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VOL.46 NO.4

Intelligence

Competitive Cognition
A brief synopsis of How to Support Knowledge Creation in New Product Development: An Investigation of Knowledge Management Methods (Bocconi University working paper, June 2004), by Anja Schulze and Martin Hoegl

Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published.

REPRINT NUMBER 46403

INTELLIGENCE

RESEARCH BRIEF

Competitive Cognition
The importance of properly identifying the strategies, and anticipating the actions, of rivals. Beth A. Walker, Dimitri Kapelianis and Michael D. Hutt
The term competitive cognition refers to the framework with which a manager organizes and retains knowledge about competitors and directs information acquisition and usage. It is the process by which managers make sense of the market environments in which they compete. Making sense of competitive environments is fundamentally a categorization process. Through repeated exposure to rivals, managers learn the attributes and strategies of competitors. Clark and Montgomery (1999) suggest that a manager forms a mental representation of a given rival, then assigns the target company to a category, using that classification as a guide to direct future actions. Porac and Thomas (1990) show how industries are created through a shared interpretation of reality among business rivals. Rather than defining competitors on an individual basis, managers assign themselves to a competitive category. In a study of Scottish knitwear manufacturers, Porac et al. (1995) argue that market boundaries are socially constructed around a collective cognitive model that summarizes typical organizational forms within an industry. This model is created when companies observe one anothers actions and define unique product positions to emphasize. In general, how many rival companies do managers identify as competitors? Relatively few. To illustrate, Clark and Montgomery surveyed 57 respondents across a
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range of business units. On average, respondents identified 6.46 companies that competed with their own business units. Of these companies, 3.07 were considered major competitors. McNamara, Luce and Tompson (2002) surveyed topmanagement teams at commercial banks in three metropolitan areas and found that managers considered, on average, 5.23 competing banks as following a strategy similar to their own. Porac and Thomas (1994) interviewed head managers of grocery stores in a small American town and found that managers considered, on average, only 3.93 other stores as major competitors. Finally, the Porac et al. study of Scottish knitwear manufacturers found that managers identified an average of only seven rivals from a list of 261 possible competitors.

Cognition and Performance

Several studies demonstrate a positive relationship between competitive cognition and corporate performance. Examining the themes included in presidents letters to shareholders, Osborne, Stubbart and Ramaprasad (2001) found that firms in the pharmaceutical industry could be clustered into five strategic groups on the basis of top managers mental models of the competitive domain and the strategy recipe to use within that domain. Tracing performance over time, they found that earlier mental models of strategic goals (for example, international growth targets)

were positively related to subsequent levels of achieved performance. McNamara, Luce and Tompson (2002) examined the relationship between the complexity of the cognitive competitive models formed by senior managers and subsequent company performance. Top managers at the best-performing firms had the smallest number of categories for grouping competitors but demonstrated a richer understanding of the competitive landscape by including a larger number of rivals within each category. The results suggest that top managers should develop simpler classification schemes that isolate the general positioning strategies of rivals and include the full range of competitors that follow each strategy. Interestingly, research on the performance of experts versus novices across disciplines yields a similar pattern: Experts have knowledge structures that include fewer categories than novices but have more items within each category (Sujan, Sujan and Bettman 1988). Importantly, little published research has proposed or tested the idea that individual competitive cognitions may influence individual performance. To address this linkage, there is an intriguing program of research in the sports literature. Gould, Eklund and Jackson (1992) examined the competitive cognitions of elite athletes (members of the 1988 U.S. Olympic wrestling team) across both successful (alltime best) and unsuccessful (all-time worst) encounters with opponents. The research demonstrates that elite athletes use extensive competitive plans that involve customized strategies and tactics to beat individual competitors, whereas poorer performers do not develop customized competitive plans but rely instead on a more generic approach to competition.
Beth A. Walker is the State Farm Professor of Marketing at Arizona State University. Dimitri Kapelianis is an assistant professor of marketing at Emory University. Michael D. Hutt is the Ford Motor Co. Distinguished Professor of Marketing at Arizona State University. Contact them at beth.walker@asu.edu, dimitri_ kapelianis@bus.emory.edu and michael.Hutt@ asu.edu.

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Illustration: Ken Orvidas

While performance at the firm level is enhanced by developing a manageable number of well-defined competitor categories, success at the individual level requires a customized response one that defines the appropriate strategy to outmaneuver a particular rival or set of rivals in a particular situation. Building on this line of inquiry at the individual performance level, Kapelianis et al. (2005) studied the role that competitive cognition plays in the competitive crafting that salespeople do. Competitive crafting involves salespeoples use of information and knowledge about competitors to create a business proposition for the customer. The results indicate that the likelihood of winning the customers business increases proportionally to the amount of competitive crafting.

on outmoded cognitive maps that have ceased to reflect industry realities. A longitudinal phase of the research also demonstrates that in turbulent environments, managers at competing companies will view the competitive landscape quite differently. Along the same lines, Houston et al. (2001) found that inertial forces develop around individual business units that serve the same product market. Their study of executives who guided the strategy of a Fortune 500 high-technology company as it entered the Internet market found that business-unit heads held opposing views regarding the nature of competition and the path the company should follow.

A Top-to-Bottom View
To lessen the probability of being blindsided by a competitive attack, Bergen and Peteraf (2002) propose a valuable framework for scanning the competitive horizon, isolating new market opportunities and anticipating competitive challenges. Extending the influential work of Chen (1996), the authors suggest that identifying competitors requires a top-down assessment of supplyside considerations combined with a bottom-up analysis of demand-side considerations. A supply-side assessment addresses the extent to which companies are similar in terms of research-and-development and production capabilities, while the demand side explores the degree to which companies address similar customer needs. This kind of analysis encompasses the entire competitive field, including direct, potential and indirect competitors: Direct competitors serve the same customer needs and employ the same types of resources as the focal company; potential competitors do not currently serve the same customer needs but have the resource base to do so; indirect competitors are serving the same customer needs as the focal company but with different types of resources. After identifying and classifying the competitors in this way, Bergen and Peteraf (2002) suggest a second stage competitor analysis which examines the strength of the various types of competitors according to whether they have high or low degrees of
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Competitive Blind Spots

Zajac and Bazerman (1991) demonstrated that in competitive situations strategy makers fail to consider the decisions of competitors sufficiently, and that this deficiency leads to a host of specific judgmental mistakes, or blind spots. The authors illustrate how competitive blind spots can be used to explain empirically observable phenomena such as industry overcapacity, the failure of new entries and acquisition overpayment. Montgomery, Moore and Urbany (2005) focus on the extent to which managers consider competitors, particularly rivals anticipated reactions, when deciding on their own strategic moves. They find that managers do consider competitors past behavior but invest little effort in anticipating competitors likely future reactions to their own strategy plans. The authors surmise that such behavior may be caused by the uncertainty that surrounds the potential behavior of competitors and the general tendency of managers to place more weight on decision inputs that can be predicted with greater confidence. Research suggests that cognitive inertia also can create competitive blind spots for managers. For example, Reger and Palmer (1996) found that, even in times of great turbulence, managers often continue to rely

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Referenced Research
Bergen, M. and M.A. Peteraf, Competitor Identification and Competitor Analysis: A Broad-Based Managerial Approach, Managerial and Decision Economics 23, no. 4-5 (June-August 2002): 157-169. Presents a two-stage framework for competitor identification and analysis. Chen, M.J., Competitor Analysis and Intercompany Rivalry: Toward a Theoretical Integration, Academy of Management Review 21, no. 1 (January 1996): 100-134. Relates the constructs of market commonality and resource similarity to competitor analysis and intercompany rivalry. Clark, B.H. and D.B. Montgomery, Managerial Identification of Competitors, Journal of Marketing 63, no. 3 (July 1999): 67-83. Explores the competitor identification process used by managers. Gould, D., R.C. Eklund and S.A. Jackson, 1988 U.S. Olympic Wrestling Excellence: I. Mental Preparation, Precompetitive Cognition, and Affect, The Sport Psychologist 6 (December 1992): 358-382. Analyzes the competitive cognition of elite athletes. Houston, M.B., B.A. Walker, M.D. Hutt and P.H. Reingen, CrossUnit Competition for a Market Charter: The Enduring Influence of Structure, Journal of Marketing 65, no. 2 (April 2001): 19-34. Details the inertial forces that develop around the product markets served by business units. Kapelianis, D., B.A. Walker, M.D. Hutt and A. Kumar, Those Winning Ways: The Role of Competitive Crafting in Complex Sales, working paper, Arizona State University, Tempe, 2005. The study examines the behaviors of 56 salespeople at a Fortune 100 information-technology company, demonstrating that competitive crafting dramatically affects salesperson performance. McNamara, G.M., R.A. Luce and G.H. Tompson, Examining the Effect of Complexity in Strategic Group Knowledge Structures on Company Performance, Strategic Management Journal 23, no. 2 (February 2002): 153-170. Using a sample of 76 top management teams from banks in three U.S. metropolitan areas, demonstrates the relationship between the complexity of top managers knowledge structures and subsequent company performance. Montgomery, D.B., M. Moore and J. Urbany, Reasoning About Competitive Reactions: Evidence From Executives, Marketing Science 24, no. 1 (winter 2005): 138-149. Examines whether managers incorporate anticipated competitor behavior into their own decision making. Osborne, J.D., C.I. Stubbart and A. Ramaprasad, Strategic Groups and Competitive Enactment: A Study of Dynamic Relationships Between Mental Models and Performance, Strategic Management Journal 22, no. 5 (May 2001): 435-454. Establishes the link between the mental models shared by corporate leaders and company performance. In a longitudinal study, the authors use computer-assisted content analysis to reveal strategic themes contained in approximately 400 presidents letters published in annual reports and demonstrate that these strategic themes influence subsequent performance. Porac, J.F. and H. Thomas, Taxonomic Mental Models in Competitor Definition, Academy of Management Review 15, no. 2 (April 1990): 224-240. Describes how industries are created through a shared interpretation of reality among business rivals. Porac, J.F. and H. Thomas, Cognitive Categorization and Subjective Rivalry Among Retailers in a Small City, Journal of Applied Psychology 79 (February 1994): 54-66. Shows that managers focus on a relatively narrow set of rival companies. Porac, J.F., H. Thomas, F. Wilson, D. Paton and A. Kanfer, Rivalry and the Industry Model of Scottish Knitwear Producers, Administrative Science Quarterly 40, no. 2 (June 1995): 203-227. Isolates the collective beliefs that create rivalries within the Scottish knitwear industry. The research results suggest that a six-category model, based on an ensemble of attributes such as size and technology, best describes the shared sense of competition in the industry. Reger, R.K. and T.B. Palmer, Managerial Categorization of Competitors: Using Old Maps to Navigate New Environments, Organization Science 7 (January-February 1996): 22-39. Uncovers differences in the ways strategists in the financial-services industry characterize competitors in a rapidly changing environment. Sujan, H., M. Sujan and J.R. Bettman, Knowledge Structure Differences between More Effective and Less Effective Salespeople, Journal of Marketing Research 25, no. 1 (February 1988): 81-86. More effective salespeople have richer and more interrelated knowledge structures about their customers than do less effective ones. Zajac, E.J. and M.H. Bazerman, Blind Spots in Industry and Competitor Analysis: Implications of Intercompany (Mis)perceptions for Strategic Decisions, Academy of Management Review 16, no. 1 (January 1991): 37-56. Describes why decision makers sometimes err in judgment when they consider the contingent decisions of competitors.

resource similarity with the focal company. Bergen and Peteraf assert that among those competitors that possess equivalent resources, indirect competitors pose the strongest threat to a focal company. This is in line with Chens prediction that the strongest competitive threat comes from rivals with low market commonality but
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high resource similarity. To illustrate, WalMart Stores Inc. is an indirect competitor to the Kroger Co. and Albertsons Inc., but given Wal-Marts considerable resources, its supercenters can pose a real competitive threat to the big grocery chains. Most managers tend to emphasize supply-based attributes in identifying com-

petitors. By adopting an integrated view and directing stronger attention to the demand side, a strategist is better equipped to spot market opportunities and emerging competitive threats.
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