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Dynamic linkages between

mental models, resource
constraints and differential
performance

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217

A resource-based analysis
Abhijit Mandal and Howard Thomas
Warwick Business School, University of Warwick, Coventry, UK, and

Don Antunes
IMD, Lausanne, Switzerland
Abstract
Purpose The purpose of this paper is to focus around the literatures of the resource-based firm and
cognitive mental models, explores the dynamic linkages between cognitive models, resources and firm
performance in the context of the insurance industry.
Design/methodology/approach In a real-life example drawn from the insurance industry,
a process-based simulation model is developed to explore the linkages between managerial mental
models, resources and performance. It represents resources as endogenous flows and mental models
and resource constraints as exogenous parameters. This allows, for example, the impact of
heterogeneity in mental models, on such factors as the time path of resource allocations, resources and
capabilities, and ultimately performance, to be studied in two firms (business units) in the insurance
industry.
Findings In general, heterogeneity in mental models leads to differences in performance in the long
run. This finding is reinforced by the presence of resource constraints. Facing strategic change,
however, it is often difficult for senior managers to overcome the influence of well-established
managerial mental models or recipes which create cognitive inertia and, in turn, hinder performance
improvements.
Originality/value There are few empirical studies which explore the impact of changes in mental
models and resource constraints on firm-performance and resource allocation decisions.
Keywords Modelling, Cognition, Resources, Resource management, Business performance,
Competitive strategy
Paper type Research paper

Introduction
According to the resource-based view (RBV), sustainable differential performance may
be obtained from a firms superior resource position (Dierickx and Cool, 1989), which
results from the firms decision processes including prior resource allocation decisions
(Levinthal and Myatt, 1994), In the presence of resource constraints, resource
allocations are strategic choices (Child, 1972), which are driven significantly by mental
models of the competitive environment (Mintzberg, 1975; Prahalad and Bettis, 1986).
The authors acknowledge the helpful and constructive comments of the Editors and the
anonymous reviewers.

Journal of Strategy and Management

Vol. 2 No. 3, 2009
pp. 217-239
q Emerald Group Publishing Limited
1755-425X
DOI 10.1108/17554250910982471

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Thus, the existence of a range of managerial mental models in association with

changes in resource constraints will produce shifts in firm performance and affect the
resulting industry structure. The determination of how changes in resource constraints
and managerial decision processes influence a firms resource allocations and
performance is highly relevant for the evaluation of firm performance, yet, it has
received relatively little attention in the literature.
The paper addresses this gap by first examining the current literature concerning
the linkages between managerial cognition, the presence of organizational slack
resources and the RBV. It then, in an empirical context, tests using a simulation
approach, the impact of managers mental models and resource constraints on
performance. The existence of, and shifts in, resource constraints (Bowen, 2002)
focuses attention on the strategic implications of mental models. The managerial
cognition literature recognizes that managers mental models (or frames) of the
decision situation influence managerial choices (Bobbitt and Ford, 1980). Indeed,
heterogeneity among firms shared mental models in the context of a competitive
industry may re-structure both industry boundaries and segments (Porac et al., 1989).
However, it is unclear how these mental models impact resource allocations and
decisions at the firm level that arise from resource constraints.
We use a process-based simulation method (Davis et al., 2007) to examine first the
impact of managers mental models on firm performance. We then investigate how a
change in a firms resource constraints, and hence in resource profiles, alters resource
allocations thus creating and sustaining resource heterogeneity and leading to
differential performance.
The paper first explores these issues by developing propositions from existing
theory and explaining how the simulation method can test these propositions.
The simulation experiment undertaken in a real-life insurance organization is then
described and the results are analyzed and discussed. Conclusions are drawn which
focus on the implications of the results for both strategy theory and managerial practice.
Theoretical background
The managerial cognition literature indicates that the process of strategic decision
making involves the use of cognitive simplification processes by managers
(Schwenk, 1984). It notes that bounded rationality (Simon, 1957), biases and
heuristics (Tversky and Kahnemann, 1974), strategic assumptions and frames of
reference (Markus and Wurf, 1987; Handy, 1985) create the cognitive maps or schemata
of senior managers (Schwenk, 1988). A way to express cognitive maps (Huff, 1990) is
through the conceptual framework of mental models (Craik, 1943; Holyoak, 1984;
Rouse and Morris, 1986).
Cognitive scientists have used concepts such as schemata, cognitive maps and
mental models to describe the mental representation of the knowledge of activities
such as remembering, perceiving, reasoning, and decision making (Hodgkinson, 2003).
We, therefore, use the term mental model to refer to these inter-related terms. In essence,
it represents a working model of a phenomenon (Johnson-Laird, 1983), that is,
a simplified, internalized representation of the knowledge and understanding of a
given reality (Hodgkinson, 2003).
Managerial mental models have a large impact on the implementation of strategic
decisions and thus, performance (Klimoski and Mohammed, 1994). Further, the sharing

of mental models with cognitively-close competitors influences strategic group

formation and in turn industry structure (Porac et al., 1989; Johnson and Hoopes, 2003).
Thus, the managerial task of reconciling the heterogeneity of cognitive maps and
frames of reference can improve processes of strategic decision-making (Hodgkinson
and Johnson, 1994). It is important that heterogeneous cognitive maps at the firm-level
are surfaced so that a range of ideas are discussed in strategy formulation and
innovation (Tyler and Gyanwali, 2002; Swan, 1997).
Since mental models usually change very slowly (Hodgkinson, 1997), they can
sometimes lead to cognitive inertia in organizations (Porac and Thomas, 1990).
Therefore, the level and availability of organizational slack resources (Child, 1972) may
induce a change in managers mental models (Ginsberg, 1994) and enhance the firms
capabilities for achievingstrategic advantage and competitive performance.
Figure 1 shows how mental models and resource constraints impact performance.
The RBV literature argues that sustainable competitive advantage requires unique
and inimitable resources (Barney, 1991). It is the heterogeneity of (potential) skills and
capabilities available from its resources that gives each firm its uniqueness (Penrose,
1959). Such capabilities are not only a complex function of existing resources and
capabilities, but also of mental models, which ultimately determine the use of scarce
resources. Persistence in the heterogeneity of mental models may lead firms to differ, at
least, in the short-term allocation of their resources and capabilities (Mahoney, 1995;
Noda and Bower, 1996). This differential resource allocation will lead to differential
performance over time (Tripsas and Gavetti, 2000), even if there is no initial
heterogeneity in resources, capabilities or skills. Hence:
P1.

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An initial difference in mental models will lead to differential performance

between firms over time, even if they are initially identical in all other aspects.

Organizational slack is often described as a buffer resource that facilitates firm

adaptation and change (March and Simon, 1958; Thompson, 1967). Bourgeois (1981)
indicates that slack resources can be used for the maintenance of coalitions (March and
Simon, 1958; Cyert and March, 1963), conflict resolution (Pondy, 1967), effective
operations management (Thompson, 1967) and experimentation with new strategies
MM

Strategic choices

RC

(Changes in)
OS

MM = Mental models
RA = Resource allocation
R & C = Resources & capabilities

(Shifts in)
RA

R&C

OS = Operating slack
RC = Resource constraints
P = Performance

Figure 1.
The impact of mental
models

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and strategic innovation (Hambrick and Snow, 1977; Cyert and March, 1963; Nohria
and Gulati, 1996). Bourgeois puts forward two main functions for slack resources:
internal maintenance of such issues as conflict resolution and a work-flow buffer on the
one hand and facilitation of strategy development through innovation and political
processes on the other hand. The latter differs from the former as it affects resource
allocation through the consequences of a strategy process involving managerial maps,
decision-making behavior and strategy implementation.
However, there is a lack of clarity in the literature about the role of slack resources in
achieving organizational efficiency or effectiveness. In the satisficing mode of decision
making it is noted that a decrease in slack may improve efficiency (Child, 1972). On the
other hand, it is pointed out that an increase in slack can produce greater disagreement in
strategy and goals within top management, as there are more flexible resources for
discretionary use (Bourgeois and Singh, 1983). Given adequate operational freedom at
lower levels of management, this may result in different resource allocations and hence
differential performance. This arises from the heterogeneity in managers mental models
and framing of the competitive environment. Yet, these authors also report some
empirical evidence showing that an increase in slack does not necessarily intensify
strategy discord particularly in routine, operational decision-making situations.
Therefore, we assert that, when certain tasks are seen as routine even if slack resources
are available, managers in a satisficing mode will dedicate only some minimum
amount of resources to execute all their responsibilities, irrespective of their mental
models heterogeneous or not. This would tend to lead to similar resource allocation.
Hence:
P2a. When there is positive slack in managerial time such as an absence of, or a
reduction in resource constraints, an initial difference in mental models will
not lead to differential performance between firms over time, provided they
are initially identical in all other aspects.
However, when there is a presence of negative slack resources in these conditions,
managers do not have the required minimum resources to dedicate towards meeting
the same responsibilities. In this situation, an opportunity exists to reallocate resources
and to compromise on the minimum resource requirements. Heterogeneity in
managers mental models will prompt more disagreements about what to compromise
on. Thus, a drop in the availability of managerial time (negative slack) intensifies
resource constraints. It may bring out disagreements in strategy inherent in
heterogeneous mental models and in conditions with sufficient operating freedom it
can result in differences in resource allocations and performance. Hence:
P2b. When, there is negative slack in managerial time and there is an initial
difference in the shared mental models amongst firms, it will lead to
differential performance amongst them over time, even if they are initially
identical in all other aspects.
Research method
The propositions require the examination of strategic situations that evolve over time,
have endogenous cause and effect implications and involve a large number of
variables. Such investigations require the specification of the impact of actual
decisions and interactions over time (Mackenzie, 1986; Abbott, 1990; van de Ven, 1992).

The method of simulation can address these requirements (McKelvey, 1997, 1999;
Davis et al., 2007). Further, it can enhance ecological validity (Hodgkinson et al., 2002),
that is, the relevance and reproduction of the details of the context in a realistic manner,
by specifying the model with rules based on actual behavioral and related context-rich
details. Further, the repeatability of creative simulation experiments enhances rigour.
Mental models can be elicited in different forms (Cooke et al., 2000). A common form
is though causal maps. Comparing maps which combine structural and causal
elements remains an important and stimulating challenge (Hodgkinson and Johnson,
1994). When represented mathematically, they can blend with the process of
deployment of different resources, capabilities and their dynamic interaction
consequences over time. This allows comparison of consequences of different mental
models by simulating the evolving behavior of interrelated variables (Sastry, 1997).
System dynamics is chosen as the basic simulation approach because, besides
facilitating the execution of the possibilities above, it has three other advantages. First, it
follows a history-friendly approach that models real business structures according to the
empirical facts in an industry, including its actual resources and their configurations
and transformation over time. Second, it is a non-equilibrium approach (Foster, 1998;
Mathews, 2002), which permits the portrayal of choice, heuristics and dynamics (Miller
and Shapira, 2004; Rivkin, 2000). Third, it is compatible with the RBV literature, since it
also employs Penroses distinction between resources and productive services, which
was later translated as stocks and flows (Mahoney and Pandian, 1992). Given that
critical firm-specific resources need time to accumulate (Dierickx and Cool, 1989), the
literature has empirically and extensively used cumulative variables (Thomas et al.,
1992; Knott, 2003; Helfat and Peteraf, 2003); although authors (DeCarolis and Deeds,
1999) have used the labels stocks and flows without taking advantage of the
properties of accumulation or the difference between stocks and flows. Further
advantages of using system dynamics in process models are detailed thoroughly in
other areas (Sastry, 1997; Repenning et al., 2002).
We use firm-level resources and the causal links among them to write equations that
constitute the mathematical representation proposed above, while organizing them in
terms of stocks and flows to facilitate accumulation (Forrester, 1961). Using concepts
from system dynamics, a basic structure of stocks and flows is used to create and
represent different capabilities that constitute a process. System dynamics is uniquely
geared towards comprehending natural and social science phenomena in terms of
stock-and-flow models, since it supports and documents the construction, simulations,
results, and insights from them (Sterman, 2000). As a result, differential rates of
accumulation arising from heterogeneity in managerial choice or context can generate
different time-paths for critical resources and for performance.
The mathematical representation was developed in modeling the strategic activities
of the agency department (strategic business units SBU) of a major firm in the
insurance industry. We used three stages to develop the model: data collection,
formulation, and validation. The field work during data collection was undertaken
in collaboration with a management consulting firm. In this stage, more than
60 interviews were undertaken by four mid-level consultants, involving around
40 managers as well as some ex-managers of the various branches and the corporate
office of the insurance firm in question; many of the senior managers were interviewed
more than once. These hour-long interviews were carried out in a semi-structured

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manner where they were asked about the execution of their responsibilities. The aim of
the interviews was to develop an understanding of the various policies, processes,
process adjustments and informal targets that were active. Wherever possible, written
data and internal studies were used to support and verify claims. Statistics about
salesmen and their performance was a key part of this; the numerical data about
salesmen was analyzed to reveal longitudinal trends. Interview content was probed to
see which aspects of management were common to all and which were distinct; it was
used to cluster the branches according to differences in management practice and
performance.
In the second stage, we developed a theory to explain the evolution of different
branches, with the help of causal loop diagrams (Sterman, 2000). The procedure is also
described in Repenning and Sterman (2002). The variables and causal links from this
analysis include the feedback processes that generate the dynamics of interest.
Separate diagrams were created for each cluster of branches. These were merged to a
unified framework so that a single set of feedback processes could generate the main
trajectories of interest. Subsequently, each causal link was converted to equations or
graphs where the variables change with time. Literatures in various relevant
disciplines were also consulted to justify the causal relationships. The set of equations
(or model) was further calibrated with the help of the available numerical data. In the
last stage, three independent industry experts validated the behavior of the model by
conducting their own experiments. Since these results conformed to their expectations,
we assume that the link between the structure of the model and its field setting is valid.
Further experiments were conducted by two industry experts who were on the
research team.
Our model represents resources as endogenous stocks, resource allocations as
endogenous flows and certain aspects of mental models and resource constraints as
exogenous parameters. This allows initial outcomes to influence the time-path of
various resource allocations, resources and capabilities to produce an overall picture of
the impact of heterogeneity in mental models on the performance of the firms being
modeled.
Empirical context and model structure
Following the development of the research propositions, the experimental setting of the
firms must satisfy two conditions:
(1) Initial heterogeneity should be limited to mental models, to show their potential
impact on performance.
(2) A focus on a very short list of potentially differentiating factors for the chosen
firms to allow for the depiction of the situation without the complexity of too
many details, thereby letting us address the complexity arising from the key
differentiation factors and their interactions.
The sample firms, which are business units (in this case two business units of a major
insurance firm), must have the same strategic positioning and capabilities. Yet, within
the sample, the firms must initially differ only in the factor suspected to cause
the difference, but later, also in performance (Pettigrew, 1990) this allows us to
examine the pure impact of the factor in question. The data available in the matched
sample must include resource structure and configurations and managerial choices

resulting from mental models. The selection of the firms is motivated by a four-step
process (Rouse and Daellenbach, 1999). These process steps indicate that the sample
must be matched by drawing it from the same industry and same strategic groups; yet,
it must differ significantly in performance when measured by the same indicators.
To satisfy the conditions above, we have chosen to examine two SBUs in the agency
area from a leading firm in the UK insurance industry. Our choice is appropriate for the
reasons that follow. In the mid-1990s new regulations were imposed on all sales agents
in the life insurance industry. These required salesmen to specify whether they were
representing a third-party. It also required insurance firms to specify the amount of
commission being paid to agents for selling a specific policy. The effect was to increase
bureaucracy and compliance costs, and consequently consumed a significant share of
managerial time. This required a strategic response about which market space firms
wanted to occupy. The lack of an immediate strategic response combined with
competition for reducing the newly-transparent margins made top players ultimately
abandon this market segment and disband their sales forces. The sales forces that
survived did so by moving up-market, in terms of selling more customized products
through better trained salespersons. The different responses, arising essentially from
different mental models, re-configured industry structure. Figure 2 shows a
progressive divergence in the most important aspect of performance among various
business units in the firm, which have been classified into three categories prosper,
survivor, and uncompetitive.
In the insurance industry, it is difficult to sustain a difference based on product
characteristics. Hence, the quality of salespersons, monitored closely by the top
management team, has important strategic consequences. Therefore, our model
focuses on this intangible resource by tracing the causes of its evolution through time.
We chose two business units in the same firm that sold insurance policies to similar
markets. Being branches of the same corporate unit ensures that, in the stylized firm of

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1,30,000
Prosper
1,10,000

90,000
Survivor
70,000

50,000

30,000
1989

Uncompetitive

1992
1995
1998
2001
Productivity is measured in UK per person per year

2004

Figure 2.
Productivity
of the three groups

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the model, the environment, nature of competition, intended strategic position,

capabilities, capability improvement abilities, endowments, corporate targets, initial
resources and policies are identical for both allowing us to introduce a heterogeneity
in mental models to see if that is capable of bringing about a significant divergence in
the differential performance of the two business units.
Appendix 1 presents a short background of the insurance industry and a brief
description of typical firms in the industry in terms of their resources and activities
performed. The business units that afford the greatest flexibility for the firm to
establish a sustainable competitive advantage through productivity are the marketing
agencies. Management decides what kind of agents (i.e. sales persons) to hire, how
many to hire, how much training they should get, how to train them, where to spread
their agents, how to identify and retain/promote their star performers and how to
implement the growth target announced by the top management team. This unit is
responsible for the entry of new money streams and to maintain the firms going
concern status. It is also the largest cost item that can actively be managed in the
business plan of the insurance company. For these reasons we focus on the functions
associated with agencies as strategically appropriate business units of firms in the
insurance industry. The insurance industry has its own particular measures of
profitability as we also explain in Appendix 1.
Model structure
The overview of the core of the model is shown in Figure 3, followed by a word-sketch.
As the model focuses on the activities of a stylized agency department of a business
unit of the insurance firm, henceforth we refer to it as a firm. This builds upon the
tradition of stylized firms in economic literature typically symbolized by very few
parameters. The core of the firm consists of four sectors that address headcount, skill,
productivity and compensation. The headcount sector is the collection of processes
directly concerned with managing agent headcount, consisting of hiring, firing and
promotions to grow the firm. Managers recruit agents from the market to be part of the
agent body that sells policies to prospective customers. Firms seek to hire more
experienced agents and retain the better-performing agents as they deliver more value.
A fraction of the agents are always moving out through resignations and firings.
Promotions are decided in-house and the rate depends on managerial vacancies, as the
ratio of managers to agents is legally regulated. The number of agents and the overall
rates of agents moving into or leaving the firm have an important impact on the
dynamics of the skill pool of the agents.
The skill sector is about the management of agents sales skills. For simplification,
multiple dimensions of sales skill have been collapsed into one dimension, which is
based on the years of sales experience possessed by an agent. Even though the
measure of this skill is fairly intangible, it is one of the most important drivers of
performance in the industry. The movement of agents into and out of the firm has a
corresponding impact on the firms skill pool. The higher the skill level of those
quitting the firm, the greater is the depletion of the skill pool. It is thus a most
important challenge to management to maintain and improve the skill level of their
agent pool.
The productivity sector highlights the productivity and turnover of the sales agents
which adds to the product portfolio. The sales function provides the firm with

Headcount
sector

Agent quits
Agents promoted
Hires

Agents

Skill
sector

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Skill per agent

225

Productivity
sector

Product
sales

Products
lapsing
Impact on
lapse rate

Agent
quit rate

Impact on
agents
recruited

Compensation sector

premiums for the life of the products length, if they do not lapse. Policy sales and
lapses are a function of the agents skill level. The larger the product base which is
defined as the inventory of live policies sold by the firm, the larger the cash flow and
revenue to the insurance firm. We use skill level per agent in the firm as the key
productivity and profitability indicator.
The compensation sector models the mechanics of fixed and variable compensation,
or commission, for agents and managers. Agents are compensated based on the sales
made and the lapses that occurred in a particular year. It specifies how the level of
skills, the lapse rate and the quit rate of the agents affect compensation and, in turn,
how the compensation level affects the same three variables. If agents perform above
the performance level expected by the market, the resulting compensation is above
market expectations. A performance lower than market standards of performance,
brings inferior compensation. Thus, the compensation affects the quit rate of agents,
which influences the lapse rate of new policies sold, as well as the attractiveness of the
firm to new agents who are considering whether to join the firm. Sectors addressing
the comparison of performance and managers reaction to the comparison are outside
the direct scope of the model; nevertheless these issues have been addressed after the
next section.

Figure 3.
Model overview

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The simulation adds a partial model to the basic core structure detailed above[1].
During the execution of the simulation, new values are calculated at every time step for
each variable. One can explore alternatives by changing the coefficients or the
equations or both. Its advantage is that the link between structure and behavior is
easier to grasp when the structure is developed in stages, with access to intermediate
results (Morecroft, 1984, 1985; Sterman, 2000). The simulation experiment will
therefore show the time-path of two firms (actually business units of an insurance
firm), a and b, having identical resources, resource structure, policies regarding
strategic positioning and (lack of) amount of slack managerial time differing initially
only in managerial mental models. Thus, any differential performance can only be
attributed to policy differences arising from mental models (a test of P1). Further, we
will address the interaction of mental model heterogeneity with resource constraints in
the two subsequent propositions (P2a and P2b).
Simulation: results and analyses
The core model assumes that managers have infinite time. In reality, managers have to
allocate their time amongst different responsibilities such as recruiting, training and
administration. The latter is imposed through industry regulations but the others arise
from the physical constraints of the chosen strategic position and direction:, i.e. to
make up for those who leave, to meet growth targets set by the top management team,
and to improve average firm productivity. Together, these actions tend to stabilize the
lapse rate of new policies sold. However, the amount of time actually spent to train
agents depends on the managers subjective beliefs about its efficacy. In certain
circumstances , e.g. a drop in managerial time, they may adjust their allocation of
time in subtle ways. This intangible, idiosyncratic but subtle adjustment is an example
of heterogeneity in mental models.
Simulation: the dynamics of preferential time allocation
According to the theory of substantive rationality (Simon, 1976) which guides
behaviour to attain a given goal, under constraints there ought to be an optimized
allotment of time to meet all responsibilities. However, we observed in our interviews a
managerial preference for establishing priorities. For instance, managers in a recruit
rather than train, while managers in b prioritize training over recruitment. Such
heterogeneity in mental models between the two firms arises due to a difference in
priorities, which in turn results from differences in motivation arising from differences
in psychological needs. This is congruent with self-determination theory (Deci and
Ryan, 2000) which takes into account three main aspects in the tasks of recruiting and
training: ability development vs demonstration (Nicholls, 1984; Dweck, 1986),
intangible vs tangible rewards (Herzberg, 1982; Riedel et al., 1988) and extrinsic vs
intrinsic motivation (Thomas, 2000; Brief and Aldag, 1977). We simulate the
consequences of the time allotment behavior of an extremist in each category.
Extremist managers move on to their other task only after completing the full extent
of their favorite task. Administration is compulsory, so it is out of the purview of
allocation. Appendix 2 details the mathematical equations of the two responsibilities,
how time is allocated and the partial model (i.e. the causal links) for time allocation.
Initially both a and b have skill levels of three years of experience as per market
expectations, the same number of agents and just sufficient time for all three tasks.

The exogenous change of increased administrative responsibilities occurs only after

five years. The simulation results display the trajectories of the firms for 20 years
(Figures 4-6). They show no divergence in the first five years; while Figure 4 shows
negligible separation between the two firms, Figures 5 and 6 do eventually show
dramatic separation. a maintains its growth rate (Figure 5) and consequently
accumulates a sales force about 16 times the initial size but sees a steady decline in the
quality of its agents (Figure 6). b has a clear increase in the quality of its agents, but its
growth rate has clearly suffered though the gap in the growth rate eventually starts to
narrow. The outcome is a sales force barely five times the initial value.
The trajectory deviations observed after the first five years of Figures 5 and 6
apparently support the first proposition which states that heterogeneity in mental
models will lead to differential performance. In Figure 5, a sees a decline in
productivity. In Figure 6, b sees a decline in the growth of sales agents. Both these
declines occur only after the reduction in the amount of time managers could dedicate
to discretionary activities. Prior to the first five years time available to managers is just
adequate with respect to the demands placed on them; thus managers are not yet
forced to make choices and the different propensities and priorities have not really
come into play, though they are there. This supports P2a which states that in the
absence of constraints, there is unlikely to be differential performance evidence
against the first proposition. We hesitate to conclude that the persistence of mental
model heterogeneity (in recruiting vs coaching) is the only reason for a clear difference
to the firms performance as there is no impact until the slack in managerial time

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Net products sold per year

108 K

: Full weight to recruiting

: Full weight to training
83 K

58 K

33 K

8,000

8
12
Time (year)

16

Units: policies per year (left) and equivalent years

of experience (right)

20

Figure 4.
Product sales

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Skill per agent

: Full weight to recruiting

: Full weight to training
5

228

Figure 5.
Divergence in
performance

12
Time (year)

20

Units: policies per year (left) and equivalent years

of experience (right)

Agents (size of sales force)

Graph for achieved growth rate

0.20

1,600

: Full weight to recruiting

: Full weight to training

0.15

1,200

0.10

800

0.05

400

0.0

Figure 6.
Divergence in size

16

8
12
Time (year)

16

20

8
12
Time (year)

16

20

Units: dimensionless (left) and agents (right)

becomes a shortage of time, thus indicating the presence of resource constraints and
the moderating effect of mental models.
The divergence is to be expected as a, after the exogenous regulatory change,
spends a greater-than-appropriate share of their time recruiting. Though the headcount

target is met, neglect of training causes a cumulative weakening of the skill pool.
b spends more of its time training and accumulating superior productivity with
obvious productivity implications, but the headcount targets are not met; the actual
growth rate falls way short of what was intended. These outcomes provide evidence
for the last proposition which states that a reduction in managerial time in the presence
of mental model heterogeneity can manifest as differential performance. Table I
summarizes the results which show full support for P2, and contingent support for P1.

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Discussion
There is negligible separation in Figure 4 which shows an aggregate financial measure
combining productivity and absolute size. In the simulations these two are negatively
correlated; so the critical information about the divergence gets suppressed.
Examining firm performance at such an aggregated level does not help us
appreciate the significant differences that originate from differences in cognitive biases
and mental models. Superficially, the outcome may point to equifinality of actions
vis-a`-vis sales revenue in the earlier years, but in reality, the difference in the
functionality of the key resources (Peteraf and Bergen, 2003) of salespersons and their
skills led to an overhaul of the then-existing market segments.
This outcome is very interesting as it shows the deviation, arising due to a
compromise made to pursue a personal target, would be ambiguous, if not completely
opaque to the top management team. It would be difficult for them to determine
whether failure to achieve the requisite growth rate was due to external circumstances
beyond their control or purely due to timid planning, when presented with a fait
accompli. Thus, differences arising from such heterogeneity persist, even while it is
difficult to track their sources. Considering the performance of the real-life firm in
question, the masking of the differences here could be one more reason why the
branches continued along different paths until it was too late to recover the situation.
A review of the seeming lack of reaction by management is justified, as the actual
industry events parallel the simulation results. We have used extreme values to
emphasize differences, but the important similarity to the empirical events is that
managers, on eventually understanding the increasing lag in skills or seeing
themselves fall behind in size, did not change their practices. Interviews with senior
managers and industry experts revealed this was due to strong cognitive orientations
(and some inertia). Apart from taking advantage of the delayed emergence and
intangible nature of their poor performance, managers in a rationalized away their

Support for the following propositions in the

simulation results

In the first
five years

In the last
few years

P1. Heterogeneity in mental models leads to

differences in performance
P2a. Heterogeneity in mental models in absence of
resource constraints leads to NO differences in
performance
P2b. heterogeneity in mental models in presence of
resource constraints leads to differences in
performance

No

Yes

Yes

NA

NA

Yes
Table I.
Summary of results

JSMA
2,3

230

falling behind through ambiguous interpretations about the influence and state of the
environment on their firms, as they believed coaching was useless or were strongly
motivated to attain the numbers that could be easily verified or enjoyed recruiting
much more than training. In contrast, the managers in b, whether or not they
understood the eventual impact of training on the industry, believed in the efficacy of
training to create a better future for their agents and themselves, or enjoyed training
more than recruiting.
The cognitive orientations (and inertia) described above turn out to be significant
barriers to flexibility (Porac and Thomas, 1990; Wright et al., 2004), and lead to
strategic consequences (Miller, 2002). Even for the minority of managers who were
alert to the changing situation, it would be difficult to change their behavior
dramatically in a short period of time. We account for at least five reasons to explain
such behavior.
First, it is hard to drop dispositional attributes like biases, likes and dislikes in the
light of situational information (Trope and Alfieri, 1997); these have been based on
self-justifying assumptions. Second is the potential unfavorable reaction from
colleagues and partners when they perceive an abrupt deviation from accepted norms
or a change in identity. Third, even if such managers were to successfully change their
habits overnight, it would require significant time to work through the depleted skill
pool and build it up back again. This is because of the inertial nature of the pool of
agents and their skills; while it is easy to change particular individuals, changing the
properties of a group with accumulated skills is a different story. Fourth, shifting
the emphasis from recruiting to training would cause a clear drop in the growth rates
that were being achieved. It is doubtful whether such a drop would be accepted in
a transparent manner by the top management team, except in a crisis. Fifth, the
trajectories of measures for product sales or product portfolio size, which are aggregate
balance sheet measures of performance, reveal little and late to the top management
team about the increasing discrepancy of skills and firm sizes, which are eventually of
strategic importance. This prevented them from introducing different kinds of
incentives; it is doubtful whether such incentives would have made an impact for the
better, considering the resistance they would face about the legitimacy of new kinds of
incentives. Apart from their legitimacy, it would take significant time to change
behavior or weed out those with undesired attributes.
These factors make it all the more difficult to establish a true balance between
actions that create immediate benefits such as recruiting and those that are vital but
need prolonged investment before delivering results such as training. This significant
management challenge is even steeper when there is considerable uncertainty about
the impact of change in the external environment.
Conclusions
A key objective of the paper has been to show that an intensification of resource
constraints, in the presence of heterogeneous mental models, can lead to differential
performance. The ideas developed so far have implications for research methods,
strategic management theory, and managerial practice.
Regarding the research method, models such as the one presented here are subject
to post-facto rationalization of retrospective accounts. A simplified model hinders
extensive generalization; yet integrating more theories into a model produces results

that are ever more difficult to interpret. Nevertheless, the model is open to extension
e.g. one could bring in the impact of the financial performance of the investing arm of
the insurance firm through the price of its policy premiums and examine the
consequences on competitive interactions.
In the theory section, we laid out the reasons why performance differentials exist
and explained how they persist. Through the simulation of the model of the insurance
firm, we have shown that, in certain circumstances, the heterogeneity of mental
models, in interacting with resources, resource constraints and resource linkages, is
likely to create a change in resource allocation and perhaps go beyond, to increase
differential performance. We also pointed out that these heterogeneities are likely to
persist and therefore it is difficult to eliminate their harmful effects in the absence of
sufficient slack.
It should be noted that, initially firms in our model lack any distinguishing features
in terms of resource-stocks (Amit and Schoemaker, 1993) that can be classified as
unique resources, (Barney, 1986, 1991; Peteraf, 1993) notwithstanding the
highly-inimitable variation in mental models that we have highlighted. Rather, it is
a process of accumulation and depletion of ordinary resources that brings about a
difference in the critical resources of the firms such as the number of agents and the
skill pool of the agents, etc. that in turn provide a basis for differential performance.
The implication is that RBV should seek to integrate process considerations so as to
complement and expand the understanding and insights it offers in order to address
how the dynamics of resources and capabilities build or dissipate competitive
advantage. This could help deeper theory building about dynamic aspects of resources
in RBV. For example, a change in resource allocations, driven by mental models and
anticipated changes in resource constraints, constitutes an underlying mechanism of
dynamic capabilities (Teece et al., 1997) which facilitates the creation of new
capabilities. We have also indicated some of the dynamic aspects about the link
between resources and competitive advantage in the previous section.
For top management, we believe that adopting a dynamic or systems perspective is
superior to a static or equilibrium perspective, when addressing strategy development
(King et al., 2002). The prescriptions from the traditional RBV encourage management
to acquire critical, inimitable resources, which are then supposed to deliver competitive
advantage provided there is a mechanism to appropriate the rent generated from these
resources. However, our experiments reveal that so-called critical resources derive their
potency from the particular competitive dynamics of the existing situation. Their
importance changes with the shifts in resource constraints and allocations achieved
through dynamic balances and reinforcements. Changes in strategy are rarely made in
time since they need convincing cognitive interpretations that link events (Barr and
Huff, 1997). Therefore, managers need to fully understand the impact of external
factors and mental models that affect the process of achieving appropriate reinforcing
and balancing dynamics as they search for systemic insights about superior ways of
building resources over time instead of leaving it to chance, habit and circumstances
or else these dynamics may provide unpleasant and pleasant surprises in hindsight,
with not so flattering implications on their own efficacy and efficiency.
Note
1. The complete details of the simulation equations can be had from the first author.

Dynamic
linkages

231

JSMA
2,3

232

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Appendix 1. Description of activities in the life insurance industry

Major players have a common set of tasks selling insurance contracts, selecting risks, fixing
and collecting premiums, writing policies, investing money, keeping accounts, collecting,
researching and analyzing statistics, processing claims and dealing with legal issues and cases.
These tasks are executed by building the required skills as individual firms, or shared from a
common pool, depending on the quantum of required investment and the scope for
differentiation. Since offerings are easy to copy, it is impractical to use this for sustained
differentiation from competitors. Owing to economies of scale collecting, researching and
analyzing statistics are pooled.
The claims department (a cost center) processes claims and the legal issues involved therein.
Scope to differentiate here is limited. The investment department (a profit center) invests
incoming premiums. Some countries require the financial performance of investments be legally
kept apart from rest of the organization. The last activity is sales of insurance contracts. Sales are
made through push (sales) and pull (marketing). Scope for differentiation through marketing is
limited, as product details are quite transparent. So, marketing campaign sizes are relatively
small compared to funds for the agency department, which handles sales agents. Figure A1
shows the departments. Several kinds of agency systems exist e.g. general agency and branch
office systems in life insurance, independent agency and exclusive agency systems in property
and casualty insurance. All agency systems sell policies through agents for commission. They
differ in the degree of control that the firm management exercises over its agents and their
Reject or
accept

Claims
dept.

Actuarial
dept.
Pricing
of
policies

Basket of
policy
variations

Figure A1.
Model boundary

Investment
of cash

Claims

Sales

Portfolio
of
policies

Premiums

Cash
inflows

Lapsed
policies

New
kinds of
policies
Marketing
dept.

Investment
dept.

Operating
expenses

Matured
policies
Agency
dept.
Model
boundary

compensation structure. Agents are responsible for minimizing lapses in the policies they sell.
A lapse is when the client discontinues payment of premiums towards his insurance contract
before the contract permits.
Activities in a typical agency department
The stylized agency department of large insurance industry firms will henceforth be
referred to as a firm. The firm sells policies to those who want to buy insurance. Sales
provide the firm with premiums for the length of the life of the product, if they do not
lapse. Larger the product base (i.e. the inventory of live policies sold by the firm), larger
the cash flow and revenue to the insurance firm. Sales are in a cycle of three stages. First,
agents are recruited from the market as employees, to be part of the agent body that sells
policies to prospective customers in the market. Firms always seek to hire more experienced
agents from the market and to retain the better-performing agents (as they are economically
more attractive for the firm). Second, accumulated policy sales of policies in force form the
basis of the future revenue stream (as premiums). Policy sales and lapses are a function of
the agents skill level. Third, agents are compensated based on the sales made and lapses
occurred in that particular year.
By joining a firm, agents increase the headcount of sales employees and add their sales skills
to the skill pool of the firm. From time to time, some agents quit the firm and some are promoted.
These decrease the headcount of sales employees and the aggregate skill pool of the firm. If
agents quitting the firm have lower than average skill level, those promoted will have a higher
than average skill level. It is thus a challenge to management to maintain and improve the skill
level of their agent base. Agent compensation is very important. If agents perform above the
performance level expected by the market (i.e. the average skill level prevalent in the market,
which is assumed to be three years in the simulations), the resulting compensation is above
market expectations. Lower than market standards performance means inferior compensation.
In turn, compensation affects the quit rate of agents (which influences the lapse rate of new
policies sold) as well as the attractiveness of the firm to new agents who are considering whether
to join the firm.
We use quantum of new products sold per year in lieu of the premiums earned annually due
to new business. As we assume products of standard length and premium, the only dimension of
distinction in sales is the number of products sold. Larger the number of contracts the firm can
sell (that do not lapse), per unit labor cost, greater the profitability of the firm.

Appendix 2. Mathematical representation of managerial responsibilities

The measure of sales productivity is given by Skill per Agent:
Skill per agent

agent sales skill

agents

units : years of experience=agents

Agent sales skill is the pooled experience of all the agents in the firm:
Agent sales skill Integration of added skill at hire 2 lost skill from agent quits
2 lost skill from promotion agent learning over time
years of experience
Added skill at hire hires * agent skill at hire years of experience=year
Lost skill from agent quits agent quits * skill per agent* relative skill of quits
years of experience=year

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linkages

237

JSMA
2,3

Lost skill from promotion agents promoted * skill per agent * relative skills of promoted agents
years of experience=year
Agent learning Agent learning rate * agents * share of time allowed for coaching
years of experience=year

238

The last term on the right hand side is the share of time that managers of that firm devote
towards coaching. Recall that they also have to devote time towards recruiting. These are not
measured here in fractions but in more absolute terms. The following equations build up the
amount of time theoretically required by managers:
Target number of recruits computer adjusted target * agents agent quits
agents promoted agents=year
Indicated recruiting time days needed per recruit * target number of recruits days=year
Indicated coaching time target days of coaching per agent in a year * agents days=year
Total time needed Indicated recruiting time indicated coaching time
Ratio

indicated recruiting time

indicated coaching time

days=year

days=year

The following equation gives the amount of time theoretically available to managers:
Managerial time available managers * working days per year per manager days=year
The following equations show how the available amount of time is allocated:
Total shortfall MAXtotal time needed 2 managerial time available; 0

days=year

Shortfall in recruiting MINMAX ratio * shortfall *

1 2 weight to recruiting
;
weight to recruiting ratio 2 weight to recruiting* ratio
indicated recruiting time 2 managerial time available;
indicated recruiting time days=year
Shortfall in coaching MAX0; shortfall 2 shortfall in recruiting
Share of time allowed for recruiting

days=year

indicated recruiting time 2 shortfall in recruiting

indicated recruiting time

dimensionless
Share of time allowed for coaching

indicated coaching time 2 shortfall in coaching

indicated coaching time

dimensionless
A shortfall in recruiting has its impact on the growth achieved through hiring, as indicated by
the following equations:
Agents integration of hires 2 agent quits 2 agents promoted over time

agents

Hires target number of recruits * share of time allowed for each recruiting agents=year
Target number of recruits growth target * agents agent quits agents promoted

Dynamic
linkages

agents=year
Agent quits agents * agent quit rate
Agents promoted promotion rate

agents=year
agents=year

Corresponding author
Howard Thomas can be contacted at: howard.thomas@wbs.ac.uk

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