Enhancing mental models,analogical transfer,and performance in strategic decision making

Recent research suggests that managers often make strategic decisions in novel situations by utilizing past experiences to reason by analogy. However, there is substantial evidence that decision makers often fail to identify and apply knowledge about one situation to a similarly structured situation. Two experimental studies investigated the mechanisms impacting knowledge transfer from one managerial situation (the source) to an analogous situation. The results show that exposure to variation in the source situation improves transfer performance. Variation decreases performance in the short term but improves learning and increases analogical transfer. Higher performance on and systematic search of the source situation also increase transfer performance. These results yield important implications for enhancing analogical transfer in strategic decision making and for future research on reasoning by analogy. Copyright © 2012 John Wiley & Sons, Ltd.     

Thinking strategically about thinking strategically: the computational structure and dynamics of managerial problem selection and formulation

A new model of managerial problem formulation is introduced and developed to answer the question: ‘What kinds of problems do strategic managers engage in solving and why?’ The article proposes that a key decision metric for choosing among alternative problem statements is the computational complexity of the solution algorithm of alternative statements. Managerial problem statements are grouped into two classes on the basis of their computational complexity: P‐type problems (canonically easy ones) and NP‐type problems (hard ones). The new model of managerial cognitive choice posits that managers prefer to engage with and solve P‐type problems over solving NP‐type problems. The model explains common patterns of managerial reasoning and decision making, including many documented ‘biases’ and simplifying heuristics, and points the way to new effects and novel empirical investigations of problem solving‐oriented thinking in strategic management and types of generic strategies, driven by predictions about the kinds of market‐ and industry‐level changes that managers will or will not respond to. Copyright © 2009 John Wiley & Sons, Ltd.     

Strategy making,novelty and analogical reasoning — commentary on Gavetti,Levinthal, and Rivkin (2005)

This commentary responds to and builds upon a recent article about the role of analogical reasoning in strategy making (Gavetti, Levinthal, and Rivkin, 2005). Based on conceptual and formal analysis, the authors state that in complex and novel contexts, analogical reasoning may be superior to two established models: rational choice and local incremental search. I show that given an alternative conceptualization of the strategy‐making context and main models, analogical reasoning is not necessarily superior. Furthermore, in novel and complex contexts, this model and other approaches such as mental experimentation can play a larger role, particularly in inventing effective strategies. I further extend the analysis by considering some boundary conditions in which analogical reasoning and its alternatives best apply, exploring the idea that blending and adapting several search strategies may be more effective than using only one method, such as analogical reasoning, and advancing new directions for empirical research. Copyright © 2008 John Wiley & Sons, Ltd.     

Analogical reasoning for diagnosing strategic issues in dynamic and complex environments

Organizations interpret their environments by categorizing strategic issues as either opportunities or threats. They make such categorizations as inferences drawn from analogies from past experience. The accuracy of issue interpretations turns on: (1) which analogy is used, (2) what are the environment's properties, and (3) what is the timeframe? A computational model allows us to evaluate over time the accuracy of interpretations based on different forms of analogical reasoning in environments that differ in variation (unpredictability and dynamism) and complexity (dimensionality and ruggedness). This study elaborates a contingency approach to assessing analogical reasoning by organizations in which the form of analogical reasoning, environmental properties, and time all matter. Our findings indicate when particular forms of reasoning produce relatively more accurate inferences about opportunities and threats. Copyright © 2014 John Wiley & Sons, Ltd.     

Determinants of alliance partner choice: Network distance,managerial incentives,and board monitoring

Research Summary: We ask if managerial opportunism is a significant problem in alliance partner choice and examine the role of corporate governance mechanisms in explaining this choice. Using a sample of 313 alliances of U.S. firms from the pharmaceutical and biotechnology industries from 1992 to 2010, we find that managerial incentives lead to managerial preference for relationally risky distant partners over existing and new close partners. Further, board monitoring encourages managers to pursue existing and distant partners over new close ones, choices aligned with shareholder interests. In addition, we find that board monitoring substitutes for managerial incentives in alliance partner choice. We contribute to the literature on alliance partner choice to identify an important, and hitherto, unexplored perspective. Managerial Summary: This article examines whether managers and shareholders view alliance‐related risks differently, and how the divergent interests between managers and shareholders affect alliance partner choice. We argue that managers’ concern about their loss of employment and compensation from alliance failure impedes the choice of relationally risky alliance partners that may increase shareholder value. We also argue that managerial stock ownership and board monitoring mitigate this managerial propensity. Our findings suggest that stock ownership owned by managers and strong board monitoring are effective governance mechanisms to align managers’ interests with those of shareholders. Our study offers a novel perspective to understand alliance partner choice by viewing the firm as an entity comprised of fragmented interests.     

Managerial decision making and firm performance under a resource‐based paradigm

A framework is presented that connects managerial decision making to resource building and firm performance. The framework takes a behavioral view of decision making and distinguishes two distinct decision‐making processes. First there is the creative conceptualization of new resource configurations that are intended to deliver competitive advantage. Then there is the painstaking development of resources required to implement strategy. We argue that heterogeneity in the resources of rival firms arises from the interplay of these two processes: resource conceptualization and resource development. Heterogeneity spawns performance differences that can be explained ex ante from characteristics of managerial decision‐making processes. We illustrate the approach in a simulated decision‐making environment representing a highly competitive and dynamically complex industry. Results from repeated simulation experiments conducted with executive and MBA students show vast differences in performance among firms, even when they started with identical resource positions. In a departure from traditional resource‐based literature, we explain how these differences stem from path dependent accumulation of resources and spontaneous variety in the way rivals conceptualize resources. Copyright © 2010 John Wiley & Sons, Ltd.     

Firm heterogeneity in growth option value: The role of managerial incentives

Growth option value varies widely across firms. This research explores managerial incentives as a source of firm heterogeneity in growth option value. We argue that when the payoff structure of managerial incentives corresponds to that of growth options, managers will be motivated to pursue actions that increase firms' growth option value, particularly when greater growth opportunities are available in an industry. Results indicate that stock option holdings and managerial stock ownership have a positive effect on growth option value, while short‐term pay has a negative effect. We also find support for a positive interaction effect between equity‐based managerial incentives and industry growth opportunities on growth option value. These findings highlight the critical role of managerial incentives in affecting firms' realization of growth option value. Copyright © 2012 John Wiley & Sons, Ltd.     

What's all that (strategic) noise? anticipatory impression management in CEO succession

We develop and test a novel theory about strategic noise with regard to CEO appointments. Strategic noise is an anticipatory and preemptive form of impression management. At the time it announces a new CEO, a board of directors seeks to manage stakeholder impressions by simultaneously releasing confounding information about other significant events. Several CEO and firm characteristics affect the likelihood that this will happen. Strategic noise is most likely when long‐term CEOs have a wide pay gap between other top managers at high stock price performance firms, and when a new CEO does not have previous CEO experience or comes from a less well‐regarded firm. Results showing that CEO succession announcements are noisier than they would be by chance have some interesting implications for impression management theory, traditional event study methodology, and managerial and public policy. Interviews with public firm directors on CEO succession provide additional validity for the strategic noise construct and help us to articulate key elements of the theory. Copyright © 2011 John Wiley & Sons, Ltd.     

How Information Technology Assimilation Promotes Exploratory and Exploitative Innovation in the Small‐ and Medium‐Sized Firm Context: The Role of Contextual Ambidexterity and Knowledge Base

This research sheds new light on how information technology (IT) assimilation affects exploratory and exploitative innovation in the context of small‐ and medium‐sized firms (SMEs). This contextualization is important in establishing the boundary conditions for the theory, as well as generating specific managerial insights for SME managers. A sample of 248 U.K.‐based SMEs in the manufacturing industry demonstrates contextual ambidexterity (CA) mediates the relationship between IT assimilation and two types of innovation. This finding highlights that IT assimilation does not automatically promote innovation. Instead, IT assimilation represents a critical resource that enables the effective implementation of CA, which in turn affects innovation. This implies that SMEs cannot fully realize the potential of their IT assimilation and use it to enable innovation without implementing CA. Furthermore, this study differentiates between two different dimensions of knowledge base: knowledge breadth and knowledge depth. This study finds that knowledge breadth moderates the indirect IT assimilation–exploratory innovation relationship by influencing the effect of CA on exploratory innovation. Knowledge depth, on the other hand, moderates the indirect IT assimilation–exploitative innovation relationship by influencing the effect of CA on exploitative innovation. This finding implies that SMEs can benefit from their IT assimilation that enables them to engage in CA, which in turn allows them to perform innovation. However, it is apparent that the dimension of knowledge that SMEs hold internally can determine what types of innovation that they are able to perform.     

Mental representation and the discovery of new strategies

Research summary : Managers' mental representations affect the perceived payoffs and alternatives that managers consider. Thus, mental representations affect how managers search for profitable strategies as well as the quality of strategies they discover. To study how mental representation and search interact, we formally model the dual search over possible representations and over policy choices of a strategy “landscape.” We analyze when it is preferable to emphasize searching for the best policies rather than the best mental representation, and vice versa. We show that, in the long run, a balance between the two search modes not only results in better expected performance, but also reduces the variation in performance. Additionally, the article describes conditions under which increased accuracy of mental representations can actually worsen firm performance. Managerial summary : Managers' mental representations affect the perceived payoffs and alternatives that managers consider. Thus, mental representations affect the quality of strategies managers can discover. We analyze a computer simulation of how managers use mental representations to search for strategies. This sheds light on how managers should deal with the trade‐off between searching for policies and searching for representations; that is, whether managers should think creatively about how to represent a strategy problem or whether they should just stick to the current problem understanding, and try to find ways to improve performance as suggested by the current representation. We provide insight regarding the balance between the two search modes and describe conditions under which increasingly accurate mental representations can worsen firm performance. Copyright © 2015 John Wiley & Sons, Ltd.     

When general recommendations fail: how to search in single innovation project settings

External sources are main elements of a firm's search strategy as they positively influence a firm's innovation activities. While previous research has almost exclusively focused on search patterns on firm level, we focus on search mechanisms in single innovation project settings. Based on an inductive case study of eight cross‐industry innovation projects, we present a theoretical framework of three archetypes. In our research, we transfer the concept of breadth and depth from firm to project level and present decisive criteria. We provide evidence that search on project level is not only influenced by breadth and depth, but the character of search represented by its level of abstraction plays a major role. Furthermore, we show that at least in our context and contrary to firm level, not always high levels of breadth and depth are required. In addition, our research contributes to an enhanced operation of search in firms applying our archetypes.     

Corporate entrepreneurship initiatives: Antagonizing cognitive biases in business model design

Entrepreneurs designing novel business model configurations face cognitive biases that derive from limited mental capacity to deal with complex and uncertain decision contexts. Building on the notion of the business model as an idiosyncratic mental representation that organizes managerial understanding of value creating and value capture, we investigate how entrepreneurs cope with cognitive biases inherent in business model design. We conducted a total of 35 in‐depth interviews with entrepreneurs situated in 15 corporate entrepreneurship initiatives in Germany. Our study results suggest that entrepreneurs counter cognitive biases by combining intuitive and deliberate reasoning approaches. Specifically, we identify five cognitive mechanisms and two higher level cognitive processes undergirding entrepreneurial reasoning in the design of new business models. Our findings provide empirically grounded insights into the cognitive perspective in business model research and help to theorize managerial reasoning during the process of business model design.     

The top management team and corporate performance

This research tested the relationship between the characteristics and background of U.S. top executives, and measures of corporate performance. Data were obtained from 953 top managers; the dominant coalition of the largest 150 companies within five U.S. industries—dairy, footwear, tyres, mobile homes, and machine tools. Results were generally positive: managerial characteristics not only predicted performance variations within industries—the top performers having significantly different managerial profiles than poorly performing companies—but also that the characteristics of managers within high-performing companies were similar across the five industries.     

All experience is not created equal: learning,adapting, and focusing in product portfolio management

This study explores the contingencies relating firm experience to product development capabilities, focusing on experience type (breadth versus depth) and timing (prior versus concurrent). Results from empirical tests in the U.S. mutual fund industry offer two primary findings. First, firms increase proficiency at adapting their processes to address new opportunities as they accumulate experience in entering new niches, but face initial hurdles broadening their experience base. Second, concurrent learning is capacity constrained, as product quality increases in the number of products introduced simultaneously in one niche, but quality decreases as the firm's concurrent portfolio of new products broadens. Jointly, these findings highlight that dynamic capabilities are built through prior adaptation experience and that management of a product development portfolio is an important managerial capability. Copyright © 2011 John Wiley & Sons, Ltd.     

A relationship strategy perspective on relationship portfolios: Linking customer profitability,commitment, and growth potential to relationship strategy

The paper develops a three-dimensional portfolio model for business relationships which distinguishes among six different categories. Based on assessments of customer profitability, customer commitment, and growth potential, the positioning of a given customer relationship in the portfolio allows managers to determine appropriate customer relationship strategies and appropriate performance indicators. Results from applying the portfolio model are reported and managerial implications and future research are discussed.     

The Decision to Exploit an R&D Project: Divergent Thinking across Middle and Senior Managers

Research and development (R&D) generates projects, but the question often remains: which projects should be exploited? Building on the innovation, strategy, and managerial cognition literatures, we use a conjoint field experiment to collect data on 4032 decisions made by 126 R&D managers to test how project attributes, strategic context, and managers' characteristics influence innovation exploitation decisions. Using hierarchical linear modeling, we find that (1) experience impacts project exploitation decision policies of middle managers more than senior managers, (2) divergent thinking across middle and senior managers increases with experience, and (3) experienced middle managers diverge from experienced senior managers in their decisions to exploit opportunities by placing greater emphasis on strategic context (relative to competitors and fit within the portfolio) and lesser emphasis on uncertainty (technological and demand). These findings have implications for the strategy and innovation literature.     

Response to Farjoun's ‘Strategy making,novelty, and analogical reasoning — commentary on Gavetti,Levinthal, and Rivkin (2005)’

In his thoughtful commentary on our 2005 paper (Gavetti, Levinthal, and Rivkin, 2005), Farjoun offers three critiques and extensions. First, he suggests our approach should have explicitly considered a constructionist logic. Second, Farjoun argues that we have neglected the full array of modes of cognition between rational choice and feedback‐based adaptive learning and have therefore overstated the role of our focal mode, reasoning by analogy. Third, he highlights some of the contingencies under which the various modes of cognition he identifies are effective. In response, we address each point. We first argue that a constructionist perspective is not alien either to the role of analogical reasoning or to the particular modeling apparatus we have developed. We then suggest that despite the richness of modes of cognition that lie between rational choice and adaptive learning, theorizing about them requires simplification and the identification of underlying categories that classify such modes, which is the approach our paper employs. Finally, we clarify how our paper adopts the contingent logic advocated by Farjoun. Copyright © 2008 John Wiley & Sons, Ltd.     

Developing Innovations Based on Analogies: Experience from Design and Engineering Consultants

This study explores how specialized design and engineering companies offering services to clients in diverse industries use inventive analogies in the product design process. Inventive analogical transfers are characterized by the use of knowledge gained from experience in one knowledge area (source domain) to solve new problems in another field (target domain). Different types of analogical transfers can be distinguished depending on (1) the conceptual distance between source and target domain and (2) the transfer content, describing the type of solution element being transferred. On the basis of these two dimensions a typology suitable to cover a wide range of analogical transfer episodes is developed. The first purpose of the present study is to understand the link between these two dimensions of analogies and their impact on potential benefits of analogy use. A second purpose of this study is to explore the practice of working with analogies, particularly to examine how relevant knowledge in a variety of domains is accessed. The research is based on an explorative approach. In‐depth interviews were held with project leaders of 18 design and engineering consulting firms located in Germany and Scandinavia. In each of these interviews the respondent reported about a particular project in which analogy use played an important role. The findings indicate that the use of analogies is a prevalent phenomenon in design and engineering consulting firms. The typology based on the two dimensions analogical distance and transfer content proved useful for the distinctive explanation of positive effects resulting from analogy use. First, analogical distance was found to be positively associated with solution novelty and negatively associated with the project duration. In addition, far analogies, rather than near analogies, proved to be helpful to foster communication within the project team as well as communication between the project team and the client firm. Second, with respect to the transfer content, beneficial effects on project duration seem to be particularly probable if the problem solvers transfer existing technological solutions and specific functional principles instead of general knowledge about shapes and design arrangements. Taken together, the findings suggest that it may be possible to influence the specific effects of analogy use ex ante by focusing on the appropriate type of analogies. Concerning the access of analogies, the findings suggest that analogies are frequently applied without the aid of formal procedures, techniques, or tools. The project teams mainly draw on personal “local” knowledge—knowledge already in their possession. While this approach is rather efficient, the tendency to access knowledge from only a limited set of familiar knowledge sources may constrain the possibility for creative recombination by analogies. Several strategies to relax this constraint are discussed, such as enhancing the heterogeneity of the team's knowledge base or broadcasting the problem to external experts.     

Strategic consensus and performance: the role of strategy type and market‐related dynamism

This paper examines the link between consensus among senior managers and performance at the SBU level and considers factors which may moderate the strength of this relationship. Using data from a cross‐national study in three industry sectors, the authors find that consensus increases the performance of the SBU in the case of a differentiation strategy but not in the case of a low‐cost strategy. Additionally, the relationship between consensus on a differentiation strategy and performance is negatively influenced by dynamism of the market. This research thus clarifies and extends prior consensus research by indicating the conditions under which consensus positively affects performance. For managers, our results indicate that investing managerial time in obtaining consensus is more important for a differentiation than for a low‐cost strategy and is particularly important when using a differentiation strategy in a stable environment. Copyright © 1999 John Wiley & Sons, Ltd.     

Development of a Design Audit Tool for SMEs*

There is strong evidence of the importance of good design to company success. However, it is apparent that despite this evidence, design skills are often marginalized in small and medium‐size enterprises (SMEs). This article presents a design audit tool that captures good design principles in a form accessible to industry. Previous audit approaches have focused extensively on the management of new product development (NPD). In this research, the audit tool is based on process maturity principles and explicitly targets the design related activities in NPD—specifically in small firms. The design audit has been developed iteratively by application in action research mode and is supported by evidence from literature and exploratory cases. This inductive development enabled the generation of a robust audit tool through intervention in small firms to improve design practices. The resulting audit tool is designed for use in a multifunctional workshop setting. Typical outputs from application include the generation of action plans for improvement in future performance. This audit tool is based around a model of good design that explicitly distinguishes between management and design related activities in NPD. The audit tool has succeeded in encouraging managers to pay greater attention to the design related elements of NPD. This complements the satisfaction of managerial goals typically emphasized in many NPD processes.