with formative constructs while such problems do

not arise in PLS path modelling. Moreover there are non convergence problems and improper

CBSEM solutions in small samples of 200 or fewer cases (Boomsma and Hoogland, 2001)

whereas the sample size can be considerably smaller in PLS path modelling (Henseler et al.,

2009). Further according to Anderson and Gerbing (1984), some CBSEM discrepancy functions

decline as model complexity increases and they may be inappropriate for more complex models

whereas PLS path models can be very complex without leading to estimation problems (Wold,

1985). Finally SEM is considered comparatively more suitable for this specific study because it

allows a simultaneous assessment of the reliability and the validity of the measurement items of

each latent variable of the model and at the same time can estimate the relationships among the

latent variables (Barclay et al., 1995) and the dependent variable. SmartPlS has been used by a

growing number of researchers from the disciplines of strategic management (e.g.Hulland, 1999)

and marketing (e.g.Reinartz et al., 2004).

For assessing partial model structures Chin (1998) has put forward a catalogue of criteria.

According to Henseler et al. (2009) a systematic application of these criteria is a two-step

process, encompassing: the assessment of the outer model (Measurement Model) and the

assessment of the inner model (Structural Model) At the beginning of the two step process,

model assessment focuses on the measurement or outer model (Henseler et al., 2009). The

measurement models are assessed for adequate validity and unidimensionality prior to

commencing the structural main effects and interactions modelling (Wilson, 2010) because it

only makes sense to evaluate the inner path model estimates when the calculated latent variable

scores show evidence of sufficient reliability and validity (Henseler et al., 2009).

Evaluation of the Measurement (Outer) Model In order to estimate the parameters in the model as suggested by Chin, (1998) and Tenenhaus et

al. (2005), just like Ali et al (2012) who assessed the Measurement Model using Smart PLS 2.3

M3, we used non-parametric bootstrapping (Chin, 1998; Tenenhaus et al., 2005) to obtain

standard error and calculate t statistics for inferential purposes.. As suggested by Chin (1998)

200 replications and construct-level changes pre-processing were run to obtain the standard

errors of the estimates. The results show good evidence for the robustness of Ali et al., (2012)

conceptualizations and measurements of these important theoretical constructs and reconfirms

their findings too.

In order to ascertain any country bias, we examined the data separately by country (UK vs.

Pakistan) and are also presented separately in this paper. Also we analyzed data separately for

United Kingdom and Pakistan because this was a study across national boundaries including

both the developed and developing countries because it has been observed that although the

service sector has grown rapidly in importance in both developed and developing countries in the

past (Kundu and Contractor, 1999), yet our understanding of the factors effecting firm

performance is still drawn largely from manufacturing companies of developed countries (Sin et

al. 2005; Quintana-Deniz et al. 2007; Qu et al. 2005). Despite the importance of organizational

learning in the modern business world, the need for organizational learning investigations in the

developing countries (especially in Pakistan) is still ignored by researchers. Very few efforts

have been taken to study learning comprehensively in a developing country market, especially in

Asia (Sin et al., 2005). There are very few studies of the nature which are conducted in

developing countries and hotel context. Bhuian (1997) noted the differences in the dynamics of

the developing country markets to those of developed countries and transition economies and

found that it would be inappropriate to generalise them to other settings. Thus we believe that

our analysis may provide greater generalizability of understanding of the key factors influencing

hotels’ performance under different market conditions and stages of economic development and

how more and less developed economies might be compared to understand the impact of OL on

performance.

Evaluation of Structural (Inner) ModelIn order to test relationships among hypothetical constructs in this paper, we applied non-

parametric tests to evaluate the structural model’s quality. As according to Gotz et al. (2010), the

PLS method does not allow statistical tests to measure the overall model goodness of fit, As a

major emphasis in the PLS is on variance explained as well as establishing the significance of all

path estimates (Chin, 2010), a logical metric for judging the structural (inner) model is the

endogenous variables’ determination coefficient (R2) (Gotz et al., 2010), which measures the

regression function’s “goodness of fit” against the empirically obtained manifest items

(Backhaus et al. 2003). Also similar to multiple regressions’ coefficient, the evaluation of model

quality should also be based on the path coefficients’ direction and significance level (Chin

1998b). Falk and Miller (1992) recommended that the individual R2 should be at least greater

than 0.1. Chin (1998) describes R2 values of 0.67, 0.33, and 0.19 in PLS path models as

substantial, moderate, and weak, respectively.

The PLS path model’s individual path coefficients represent standardized beta coefficients

resulting from the least square method or estimation (Gotz et al. 2010). The PLS bootstrap

approach represents a non- parametric approach for estimating the precision

(significance/goodness of fit) of the PLS estimates (Venaik et al.2001, Tenenhaus et al., 2005,

Chin 2010). Structural paths, whose sign is in keeping with a priori postulated algebraic signs,

provide a partial empirical validation of the theoretically assumed relationships between latent

variables. Paths that possess an algebraic sign contrary to expectations do not support the a priori

formed hypotheses (Henseler et al, 2009).

The hypothesized relationships in this paper were also evaluated using SEM-PLS modelling in

SmartPLS 2.0 M3. Estimation of paths and calculation of t-values in PLS are done through the

PLS and bootstrapping processes respectively (Ringle et al., 2005).

We calculated t-statistic and path significance level for each of the hypothesized relationships via

the bootstrapping method (with 200 resample). This is a one-tailed test. The acceptable T-values

for a one-tailed test are 1.283, 1.648, 2.334 and 3.107 at the significance level of 0.1, 0.05, 0.01

and 0.001 respectively. Path coefficient (β) and R2 values were obtained by running the PLS

algorithm to access the predictive performance of the structural model.

Table 1 summarizes the results of the PLS analysis performed to test the structural model. In

particular, the standardized coefficients (β), the value of the R2 of the dependent variables

(Figure 2, 3) and the significance level (t statistic) (Figure 4, 5) are shown.

United Kingdom PakistanOL DC SC ECO NECO OL DC SC ECO NECO

R2 0 0.347 0.246 0.755 0.791 0 0.23 0.214 0.79 0.742OL

DC

SC

H1: 0.589*** H1: 0.480***

H2: 0.496*** H2: 0.463***

H3a: 0.869*** H3b: 0.791*** H3a: 0.790*** H3b: 0.742***

Table 1: Structural Model Results

Bootstrapping results (n=200) † p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001, n.s = non significant

Figure 2: PLS Algorithm Results for the United Kingdom Sample

Figure 3: PLS Algorithm Results for the Pakistan Sample

Figure 4: Bootstrap Results for the United Kingdom Sample

Figure 5: Bootstrap Results for the Pakistan Sample

Inspection of the estimation results of the structural model reveals the following. First of all, we

can conclude that our conceptual model is well supported by the data as indicated by the R-

squared values.

The constructs for Organizational Learning (OL), Dynamic Capabilities (DC), Substantive

Capabilities (SC) have an R2 value which are moderate amount of variance according to Chin’s

(1998) criteria and greater than Falk and Miller’s (1992) 0.10 cut off value for R2. Similarly the

constructs of Economic Performance and Non Economic Performance have R2 value which are a

large amount of variance according to Chin (1998) criteria and far greater than Falk and Miller’s

(1992) 0.10 cut off value for R2.

Moreover in this paper nomological validity is assessed through standardized path coefficients

and t-values produced by SmartPLS (Ringle et al., 2005).

The standardized path coefficients values for the direct paths between Organizational Learning

Process (OL) and Dynamic Capabilities (DCs), Dynamic Capabilities (DCs) and Substantive

Capabilities (SCs), Substantive Capabilities (SCs) and Economic Performance and Substantive

Capabilities (SCs) and Non Economic Performance shown in Table 1 between these constructs

for both United Kingdom and Pakistani samples were strongly supported at acceptable level of

significance which indicate the relative strength of these statistical relationships (Gefen et al.,

2000).

Also, based on our conceptual model, we tested for the mediating effect of Dynamic Capabilities

in relationship between Organizational Learning and Substantive Capabilities and the mediating

effect of Substantive Capabilities in the relationship between Dynamic Capabilities and a firms

Economic and Non Economic Performance. Table 2 summarizes the results for all mediating

effects in our conceptual model.

United Kingdom Pakistan

Structural Relation Model withoutmediator

Model withmediator

Model without mediator

Model withmediator

DC

a bOL C SC

β 0.395*** 0.292**

(0.589*0.496)

0.240** 0.222***

(0.480*0.463)R2 0.156 0.246 0.049 0.214 R2 0.090 0.165F2 0.119 0.209

SC

a b

DC C ECO

β 0.832*** 0.431** (0.496*0.869)

0.750*** 0.411**

(0.463*0.889)R2 0.693 0.755 0.562 0.790

Table 2: Mediating Effects

Bootstrapping results (n=200) † p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001, n.s = non significant

Organizational Learning Process Dynamic Capabilities Substantive

Capabilities

First, we tested for the mediating effect of Dynamic Capabilities (DC) in the relationship

between Organizational Learning Process (OL) and Substantive Capabilities (SC). As suggested

by Holmbeck (1997), we first estimated a model containing only the direct effect (path c in Table

2, baseline model without mediator) of Organizational Learning process (OL) on Substantive

Capabilities (SC) for both the United Kingdom (β = 0.395, p < 0.001; R 2 = 0.156) and Pakistan

(β = 0.240, p < 0.001; R2 = 0.049) samples. Then we incorporated the mediator (indirect Path a,

b, model with mediator) into the models for the United Kingdom (β = 0.292, p < 0.01; R2 =

0.246) and Pakistan (β = 0.222, p < 0.01; R2 = 0.214). We then compared both models. The

results suggest that the impact of the direct effect declines in the United Kingdom Model and in

the Pakistan model by the inclusion of the indirect effect through the mediator, Dynamic

Capabilities (DC). However, the bootstrap significance level, albeit decrease, was still

statistically significant. This is a sufficient test within the specific context that that Dynamic

Capabilities partially mediates the effect of the Organizational Learning (OL) process on

Substantive Capabilities according to Chin’s (2010, p.679) criterion. Moreover, we assessed the

mediating effect by comparing the proportion of variance explained (as expressed by the

determination coefficient R2 of the main effect model (the model without mediating effect) with

the R2 of the full model (i.e. the model including the mediating effect). The results suggest a

significant impact of the direct effect on the variance explained in Substantive Capabilities, albeit

with a fairly small effect size (Δ R2 = 0.090, f2 = 0.119) for the United Kingdom and a moderate

effect size (Δ R2 = 0.165, f2 = 0.209) for Pakistan respectively.

It should be noted that in order to assess the significance of the indirect path for all the relations

in this study, we used the PLS bootstrap method as suggested by Shrout and Bolger (2002) and

Chin (2010) which seems to be more appropriate for PLS than Sobel’s (1982) large sample test

(Chin, 2010).

Dynamic Capabilities Substantive Capabilities Economic

Performance

Dynamic Capabilities Substantive Capabilities Non Economic

Performance

Second, we tested for the mediating effect of Substantive Capabilities (SC) in the relationship

between Dynamic Capabilities (DC) and Economic Performance (ECO). As suggested by

Holmbeck (1997), we first estimated a model containing only the direct effect (path c in Table 2,

baseline model without mediator) of Dynamic Capabilities (DC) on Economic Performance

(ECO) for both the United Kingdom (β = 0.832, p < 0.001; R2 = 0.693) and Pakistan (β = 0.750,

p < 0.001; R2 = 0.562) samples. Then we incorporated the mediator (indirect Path a, b, model

with mediator) into the models for the United Kingdom (β = 0.431, p < 0.01; R2 = 0.755) and

Pakistan (β = 0.411, p < 0.01; R2 = 0.790). We then compared both models. The results suggest

that the impact of the direct effect declines in the United Kingdom model and in the Pakistan

model by the inclusion of the indirect effect through the mediator, Substantive Capabilities (SC).

However, the bootstrap significance level, albeit decreased, was still statistically significant. This

is a sufficient test within the specific context that Substantive Capabilities partially mediate the

effect of Dynamic Capabilities on Economic Performance according to Chin’s (2010, p.679)

criterion. Moreover, we assessed the mediating effect by comparing the proportion of variance

explained (as expressed by the determination coefficient R2 of the main effect model (i.e., the

model without mediating effect) with the R2 of the full model (i.e. the model including the

mediating effect). The results suggest a significant impact of the direct effect on the variance

explained in Economic Performance (ECO), with a large effect size (Δ R2 = 0.062, f2 = 0.253) for

the United Kingdom and (Δ R2 = 0.228, f2 = 1.085) for Pakistan respectively.

We followed the same procedure for testing the mediating effect of Substantive Capabilities (SC)

in the relationship between Dynamic Capabilities (DC) and Non Economic Performance

(NECO). As suggested by Holmbeck (1997), we first estimated a model containing only the

direct effect (path c in Table 2, baseline model without mediator)) of Dynamic Capabilities (DC)

on Non Economic Performance (NECO) for both United Kingdom (β = 0.734, p < 0.001; R2 =

0.539) and Pakistan (β = 0.606, p < 0.001; R2 = 0.367) samples. Then we incorporated the

mediator (indirect Path a, b, model with mediator) into the models for the United Kingdom (β =

0.440, p < 0.01; R2 = 0.791) and Pakistan (β = 0.398, p < 0.01; R2 = 0.742). We then compared

both models. The results suggest that the impact of the direct effect declines in the United

Kingdom model and in the Pakistan model by the inclusion of the indirect effect through the

mediator, Substantive Capabilities (SC). However, the bootstrap significance level, albeit

decreased, was still statistically significant. This is sufficient test within the specific context that

Substantive Capabilities partially mediates the effect of Dynamic Capabilities on Non Economic

Performance according to Chin’s (2010, p.679) criterion. Also, we assessed the mediating effect

by comparing the proportion of variance explained (as expressed by the determination coefficient

R2 of the main effect model (i.e., the model without mediating effect) with the R2 of the full

model (i.e. the model including the mediating effect).The results suggest a significant impact of

the direct effect on the variance explained in Non Economic Performance (NECO), with a large

effect size (Δ R2 = 0.253, f2 = 1.205) for the United Kingdom and (Δ R2 = 0.375, f2 = 1.453) for

Pakistan respectively.

To summarize, all hypothesised direct relationships (H1, H2, H3a, H3b) were significant (p <

0.001) for both United Kingdom and Pakistani samples. Besides the direct relationship the

results confirm our claim of partial mediation in Hypotheses H4, H5a and H5b for both the

United Kingdom and Pakistan data.

Discussion and Conclusion

Both researchers and practitioners in the fields of organizational learning and strategic

management are continuously in the search of an answer to the question of how to

improve/sustain performance in the turbulent business environment. This study is an attempt to

answer this question by exploring the role of firm internal capabilities in enhancing performance.

Our findings confirmed, as claimed, that learning mechanisms help in the evolution and

development of dynamic capabilities inside an organization. In this case, that is hotels in both the

United Kingdom and Pakistan. Our analysis supported the idea of Zollo and Winter (2002) who

argued that dynamic capabilities are shaped by the co-evolution of these learning mechanisms,

specifically experience accumulation, knowledge articulation, and knowledge codification. This

study contributes to both the organizational learning and strategic management literature by

enhancing not only our understanding of how organizational learning occurs but also by

clarifying how the “Process View” of organizational learning helps in the evolution of dynamic

capabilities of a firm i.e. it empirically explores the process of creating dynamic capabilities. In

this way it not only answers the question of where dynamic capabilities come from (Teece,

Pisano and Shuen, 1997; Eisenhardt and Martin, 2000; Zollo and Winter, 2002; Bowman and

Ambrosini, 2003) but also establishes a deep connection between dynamic capabilities and

organizational process research which was not adequately appreciated previously (Helfet et al.,

2007. P. 36). In this way it may also be considered a study of co-evolution in the organizational

learning and strategic management fields by providing a synthesis and integration of closely

related concepts from each field.

Also the findings from this study demonstrate that one of the ways to enhance

performance/achieve SCA is through the continuous development of organizational internal

capabilities. This study not only conceptualized but also empirically tested the indirect effect of

organizational learning on firm’s performance taking on board the organizational internal

capabilities view, a perceived imbalance with Porter’s (1980, 1985) ‘positioning’ school. This

study tested for the mediating role of dynamic capabilities in the impact of OL on a firm’s

substantive capabilities. Further it also tested for the mediating role of substantive capabilities in

the impact of dynamic capabilities on a firm’s performance. In this way it confirms the capability

hierarchy view of Collis (1994), Winter (2003), Zahra et al. (2006) Easterby-Smith and Prieto

(2007), Ali et al. (2012) and others in which operational (zero level), dynamic (first-order) and

learning (second order) capabilities are intrinsically linked to one another. This will help

managers to understand the components in the hierarchy of capabilities, the underlying processes

and the functional resources, when ones aim is to use capabilities to achieve or sustain

competitive advantage. This study therefore contributes to practitioner understanding and

informs managerial practice on how capabilities can be developed, the antecedents and

consequences of capabilities development, activities and the resources that are important during

this process. Hence, it reveals that while managers tend to emphasise its operating environment

while trying to enhance their organization performance, it is equally important for managers to

place emphasis on their internal capabilities development as both sources play significant roles in

the achievement of SCA

Moreover, it was observed that, as predicted, the operational capabilities incorporating

knowledge processes and resources in the form of differential and complementary technological

and marketing competences (Danneels, 2002, Tanriverdi, 2005) could lead to better firm

performance (Easterby-Smith and Prieto, 2007). These findings help in dissolving the lack of

agreement in the literature on the true nature of the relationship between dynamic capabilities

and firm performance by supporting the ideas of Eisenhardt and Martin (2000), Winter (2003),

Zahra et al. (2006), Pavlou and El Sawy (2005), and Helfat and Peteraf (2003), who stated that

competitive advantage does not come directly from dynamic capabilities but from the new

configurations of resources and operational routines resulting from them. The research findings

from this study confirm the proposition of Easterby-Smith and Prieto (2007) who stated that

operational routines or capabilities are the visible outcome of dynamic capabilities.. In other

words, the capacities of a firm to create, extend and modify its resource base (dynamic

capabilities) helps to improve its logistics, marketing , technology and sales or manufacturing

abilities (substantive capabilities), which in turn enhance its economic and non economic

performance. The managerial take away is that a firm with just substantive (functional)

competence/resources will earn a living by producing and selling the same product, at the same

scale and to the same customer population (Winter, 2003) while a firm with dynamic capabilities

will constantly renew these substantive or functional competencies in order to achieve long-term

competitive advantages.

Further, this study was a step towards testing the newly developed construct of dynamic and

substantive capabilities in Ali et al (2012) study. Although they adopted most of the

measurement items from previously validated scales, some constructs and measurement items

were developed for the first time for their study and particularly the hotel sector context. This

study empirically tested the relationship among these newly developed constructs (Dynamic and

Substantive capabilities) and other established constructs of the OL-Performance model which

provide validation and generalizability for these newly developed constructs.

Finally, this was a cross-country study and data from two countries (Unite Kingdom and

Pakistan) was used to investigate the effect of OL on hotel performance in these countries. This

study across two countries contributes to our understanding of the differential effects of OL on

performance between two different countries (developed and developing). The survey data was

divided into two sub-samples (United Kingdom and Pakistan) and was analysed separately at

every step of the analysis. The main aim of doing this was to test the

generalisability/applicability of the proposed conceptual framework in both the countries. The

results from this study do not show any big differences between the United Kingdom and

Pakistan samples. Rather, it was observed that the data analysis gave almost similar results for

both the countries. The results are interesting because apparently these two countries are at

different stages of the economic life cycles and have various cultural, environmental and market

differences. However, we think that these similarities are because of several key factors,

specifically; the “similar” nature of the market, technology advancement, the customers,

managerial exposure to different cultures, and the ownership of hotel sector in these countries.

Limitations and Directions for Future Research

This study has produced a number of relevant and interesting insights into the relationship

between OL and the firm performance. However, as with any study of this magnitude, a number

of limitations exist and it is important to recognise the limitations and to make recommendations

for future research.

The conceptual framework for the indirect effect of OL on performance was proposed as a

generic framework that could be applied to any country (developed or developing), but

considering the time and cost involved, only one developing and one developed country could be

studied. Also the response rate for the survey used in this study is acceptable (26%). The findings

of this study are based on responses from only 240 hotels. Future studies should not only try to

cover more proportionate of hotels not only in the United Kingdom and Pakistan to provide more

confidence in the results but should also include hotels worldwide. To the best of our knowledge,

no studies have been conducted on the effect of OL on hotels performance worldwide. Therefore,

further study needs to be carried out in more developing and developed countries to examine the

applicability of this framework.

The purpose of this study was to investigate the indirect effect of OL on the performance of

hotels and thus manufacturing and other companies were excluded. This meant that the focus of

this study was solely on how hotels can use OL to enhance performance. Whilst the narrow and

specific approach meets the needs of this particular study, additional studies in other contexts are

needed in order to develop a more complete picture. The service sector involves a number of

characteristics and challenges that make it a business that is indeed different from other business

sectors like manufacturing industries (Gilbert, 1999). As a consequence the results obtained for

the service sector (having direct contact with customers) in this study may not be generalisable

for other sectors. Therefore future studies should include manufacturing and other companies in

order to provide applicability of the conceptual framework in other contexts.

In this study the respondents were key informants from each hotel including chief executive

officers and top managers of marketing and non-marketing departments. This approach was

considered to be appropriate for the population and was considered to be an adequate way of

producing reliable and valid data. These key informants were used because of their specific

knowledge about the required information for this study. However, future studies on OL-

Performance relationship should use multiple informants in order to test the reliability and

validity of the data.

Cross-sectional data was used in this study so the findings only provide an analysis of a current

situation (as opposed to a time sequence). This means that whilst the findings lend support to the

existence of a prior relationship, the extent to which they provide evidence of a causal

relationship is limited. Although a cross sectional study can provide many perspectives of a

business through a snap shot view of business, however, it is limited in its capacity to provide a

complete picture of the continual process that occurs in the implementation dynamic capabilities.

Wang and Ahmad (2007) distinguished ‘capability development’ from ‘capability building’.

According to them measures for capability development often involve a comparison of the same

aspects of a firm’s capabilities at different points in time. Therefore measuring constructs that are

dynamic in nature might not be fully accessed in a cross sectional study. Therefore a time-series

testing of hotels’ OL should be carried out using a longitudinal framework so that probable

causation can be investigated.

Moreover, certain limitations regarding the measurement and applicability of some constructs

also need to be addressed. Although Ali et al, (2012) adopted most of the measurement items

from previously validated scales, some constructs and measurement items (i.e. dynamic and

substantive capabilities) were developed for the first time for their study and particularly the

hotel sector context. In addition to their first time use, the numbers of items for the various

dimensions of these constructs were kept limited in order to create a reliable instrument for later

statistical analysis and to keep the survey to a manageable size. Therefore one cannot be certain

that they completely captured each and every aspect of a given dimension/factor. Future studies

could incorporate additional items to ensure that the full domain of the complex

constructs/factors is captured. The knowledge gained from the broad literature review and the in

depth interviews with hotel managers in Ali et als’, (2012) study provided essential aspects for

our understanding of the “black box” of dynamic and substantive capabilities constructs.

Nonetheless the measures for the constructs of dynamic and substantive capabilities in their

conceptual model were viewed as preliminary and future studies should be targeted at more fully

developing and validating appropriate measures for these constructs especially when researching

sectors other than hotels.

Finally, future research should also investigate if there may be moderating conditions that would

better inform the dynamic–substantive capabilities relationship. According to Thompson, (1967)

the interest in dynamic capabilities view is the result of the link between firms’ strategic choices

and environmental conditions in the strategy and organization theory literatures and according to

Audia et al. (2000) failure to address major environmental changes can negatively affect firms’

performance (C.f. Barreto, 2010). These conditions could be environmental factors, cultural and

economic development factors and industry characteristics.

Acknowledgement We thank Dr. Linda Peters and Dr. Fiona Lettice for their guidance during concept development and help in data collection. We also thank the “Institute of Hospitality” United Kingdom which took keen interest in the research and kindly agreed to distribute the survey to its members through their e mail addresses. We are also thankful to Pakistani hotel managers who fill in our survey and provide useful feedback. This research was supported by KPK-UK Business School Partnership Program (USA 2013)

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