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CID Research Fellow and Graduate Student Working Paper No. 55

January 2012

Tackling the Capability Gap in Utility Firms: Applying Management Research to Infrastructure Sectors

Hagen Worch, Bernhard Truffer, Mundia Kabinga, Jochen Markard, and Anton Eberhard

Abstract

Infrastructure services such as electricity, water supply, sanitation and transportation are crucially important in our economies. Despite this importance, utility firms have found little attention in management research. This is surprising because the lack of adequate organizational structures, skills and specialized managerial know-how is an emergent issue and main challenge for many utilities worldwide. We propose a capability-based framework to explain performance deficiencies in utilities. The framework elaborates why capability gaps emerge and persist, and how this, in turn, affects performance. The insights from this framework go beyond the conventional explanations of the transaction cost and agency approaches, which suggest that appropriate incentives and regulatory structures increase the performance of public utilities immediately or after a short adaptation process. In contrast, capability gaps – understood as an inadequate availability of competences, expertise and experience – tend to have long-lasting effects because capabilities take time to develop. Especially if capabilities are highly tacit, correcting for a gap and rebuilding capabilities take time due to the involved learning processes. Consequently, performance deficiencies affect utility firms more severely than expected by traditional approaches. Deriving from the proposed framework, we discuss possible strategies that utility firms can implement to respond to capability gaps.

Keywords: capability gap, public utilities, infrastructure sector, capability building, tacit knowledge

JEL subject codes: J24, L32, L94, L95, M50

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