Unpacking dynamic capabilities in the small-to-medium software enterprise: process assets and history

Previous studies of commercial software enterprises have employed industry-level analyses, or have focused on major players in the industry. There is, therefore, a dearth of in-depth research on small-to-medium software enterprises (SMSE). The need to understand the institutional contexts and firm-specific capabilities of such firms is important, as they account for over 90% of software enterprises operating in Europe and the US. This paper adopts a dynamic capabilities perspective to help understand the social and institutional web of conditions and factors that shaped and influenced capability development in one European SMSE. The findings illustrate that a commitment to learn and to evolve this firm’s intangible knowledge assets underpinned the development of dynamic business and IT capabilities. Another contribution is this paper’s identification of—and distinction between—‘soft’ and ‘hard’ IT capabilities, which were embedded in the firm’s organizational and managerial processes. The lessons learned here are applicable to other European SMSEs, as they share similar institutional contexts with the organization studied—for example, European SMSEs can access direct and indirect R&D funding from EU and individual member states. This study is, therefore, well timed as the EU has, in 2003, set aside a significant proportion of its 16 billion euro 6 Framework R&D budget for small-to-medium enterprises. Finally, this paper presents a dynamic capabilities model that captures the firm-specific capabilities and assets of innovative SMSEs.