The importance of properly identifying the strategies, and anticipating the actions, of rivals.

The term “competitive cognition” refers to the framework with which a manager organizes and retains knowledge about competitors and directs information acquisition and usage. It is the process by which managers make sense of the market environments in which they compete. Making sense of competitive environments is fundamentally a categorization process. Through repeated exposure to rivals, managers learn the attributes and strategies of competitors. Clark and Montgomery (1999) suggest that a manager forms a mental representation of a given rival, then assigns the target company to a category, using that classification as a guide to direct future actions.

Porac and Thomas (1990) show how industries are created through a shared interpretation of reality among business rivals. Rather than defining competitors on an individual basis, managers assign themselves to a competitive category. In a study of Scottish knitwear manufacturers, Porac et al. (1995) argue that market boundaries are socially constructed around a collective cognitive model that summarizes typical organizational forms within an industry. This model is created when companies observe one another’s actions and define unique product positions to emphasize.

In general, how many rival companies do managers identify as competitors? Relatively few. To illustrate, Clark and Montgomery surveyed 57 respondents across a range of business units. On average, respondents identified 6.46 companies that competed with their own business units. Of these companies, 3.07 were considered major competitors. McNamara, Luce and Tompson (2002) surveyed top-management teams at commercial banks in three metropolitan areas and found that managers considered, on average, 5.23 competing banks as following a strategy similar to their own. Porac and Thomas (1994) interviewed head managers of grocery stores in a small American town and found that managers considered, on average, only 3.93 other stores as major competitors. Finally, the Porac et al. study of Scottish knitwear manufacturers found that managers identified an average of only seven rivals from a list of 261 possible competitors.

Cognition and Performance

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