Strategic Management Journal Strat. Mgmt. J., 32: 115–138 (2010) Published online EarlyView in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.870 Received 18 March 2009; Final revision received 13 May 2010 THE INFLUENCE OF EXECUTIVE COGNITION ON COMPETITIVE DYNAMICS JEREMY J. MARCEL, 1 * PAMELA S. BARR, 2 and IRENE M. DUHAIME 2 1 McIntire School of Commerce, University of Virginia, Charlottesville, Virginia, U.S.A. 2 J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia, U.S.A. Prior competitive dynamics research has drawn on theories of information processing to model the subjective antecedents of executives’ retaliation choices. This prior work has made great progress in developing our understanding of the retaliation choices most firms will make to a given type of attack. What the information processing perspective has not been able to do is explain firm-specific behavior to predict which competitive moves individual firms will challenge, or explain why individual firms differ in the types of actions that they are most likely to challenge. The goal of this paper is to sharpen the theoretical and empirical focus on predicting firm-level retaliation proclivities. We leverage managerial cognition research to examine the relationship between firm-level differences in the cognitive frameworks that executives possess, and firm- level differences in whether and how quickly firms challenge a market move. Results from a longitudinal study of the airline industry suggest that the addition of a cognitive perspective provides important insights into competitive retaliation. Copyright 2010 John Wiley & Sons, Ltd. INTRODUCTION Top executives commit their firms to particular market actions because they hope to gain some advantage over competitors. Still, the chance that these efforts will yield superior profits decreases when other firms respond competitively (Schum- peter, 1934; Wiggins and Ruefli, 2005). For that reason, scholars suggest that top executives should formulate market initiatives with some anticipation for whether or not competitors will retaliate (Zajac and Bazerman, 1991). Keywords: competitive dynamics; managerial cognition; information processing *Correspondence to: Jeremy J. Marcel, University of Virginia, McIntire School of Commerce, PO Box 400173, Charlottesville, VA 22904, U.S.A. E-mail: [email protected]Traditionally, competitive dynamics research has used an array of theories to model firm response and interaction: communication information pro- cessing theory (Smith et al., 1991), multimar- ket commonality theory (Baum and Korn, 1999), strategic similarity theory (Gimeno and Woo, 1996), social network theory (Gnyawali and Mad- havan, 2001) and upper-echelon theories (Ham- brick, Cho and Chen, 1996). Despite an apparent plurality of theories, these perspectives all pivot on a single information processing argument — that retaliation is a function of factors that shape top executives’ attention toward and interpretation of market moves. Our review of this literature suggests that prior studies take one of two distinct perspectives on information processing and its role in competitive dynamics, which we label the cue approach and Copyright 2010 John Wiley & Sons, Ltd.
Published online EarlyView in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.870
Received 18 March 2009; Final revision received 13 May 2010
THE INFLUENCE OF EXECUTIVE COGNITIONON COMPETITIVE DYNAMICS
JEREMY J. MARCEL,1* PAMELA S. BARR,2 and IRENE M. DUHAIME2
1 McIntire School of Commerce, University of Virginia, Charlottesville, Virginia, U.S.A.2 J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia,U.S.A.
Prior competitive dynamics research has drawn on theories of information processing to modelthe subjective antecedents of executives’ retaliation choices. This prior work has made greatprogress in developing our understanding of the retaliation choices most firms will make toa given type of attack. What the information processing perspective has not been able to do isexplain firm-specific behavior to predict which competitive moves individual firms will challenge,or explain why individual firms differ in the types of actions that they are most likely to challenge.The goal of this paper is to sharpen the theoretical and empirical focus on predicting firm-levelretaliation proclivities. We leverage managerial cognition research to examine the relationshipbetween firm-level differences in the cognitive frameworks that executives possess, and firm-level differences in whether and how quickly firms challenge a market move. Results from alongitudinal study of the airline industry suggest that the addition of a cognitive perspectiveprovides important insights into competitive retaliation. Copyright 2010 John Wiley & Sons,Ltd.
INTRODUCTION
Top executives commit their firms to particularmarket actions because they hope to gain someadvantage over competitors. Still, the chance thatthese efforts will yield superior profits decreaseswhen other firms respond competitively (Schum-peter, 1934; Wiggins and Ruefli, 2005). For thatreason, scholars suggest that top executives shouldformulate market initiatives with some anticipationfor whether or not competitors will retaliate (Zajacand Bazerman, 1991).
Keywords: competitive dynamics; managerial cognition;information processing*Correspondence to: Jeremy J. Marcel, University of Virginia,McIntire School of Commerce, PO Box 400173, Charlottesville,VA 22904, U.S.A. E-mail: [email protected]
Traditionally, competitive dynamics research hasused an array of theories to model firm responseand interaction: communication information pro-cessing theory (Smith et al., 1991), multimar-ket commonality theory (Baum and Korn, 1999),strategic similarity theory (Gimeno and Woo,1996), social network theory (Gnyawali and Mad-havan, 2001) and upper-echelon theories (Ham-brick, Cho and Chen, 1996). Despite an apparentplurality of theories, these perspectives all pivoton a single information processing argument—thatretaliation is a function of factors that shape topexecutives’ attention toward and interpretation ofmarket moves.
Our review of this literature suggests that priorstudies take one of two distinct perspectives oninformation processing and its role in competitivedynamics, which we label the cue approach and
Copyright 2010 John Wiley & Sons, Ltd.
116 J. J. Marcel, P. S. Barr, and I. M. Duhaime
the information processing-propensity approach.These two approaches reflect very different as-sumptions about the factors that influence man-agerial attention and interpretation, and how thosefactors direct competitive retaliation (Mischel,1977; Ross and Nisbett, 1991). They also com-plement one another because they combine tooutline broad central tendencies that predict howmost firms generally respond to market moves.We argue, however, that the existing literature isincomplete because it does not fully examine thefactors that cause firm-level behavior to vary fromthese broad central tendencies. Specifically, exist-ing approaches are not well adapted to identifyingwhich competitive moves a specific firm is mostlikely to challenge, nor, by extension, which com-petitive moves a firm is unlikely to challenge.The goal of this empirical study is to sharpen theempirical focus on the retaliation proclivities ofindividual firms.
This study draws on managerial cognition re-search (Barr, Stimpert, and Huff, 1992; Gioia andThomas, 1996; Thomas, Shankster, and Math-ieu, 1994; Nadkarni and Barr, 2008) to explorethe connection between the cognitive frameworksthat a firm’s top executives possess and the spe-cific competitive retaliations to which they committheir firms. Prior research shows that cognitiveframeworks direct attention and affect interpreta-tion. We hypothesize that across-firm heterogene-ity in top executives’ cognitive frameworks willalso relate to whether and how quickly differentfirms respond to the same competitive action. Inthe interest of integrating our findings with priorresearch, we also examine the extent to whichthe subjective factors emphasized in the externalcue and processing-propensity approaches mod-erate the influence of cognitive frameworks. Wedraw on longitudinal data for 10 large firms and174 competitive attacks in the airline industry overa seven-year period. Our findings show that whenexecutives at a firm possess cognitive frameworksthat label a type of competitive action as strate-gically important, both the likelihood and speedwith which they retaliate against that type of attackincrease dramatically. We conclude by outliningthe theoretical and practical implications of ourfindings, arguing that an emphasis on factors thatdrive across-firm differences in competitive retalia-tion is crucial if executives are to effectively antic-ipate and manage the competitive realities withspecific rivals.
BACKGROUND AND HYPOTHESES
The focus of recent competitive dynamics researchhas been on exploring the longitudinal sequencesof firm rivalry, as well as the performance con-sequences of aggression (Ferrier, 2001; Ferrier,Smith and Grimm, 1999). This focus on how inter-action plays out over time is ultimately neces-sary for a better appreciation for how retaliationbehaviors can impact firm competitiveness (Boydand Bresser, 2008). However, there remain criti-cal gaps in our fundamental appreciation for whyexecutives at one firm will challenge another firm’smarket move. Clarifying the basic antecedents ofretaliation is critical because this phenomenon rep-resents the foundation on which much of the com-petitive dynamics literature is built. Our reviewof this literature reveals two different but com-plementary types of antecedents: the character-istics of the competitive actions or actors (thecue approach) and the characteristics of informa-tion processing in the potential responding firm(the processing-propensity approach). A summaryof existing research as it relates to these twoapproaches is shown in Table 1.
The cue approach
A majority of prior empirical work in competi-tive dynamics emphasizes how characteristics ofexternal cues predictably shape which actions mosttop executives are likely to notice, as well as howmost executives are likely to interpret those actions(e.g., Smith et al., 1991; Young et al., 2000). Thisemphasis on external cues evolves most directlyfrom neoinstitutional traditions (DiMaggio andPowell, 1983; Fombrun and Shanley, 1990), andfrom research detailing the diffusion of signals andinformation through competitive space (Rogers,1983). The basic assumption of research using thecue approach is that competitive actions containembedded signals that other firms must process andevaluate (Haveman, 1993; Rogers, 1983). Thosesignals are seldom entirely neutral in the sense thatmanagers can plausibly apply any meaning theychoose (Ross and Nisbett, 1991). Instead, com-petitive actions differ in the extent to which theycue predictable responses—that is, whether theyencourage everyone to construe and respond to anevent in the same way (Mischel, 1977). Much ofthe work in competitive dynamics research has log-ically sought to identify those cues that prompt
common behaviors among the greatest number ofindustry participants. For example, research showsthat executives are likely to notice, and by exten-sion are more likely to respond to, actions thatare initiated by legitimate firms, as well as actionsthat are inherently public or visible or directedtoward key markets (MacMillan, McCaffrey, andvan Wijk, 1985; Smith et al., 1991). Alternatively,executives are less likely to respond to actions thatare irreversible or radical or complex because theseactions tend to activate interpretations of ‘riski-ness’ (Chen et al., 2002). Likewise, researchersnote that if two firms are strategically similar,if they are members of the same strategic group(Baum and Haveman, 1997; Osborne, Stubbart,and Ramaprasad, 2001, Strang and Meyer, 1994),or if they compete in common markets (Gimenoand Woo, 1996), any move by one will trigger pre-dictable interpretations of ‘relevance’ or ‘mutualinterdependence’ on the part of the other, whichdrives eventual responses in specific competitivesituations.
The value of this approach for understandingcompetitive dynamics is that it is the nature ofthe cue, or the situation that firms encounter, thatdetermines what is noticed or how it is inter-preted and, thus, how executives will respond.Individual firms are presumed to respond differ-ently only to the extent that the cues and situa-tions that they encounter differ. As Ocasio notes,‘individual decision-makers will vary their focusof attention depending on the situation, and thatconsistency (or variance) in attention and behav-ior is dependent more on consistency (or variance)in the characteristics of the situation rather thancharacteristics of the individuals’ (Ocasio, 1997:190, emphasis added). Thus, competitive dynam-ics research using the cue approach theoreticallyaddresses population-level behaviors, or how theaverage firm will respond in different scenarios.
The processing-propensity approach
The second major approach in competitive dynam-ics research, which we label the processing-propensity approach, evolves most directly fromthe upper-echelon research tradition (e.g., Carpen-ter, 2002; Miller, Burke, and Glick, 1998; Pelled,Eisenhardt, and Xin, 1999). For example, Ham-brick et al. (1996) note that the main limitation ofresearch that takes the cue approach is that it fails
to consider how organizational and team-level fac-tors influence the thoroughness with which infor-mation about competitors’ actions is processedby top managers and, by extension, how execu-tives notice and process information about mar-ket actions. Differences in information processingare, in turn, related to variation across firms intheir overall propensity to retaliate. For example,Smith and colleagues (1991) attributed the neg-ative relationship between top management team(TMT) industry tenure and response to the factthat more experienced managers are less likely toundertake the exhaustive search processes neces-sary to monitor actions. Contrary to their expecta-tions, Hambrick and colleagues (1996) found thatTMT heterogeneity dampened a firm’s overall ten-dency to retaliate, ostensibly because heterogeneitycan promote team conflict that slows informationprocessing routines, perhaps even preventing com-petitive response decisions altogether (O’Reilly,Caldwell, and Barnett, 1989). In this same vein,excessive organizational complexity (Smith et al.,1991), firm-level internal orientations, lack of slackresources, or poor position in social networks(Gnyawali and Madhavan, 2001) hinder informa-tion collection processes so that firms demonstratea low propensity to retaliate to actions in gen-eral. These across-firm differences in structure androutine are crucial because they can explain grossdifferences in a specific firm’s overall propensityto notice and respond to all competitive actions(Hambrick et al., 1996).
When considered simultaneously, the cue ap-proach and the processing-propensity approachoutline the broad central tendencies of competitivebehavior. The cue approach predicts the generaldirection of managerial attention for all executivesbased on characteristics of the external contextand the most likely interpretations of that con-text that executives will reach. The processing-propensity approach focuses on the extent to whicheach firm is more or less adept at noticing andthus responding to all types of actions. This priorresearch contributes to our understanding of com-petitive dynamics by highlighting the common andexpected response of any given firm to a compet-itive situation. What prior work does not explainis why there is variation in response (and in tim-ing of response) to the same competitive moveby firms with similar processing propensities. Weargue that it is crucial to understand why a par-ticular firm systematically and quickly retaliates to
The influence of executive cognition on competitive dynamics 119
certain types of competitive attacks, while anothercompetitor firm may be indifferent to those attacksbut highly sensitive to others. Understanding com-petitive response at this level is necessary if theoverarching research goal is to predict why exec-utives at one firm challenge the actions of another(Chen, 1996). Thus, our study examines variationfrom a managerial cognition standpoint to poseand address a straightforward question: do firm-level differences in the cognitive frameworks thatexecutives possess explain significant firm-levelvariance in the likelihood and speed of retaliationchoices?
Cognitive frameworks and variancein competitive retaliation
Strategic decision making inevitably involves topexecutives sifting and reconciling large amounts ofincomplete, ambiguous, and often conflicting data(McCall and Kaplan, 1985). This is particularlythe case where top executives meet the challengeof observing and reacting to competitors’ marketactions. In highly competitive environments, forexample, rivals purposefully launch moves whenleast expected and often do their best to obscure awide range of information, including the rationale,implementation, and sometimes even the eventualoutcomes of these attacks (D’Aveni, 1994). Thevery public, high-stakes, and risky nature of attacksalso means that these actions are accompaniedby a range of confounding ‘after-market’ explana-tions by management. These behaviors range fromgrandstanding and extrapolation of intent whenactions are successful, to ex post rationalization,distancing, and reframing when actions fail. Oneresult of this noisy information environment is thatit complicates the executives’ job of first monitor-ing competitors’ attacks and then deciding whetherand how to react (Chen, 1996).
Problems exist in dealing with this complex-ity because executives operate under conditionsof bounded rationality and their eventual choicesregarding competitive response reflect the inherentlimitations of their information processing routines(Daft and Weick, 1984; March and Simon, 1958).Literatures in both cognitive and social psychol-ogy show that decision makers cope with thisshortcoming in part by relying on subjective rep-resentations, or cognitive frameworks, that theydistill from prior experience, and that subsequentlyshape their attention to and interpretation of the
environment (Nadkarni and Barr, 2008; Dutton,1993; Fiske and Taylor, 1991; Galambos, Abelson,and Black, 1986).
Two findings from managerial cognition researchare particularly relevant when studying the con-nection between cognitive frameworks and retal-iation behavior. First, cognitive frameworks candiffer significantly across firms. These differencesexist because cognitive frames emerge largely fromthe private experiences and social interactions thatare unique to individuals or teams (Kiesler andSproull, 1982; Sutcliffe and Huber, 1998; Reger,1990). The existence of significant cognitive diver-sity across firms has been empirically validatedby numerous studies (Hodgkinson and Johnson,1994; Reger, 1990; Reger and Palmer, 1996; Wal-ton, 1986). The second important point is thatfirm-level differences in cognitive frameworks aresystematically related to differences in firm-levelstrategic behavior. Research that examines strate-gic change and adaptation show that differencesin cognitive frameworks lead to significant differ-ences in whether and how quickly executives reactto a wide range of external challenges, includ-ing changes in industry regulation and technology(Tripsas and Gavetti, 2000; Sharma, 2000; Gioiaand Thomas, 1996; Barr and Huff, 1997). Clearly,differences in cognitive frameworks are an impor-tant determinant of large-scale strategic change.However, the possibility that cognitive frameworkswill cause firms to react differently to competitiveattacks has not been fully explored in competitivedynamics research.
Consistent with arguments made in the strate-gic change literature, we argue that cognitiveframeworks will impact both the likelihood andspeed of competitive retaliation because they affecttwo important aspects of information process-ing—noticing and interpretation. In practice, exec-utives must first notice competitors’ market attacksbefore they can commit their own firm to retaliate.Noticing, however, is not sufficient to drive reac-tion (Barr et al., 1992). Executives must also inter-pret the information that they notice as important;as requiring response. Theory suggests that thecausal logics embedded within cognitive frame-works affect both noticing and interpretation (Cyertand March, 1963, Kiesler and Sproull, 1982). Inthe remainder of this section, we outline thesetheoretical links and hypothesize a relation-ship between differences in executives’ cognitive
frameworks and differences in firm retaliationbehavior.
Theory suggests that cognitive frameworks af-fect noticing by directing attention (Kahneman,1973). Generally speaking, individuals notice in-formation that is salient and information is mostsalient when it is unfamiliar, differs from expec-tations, or is goal relevant (Nadkarni and Barr,2008: 1399; Fiske and Taylor, 1991; Sutcliff andHuber, 1998). In estimating the influence of exec-utives’ cognitive frameworks on attention, empiri-cal research shows that executives are particularlyattentive to issues and information that they per-ceive, a priori, as causally affecting organizationaloutcomes. For example, Thomas, Sussman, andHenderson’s (2001) findings suggest that cogni-tive frameworks can lead managers to focus tele-scopically on the types of information that theyperceive as having been important in the past,and ignore other information. In their study ofCEOs, Boyd and Fulk (1996) show that envi-ronmental scanning is directed primarily towardinformation that is labeled as strategically impor-tant. Gioia and Thomas (1996) also reported thatdecision makers tend to focus attention on issuesthat they consider strategic. Given the evidencethat perceived strategic importance focuses man-agerial attention, it is logical to expect that com-petitive actions denoted in cognitive frameworksas being strategically important are more likely tobe noticed when undertaken by competitors thanthose not so labeled. For the purpose of mod-eling competitive action and reaction, we definestrategic importance as the belief held by top exec-utives that a type of competitive action influencesfirm-level performance outcomes such as financialperformance, competitiveness, or market position.Thus, we expect that cognitive frameworks thatcausally link a particular type of competitive actionto some concept of firm performance will increasethe likelihood that executives notice when com-petitors launch that type of attack in the market-place. Executives, however, do not simply react toall information that they notice (Barr et al., 1992).Once information is noticed, it must also be givenmeaning through the process of interpretation.
Similar to their influence on noticing, the cog-nitive frameworks that executives possess affectinterpretation because perceived causal relation-ships between information and important outcomesare the preexisting constructs against which the rel-evance of new information is judged (Fiske and
Taylor, 1991). Thomas et al. (1994), for exam-ple, reported that organizational decision makerstend to interpret issues based mainly on whetherthey influence performance, and that these causalinterpretations affected the subsequent course oforganizational action. Other research shows thatwhether and how quickly firms respond to environ-mental shifts depends on whether executives viewthose events as causally linked to organizationaloutcomes (Barr et al., 1992; Barr and Huff, 1997).Given this evidence that perceptions of strategicimportance affect interpretation and willingness toreact to information, it is logical to expect thatcompetitive actions denoted in cognitive frame-works as being strategically important are morelikely to be responded to, and more likely to beresponded to quickly when undertaken by com-petitors than those not so labeled.
In sum, theory suggests that cognitive frame-works shape attention and affect interpretation, andby extension affect whether and how quickly exec-utives react to external issues. Of particular impor-tance to the likelihood and speed of firm-levelaction are beliefs regarding the extent to whicha given action or event is linked to firm perfor-mance outcomes. We expect that similar processesinfluence decisions about competitive retaliation.Specifically, we hypothesize:
Hypothesis 1a: Executive-level cognitive frame-works that causally link a particular type ofcompetitive action to performance outcomes areassociated with a greater likelihood of firm retal-iation when a competitor initiates that type ofattack.
Hypotheses 1b: Executive-level cognitive frame-works that causally link a particular type ofcompetitive action to performance outcomes areassociated with a greater speed of firm retali-ation when a competitor initiates that type ofattack.
While prior work has established an importantrole for cognitive frameworks in directing top man-agement attention and interpretation, this influenceis bounded. The extent to which executives relyon socially constructed cognitive frameworks, andthus the extent to which differences in these frame-works foster heterogeneous firm-level behaviors,may depend on the strength of external cues, or
The influence of executive cognition on competitive dynamics 121
on information processing-propensity factors. Todevelop an integrated perspective that accounts forthese possible interactions, we address these issuesin the next two sections.
Cognitive frameworks and external cuesas alternate sources of subjective inference
External cues, like socially constructed cognitiveframeworks, are a source of subjective inferencethat executives rely on to make decisions withouthaving to bear the cost of actively collecting andassessing new data (Mischel, 1977). If news ofa competitor’s market moves prompts uncertaintyand the need for executives to choose a course ofretaliation (Haveman, 1993; Smith et al., 1991),then visible, easily discernable characteristics ofthat situation can prompt, or cue, plausible butsimilar reactions from most competitors (Mischel,1977). As noted earlier, much of the work in com-petitive dynamics research has emphasized neoin-stitutional thinking to identify the cues that promptthe most predictable and common behavior bycompetitors (e.g., Smith et al., 1991; Gimeno andWoo, 1996; Baum and Korn, 1999). But if cogni-tive frameworks and external cues are both sourcesof subjective inference, then executives’ relianceon one source over the other can have importantimplications for the extent to which competitivebehavior differs across firms. When executivesbase retaliation decisions on external cues, firmswill react in a similar fashion to the same cue. Agreater reliance on cognitive frameworks to eval-uate that same action, however, should result ininterfirm variation in the likelihood and timing ofretaliation to the same action.
Whether executives’ competitive retaliationchoices are influenced more by external cues orby firm-specific, cognitive frameworks dependsprimarily on the capacity for each of these mech-anisms to quickly satisfy some minimal informa-tion processing requirements that allow executivesto act (Cyert and March, 1963). The ability ofan external cue to influence managerial choicedepends on the strength of that cue, or its mag-nitude (e.g., DiMaggio and Powell, 1983; Meyerand Rowan, 1977). For example, competitive situ-ations marked by extremely high or extremely lowvalues for actor legitimacy, attack intensity, orga-nizational similarity, or multimarket commonalitywill exert relatively strong influences on retaliationdecisions. In these situations, strong cues represent
a viable external source of inference that fosterswidely held expectations regarding the best courseof reaction. In the absence of strong and directiveexternal cues, firm-level differences, like those thatarise from differences in cognitive frameworks,should have a greater influence on retaliation (Mis-chel, 1977). For this reason, we hypothesize thatthe influence of across-firm differences in cogni-tive frameworks will relate more strongly to vari-ance in retaliation behaviors when external cuesare weak, and that differences in cognitive frame-works will relate less strongly to retaliation behav-iors when external cues provide clear guidanceregarding the appropriateness of response.
Hypothesis 2: The influence of cognitive frame-works on competitive response will be less whencompetitive situations are characterized bystrong external cues (either positive or nega-tive), and greater when competitive situationsare characterized by weak external cues.
Interaction between cognitive frameworksand information processing propensity
Executives’ cognitive frameworks direct attention,but they do so only within the broader con-text of organizational and team processes (Oca-sio, 1997). Scholars who adopt the processing-propensity approach examine how noncognitivefactors such as the availability of slack resources,TMT age, or levels of TMT industry tenure andheterogeneity affect competitive retaliation (Chenand Hambrick, 1995; Hambrick et al., 1996).These factors are thought to affect how aggres-sively firms retaliate to the moves of rivals becausethey influence the thoroughness of executives’information processing activities, presumably byforcing executives to subordinate the influence oftheir existing cognitive frameworks in favor ofmore active, and presumably more exhaustive, col-lection and analysis of current data (Amason andSapienza, 1997; Pelled et al., 1999)1.
1 Slack resources are argued to affect the resources that managerscan commit to active data collection (Smith et al., 1991), whileTMT age and experience relate to managerial tendencies to favortheory-driven versus active processes (Hambrick et al., 1996).Characteristics of the TMT’s composition—specifically charac-teristics that reflect levels of diversity—are argued to promptactive data processing because they increase the likelihood ofgroup disagreement and task-oriented conflict, the resolution ofwhich subsequently prompts added evidence gathering, debate,and consensus building. This type of conflict, and by extension
Cognitive theory suggests that decision mak-ers will tend to use existing cognitive frame-works for understanding all but the most novelsituations, and will usually continue to do so aslong as perceptions provide an adequate meansfor interacting with the world (Louis and Sut-ton, 1991). Nevertheless, this tendency to makedecisions based mainly on existing cognitiveframeworks should be weaker when broader char-acteristics of the team or organization otherwiseprompt decision makers to use active informationprocessing routines. Routines that prompt decisionmakers to consider new information and recon-cile discordant information increase the possibilitythat existing cognitive frameworks are disproved,or at least that their influence is subordinated tocurrent evidence (Starbuck and Milliken, 1988).Conversely, the influence of cognitive frameworkson competitive response decisions should be great-est when organizational and social processes aresuch that top executives lack either the capac-ity or the tendency to process information thor-oughly. For these reasons, we expect that lackof organizational resources, high levels of TMTindustry tenure, and low levels of TMT hetero-geneity will strengthen the relationship betweenexecutives’ cognitive frameworks and retaliationdecisions.
Hypothesis 3: The influence of cognitive frame-works on competitive response will be moder-ated negatively by unabsorbed organizationalslack and TMT heterogeneity, and positively byTMT industry tenure.
METHODS
We studied the U.S. major domestic airline indus-try, defined as all domestic airlines that haveannual sales in excess of $100 million. This indus-try context was highly competitive while also con-sisting of a limited number of identifiable firms,which facilitated analyzing both executives’ cogni-tive frameworks and competitive interactions overtime. We selected the specific seven-year timeframe between 1993 and 1999 in order to avoid thedisruptive effects of industry shifts associated with
the factors that prompt it, has been shown to affect both like-lihood and timing of response, the latter because the conflictresolution process tends to slow eventual decision making.
the difficult operating conditions following the Per-sian Gulf War, which persisted until 1992, and thenegative effects of the terrorist attacks of Septem-ber 11, 2001. We collected data on the 10 airlinesthat constituted the industry during that period.
We used two different content analysis tech-niques to gather and match historical data on exec-utives’ cognitive frameworks and actual patternsof firm interaction. We minimized the chances ofresearcher bias during the various coding phases bycarefully sequencing the data collection activities.
Step 1: Identifying competitive action and re-sponse. We identified the patterns of firm actionand competitive response that occurred during thesample period by analyzing the ((news archivesof Aviation Daily and other comprehensive newsdatabases (Chen and Hambrick, 1995; Ferrier,2001). We followed the detailed procedure forstructured content analysis described by Smith andcolleagues (1991: 70–71). This process involvedfirst identifying potential competitive exchanges bysearching news archives for keywords that indicatethat a competitive action and corresponding reac-tion had occurred (e.g. ‘in response to,’ ‘reactedto,’ ‘following,’ etc.). A firm was coded as hav-ing ‘responded’ when news sources stated that aspecific behavior was a reaction to a specific mar-ket move initiated by another firm (Smith et al.,1991). The retaliations coded ranged from imme-diate market-based reactions (e.g., as matching acompetitor’s promotion, cutting travel agent com-missions) to immediate nonmarket-based reactions(e.g., laws suits to challenge market entry by acompetitor) to the announcement of longer-terminitiatives (e.g., announcing and seeking regula-tory approval for a new alliance). In all cases, thisprocess identifies specific countermoves, promptedby a rival’s action, that firms took to defend orimprove their positions in the marketplace (Chen,1996). We identified initial attacks by searchingbackward through the archive to find the originalreport of the first action (Jauch, Osborn, and Mar-tin, 1980). This procedure identified a total of 271initial actions and 599 corresponding competitiveresponses.
Step 2: Creating a competitive action taxonomy.Our goal of exploring whether executives cogni-tively distinguish between various market attacksrequired that we construct a taxonomy that fulfillstwo key criteria. First, the taxonomy must rep-resent the relevant forms of competition actually
The influence of executive cognition on competitive dynamics 123
used in the market at the time. Second, the cate-gorical distinctions must be perceptually relevantand actually affect managerial choice.
Prior research provides some guidance. Cogni-tive group research demonstrates that executivesroutinely compare competitors along key strate-gic dimensions (Porac and Thomas, 1994). As oneexample, Baum and Lant (1993) find that hotelexecutives identify competitors with similar priceand location and amenities as particularly rele-vant rivals. Our interest in characteristics of dis-creet market attacks, rather than broader firm-levelstrategic profiles that result from these choicesover time, suggested a similar but slightly differentapproach. Specifically, we conceptualized ‘actiontype’ as the perceptually relevant basis of competi-tive interaction that affects management’s responsedecisions.
To insure the objectivity of our taxonomy,we applied an inductive approach using a three-member expert panel and Q-sort procedures(Neuendorf, 2002). Each expert was given a stackof index cards containing the actual textual ac-counts of the 271 initial actions identified in Step 1.Experts were asked to sort the cards into categoriesof action. The experts first free-sorted the cardsindividually before they met to discuss differencesand formalize the final taxonomy. This collabora-tive process resulted in a taxonomy of six actiontypes: pricing, route, ticketing, collaboration, ser-vice, and cargo-related actions. The distinctionsbetween these actions types are similar to thosehighlighted in other research on the airline indus-try (e.g., Gimeno and Woo, 1996). To preserve theintegrity of the data collection process, the expertpanel did not sort the actual competitive actionsused by individual firms into the taxonomy at thattime; that sorting was done later by naı̈ve coders(Step 5).
Step 3: Analyzing cognitive frameworks. Becauseprior research shows that executives focus atten-tion on data that they perceive a priori as ‘strategi-cally important’ (Gioia and Thomas, 1996; Thomaset al., 2001), and consistent with our definition of‘strategically important’ as the belief that a typeof competitive action influences firm-level perfor-mance outcomes, we next sought to identify theextent to which cognitive frameworks espouseda specific causal relationship between each typeof competitive action and organizational perfor-mance. To accomplish this, we first used causalmapping techniques to analyze the accounts that
executives shared in their annual letters to share-holders during the sample period (Barr et al.,1992). The causal mapping was completed con-currently with, but separately from, Steps 1 and2. The rigorous protocol for identifying and cod-ing all stated causal associations existing within awritten message was initially developed by Axel-rod (1976), and later elaborated by Huff, Nara-pareddy, and Fletcher (1990). We used the fullprotocol, which specifies 10 distinct types ofcausality (e.g., Huff et al., 1990: 315). As a sim-ple example, the statement ‘Customer demand forlower real air fares forces us to continue to reducereal costs through improved labor and capital pro-ductivity’ was coded as:
Cause concept Relationship Effect concept
customerdemand forlower realair fares
+ forces us tocontinue toreduce realcosts
improved laborproductivity
+ reduce realcosts
improvedcapitalproductivity
+ reduce realcosts
Following prior research, we argue that causalanalysis of shareholder letters provides longitu-dinal insight into executives’ perception of thecomplex interplay between their own efforts, theexternal environment, and firm outcomes (Barr,1998; Ginsberg and Venkatraman, 1992). Lettersto shareholders are signed and publicly attributedto the CEO, who is most directly responsiblefor orchestrating firm action. However, in real-ity, formal organizational structure, the delegationof tasks, and the distributed nature of informa-tion and responsibility means that action requiresexecutives to interact socially to reduce uncer-tainty and ambiguity. As Cho and Hambrick note(2006: 455, 459–460), this does not presume thattop executives share a common set of percep-tions, or that all executives are involved in everyresponse decision, but rather that action is directedby the cognitive frameworks that are socially nego-tiated and advocated by those executives who exertthe most influence over administrative processes(Walsh and Fahey, 1986). In practice, these differ-ences in formal authority mean that the CEO iseffectively the most powerful decision maker, but
one whose own perspective is shaped by the com-peting perspectives that subordinates hold, and thatthey must integrate for decision making (Calori,Johnson, and Sarnin, 1994; Hambrick, 1994; Hale-blian and Finkelstein, 1993). Scholars have specif-ically argued that the understandings conveyed inshareholder letters represent the socially negotiatedperspectives of the CEO and other influential exec-utives (D’Aveni and MacMillan, 1990; Cho andHambrick, 2006).
Though prior research has demonstrated widesuccess linking causal statements elicited fromshareholder letters to subsequent firm outcomes,some argue that issue framing, persuasion, andattribution biases distort measures of cognitiveframes (Fiol, 1995). However, other research sug-gests that much of the apparently convenient attri-butions found in shareholder letters may reflectactual biases rather than effortful attempts atimpression management (Clapham and Schwenk,1991). Thus, while executives’ perceptions of real-ity may be inaccurate while also tending to excul-pate decision makers from blame, these cognitiveframes may, in fact, reflect executives’ currentthinking. This is not to say that shareholder let-ters are free from persuasion. Indeed, shareholderletters may be expected to embody the same typesof simplification, rationalization, and hedging thatis likely when any informant is required to offerpublic explanations of his or her conduct. The rel-evant issue is not whether measures of cognitiveframes extracted from shareholder letters includemeasurement error, but rather whether this mea-surement error is great enough to prevent detectionof relationships that are, in fact, statistically signif-icant. We suggest that empirical evidence repeat-edly linking the statements espoused in shareholderletters to the firm’s future actions strongly sup-ports the notion that these accounts adequatelyreflect the subjective perspectives of actual deci-sion makers (Cho and Hambrick, 2006), at leastfor the purpose of predicting firm-level strategicbehavior (Clapham and Schwenk, 1991). In sum,these considerations suggest that causal mappingof shareholder letters represents one of the bestavailable methodologies for meeting the goals ofthis study.
Letters to shareholders were available for 67 ofthe 70 sample firm years. Following prior research,shareholder letters were content analyzed by twoindependent research assistants unaware of the pur-pose of the study. Based on Robinson’s (1957)
measure of agreement, intercoder agreement onthe number of codable assertions in the sampletext was 95.5 percent. Agreement on the identi-fication of the cause concept (i.e., construct thatcauses), the effect concept (i.e., construct that isinfluenced), and the nature of the causal rela-tionship (e.g., +, −, etc.) was 98.1, 96, and94.7 percent, respectively. These levels of reli-ability far exceed the generally accepted lowerbounds of intercoder reliability in qualitative man-agement research. Intercoder and code-recode reli-ability were checked periodically throughout theremainder of this process and were consistent withthe initial levels of reliability.
Step 4: Identifying the strategic importance ofaction types. Step 3 of the data collection pro-cess revealed all stated causal assertions thatappeared in the executives’ annual letters, asser-tions that represent a focus on a wide range oftopics. This next step, Step 4, involved further con-tent analysis of these causal assertions to identifythose statements that directly address the types ofaction identified in the taxonomy. Specifically, wesought to identify espoused assertions that causallylinked the six specific types of competitive actionaddressed in this study to some concept of orga-nizational performance. To accomplish this, weapplied a grounded process of variable identifica-tion to build dictionary lists of language proxies foreach type of competitive action identified in Step2, as well as for overall organizational performance(Neuendorf, 2002).
The individual components of every causal as-sertion (i.e., cause concepts and effect concepts)elicited in the causal mapping process were blindlisted alphabetically in a single electronic file.The lead researcher then used the expert panel’sdescription for each type of action to identifyactual extracts of shareholder letter texts to builda dictionary list. For example, language such as‘pressure to lower fares,’ ‘fare competition,’ or ‘theability to sustain higher fares’ were tagged as con-structs related to pricing actions. At the same time,shareholder language that could be reasonablycoded as synonymous with overall organizationalperformance, both positive and negative, was iden-tified and added to a separate dictionary. For exam-ple, phrases such as ‘long-term success,’ ‘achiev-ing record financial performance,’ ‘large losses,’‘market position,’ ‘competitiveness,’ and so forthwere noted as language proxies for organizationalperformance. These initial dictionary lists were
The influence of executive cognition on competitive dynamics 125
then submitted for approval to the expert panel.Several adjustments reflecting direction from theexpert panel were made before consensus amongthe panel members was reached. Samples from thevarious dictionary lists are shown in the Appendix.
We next assessed whether executives’ cogni-tive frameworks causally linked the six types ofcompetitive action to overall firm performance.To account for changes in perception over time,we measured these cognitive frameworks in eachyear. In addition to direct causal relationships,we accounted for perceptual interrelatedness bycoding second order mediated causal relation-ships. Direct causal relationships, or instanceswhere a type of competitive action was notedas directly influencing organizational performance,were coded as 2. Second order mediated relation-ships between a type of action and organizationalperformance (e.g., ability to gain access to prof-itable new routes + increased traffic; increasedtraffic + winning in the marketplace) were codedas 1. Lastly, the lack of a stated causal linkbetween a type of competitive action and perfor-mance resulted in a code of 0.
This coding process confirmed a significant levelof perceptual diversity within the airline industryregarding which types of action influence firm per-formance. In each year, there were no instanceswhere executives at all 10 airlines unanimouslyagreed that a type of action either influencedor did not influence firm performance. Only 25percent of the time did more than half of thesample agree that a particular type of action influ-enced performance. Fifty-eight percent of the time,executives from three or fewer of the 10 firmsagreed that a particular type of action influencedfirm performance. The data also suggest variabil-ity in cognitive frameworks over time. In onlytwo instances did executives at a firm claim, forsix years straight, that a type of action influencedfirm performance. Seventy percent of the time, theespoused relationship between a type of compet-itive action and performance changed during thesample period.
Step 5: Sorting competitive action data. Finally,the data collection process concluded when twonew naı̈ve coders independently categorized the271 initial competitive actions identified in Step1 into the taxonomy. Initial agreement betweenthese coders was 93.5 percent. Following simi-lar research, we asked the coders to undertake a
consensus-seeking process through which they fur-ther examined instances of disagreement (D’Aveniand MacMillan, 1990). Through that process thecoders reached a final agreement of 98.6 percent.We excluded four initial actions on which agree-ment could not be reached, as well as all initialactions that were coded into the ‘other’ category.This resulted in 241 initial competitive attackssorted into six action-type categories.
This lock-step data collection procedure resultedin two longitudinal databases that were used to testthe hypotheses. The first contains a longitudinalrecord of 241 competitive attacks during the sam-ple period, as well as the type of action used in thatattack and whether and when each other firm retal-iated. The second database contains a longitudinalrecord for each firm of whether cognitive frame-works causally link a type of competitive action toperformance outcomes.
Measures
Likelihood of retaliation was measured as whethera firm retaliated against a specific market move(Chen and MacMillan, 1992). We coded a firm asresponding (coded as 1) or not responding (codedas 0) to an attack based on the structured con-tent analysis of Aviation Daily. Retaliation lagwas defined as the number of days that lapsedbefore a response was reported in Aviation Daily.Strategic importance captures the extent to whichthe cognitive framework proffered by a firm’sexecutives causally link the type of competitiveaction used in an attack to some form of organi-zational performance. As noted, we coded directcausal relationships as 2, mediated causal rela-tionships as 1, and the absence of a causal rela-tionship as 0. We measured executives’ assertionsregarding the importance of each type of actionduring the period preceding the year in whicha rival’s attack and the corresponding competi-tive retaliation were actually observed. This lagbetween cognitive frameworks and the observedpatterns of interaction (i.e., action and response)assured that cognitive frameworks existed priorto the initiation of market actions, rather than expost.
Given our goal to assess the influence of cogni-tive frameworks within the context of an integratedapproach, our empirical model also measures anarray of cue variables. First, we used two items tocapture the overarching concept of firm legitimacy.
We measured actor’s size as the amount of totalassets owned by a firm in each year as reportedin Compustat. We also measured actor’s perfor-mance as the average return on assets (ROA) of afirm over the prior three years (Carpenter, 2002).These variables were measured in each year andwere collected from Compustat.
Second, we measured organizational similar-ity as one minus the Euclidean distance betweenseven strategic dimensions that capture critical ele-ments of strategy in the major airline industry.This resulted in a variable ranging from zero toone, with higher scores representing higher levelsof organizational similarity. The seven dimensionsare (1) average density of the markets served,(2) average distance of routes served, (3) averageseats per plane for each market, (4) average dailyflight frequency, (5) average market share in themarkets in which they compete, (6) customer ser-vice expense per mile served, and (7) the averagefare premium over standard industry fare level.The seven dimensions are similar to those used byGimeno and Woo (1996), and were collected fromTransStats, a public database operated by the U.S.Bureau of Transportation. Organizational similar-ity was measured for each pair of firms, in eachyear.
Third, we measured multimarket commonalityaccording to the methodology set forward by Baumand Korn (1999) for each pair of firms in each year.Finally, to capture variation in importance thatmight be attributable to differences in geographicmarkets, we measured attack intensity as a binaryvariable, capturing whether a firm’s attack affecteda geographic market in which a potential respondercompeted (Chen, Smith, and Grimm, 1992). Bothmultimarket and intensity measures were codedfrom TransStats.
We also measured and accounted for threeprocessing-propensity variables. First, organiza-tional slack captured the overall level of resourceavailability, with higher scores reflecting an abun-dance of resources available for information pro-cessing routines. Consistent with prior research(Ferrier, 2001; Smith et al., 1991), we measuredorganizational slack as the quick ratio for thefocal firm in each year. Second, TMT industrytenure was calculated as the average number ofyears of experience in the airline industry forTMT members. Finally, we captured TMT organi-zational tenure heterogeneity using the coefficientof variation, calculated as the standard deviation
of the TMT’s organizational tenure divided bythe average organizational tenure (Hambrick et al.,1996). Consistent with prior research (Carpenter,2002), we defined the TMT as the top two tiers ofmanagement within the organization in each year.Data for TMT variables were collected from var-ious sources including Standard & Poor’s Regis-ter of Corporations, Directors and Executives, andDun & Bradstreet’s Reference Book of CorporateManagements.
Finally, we included a number of controls tocapture the effects of other potential explana-tions for variation in the likelihood and speed ofresponse. We controlled for each potential respon-der’s size (i.e., total assets), responder’s perfor-mance (i.e., three-year ROA), TMT size, and meanTMT age. We also controlled for each firm’s attackpropensity, calculated as the number of attacks thateach firm initiated in the marketplace, in each year.Variables for the cross products were centered priorto the analysis.
ANALYSIS AND RESULTS
The entire dataset consisted of seven years of paneldata with 241 individual attack events. Given thateach initial attack prompted an opportunity forthe other nine sample firms to react, the databaseincludes a potential 2,169 observations, represent-ing attacking-firm and responding-firm pairs. How-ever, we employed a one-year lag design suchthat cognitive frameworks in one year were usedto predict competitive actions and responses inthe following year. This lag effectively restrictedthe data set to six analyzable panels consistingof 174 attacks, for a total of 1,566 attacker-responder observations. Three missing letters toshareholders further obliged us to exclude dataregarding the competitive response behavior forthree firm years. This reduced the final sam-ple size to 1,439 analyzable attacker-responderfirm observations, which is based on 174 ana-lyzable attacks and 369 discernable retaliations.Summary statistics for all variables are shown inTable 2.
We used logistic regression to test hypothe-ses related to the likelihood that each separatefirm retaliates against a specific market attack.Given that a major concern with cross-sectionaltime-series data is interdependence across observa-tions (Sayrs, 1989), we clustered standard errors.
SI × Actor size −2.52e-06 0.0001388SI × Actor performance −0.0020837 0.0115738SI × Organizational similarity −0.7112733+ 3.023021SI × Multimarket commonality 0.2548144 −1.267461SI × Attack intensity 0.1666298 −2.216786∗
SI × Organizational slack 0.1589708 −3.174288SI × TMT industry tenure 0.0000299 −0.0279189SI × TMT org. tenure het. −0.5299099∗ −0.0016676N 1439 1439 369 369Log likelihood −700.848∗ −695.309∗
Pseudo R2 0.1778 0.1843 0.1032 0.1212
+ p < 0.10; ∗ p < 0.05; ∗∗ p < 0.01.
Similarly, we used ordinary least squares regres-sion with clustered standard errors to test hy-potheses related to retaliation lag. Table 3contains the results of the analysis. Models 1 and3 of Table 3 show the baseline models predict-ing, respectively, competitive retaliation and retal-iation lag. Models 2 and 4 include cross productmoderation.
The analyses provide interesting results. Hypoth-esis 1a argues that differences in executives’ cogni-tive frameworks will predict firm-level differencesin whether firms retaliate against a competitor’smarket move. This hypothesis received very strongsupport. As expected, Model 1 shows that a firmis significantly more likely to challenge a competi-tor’s market move when those executives possesscognitive frameworks that causally link the typeof attack used to firm performance (β = 0 .12 ;p < 0 .05 ). In practical terms, calculation of the
odds-ratio shows that firms are roughly 25 percentmore likely to retaliate against a particular mar-ket attack when executives’ cognitive frameworksdirectly link that specific type of action to firmperformance, as opposed to when there is no suchlink to performance.
The data also provide very strong support forHypothesis 1b, which linked labeling of an actiontype as strategically important to faster retaliationspeeds (i.e., shorter retaliation lags). As expected,Model 3 shows that the coefficient for strate-gic importance is significant and negative, indi-cating that cognitive frameworks that causallylink the type of competitive action used to firmperformance are associated with speedier retali-ations (β = −3 .02 ; p < 0 .01 ). The average lagfor all of the retaliations included in our sample is6.7 days. Executives retaliated, on average, after3.7 days when their cognitive frameworks labeled
The influence of executive cognition on competitive dynamics 129
a type of action as indirectly affecting firm perfor-mance. Executives retaliated, on average, withinone day when those frameworks labeled the typeof action used in the attack as directly linked tofirm performance.
Hypothesis 2 addressed the extent to which themagnitude of external cues moderates the influ-ence of cognitive frameworks on retaliation deci-sions. Consistent with prior research in this area,a number of the external cues directly predictedwhether and how quickly a firm retaliates against acompetitor’s market action. Our results, however,do not support the hypothesized interactions. Asexpected, the interaction between organizationalsimilarity and strategic importance is negative forpredicting likelihood of retaliation, indicating thatextremely high or low levels of similarity weakenthe influence of executives’ cognitive frameworks.Yet, this interaction is only marginally significant(p < 0.10). Contrary to our hypothesis, the coef-ficient for the interaction between attack inten-sity and strategic importance was negative andsignificant (p < 0.05) for retaliation lag. Thisindicates that the tendency for cognitive frame-works to shorten retaliation lags was stronger, notweaker, when external cues pertaining to the inten-sity of that action were strong. The interactionterm for attack intensity was not significant whenmodeling likelihood of retaliation. Given thesemixed findings, the study provides no support forHypothesis 2.
Hypothesis 3 proposed that the influence of cog-nitive frameworks on retaliation will be weakerwhen organizational and TMT-level characteristicsincrease the likelihood that executives are alreadypredisposed to using active, thorough informa-tion processing routines. Again, several of theprocessing-propensity variables directly predicteither likelihood or lag of retaliation. However,only one of the three interactions that we exam-ined was statistically significant. Specifically, thecoefficient for the interaction between TMT orga-nizational tenure heterogeneity and strategic impor-tance is significant and negative (p < 0.05) forlikelihood of retaliation, indicating that the influ-ence of cognitive frameworks on likelihood ofretaliation is weaker when teams already benefitfrom tenure heterogeneity. This interaction termwas not significant for the analysis of retalia-tion lag. Based on this, we conclude that ouranalysis provides, at best, very weak support forHypothesis 3.
DISCUSSION
Researchers have long sought to accurately modelthe factors that influence competitive responsebehavior. In their review and extension of com-petitive dynamics research, Hambrick and his col-leagues (1996) argue that those factors that leadto across-firm differences in response behavior areparticularly important for understanding the com-plex nature of market interaction. We agree withthis argument and in this study seek to furtherour understanding of across-firm differences byinvestigating the influence of executives’ cogni-tive frameworks on the retaliation behaviors oftheir firms. We note that the cue and processing-propensity approaches embody distinct sets ofassumptions about information processing, whichmeans that these two approaches effectively modeldifferent types of broad-based variance in compet-itive behavior. The central premise of our studyis that firm-level differences that arise due tovariation in cognitive frameworks represent yeta third type of variance; one that addresses thefine-grained and firm-specific retaliation procliv-ities that are not captured in prior research. Wesuggest that an integrated perspective that simul-taneously considers all three approaches is crucialto developing a better understanding of how inter-action unfolds in the marketplace.
Our results clearly demonstrate that differencesin executives’ cognitive frameworks relate system-atically to whether and how quickly they committheir firm to challenge an adversary’s action. Ata broad level, this is consistent with theory thatsuggests that differences in executives’ cognitiveframeworks direct patterns of attention and inter-pretation (Thomas et al., 2001). It is also consistentwith empirical research from strategic manage-ment that demonstrates that differences in execu-tives’ cognitive frameworks cause firms to reactdifferently to external stimuli (e.g., Fiol, 1989;Barr et al., 1992), and with broader research thatsuggests that executives’ subjective perceptionsinfluence how these decision makers view com-petitive environments and firms (Lant and Baum,1995). Within the context of competitive dynam-ics research, executives’ cognitive frameworksexplain why executives at a firm are systemati-cally more likely to challenge some types of com-petitive action, but ignore others. Evidence of asignificant link between cognitive frameworks andthe likelihood and speed of competitive response
helps explain why and how these sensitivities dif-fer from firm to firm. As noted in the resultssection, examination of the odds-ratio and regres-sion coefficients show that the interfirm variationsin response attributable to variation in cognitiveframeworks are of practical, as well as statisticalsignificance.
We also argued that the presence of strong exter-nal cues should lessen the influence of cognitiveframeworks. We reasoned that strong cues clearlyindicate the course of action that responders shouldtake, thus minimizing the individual-level differ-ences that are likely to flourish when executivescope with weak or ambivalent cues by referring totheir own prior experiences. Our analysis providesonly weak evidence that the magnitude of cuesmoderate our main effect. Of the five cue vari-ables, only attack intensity affects the influence ofcognitive frameworks on response. Contrary to ourexpectations, the effect between cognitive frame-works and response lag were larger when cues ofintensity were strong. However, we found no evi-dence that the remaining four cues moderate theinfluence of response.
One explanation for the paucity of interactionsbetween cues and cognitive frameworks may bethat while external cues and existing cognitiveframeworks are clearly distinct sources of sub-jective inference, as modes of information pro-cessing they are both sufficiently ‘low-cost’ thatexecutives need not rely on one to the exclusionof the other. Theorists conceptualize informationprocessing activities as existing along a contin-uum between active and theory-driven informa-tion processing (Walsh, 1988). The differences incost (in terms of information speed and cogni-tive effort) between active and theory-driven rou-tines are clear—active processing requires muchgreater time and effort (Gioia, 1986; Galamboset al., 1986). However, both external cues and cog-nitive frameworks exist on the theory-driven endof that continuum. Cognitive scientists also suggestthat decision makers will continue to base deci-sions on cognitive frameworks even when thoseframeworks apparently conflict with other sourcesof data, including the implicit meaning that theyinfer from external cues. Over the long term,repeated dissonance between executives’ cogni-tive frameworks and cues can prompt executivesto challenge and possibly revise their cognitiveframeworks (Lant, Milliken, and Batra, 1992; Star-buck and Milliken, 1988). It is possible that by
examining the influence of cognitive frameworksand cues concurrently, our analysis does not cap-ture the interaction and possible subjugation ofcognitive frameworks that happens only overlonger periods of time.
The finding of a significant and positive interac-tion between attack intensity and cognitive frame-works on speed of response was unexpected.However, it is consistent with work that in periodsof stress—and high attack intensity would be con-sidered stressful in most instances—individualsfall back on their most basic learned response(Barthol and Ku, 1959). Further study is neces-sary to determine the generalizability and cause ofthis relationship.
We hypothesized that cognitive frameworks willhave a stronger influence on retaliation whenthe organizational and team-level characteristicsthat can prompt executives toward active infor-mation processing are otherwise absent. Of thethree processing-propensity variables included inour analysis, only TMT organizational tenure het-erogeneity significantly moderated the influence ofcognitive frameworks on likelihood of retaliation.This finding is consistent with our argument thathigher levels of heterogeneity increase the likeli-hood that executives use more thorough decisionmaking processes, rather than rely on their cogni-tive frameworks (Bantel and Jackson, 1989). Wedid not, however, find a similar effect for responselag, indicating that the effect of cognitive frame-works on response lag is not influenced by theuse of more thorough decision making processes.Though unexpected, this second result is consistentwith findings by Eisenhardt (1989) that suggestthat decision making can be both comprehensiveand fast.
One interpretation of the insignificant interac-tions between cognitive frameworks and measuresof slack is that the effect of these frameworks isindependent of the additional data collection capa-bilities that have been linked to slack. The maineffects for slack, however, suggests that, for oursample, additional slack may not be an indicatorof information processing propensity, but rather anindicator of ability to respond. Firms with greaterslack resources at their disposal may be more ableto respond, and also have the luxury of delayingresponse until the effect of the initial action (onthe initiating firm and/or on others in the industry)becomes clearer. Similarly, we also found neither adirect nor indirect effect for TMT industry tenure.
The influence of executive cognition on competitive dynamics 131
As we argued, prior research suggests that as theTMT gains industry experience, executives eschewactive information search and processing in favorof more automatic reactions rooted in subjectivebeliefs. One possibility is that experience is a weakproxy for executives’ likely adherence to cognitiveframes, and that the stilting influence of long expe-rience is difficult to detect when models directlycontrol for multiple alternative sources of subjec-tive inference, such as external cues and cognitiveframeworks. Speaking generally, the weak inter-actions between the various processing-propensityvariables and cognitive frameworks suggest thatmore work is needed to understand how, andunder what contexts, these factors drive responsein markets.
Our results have several implications for thestudy of competitive dynamics. First, our resultscontribute to competitive dynamics research byhighlighting the importance of devoting moreattention to the subjective factors that cause non-conforming, or idiosyncratic, patterns of attentionand retaliation at the firm level. Evidence thatunexamined cognitive differences can explain vari-ation in firm-level behavior suggests that existingtheories underestimate the extent to which compet-itive response behaviors vary across firms. Priorwork (Hambrick et al., 1996; Chen, 1996) hashighlighted the importance of interfirm variation inresponse to the development of a theory of com-petitive dynamics, yet this has remained an under-studied phenomenon. The strong relationships thatwe found between cognitive frameworks and retal-iation, over and above the effects of cues andprocessing propensity predicted by prior research,suggest that further investigation of more micro-level factors, including the cognitive frameworksof executives, would be a fruitful avenue for futureresearch.
Second, our results suggest that an increasedemphasis on variation in cognitive frameworksextends areas of competitive dynamics researchthat have focused on longer-term patterns of inter-firm rivalry rather than on discreet responses toparticular actions. Research on multimarket com-monality (Baum and Korn, 1999) and on resourcesimilarity (Gimeno and Woo, 1996), for exam-ple, has examined broad factors that promote orrepress the number of exchanges between pairs offirms over time. Our findings suggest that someappreciation for the specific patterns of cogni-tive agreement, or the specific issues on which
executives at different firms agree and disagree,provide useful insight into firm-specific patternsof competitive interaction. For example, cognitiveagreement between firms regarding which typesof actions influence firm performance may meanthat executives at those firms closely monitor andassess the same type of actions. More specifi-cally, understanding these patterns of agreementand disagreement may help clarify why long-terminterfirm rivalry manifests through certain types ofexchanges but not through others.
In the interest of offering further evidence asto the plausibility of this argument, we performeda post hoc analysis of our current data. Resultsof an analysis (not presented here) of the firm-pair dyads in our sample suggests that, over thelong term, pairs of firms are more likely to inter-act competitively through the subset of action typesthat executives at both firms subjectively label asimportant, rather than through those action typesthat they disagreed upon (p < 0 .05 ). Thus, futureresearch might examine several questions linkingspecific patterns of cognitive agreement to long-term rivalry. For instance, how does the overalllevel of cognitive agreement between executives attwo firms influence the severity of rivalry betweenthose competitors? At the industry level, does anoverall lack of cognitive diversity in markets leadto more intense rivalry? The answers to these ques-tions have important prescriptive considerationsfor executives. To the extent that a firm’s actionsand strategies reflect the personal preferences oftop managers (Hambrick and Mason, 1984), highlevels of cognitive diversity may promote largerdifferences between firms, including higher lev-els of differentiation and the creation of uniqueand unassailable resource profiles. Conversely, thefailure of executives to develop cognitively dif-ferentiated mindsets may result in an inability tofind competitive positions safe from the negativeconsequences of rivalry. In any case, the stronginfluence of cognitive differences on decision mak-ing suggests that the mix of factors that pro-motes idiosyncratic versus isomorphic cognitiveframeworks deserves more attention. Of particularimportance is understanding why executives per-sist in holding nonconforming cognitions and howdoing so might define firm behavior.
Finally, this study contributes to the broaderliteratures on managerial response to competitiveissues and change. Ocasio’s (1997) attention-basedview of the firm highlights the multiplicity and
complexity of factors that influence informationprocessing and subsequent organizational behav-ior. Prior strategy and cognition research has inves-tigated how belief differences influence managerialresponse to a number of different stimuli (e.g., Barrand Huff, 1997; Gioia and Thomas, 1996; Kaplan,Murray, and Henderson, 2003; Tripsas and Gavetti,2000). Other research has examined the industry,organizational, and social determinants of interpre-tation (Thomas et al., 1994). This study builds onthese literatures by assessing specific interactionsbetween cognitively directed attention and both sit-uated and distributed determinants of informationprocessing. The results of our moderation analysesare surprising and contradict established views thatthe existence of strong situational cues or organiza-tional factors will limit the extent to which cogni-tive frameworks of executives influence firm-levelbehavior. Our finding that cognitive frameworkshave a direct effect that is evidently independentof these more macro-level factors points to theimportance of further teasing out of the relation-ship between these different levels and types ofinformation processing.
Our results also have implications for managers.In particular, our findings suggest that a betteranticipation for whether and how a specific rivalmight respond differently to the various competi-tive repertoires at a manager’s firm’s disposal mayhelp those executives better manage the compet-itive relationship with particular firms (Zajac andBazerman, 1991). For example, executives may beable to reduce the risk of response from a trou-blesome rival by utilizing the types of action thatthey themselves view as important, but that theyknow to be valued less by their rival. This type ofinformed manipulation may even help firms attackrivals with greater immunity (Schumpeter, 1934).
Limitations and future considerations
Though our results suggest many benefits from arenewed and more detailed interest in exploringthe subjective antecedents of firm response, it isimportant to note some limitations. First, manydifferent kinds of managerial beliefs can influenceexecutives’ response decisions. Indeed, the kind ofcause-effect relationships that we examined is onlyone of many subjective beliefs that can promptheterogeneous firm behavior. While the variablethat we explored explains significant variance, it islikely that, if anything, this study underestimates
the degree to which response behavior differs fromfirm to firm. Future research that simultaneouslyexamines other subjective factors that are asso-ciated with nonconforming competitive behaviorswould be useful.
Second, the nature of executives’ language in theshareholders letter required that we make severalmethodological choices. For example, the causal-mapping protocol outlined by Huff et al. (1990:315) includes several different types of associa-tion (e.g., positive effect, negative effect, no causaleffect, indeterminate effect, example, equivalency,etc.). The specificity of executives’ language meantthat letters displayed several different types ofassociation for the same concepts, which made itimpractical to define only one relationship betweenconcepts. Given our focus on establishing that per-ceptions of causality affect retaliation choices, wefocused on whether letters outlined causal (versusnoncausal) relationships between concepts. Thus,we were able to study only the effects of the exis-tence of a stated causal influence of action types onfirm performance outcomes, rather than the effectsof the more specific types of causal linkages iden-tified through the coding process. Prior researchhas also shown that executives exhibit differentsubjective sensitivities to threat and opportunityinformation (Jackson and Dutton, 1988). We, how-ever, adopted the conservative approach that aninitial focus only on the presence and degree ofcausality captured the relevant characteristics ofexecutives’ cognitive frameworks. Distinguishingbetween different types of causal relationships, aswell as between positive and negative relation-ships, may empirically explain more variance thanoverall causality alone, but this issue is beyondthe scope of this initial study. Future researchthat more closely examines both of these issuesmay be valuable for modeling why executivescommit their firms to challenge an adversary’sactions.
Third, our focus on offering a cognitive perspec-tive on competitive dynamics led us to examinethe relationship between cognitive frameworks andsubsequent competitive retaliation. In developingour arguments, we tie causal beliefs theoretically tothe processes of noticing and interpretation, but wedo not empirically capture these intermediate stepsof the information processing and retaliation pro-cess. It is possible, and even likely, that executivesnotice actions but do not respond because theydecide that they should not. Our study examines a
The influence of executive cognition on competitive dynamics 133
limited number of bases for interpretation, namelyperceived strategic importance and various exter-nal cues. Clearly, retaliation decisions involve amyriad of additional considerations that may provea more nuanced view of how executives approachrivalry.
Finally, the fact that the airline industry hasbeen studied so frequently by competitive dynam-ics researchers could be considered a limitation.However, studying the airline industry allowed usto gauge the value of an integrated perspectivewithin the existing body of research. In retro-spect, our findings may, in fact, provide a con-servative estimate of the importance of cognitiveframeworks because the airline industry providesa particularly harsh test of our central hypothe-sis. Though our data suggest that executives atdifferent firms possess heterogeneous cognitiveframeworks, competition in the airline industryeffectively manifested itself through a relativelynarrow range of traditional, non-innovative andpresumably well-understood action types. Giventhat dynamism and strategic experimentation atthe industry level should exacerbate differencesbetween firms, follow-up studies linking cognitiveframeworks to competitive response in other indus-tries may find larger effect sizes.
CONCLUSION
Understanding the evolution of competitivedynamics requires an understanding of what drivesresponse to competitive actions. Prior researchutilizing theories of information processing hasoutlined the broad central tendencies that predicthow firms react to competitive situation. Researchhas focused less on the retaliation proclivities offirms, or why and when the behavior of particularfirms deviates from these central tendencies. Exist-ing theory suggests that in complex and ambigu-ous situations, executives base their decisions inpart on the cognitive frameworks that they distillfrom prior experience (Nadkarni and Barr, 2008;Walsh, 1995 Cyert and March, 1963). The cogni-tive frameworks that executives possess can differsubstantially across firms, and research has shownthat these differences lead to variance in a widerange of strategic decisions. Our empirical exam-ination of this idea in the context of firm-levelresponse to competitive action suggests that accu-rately modeling the likely competitive response
of individual firms will be difficult unless mod-els directly account for the content of cognitiveframeworks. At a broader level, we suggest thatfully understanding the antecedents of competi-tive response behavior requires a greater empha-sis on the many subjective factors that lead toidiosyncratic patterns of attention, interpretation,and reaction.
ACKNOWLEDGEMENTS
We gratefully acknowledge the contributions ofEditor Richard Bettis and two anonymous review-ers in helping to improve our study. We areindebted to Susan Houghton, Mark Keil, GaryBallinger, Tom Bateman, Amanda Cowen, andAdelaide King for their comments on earlier draftsof this paper. This research was funded, in part, bythe J. Mack Robinson College of Business and theMcIntire Foundation’s Raichlen Dean’s Fund forAcademic Excellence.
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The influence of executive cognition on competitive dynamics 137
APPENDIX: DESCRIPTIONSOF ACTION TYPES, PERFORMANCE,AND SAMPLE EXCEPTS FROMDICTIONARY LIST
Pricing actions: Competitive actions that fall intothe pricing domain include all actions that affectthe overall and final cost of air service to customerswith the purpose of influencing product demand ormarket share. As such, this domain includes, butis not limited to, issues such as: price increases;price decreases; various forms of price promotion;promotional fares; introductory fares; and changesto pricing elements of a company’s fare structure.
[excerpts from dictionary: ‘a modest increasein average fares’; ‘higher average fares’; ‘fareincreases’; ‘rational pricing’; ‘domestic fare war’;‘being competitive on price’; ‘. . .had to matchfare actions’; ‘our ability to provide low fares’;‘ increased availability of low fares’; ‘price com-petition’; ‘low fare airlines’; ‘fare promotions’;‘increased competition from low-cost’, ‘friends flyfree program’]
Route actions: Competitive actions that fall intothe route domain include all actions that affect oralter the combination of markets/destinations thatan airline serves. As such, this domain includes,but is not limited to, issues such as: adding stand-alone service to or from a new market; exit-ing an existing route; increasing daily frequencieson an existing route; decreasing daily frequencieson an existing route; formal filings with govern-mental agencies requesting new stand-alone orback-up service authority; formal filings with gov-ernmental agencies requesting renewal of stand-alone or back-up service authority; direct purchaseof gates/authority from other companies.
[excerpts from dictionary: ‘changes to the routestructure’; ‘additional route authorities’; ‘in-creased service to Tampa’; ‘entering 54 new des-tinations’; ‘minimizing route overlap’; ‘unprof-itable flights have been eliminated’; ‘increaseddepartures’; ‘acquired routes’; ‘expanded routes’;‘added new markets’; ‘continued development ofroutes’; ‘adding to our list of destinations’; ‘everynew city that (company) enters; ‘international routestructure’; ‘inaugurated new service’; ‘discontin-ued flying on routes’]
Ticketing actions: Competitive actions that fallinto the ticketing domain include all actions thataffect or alter activities related to the distribution ofpassenger boarding authority. As such this domain
includes, but is not limited to, issues such as:airlines’ utilization of travel agencies; changes totravel agent commission rates; computerized reser-vation systems (CRS); regulations related to CRSdisplay; Internet-based ticket sales/reservations;telephonic-based ticket sales/reservations; ticket-ing related alliances with Internet companies;changes to ticket purchase rules; changes to ticketchange/cancellation policies.
[excerpts from dictionary: ‘Travel agent com-missions’; ‘changing commissions paid to travelagents’; ‘commission caps’; ‘electronic ticketingprogram’; ‘electronic distribution’; ‘E-tickets’;‘redesign booking system’; ‘ticketless travel op-tions’; ‘emergence of Internet ticketing technolo-gies’; ‘reservations’; ‘Internet booking systems’;]
Collaboration actions: Competitive actions thatfall into the collaboration domain include allactions that affect or alter those inter-airline col-laborative agreements that a company utilizes tocomplement, augment, or otherwise improve itsown route system. As such, this domain includes,but is not limited to, issues such as: code shar-ing with domestic or foreign partners; equity ornon-equity strategic alliances between domesticor foreign partners; formal request to govern-mental agencies requesting new code-share ser-vice authority; formal filings with governmentalagencies requesting renewal of code-share ser-vice authority; formal filing with governmentalagencies requesting authority to display one air-line’s code on another airline’s flights; formalrequest to governmental agencies requesting anti-trust exemptions related with collaboration; jointmarketing agreements; reciprocity between fre-quent flyer programs.
[excerpts from dictionary: ‘new marketing alli-ances’; ‘code-sharing agreement’; ‘global alli-ance’; ‘alliance partners’; ‘expanding alliances’;‘code sharing’; ‘formed an alliance with Ameri-can Airlines’; ‘the Delta-Air France partnership’;‘being part of a global network alliance’; ‘an inno-vative alliance with Northwest’; ‘exploit synergiesfrom combined systems’]
Service actions: Competitive actions that fallinto the customer service domain include allactions that affect or alter the level/type ofcustomer service experienced by an airline’spassenger. As such, this domain includes, but is notlimited to, issues such as: design of aircraft inte-riors related to customer comfort, preferences, orsatisfaction; decoration of aircraft interiors related
to customer comfort, preferences, or satisfaction;variety of service class offerings (i.e., first-class,business-class, coach); aircraft cleanliness; passen-ger meals/beverages; aircraft amenities; leg room;quality/level of in-flight steward service; passengerservice upgrades; airport lounges; airline mem-bership clubs; frequent flyer programs, customerloyalty programs; on-time flying; reliability of bag-gage service.
[excerpts from dictionary: ‘redefined customerservice’; ‘adding seats without adversely affectingleg room’; ‘an industry leading business class ser-vice’; ‘being superior in service’; ‘commitment tocustomer service’; ‘service accountability’]
Cargo actions: Competitive actions that fall intothe cargo domain include all actions that affect oralter aspects of an airline’s non-passenger serviceactivities. As such, this domain includes, but isnot limited to, issues such as: shipment of freight;shipment of mail; cargo authorities; cargo authorityrenewals; freight contracts; cargo code sharingauthorities.
[excerpts from dictionary: ‘building a strongcargo presence’; ‘being one of the leading air-freight operators’; ‘increased our dedicated 747cargo flights’; ‘reliable mail and freightoperation’]
Other: Other represents a residual category foractions not readily classifiable above.
Organizational performance: This constructincludes all concepts, terms, and references thatcan be reasonably considered synonymous withorganizational-level performance. Some examplesinclude: our performance; falling short of ourgoals; our success; profitability; stock price; earn-ings; poor results; competitive advantage, or ourability to compete in the marketplace; market lead-ership; reaching our goals; and so forth. Concepts,terms, and references were not included in thiscategory on the sole basis that they are positiveorganizational aspects, or that they affect organi-zational performance.
[excerpts from dictionary: ‘achieve record earn-ings’; ‘future success’; ‘our performance’; ‘con-tributing to shareholder’s utility’; ‘building aworld-class airline’; ‘being the best’; ‘excellentfinancial position’; ‘long-term future’; ‘growth’;‘being competitive in the marketplace’; ‘large loss-es’; ‘poor performance’; ‘sub-par returns’; ‘anamazing position in the marketplace’; ‘(company’s)prosperity; ‘profitability’]
