Competitive Cognition

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 another’s 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 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 top-management 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 (all-time 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.

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. See sidebar

Building on this line of inquiry at the individual performance level, Kapelianis et al. (2005) studied the role that competitive cognition plays in thecompetitive crafting that salespeople do. Competitive crafting involves salespeople’s use of information and knowledge about competitors to create a business proposition for the customer. The results indicate that the likelihood of winning the customer’s business increases proportionally to the amount of competitive crafting.

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 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 supply-side 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 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 Chen’s prediction that the strongest competitive threat comes from rivals with low market commonality but high resource similarity. To illustrate, Wal-Mart Stores Inc. is an indirect competitor to the Kroger Co. and Albertson’s Inc., but given Wal-Mart’s 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 competitors. 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.