Strategic Adaptation and the Dynamics of Performance: A Functional Theory of the Firm

Rogerio S. Victer ()
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Rogerio S. Victer: University of Connecticut

Chapter 3 in The Expanding Horizons of Business and Management, Volume I, 2026, pp 53-78 from Palgrave Macmillan

Abstract: Abstract This chapter develops a functional theory of the firm that locates the source of sustained competitive advantage in organisational intelligence – an adaptive proficiency that enables firms to couple with their environment and minimise prediction error. Integrating the Behavioural Theory of the Firm with Active Inference, we argue that advantage is visible not only in performance levels but, critically, in temporal signatures. Using a 22-year panel of 1,847 US firms, we show that high performers exhibit greater persistence, lower volatility and higher predictability after comprehensive controls. The performance trajectory of high performers converges to a positive steady-state differential, providing empirical support for the presence of superior adaptive functions. We discuss implications for strategy scholarship and practice, proposing diagnostics to assess persistence, volatility, predictability and long-term trajectory. The findings explain why competition does not fully erode heterogeneity and offer a scalable method to infer the presence of strategic adaptive functions in a large population of firms.

Keywords: performance heterogeneity; theory of the firm; functional theory of the firm; organisational intelligence; Active Inference; performance dynamics; abductive methodology; performance feedback; self-organising entity; adaptive functions; epistemic tasks; high performers; performance groups; strategic adaptation; performance signatures (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pscchp:978-3-032-26496-1_3

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DOI: 10.1007/978-3-032-26496-1_3

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