Why do high-performing firms fail to adapt? A theory of capability rigidity under environmental change

Abstract

Established firms with strong performance records fail at an uncomfortable rate when their environments shift, and the failure is rarely explained by a shortage of effort or resources. This paper develops a conceptual account of that pattern. Existing explanations treat adaptive failure as the absence of a capacity for change, described as structural inertia, core rigidity, or a shortfall in dynamic capabilities. The account proposed here treats it as something a firm can produce while changing vigorously. Capability rigidity is defined by an observable outcome, the stability of a firm's strategic objective across successive episodes of change in a changing environment. Three mechanisms produce it. Sustained performance narrows the environmental cues a firm's attention structures admit. Feedback generated inside the firm's existing configuration then confirms the narrowed representation, a property termed feedback endogeneity, which extends established work on endogenous sampling from options to the evidentiary standard itself. Commitments built around the representation raise the cost of revising it. Digital environments intensify all three, and algorithmic personalisation and controlled experimentation close the loop, because the systems that generate a firm's evidence also determine what its environment is permitted to show. Eighteen propositions are developed, including the claim that seizing and transforming capability accelerates movement toward an obsolete objective wherever the commitments are sunk and the reconfiguration stays inside the boundary the representation describes. The paper specifies boundary conditions, proposes ex ante criteria for the exogenous feedback that releases the condition, and sets out an agenda for empirical work.