COGNITIVE DYNAMICS OF STRATEGIC CHANGE IN MANAGERIAL BELIEF SYSTEMS

TIMO VUORI

HelsinkiUniversity of Technology

Department of Industrial Engineering and Management

PO Box 5500, Espoo, 02015 TKK, Finland

e-mail:

phone: +358 40 5745346

fax: +358 9 451 3095

Paper presented at the Strategic Management Society Meeting 2008

A finalist for the best PhD paper

- 1 -

COGNITIVE DYNAMICS OF STRATEGIC CHANGE IN MANAGERIAL BELIEF SYSTEMS

ABSTRACT

Cognitive inertia can slow down organizational adaptation to environmental changes. There is a relatively good understanding of the individual level belief system development and related causes of cognitive inertia. However, at the group level the understanding of these dynamics is rather limited. This research contributes to this gap via an in-depth longitudinal cognitive mapping study. I develop a three stage model of group level belief system development and identify two sources of inertia at the later stages of belief system development. First, if managers share some basic beliefs but have contradicting derived beliefs, they tend to debate over the contradicted derived beliefs even though the actual cause for poor performance was at the level of basic beliefs. Second, three group phenomena can keep managers trapped in a self-reinforcing belief system which amplifies inertia. I argue that relying on a rational-analytical reasoning would help in overcoming these sources of inertia. However, I will also discuss how the same rational-analytical reasoning can cause inertia at the earlier stages of belief system development.

KEYWORDS: belief systems, cognitive inertia, change, shared cognition

Introduction

“We used to fool ourselves…We used to think our content was perfect just exactly as it was. --- We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection and file sharing was exploding. And of course we were wrong. How were we wrong? -- By standing still or moving at a glacial pace, we inadvertently went to war with consumers by denying them what they wanted and could otherwise find and as a result of course, consumers won.”- Edgar Bronfman, Chairman and Chief Executive Officer of Warner Music Group(Riley, 2007)

Managerial belief systems play an important role in organizational adaptation to environmental change. Managers formulate beliefs about the world and these beliefs influence managers’ decision making (Barr & Huff, 1997; Haleblian & Rajagopalan, 2006; Hilton, 1995; Hodgkinson & Sparrow, 2002; Markoczy, 1997; Naquin & Tynan, 2003; Porac, Thomas, & Baden-Fuller, 1989; Tsang, 2002; Wagner & Gooding, 1997). However, the belief systems oftenlag behind the change in the real world (e.g. Hodgkinson, 1997; Reger & Palmer, 1996; Tripsas & Gavetti, 2000). The consequent(Ansoff, 1980: 143) “refusal by top management to accept new and unfamiliar issues as relevant to the business of the enterprise”can slowdownthe adaptation process deteriorating the performance of the organization. This phenomenon is commonly called cognitive inertia.

There have been several attempts to explain the causes of cognitive inertia. First, human cognitive biases and heuristics tend to make people act according to their earlier beliefs and decisions (Kahneman, Slovic, & Tversky, 1982; Neisser, 1976; Porac et al., 1989; Wason, 1968). Second, emotional factors such as defensiveness and a lacking sense of urgency can cause that managers ignore the environmental changes (e.g. George & Jones, 2001). Third, the paradox of success can make managers to believe that what worked in the past will work also in the future, even though the world has changed (Audia, Locke, & Smith, 2000; Schein, 1999). Finally, even though managers may observe the environmental changes, they may not be able to link them to the corporate strategy and therefore, fail to adapt (Barr, Stimpert, & Huff, 1992).

Although cognitive inertia has gradually become increasingly well understood, there is still a lot to learn about. What is common to all the explanations discussed above is that they tend to focus on one individual at a time. This can limit their explanatory power because (Michel, 2007: 549) “what are currently understood as inner mental processes should also be viewed in distributed terms… Individual cognition cannot be separated from the social system in which it takes place.”In organizational contexts this is especially true, as the individual cognition is always influenced by the organizational practices and factors (e.g. March & Simon, 1958/1993).

In this paper,I investigate group level belief system development and causes of cognitive inertia. I do this by an in-depth cognitive mapping study in which I use a qualitative method to depict the development of my case organizations’ dominant coalition’s belief systems regarding a case issue over a 17-year period. I will also use the same cognitive mapping technique to depict the current belief systems of six managers about the future of the case issue. These methods allow me to identify patterns and dynamics in the group level belief system development.

I develop amodel of group level belief system development and identify two group level causes for cognitive inertia at the later stages of belief system development. The model identifies that belief system development starts from the formation of a basic belief, from whichnew beliefs are derived. The derived beliefs will guide organizational action until enough contradicting evidence has accumulated to invalidate the basic belief and cause the belief system to collapse.The first source of inertia emerges if managers agree on the basic beliefs and disagree on some of the derived beliefs because their attention is more likely to focus on the areas of disagreement. This makes them less likely to notice changes in areas of agreement and therefore, causes cognitive inertia. Secondly, several group phenomena (Janis, 1982; Lamm, 1988; Latané & Darley, 1968) tend to reinforce the self-reinforcing nature of some belief systems, which makes observing contradicting evidence less likely and therefore, causes inertia.

The paper proceeds as follows. First,I reviewthe general theoretical background of cognitive inertia and belief system development.Then I provide adescription ofthe methodsand the results. Finally, a discussion and conclusions complete the paper.

COGNITIVE INERTIA

Cognitive inertia has become an important sub-stream of managerial and organizational cognition research during the past 30 years(c.f. Ansoff, 1980; Gavetti & Rivkin, 2007; Hodgkinson, 1997; Reger & Palmer, 1996; Tripsas & Gavetti, 2000).According to the basic cognitive research finding, mental models tend to change slowly even when environments change rapidly.For example,Hodgkinson (1997)found in a study of residential agents’ mental models that “the respondents’ individual and collective cognitions remained highly stable, despite a significant down-turn in the property market from T1 to T2.” Based on this, Hodgkinson concluded that (p. 938) “changes in mental models … significantly lag behind changes in the material conditions of the market place.”

Two cognitive processes have been identified, in general psychological studies on learning, as critical in restraining and hindering the transformation of mental models (c.f. Hewson, 1984; Thagard, 1988, 1992). First, people have a tendency to reconstruct contradictory evidence in a way that makes it compatible with their mental models. Second, people tend to split the contradictory evidence into pieces that roughly fit their mental models, resulting in only minor modifications in their mental models. However, it should be noted that managers formulate beliefs in changing environments whereas psychological studies are usually interested in how people develop ever more accurate models of stable reality(e.g. Hodgkinson & Sparrow, 2002). Therefore, we will gain more insight by focusing on the advancements made within the management literature.

First, Barr, Stimpert and Huff(1992)identifythree possible reasons for cognitive inertia. Accordingly, actions based on outdated beliefs may result in good outcomes by chancestrengthening the old belief system. Second, managers may not notice changes in the environment, because they may not be central to existing belief systems. Finally,the development of new beliefs may simply require time.Yet, based on their empirical analysisthey find (p. 15) “…that renewal hinges not so much on noticing new conditions, but on being able to link environmental change to corporate strategy and to modify that linkage over time.”They emphasize that (p. 16)“organizational renewal requires managers to change their mental models in response to environmental changes and that delays in this process will be associated with decline.”

Second, Audia, Locke and Smith (2000) discuss the paradox of success following a radical environmental change. Basically, what they find is that if companies succeed well for a long period of time, the managers come to believe that what worked in the past will also work in the future. This leads them to pay less attention to environmental changes and/or not to re-evaluate their strategies after major changes. Consequently, the managers try to play the game as if the rules had not changed even though they have. Audia et al. (2000)identify psychological mechanisms moderating this tendency, which include a higher level self-efficacy after success and a lessened amount of critical information/feedback sought after success.

Third, George and Jones (2001) identify several cognitive and affective sources of inertia in organizational settings, including (1) the rationalization of discrepancies, (2) using schemas that are resilient to discrepancies, (3) learned helplessness (c.f. Seligman & Maier, 1967), (4) denial, (5) focusing on more pressing problems once the emotions relating to the discrepancy have subsided into less intense moods, and (6) perceiving the challenges to be a result of an unpredictable or uncontrollable event.

Rationalization refers to a process where modifying specific derived beliefs substitutes for changing the more fundamental level basic beliefs (e.g. George & Jones, 2001). For example, if a manager has a basic belief that the demand for type A services is increasing, s/he derives from it that the company should offer type A services, using marketing concept X. Based on these beliefs, the company launches a marketing campaign and waits for a market reaction. If the reaction is negative, the manager can rationalize that the marketing concept X was poor and that they should use marketing concept Y instead. If the market reaction is still not good, s/he can conclude that also marketing concept Y had flaws, and they should use marketing concept Z instead. The manager can continue this cycling around negative market reactions and marketing concepts for a long time, even though it may be that the ultimate reason why markets react negatively, is that the demand for type A services was only a fad which has already passed. Thus, rationalization can cause cognitive inertia (inability to notice change in the environmental conditions).

Finally, the ontological ideas and modes of reasoning managers have and use can possibly cause delay. A basic distinction is made between the discovery theory, where it is assumed that opportunities exist independent of an entrepreneur’s activities; and thecreation theory, where it is assumed that the opportunities only emerge after an entrepreneur acts and creates the opportunity (e.g. Alvarez & Barney, 2007; Baron, 2007) The discovery theory emphasizes the importance of rational data collection and analysis. Conversely, if the creation theory is valid, then too much focus on data collection, analysis and planning can cause delay. As Weick (1995: 55) argues:“Managers keep forgetting that it is what they do, not what they plan, that explains their success … and having made this error, they spend more time planning and less time acting … [but] more planning improves nothing.”

I aim to extend the prior research on the causes of cognitive inertia by taking into account the group level structure and dynamics of managerial belief systems. Therefore, I need to consider how belief systems develop at the group level.

Development of group level belief systems

March and Simon (1958/1993) describe how the process of uncertainty reduction influences what people come to believe in organizations:Someone in an organization collects a vast amount of data, makes conclusions from the data and then communicates his or her conclusions to the rest of the organization. Thus, the conclusions become “facts” for the rest of the organization who remainsonly limitedly aware of the evidence behind the conclusions. Then, the organization starts acting and formulating new beliefs based on these new facts. Therefore, organizations will (Michel, 2007: 510)“create an environment of ‘givens’” which makes it possible for individuals to function in new situations using abstract guidelines (“we can assume this much, so we need to focus only on that”) and which reduces their cognitive overload.[1]

Uncertainty reduction indicates that organizational belief systems are structured hierarchically. Indeed, plenty of research in organizational contexts supports this idea (e.g. Lyles & Schwenk, 1992; Sackmann, 1992; Zack, 1999; see Table 1).Here, I will utilize the conceptualization of foundational philosophers who argue that there are two kinds of beliefs: basic beliefs that “are justified independently of inference from other beliefs, for example, by virtue of current perceptual experience” (Wilson & Keil, 2001: 426), and derived beliefs that “are justified by their relation to other beliefs” and “depend for their justification on their foundations” (Alston, 1976: 165). Therefore, we get a belief system consisting of a basic belief which is formed through the uncertainty reduction, and other beliefs that are derived from the basic belief.

------

Insert Table 1 about here

------

But how do the belief systems develop in changing conditions? To answer this question, we need to go back to the basics of developmental psychology and to the work of Jean Piaget (e.g. 1954). Accordingly, belief system development has two distinct phases: assimilation and accommodation. Assimilation refers to the process in which a person interprets new information in terms of the existing mental structures and uses that new information to expand the existing mental structures. Accommodation refers to the process of changing the existing mental structures to make them correspond to reality better. It occurs when the existing mental structures do not explain reality well enough. (c.f. Flavell, 1966; Piaget, 1954)

During assimilation, people tend not to notice information that is inconsistent with the existing mental structure. For example, studies (e.g. Carey, 1985; McCloskey, 1983) about how students learn new things at schools show that students create theories of their environment based on their experiences. These theories may not be well justified (DiSessa, 1998). Yet, students use these initial theories when they collect and interpret new information. The problem is that people have a tendency to look for only information that is consistent with their mental models, and build new beliefs based on that information(e.g. Carey, 1985; DiSessa, 1998; McCloskey, 1983; Neisser, 1976; Wason, 1968). Even when people face information that challenges their mental models, they may keep their mental models unchanged (Kahneman et al., 1982; Nisbett & Ross, 1980).

Assimilation may be further amplified by several group-related processes. First, the process of uncertainty reduction (March & Simon, 1958/1993) makes assimilation more likely to happen, as the basic belief comes as a given for the members of the organization. Second, from the social cognition perspective, parts of the existing belief system are fundamentally part of the existing artifacts, concepts and procedures of an organization (c.f. Michel, 2007), which can increase the tendency to see new things in terms of the old models. Third, group polarization (Lamm, 1988) and groupthink (Janis, 1982) can make people strengthen each others’ faith in the prevailing mental models. Fourth, the bystander effect(Latané & Darley, 1968) can cause everyone to assume that someone else has taken the obvious acts to check the basics.Therefore everyone will assume that the basics are right, when, in fact they are not and no-one has done the checking.

Accommodation, on the other hand, is about creating new mental models when the existing ones have proven invalid. Usually, it takes a plenty of information before one starts the process of accommodation (Gardner, 2004) and it is often required that the old belief system is unfrozen via contradicting information(Lewin, 1951; Schein, 1999). Empirical evidence from organizational contexts support these arguments(e.g. El Sawy & Pauchant, 1988; Hodgkinson, 1997). For example, Tripsas and Gavetti (2000) discuss how it took several years before Polaroid’s strategic management accommodated its basic belief regarding the income logic in the imaging industry. Basically, the foundation of Polaroid’s mental model was that the money will come from selling expensive films to cheaply sold cameras, and because there are no films in digital cameras, the company has no reasonto go digital even though they had the technology. Consequently, it took several years before the company finally recognized the possibility of making profits by selling digital cameras.

By synthesizing the above literature, a three-phase model of group level belief system development can be created (Figure 1).