Joumal of Management Studies 26:4 July 1989

0022-2380 $3.50

MANAGERIAL GOGNITION: A MISSING LINK IN STRATEGIG MANAGEMENT RESEARGH

GHARLES I. STUBBART School of Management, University of Massachusetts ABSTRACT This article explores the linkages between cognitive science and strategic management research. It begins by noting that Schendel and Hofer, in their classic work Strategic Management: A New View of Business Policy and Planning, implicitly assumed a cognitive basis for much of the strategy-making process but did little to systematize a cognitive approach. Next, the article examines the foundations of modern cognitive science. Several areas of recent research that are particularly relevant to strategic thinking are reviewed. The article concludes with a call for a more explicit cognitive emphasis in strategic management.

INTRODUCTION Since Ghandler wrote Strategy and Structure (1962), the variety of perspectives brought to bear upon stategy has proliferated. New ideas have entered the discipline from economics, decision theory, organization behaviour, and organization theory, as well as from more distant fields such as critical theory, biology, literary theory, agency theory, etc. This article aims to introduce cognitive science to strategy and to demonstrate how cognitive science can impart a powerful theoretical and empirical thrust to advance strategic management research. This discussion contains four parts. The first shows how managerial cognition was already a vital but neglected element in Schendel and Hofer's strategic management paradigm. The second is a brief review of the central principles of cognitive science, which provide a cornerstone theoretical subject that sets the stage for research into specific issues in managerial cognition. Next, three topics in managerial cognition relevant to strategic management are briefly addressed: categories, semantic networks, and inferences. Lastly, the article concludes by summing up the contributions which managericil cognition can make to strategic management.

WHATEVER HAPPENED TO STRATEGIC THINKING? In a general sense, everyone recognizes that managers think. But, what kind of thinkers are thinking managers? Economists prefer a vision of rational utilityAddressfor reprints: Gharles I. Stubbart, Department of Management, University of Massachusetts, Amherst, MA 01003, USA.

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maximizing managers. 'Rational' managers all possess the same knowledge, all reason the same logical way, all notice the same threats and opportunities, and all pursue the same goals. Assumptions of rational utility-maximization have one overriding advantage: they allow economists to transform economics into a branch of mathematics - the rigorous theory of rational choice. Economic theories regard competitive ups and downs as a product of industry structural forces, bureaucratic inertia, economic necessity, or random events. The parsimony of the economists' vision is that managerial thinking can be totally, and safely, ignored for research purposes because managers all think the same. Although the theory of rational choice has won Nobel prizes for economists, it has not explained why or how economic decisions take place in an uncertain and subjective world where managerial cognitive systems operate (Hogarth, 1980; Kahneman etal., 1982; Simon, 1957; Smircich and Stubbart, 1985; Thurow, 1983). In economics, axioms provide scant comfort to managers who are uncertain about their preferences, unsure about their economic alternatives, and baffled as to which strategy represents the marginal utility-maximizing choice. Few researchers in strategic management accept consciously the economists' model of think-alike managers as a viable foundation for their own research. Most strategic management scholars would probably agree that the rationality of managers is often limited, their knowledge often incomplete, and their attention often overloaded. Yet simultaneously, many managers are skilled at strategymaking, adept organizational experts, and ingenious innovators. Nor do managers all think alike in terms of their vision, expertise, risk-profiles, motivations, or goals. These conflicting views leave the field in a quandary regarding managerial cognition. Even though managerial cognition must figure prominently in strategymaking, top managers' thinking is seldom explicitly mentioned in the academic or business literature on strategic management. Why doesn't managericil thinking merit a chapter in any of the foundational works of the strategic management field (Andrews, 1980; Ansoff, 1965; Ghandler, 1962; Mintzberg, 1973; Porter, 1980; Schendel and Hofer, 1979)? Since strategic management studies the activities of managers, and since managers must think about strategy, why don't researchers allocate more research to studying how strategic managers think? Is it because executive thinking is purely automatic, instinctive, and intuitive? Is it because researchers are more inclined to tell managers to accept normative models of strategic thinking than to investigate and describe managerial thinking as it is? Or is it because researchers do not have the correct training to pursue cognitive issues? In any event, it is not realistic, wise or safe for the strategic management discipline to continue to ignore managerial cognition, for reasons explained below. Many authors have contributed to the study of general management and strategy. Out of these contributions, allow me to select one important work which all scholars in strategy will immediately recognize: Schendel and Hofer, Strategic
Management: A New View of Business Policy and Planning (1979). For most strategy

scholars, Schendel and Hofer's book represents the crystallization of the strategic management discipline. I do not contend that Schendel and Hofer wrote the most articulate, the best, or the most important volume among the many works that constitute strategy scholarship. Nevertheless, I do contend that their new

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paradigm set the course for scholarship during the recent decade. In setting their agenda they overlooked the critical topic of managerial cognition, even though it was right there in their paradigm from the start. In this sense, managerial cognition (thinking) represents a vital 'missing link' in strategy.
How Schendel and Hofer Sidestepped Managerial Cognition

In Strategic Management, Schendel and Hofer codified, elaborated, and extended the ideas of strategy which Chandler (1962) originally set into motion. On the first page of their Preface (p. v), they thanked Chandler for his landmark recognition of the distinction between operating decisions versus strategic decisions, and for launching the discipline. They integrated Chandler's definitions of strategy into their work, agreeing with him that strategy included 'both formation of goals and objectives. . . and of action plans and resource commitments' (p. 9). They expressly accepted Chandler's emphasis on the important role of top management's strategic vision,'. . .the search for the key idea' (p. 9). They implicitly accepted Chandler's view concerning the primacy of top-down initiative, as strategic decisions remain the province of top management. In summary. Strategic Management ratified Chandler's legacy by proclaiming that strategic decision-meiking signified an intentional, deliberate, and intelligent activity, managers consciously directing the firm's strategic resource allocations to ensure the long term survival prospects of an organization. Most important to our discussion here. Chandler's disciples placed much emphasis on the 'analytical process' of strategic management. Schendel and Hofer placed entrepreneurship at the centre of strategy. They wrote, 'Any successful business begins with a "key idea" . . .that product of the entrepreneurial mind (1979, p. 6). If minds propel entrepreneurship, then managerial cognition about 'key ideas' lies at the centre of a strategic management process. To institutionalize entrepreneurial strategic management, Schendel and Hofer devised a series of six complicated responsibilites for managers. By reviewing their strategic management process, we can broadly consider the role of managerial cognition within their new paradigm. 1. Schendel and Hofer referred to goalformulation as a 'complex process. . . may be rational. . . may involve political processes. . . priorities that specific goals are given, and the goal structure... the goal hierarchy used in formulating strategy' (p. 14). Strategists are charged with the duty to devise a set of interrelated, sensible, and motivating goals, pointing their organization in a fruitful direction. As a consequence, goal formulation processes require managers to envision, contemplate and prioritize a hierarchical set of goals which are right, proper and worthwhile. 2. Environmental analysis requires executives to make forecasts, predictions, and assumptions about significant uncontrollable environmental elements liable to affect the prospects for particular strategies. Forecasts and predictions require complicated knowledge about many sociad, economic, political and technological forces. Environmental analysis depends on significant intellectual skills, such as attention and perception, speculating about the future, reflection, and comprehension. 3. Strategy formulation encompasses a variety of concerns, chief among which is the development of analytical and normative models of strategy, an analysis

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of which strategies work best under which conditions. Analytical and normative models originate in economics, decision theory, marketing, and operations research. Therefore, strategy formulation is founded on analysis of purely abstract, logical, mathematical models or representations. 4. Strategy evaluation directs executives' attention toward additional thought questions, such as identifying and evaluating existing strategy or alternative strategies. Identifying, comparing, contrasting, and evaluating different strategies presents an intellectual challenge of the first rank. Strategy evailuation banks on expertise, creativity, complicated reasoning, and making thoughtful inferences. 5. Strategy implementation designates ', , .an administrative task, while goal setting, environmental analysis, strategy formulation, and strategy evaluation can be accomplished analytically and independently of the organization, although that is usually not the best way to do them'. Therefore, according to Hofer and Schendel, it is only at the fifth step of strategy-making that the action component of strategy first takes precedence over the thinking component df strategy formulation. But, according to Schendel and Hofer, even implementation can be planned! It is clear that strategy implementation counts on deliberate thoughts about the organizational ramifications of changing strategies, conscious anticipations of roadblocks to implementation, on problem-solving, and on logic. 6. Strategic control delineates the fmal stage of strategic management under Hofer and Schendel's paradigm. Strategic control required comparisons between planned strategy and actual strategy results. Obviously, executives must perceive control items, know targets, and render conscious judgements to make the comparisons required by strategic control. Strategic Management as described by the six-step process accentuates the precepts of microeconomic theory: economic motivations, efficiency, rational decisionmaking, and a responsive, malleable organization. Moreover, organizational goal formulation, environmental analysis, strategy formulation, and strategy evaluation were to be regarded as ', , .accomplished in a technical, rationaldeductive manner, and were done independently of behavioural and social system considerations, , .' (p, 17). Obviously, Schendel and Hofer meant that goal formulation, environmental analysis, strategy formulation and strategy evaluation are the product of rational thinking activities. Schendel and Hofer described thinking activities which require COGNITIVE components. When they deployed the term 'analytical process', they implicated thinking minds which analyse strategy. Their six steps require managers to envision, contemplate, prioritize, use knowledge, direct their attention, anticipate, engage in problem-solving, use logic, perceive, make conscious judgements - as noted above. Only one step in their strategic management process - implementation - concentrates mainly on action and behaviour. And even implementation can be planned! Because Strategic Management mainly stressed managerial rationality, and despite the fact that some important contributions to their book also described political, technical, and social constraints on strategy-making, no chapter or major sections addressed the capacities and constraints characterizing executives' thinking. Cognitive aspects of strategy are implied but passed over in silence. As a consequence, managerial cognition becomes the unnamed 'missing link' in their strategic management paradigm. Why is it unwise for strategic management to continue to relegate managerial

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cognition to an axiomatic status? First, a conservative scientific stance recommends that axioms should only encompass purely self-evident, non-empirical elements, ones that can safely be taken for granted. But the nature of managerial cognition is hardly self-evident and it is clearly an empirical issue. If strategic management is highly contingent on managerial cognitive activity, then it makes little sense to de-emphasize theory and research on cognitive elements as these may affect strategy. Second, extensive empirical findings in cognitive psychology, behavioural decision theory anthropology and organizational sciences all suggest that human cognitive patterns contrast markedly with the economists' ideal, rational agent. Indeed, the field of organizational sciences itself was founded as an alternative to economists' assumptions about managerial rationality (March and Simon, 1958)! Third, over 20 years of disappointing practical experience with strategic planning has repeatedly shown the dangers inherent in ignoring managerial cognition. Promises about the payoffs which would result from applying the over-arching comprehensive rationality inherent in the six-step strategic management process have often failed to materialize {Economist, 1987; Kiechel, 1982; Pearce et al., 1987). For these reasons, managerial cognition is a 'missing link' demanding additional theoretical and empirical development. In view ofthe significant ramifications of cognitive aspects for strategic management, it makes sense to look toward the discipline which can contribute the most toward understanding managers' thinking - cognitive science.
COGNITIVE SCIENCE; FUNGTIONALISM

The topic of managerial cognition pulls us toward cognitive science. Although cognitive science initially seems to occupy a realm far removed from strategy, nevertheless it is the realm of cognitive theories and research. If Schendel and Hofer's paradigm entails an assumption that managers formulate strategy as analytical thinking process, and if scholars want to study managerial cognition relative to that process, then scholars first need a theory of managericd knowledge (Smircich and Stubbart, 1985; Weick, 1979). How is managerial knowledge organized and how does it operate? From a research standpoint, how can scholars capture managerial strategic knowledge? Cognitive science synthesizes ideas from philosophy, neurosciences, linguistics, psychology, artificial intelligence and anthropology. Three pivotal axioms about minds express the commitments of cognitive science. Cognitive scientists subscribe to a doctrine called functionalism, viewing cognition as intentional, representational, and computational. Intentions. Cognitive science holds strongly to doctrines that purposeful minds guide higher-level human activities such as interpreting events, contemplating goals, and making plans - tenets held in common by both interpretivists (Smircich and Stubbart, 1985) and cognitive psychologists (Schank and Abelson, 1977). Having reasons and acting intentionedly characterize the meaning of intelligence. Having reasons also implies free will and choice, not determinism. Reasons and intentions highlight the irreducible differences between the rationalism of cognitive science versus the empiricism and 'mindlessness' of behaviourism (as Skinner, 1974).

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Contrary to the behaviourist perspective that colours some strategy literature - suggesting that managers mainly act according to habit, instincts, or environmental determination - the strategic management paradigm emphasizes the intentional dimension of managerial work. Managers take strategic actions mainly for reasons, neither as a habit nor as a mindless repertoire, but as a programmed response to environmental fiat. This is not to say that habits, repertoires, and programmed responses do not enter at all into managerial activity, only that their role does not drive strategy-making. Nor does intentionality guarantee that strategic intentions are realized by managerial action. Intentional actions do not always achieve their object (Mintzberg, 1978). Nevertheless, one of the essential foundations of strategic management is the idea that managers can (or should) act intentionally to reach planned goals (Schendel and Hofer, 1979, p. 14). Representations. Mental representation is central to cognitive science (Gardner, 1985). Descartes was first to formulate the idea of'imprints' - or in modern terminology, mental representations (Cottingham, 1986). According to Descartes, as sensory impulses flow through the nervous system they change the brain, producing mental impressions of external objects, similar to the way a modern camera creates a photograph. As a result, mental representations in the brain mirror reality as perceived through the senses, rendering the external world accessible by the mind. As representations, minds are symbol-processing systems. Descartes' notion of'imprints' manifests itself in modern cognitive science topics such as visual imagery, declarative knowledge (symbols, propositions, beliefs, schemas), episodic knowledge (scripts, serial memories), and procedural knowledge (knowing how to do things, such as riding a bicycle). Philosophers, cognitive psychologists, linguists, AI researchers, and neuroscientists carry on a spirited debate about the specifics of mental representations - but they all opt for some variety of representation. Knowledge representation means using computer programs as a representation of human knowledge. While some cognitive scientists take this anology (mind = program) as being literally true, I prefer to regard computer programs as an intriguing metaphor for minds. Formalization is one major contribution which cognitive science can add to the study of strategic knowledge. By formalization, I mean that AI knowledge representations must be computable, must be represented as tractable mathematical forms. In AI, any useful knowledge representation scheme must include both an explicit syntax and a well-defined semantics. One of the benefits of placing strategic knowledge within a cognitive science framework, is that researchers must specify their theories and their assumptions in detail, rather than rely on abstract pronouncements about maps, schemas mental models, mindsets, etc. Schendel and Hofer had nothing to say about managers' mental representations. But strategy scholars have recendy focused their efforts on describing managers' semantic networks, or 'cognitive maps' - what managers know about their competitive situation (Bougon et al., 1977; Huff and Schwenk, 1985; Stubbart and Ramaprasad, 1988). The idea behind studying cognitive maps is that managers' mental representations guide cognition and actions relative to strategic choices. Cognitive mapping is only one of several knowlege representation techniques

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that could be used to study managerial cognition. Other candidate knowledge representations include: schemas, scripts, rule systems, and mental models. Cognitive mapping in strategy will be discussed in the next section. Computations. Most cognitive scientists hold firmly to the doctrine of functionalism. Functionalism defines mental states in terms of their causal role in affecting other mental states or behaviour. Under this metaphor, the mind stands to the brain as the computer program stands to the computer. Changes in cognitive states result from 'effective procedures', a specific set of instructions which defme a succesion of mental states (Boden, 1988). Cognitive science stresses the notion that intelligence in man or machine is equivalent to a computer program and is computational (Pylyshyn, 1986). Thus, according to Johnson-Laird (1988) any useful cognitive theory should be able to be expressed as a computer program. in the cognitive science vocabulary, computational rules are the operating mechanisms for encoding, locating, using, and changing mental representations. Many contemporary artificial intelligence systems deploy rules implemented as predicate logic (IF, condition 1, AND condition 2, . . ., AND condition n, THEN do action A). In addition to their attractive mathematical properties, rules have proved useful for designing quasi-intelligent systems because they are nicely modular, they are an efficient form of representation, and they are useful for sequential problem-solving, predictions, and planning. Of the three central axioms about minds (intentions, representations, and computation), computational strategic knowledge is surely the most controversial. The idea of program-like strategic knowledge is bound to raise both doubts and hackles among some strategic management scholars, many of whom remain committed to the existence and efficacy of undefined 'gut feeling', 'intuition', and other vague phenomena which allegedly lie beyond the reach of scientific research {e.g., Mintzberg, 1973; Quinn, 1980). But Schendel and Hofer wrote approvingly that strategic management could be a ' . . . rational-deductive process' (p. 14). Their statement implies that they were certainly not hostile to the concept of computational reasoning. In view of the remarkable advances made in the cognitive sciences using the principle of computational knowledge, the reasonable course is to put such assertions to the test. Summary. Cognitive science's assumptions about cognition emphasize intentions, representations and computation. As applied to the managerial problem of strategy formulation, intentions motivate managers to think about strategic issues and options. Representations embody the content of managers' knowledge about strategic management. In turn, intentions and representations are created, manipulated, changed, sustained or abandoned according to a computationsd process of thought. Nothing in the doctrine of functionalism is directly inconsistent with Schendel and Hofer's view except the pivotal role of managerial cognition versus more macro-level issues within the paradigm. A concept of managerial cognition does not necessarily pose a threat to the paradigm. So managerial cognition should not be viewed as an attack on strategic management. On the contrary, cognitive science adds to the paradigm by providing theoretical principles for investigating the topic of managerial cognition, which, as pointed out above, happens to reside at the core of the strategic management process that Schendel and Hofer devised.

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CHARLES L STUBBART THREE TOPICS IN MANAGERIAL COGNITION: CATEGORIES, NETWORKS, INFERENCES

This section describes three topics in managerial cognition, A brief cognitive science overview is provided for each topic. Each of these topics is also linked to important research issues raised by the strategic management paradigm. The purpose of this section is to demonstrate relevance of cognitive science to strategy issues tied into Schendel and Hofer's analytical process for strategic management.
Managerial Cognition of Categories

It is hard to imagine how humans could function intelligently without useful categories. If thought only advanced by unique instances instead of categories, human perception and memory would rapidly overload with insignificant details. Dividing up experience and placing its elements into categories is a fundamental human cognitive ability; an absolute prerequisite for human knowledge. It has been shown that even very young children use cat';gories to guide their inferences (Gelman and Markham, 1983). Results of failures in human abilities to categorize experience are observed in certain brain-damaged patients, who rapidly become confused by any sorting task (Shanon, 1978). Studies reported by Rosch and Lloyd (1978) and Mervis and Rosch (1981) have done much to reinvigorate the study of linguistic categories in culture, thought and action. These new empirical findings highlight three important aspects of categorization - category organization, basic levels, and prototypes. Each is treated briefly in turn. CaUgory organization. Useful categories relate to human intentions. That is, different types of categories such as visual, functional, relational or ad hoc categories share a common denominator - their utility in achieving intentional goals. Therefore, creating categories is closely tied to problem-solving activities. Many theories use an analogy to the effect that memory for category names and properties is organized as an association hierarchy, a network composed of nodes and arcs. These networks organize and integrate semantic knowledge about categories. Nodes represent names for objects, arcs represent perceptual, functional, or relational properties among objects. Semantic codes are thought to be organized in propositional form. For example, the proposition 'A CEO is a manager' is represented as two semantic nodes, CEO and MANAGER, linked by the arc, IS-A. As we shall see in the next section, the idea of semantic networks aligns nicely with schema representation. Research questions. Until now empirical research on strategy has taken managers' categories of knowledge completely for granted. Researchers simply assumed that the definitions and associations of terms used in strategy are obvious, and that their own understanding of strategy terminology was interchangeable with managers' understanding, Schendel and Hofer did not cite any research issues related to managers' categorizations of their environment. Those authors did not categorize managerial vocabularies and discourse as an issue at all. But purposeful classifications of objects, people, and events, are an indispensable

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requirement for thinking about competition or strategy. The complexity, difficulties, and results of categorizing managerial experiences have important ramifications for strategy formulation and implementation. Categories used by executives obviously channel their thoughts regarding strategic situations, objectives, and actions. It is clear from research that managers define their categories much differently from scholars (Ford and Hegarty, 1984; Shrivastava and Lim, 1984). Jackson and Dutton (1987) drew on recent work in cognitive psychology to examine the role of categories in strategic management. They selected two linguistic terms having both theoretical importance in Schendel and Hofer's paradigm plus practical importance - 'opportunity' and 'threat'. Surprisingly, their study found that opportunities and threats are not polar opposites. Instead, the terms share many attributes, such as 'high importance'. They also reported a 'threat bias', a systematic over-sensitivity to threat information. Their results add to the argument that researchers have taken too much terminology for granted. To extend their work, a collateral research opportunity suggests possibilites for studying 'strengths' and 'weaknesses' as managers may use those categories. Because managers classify experience differently from academics, other important research questions arise. Competition is at the heart ofthe concepts behind the strategic management paradigm. Strategy researchers are now beginning to study the classifications which strategists make (or don't make) regarding competitors (Baden-Fuller ? < a/., 1987; Hodgkinson and Johnson, 1987; Reger, 1987). Studies of competitor classifications suggest an opportunity to study other familiar categories - suppliers, customers and substitutes (Porter, 1980). In addition to structural categories, other research topics include: what do managers mean when they speak of environment, diversification, leadership? Are these important terms for managers? How do managers label their business, their industry and their firm? What properties define industry membership? What strategies do managers recognize? Do executives perceive strategic groups? If they do, what are their taxa, and are these different from academics' taxa? What is a competitive advantage from a managers' perspective? All these classification questions merit study as they pertain to the strategic management process. Basic categories. From studying natural objects {e.g., birds, furniture). Roach and her colleagues found that some linguistic catgories are more essential, more fundamental, more basic than others: the most cognitively efficient, and therefore the most basic level of organization, is that at which the informaton value ofthe attribute clusters is maximized. This is the level at which categories maximize within-category similarity relative to between-category similarity (Mervis and Rosch, 1981). Basic-level categories share many attributes and reflect a moderate degree of abstractness. They are also easily recognized and learned (Tversky and Hemenway, 1984). For these reasons, basic-level categories are very important for perception and learning. According to Rosch basic-level categories dominate ordinary discourse about normal events.

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Research questions. The topic of basic-level terms in management discourse presents another research focus. What are the 'basic level' terms in managers' vocabulary? Gripsrud and GrcTnhaug (1985) and Porac and Thomas (1986) found that retail managers draw a surprisingly narrow 'basic-level' definition around their own business and their competitors. Retailers named few competitors outside a narrow definition based on their own business description. This finding suggests that informational asymmetries can offer a competitive advantage, because 'real' competitors may be able to escape attention if they lie outside others' definition. Can asymmetries in labelling offer a site for strategic competitive advantage that avoids retaliation? Prototypes. Members of a category are not all equal. Subjects often specify certain category members as prototypes. These members occupy a special status as ideals, exemplars, or standards. A prototype captures the essence of a category, but not necessarily its central tendency. Due to the role of prototyping in categorizing new instances, categories with prototype members are said to have a graded structure. Membership is graded by overall similarity to the prototype. For instance, subjects regard equilateral or right-angled triangles are 'better' than ad hoc triangles. One result is that subjects learn better and faster when an object is similar to a prototype (Rosch et al., 1976). Research about categories in social domains parallels Rosch's findings about natural objects (Cantor and Mischel, 1977). Subjects also classify social phenomena by comparing observations against prototypes, not by checking an exhaustive list of defining criteria. The John Wayne movie character in the film 'Sands of Iwo Jima' is still regarded as a prototypical marine by real marines today. All this evidence implies that prototypes might play an especially important role in managerial knowledge. Research questions. How do prototypes figure, if at all, in strategy? Under the stimulus of Schendel and Hofer, scholars have categorized environments (Hambrick, 1983), strategies (Miles and Snow, 1978; Porter, 1980) and competitive situations (Miller and Friesen, 1978). But do managers recognize these prototypes? If not, do managers have their own prototypes for environments, etc. ? What are managers' prototypes? Categorization is also relevant to pedagogical issues in strategy. Are some general managers such as Lee Iacocca regarded as prototypes for effective general management? Students think so. Do students already know complex prototypes about 'management' before we teach them our prototypes? Summary. Hodgkinson and Johnson (1987) pointed out that studying managers' categories represents only a first step toward understanding managerial cognition. Category research must be connected to reasoning processes and managerial action. Accordingly, categories of managerial knowledge can be together linked as propositions. Categories in propositional form can serve as the raw material for larger, interconnected networks of organized information. Many scholars now point toward semantic networks, schemas, or scripts to provide a bridge, linking isolated categories into organized knowledge. It is towards semantic networks that this article turns next.

MANAGERIAL GOGNITION Managerial Cognition as Semantic Networks

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Semantic networks started as a framework to represent knowledge about the meaning of concepts. The first research using semantic networks pertained to the semantic meaning of concepts in natural language (Collins and Loftus, 1975; Quillian, 1966). Semantic networks evolved in several directions, one of which closely parallels cognitive mapping studies in psychology, political science, and organization theory. A semantic network is an interconnected network of semantic nodes with paths, or arcs, running between them. Nodes can represent a wide range of phenomena; physical objects, or ideas, or acts, or events, or descriptors. Arcs represent the associations between various nodes. Figure 1 illustrates a hypothetical semantic network about a few concepts pertaining to GENERAL MOTORS. It illustrates some of the more common arcs: IS-A arcs [GENERAL MOTORS IS-A FIRM], HAS-PART arcs [GENERAL MOTORS HAS-PART DIVISION] and heuristic knowledge arcs [CHEVROLET MAKES CARS]. Arcs can also represent other logical connections such as conjunction, disjunction, or quantification. Although semantic networks are often displayed as pictures (Weick, 1979), in principle the number and variety of nodes and complexity of relations representable by a semantic network is unlimited. In practice, the size of semantic networks is only limited by the structure of computer programs designed to analyse networks. GENERAL MOTORS
has part DIVISION is a GHEVROLET has a makes PROFIT Figure 1. GENERAL MANAGER GARS

is a

FIRM

is a

ORGANIZATION

Semantic networks have several useful properties: 1. Flexibility. Semantic networks offer a very flexible structure for representing knowledge. T'hey easily accept hierarchical knowledge. For instance, a semantic network can represent the management hierarchy and reporting relationships across the various organizational levels of GENERAL MOTORS, as in an organigram. Additionally, semantic networks can accommodate many types of associations and properties, thus incorporating diverse kinds of knowledge. 2. Inheritance and Exceptions. Semantic networks are an efficient form of knowledge because a node inherits properties from other nodes to which it is related by an 'IS-A' arc. This means that a concept inherits properties from any more general class of which it is a member. Inheritance makes deductions easy, compared to an equivalent predicate calculus formulation. In the example illustrated in figure 1, GENERAL MOTORS inherits the properties diat FIRMS

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share, as well as the properties of ORGANIZATIONS, such as the property that firms seek profits, and that organizations allocate resources. Many hierarchical relationships involve exceptions. Semantic networks can handle exceptions. For instance, a general manager usually heads each DIVISION of GENERAL MOTORS. But, suppose that CHEVROLET does not have a division manager. The absence of a general manager at CHEVROLET, in violation of normal inheritance, can be handled with an exception arc, to forestall the normal inheritance from the general manager default from DIVISION. Hierarchies with numerous exceptions pose a difficult problem in constructing efficient semantic networks. 3. Activation. Quillian (1966) used networks to study connections between semantic nodes which represented associative human memory. Each of his nodes, called planes, encoded information about a concept and its associations with other concepts in the network. Quillian examined the network to study the natural language connections between semantically related concepts. He called his technique 'spreading activation'. Spreading activation meant that activation in one node spreads to connected nodes, which were then activated in turn. Whenever a concept node was activated from two directions, an association was pinpointed. In later versions, Quillian (1969) made a more complex model which was 'directed'. That is, activation was no longer random, it spread in some directions but not others. 4. Reasoning. There is no formal syntax or semantics for networks. Each network builder has been free to devise any reasoning procedures that are required. Therefore, semantic networks come in many sizes and shapes. For example, in organizational research, compare Bougon et al. (1977), Eden et al. (1983), and Stubbart and Ramaprasad (1988). Most semantic networks reason by matching. In the GENERAL MOTORS example, suppose one directed the question, 'What does GENERAL MOTORS OWN'? First, the fragment 'OWN' is constructed and the system searches to determine whether 'OWN' is in its database. Next it checks to determine whether 'OWN' is connected by any arc to 'GENERAL MOTORS'. If an OWN arc is attached to GENERAL MOTORS, what does GENERAL MOTORS OWN? According to our semantic network, GENERAL MOTORS owns CHEVROLET. Advanced network reasoning systems can also give advice to the user about how to select concepts and arcs, and how to match elements to facilitate reasoning. 5. Computation. In the domain of organization studies and strategy, scholars have mainly used either pictorial maps (Bougon et al., 1977; Maruyama, 1963), which are not computable; or matrices, which are very tractable using matrix algebra (Stubbart and Ramaprasad, 1988). Using pictorial and matrix maps, scholars have chosen to represent only causal relationships between concepts. By keeping to causal relationships, and using matrix algebra to manipulate cognitive maps, scholars can answer questions such as. What concept-nodes does concept-nodex affect? What concept-nodes affect concept-node^? Which concept-node affect the most (least) other concepts? What are the indirect effects on (or from) Z, when X affects intervening concept-nodes Y{X- Y-Z) ? Ramaprasad and Stubbart (1987) have added to the sophistication of these computations, having shown how a modified version of LOTUS 1-2-3 can analyse large matrix maps (ConceptSAf>200).

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Research on managerial cognition as semantic networks. Although their paradigm put

a critical dependence upon managers using their knowledge to make intelligent strategic decisions, Schendel and Hofer did not discern that the discipline ought to study the nature and organization of that same managerial knowledge - except in the most abstract terms. After Schendel and Hofer, some scholars moved to remedy that oversight (Chaffee, 1985; Smircich and Stubbart, 1985; Weick, 1979). Strategy researchers have recently extended their study of managerial knowledge by constructing semantic networks, or as they are called 'cognitive maps' (Bougon et al., 1977; Huff and Schwenk, 1985; Stubbart and Ramaprasad, 1988). Summary. Semantic networks are a useful knowledge representation. They are easy to understand and to construct, flexible, efficient for some purposes, and are computable as programs. But semantic networks also run up against significant limitations, particularly as they have been adapted to cognitive mapping. Some of these limitations include: (1) The problem of logical typing. Many cognitive map applications mix together concepts occupying different levels of abstraction. This leads to the problem of logical typing, or double-counting (Ramaprasad and Stubbart, 1987). (2) Although cognitive maps are mathematically tractable, there is no evidence that humans reason according to matrix algebra. Indeed, much evidence suggests that humans cannot and do not reason consistently with matrix algebra calculations (Schwenk, 1984). (3) Cognitive maps generally include only cause and effect concepts, but knowledge and reasoning include much more than merely cause and effect relationships. Why, then, is causal knowledge the sole target of cognitive mapping? (4) Cognitive maps cannot easily represent temporal relations. (5) Cognitive maps used in strategy research are often excessively abstract. They often treat only general classes, not specific instances of a concept. In this, they may not distinguish correctly properties of a class versus properties of a member of a class. (6) Cognitive map representations do nothing to help us understand why managers carve the world into the concepts and causal relationships described by the maps, nor how these relationships evolve. These are important theoretical questions for scholars who intend to increase the precision and applications of cognitive mapping. For more on semantic networks, see Anderson (1983); Barr and Feigenbaum (1981); Carbonell (1970); Findler (1979); Norman and Rumelhart (1975); Woods, et al. (1976).
Managerial Inferences: Rationality, Heuristics, Expertise

Rational inference. Neoclassical economics offers a vision of economic agents (firms) which act rationtilly. Rational agents operate in an environment characterized by fixed preferences, known alternatives, and risky consequences. They fully understand their own preferences, their productive possibilities, and their choice situation. Rational agents are cognitively homogenous, sharing identical, complete knowledge relative to their industry and the choices it affords. The content of managers' economic knowledge is specified by the variables in econometric equations, revenues, prices, marginal costs, marginal utility, budgetary constraints, profits, etc.

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Although Schendel and Hofer expressed rationalist leanings, they recognized that rationality was an ideal rather than an empirical fact: even if the. . .tasks (of strategy formulation) were accomplished in a technical, rational-deductive manner, and were done independently of behavioural and social systems considerations (one wonders how), the implementation task is inherently behavioural in nature. It is this fact that has led a number of researchers to believe that strategy formulation cannot be a rational-deductive process, some because their research does not reveal the earlier tasks (goal formulation, environmental analysis, etc.) being performed at all, and others because they believe that personal goals will always take precedence over organization goals (1979, p. 17). Today, a few strategy researchers advocate borrowing the economists' rational agents as a viable foundation for their own empirical research. Research in managerial decision-making shows little evidence of comprehensive rationality in managerial decisions (Kotter, 1982; McCall and Kaplan, 1985; Mintzberg, 1973; Quinn, 1980; Nutt, 1984). Instead of comprehensive rationality, most strategic management scholars, aligning themselves with Schendel and Hofer's worst fears, would probably concur that managerial cognition falls short of the requirements of the theory of rational choice. But how far short?
Heuristic inference: the bonded rationality of administrative man. Simon (1957) and March

and Simon (1958) advanced the idea of bounded rationality, that manager's cognitive abilities were sequential and limited in their capacity. Those theorists repeatedly contrasted the narrow rationality of'administrative man' against the omniscient rationality of'classical economic man'. Simon's perspective does not contest the pivotal role of economic preferences in business decision-making, but points out that the axioms of rational choice are questionable, that they require empirical investigation. Real managers, as contrasted with rational agents, face busy, immensely complicated, uncertain information environment, which always threatens to overload their information processing abilities. Moreover, such pressures are accentuated by strategy formulation in the modern environment. A manager copes with the constant threat of information overload by relying on a handy but imperfect set of problem-solving procedures - heuristics, or rules of thumb - that apply to a variety of problems. Experimental research from several fields has shown that the bounds of rationality are very narrow indeed. For example, much research in attribution theory described human information processors as 'cognitive misers' (Fiske and Taylor, 1984), or lazy organisms'. Behavioural decision research identified dozens of heuristic rules which produce egregious errors and biases for simple information processing tasks (Hogarth, 1980; Kahneman et al., 1982). Research on human deductive reasoning found that subjects were shockingly poor at syllogistic reasoning (Johnson-Laird, 1983). Even scientists prove vulnerable to cognitive simplification and errors. Studies in the history of science (Kuhn, 1970), and social cognition (Nisbett and Ross, 1980) have revealed that entrenched scientific hypotheses can easily and repeatedly resist unambiguous disconfirming evidence. In total, a large body of research portrays human decision-makers as error-prone

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over-simplifiers. Taylor (1984) succinctly summed up the gloomy empirical evidence on inferential heuristics: Even in describing the behaviours of individual decision makers, the rational model has shown to be inadequate. In addition to failing to meet the assumptions concerning information processing, research evidence has suggested that people may not attempt to maximize expected values or think probabilistically (p. 205). Today, some scholars regard cognitive simplification and non-optimal heuristic inferences to be a serious threat to managerial decision-making. Hogarth and Makridakis (1981), Isenberg (1984), Schwenk (1984), and Whyte (1986) have heavily prosecuted fmdings about heuristic reasoning as these may apply to managerial reasoning. For instance, Barnes (1984) explained how representative biases could cause strategic errors in integrating planning information, manipulating information given to superiors, and making pricing decisions (p. 132). Duhaime and Schwenk (1985) conjectured that a bad acquisition by General Cinema resulted from managements' fascination with a simple analogy about a '3-legged stool' (p. 289). Moreover, managers' difficulties in making accurate inferences regarding changing industrial conditions has been extensively observed in the domestic economy (steel, autos, machine tools, electronics, etc.) and has been reported in empirical research (Argyris, 1985; Fahey and Narayanan, 1986; Kiesler and Sproull, 1982; Ramaprasad and Mitroff, 1984). Such findings imply that strategists' reliance on simple, flawed, and biased inferentied heuristics in making strategic decisions might be the culprit behind strategic decision errors. Expertise. Does the 'heuristic manager' represent an advance over the rational agent as an empirical description of managerial reasoning? Probably not. Whereas rational agents are too 'smart' to represent a realistic empiricEil description of managerial reasoning, cognitive simplifers are too 'dumb'. Overadl, cognitive simplification literature over-compensates for the theory of rational choice, it swings the pendulum too far away from rationality. Evidence for this can be seen in that growing disenchantment with portrayals of simple-minded humans has begun to spread both in social psychology (Higgins and Bargh, 1978) and within behavioural decision theory (Ungson and Braunstein, 1981). To be sure, most organizational scholars probably find the 'boundedly rational heuristic manager' believable. But rejecting rational agents as a viable empirical model has not settled issues about managerial rationality. A new debate now centres over the general effectiveness of managerial heuristic inferences. Are managers wise, intuitive, heuristic inferencers (Kotter, 1982; Mintzberg, 1973; Quinn, 1980) or narrow-minded, error-prone, heuristic inferencers (Hogarth and Makridakis, 1981; Stahl and Zimmerer, 1984)? A framework which accommodates comfortably both 'smart' and 'dumb' managerial reasoning is needed. That is, we are looking for a model of both intelligent choices and occasional errors. We need such a theory in order to discern properly the nature of the real task which Schendel and Hofer laid out in their paradigm. Such a theory is beginning to emerge with a focus on human expertise. Humans demonstrate impressive competence in a wide array of real-world

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cognitive tasks (Chase and Simon, 1973; Larkin et al. 1980; Sternberg and Wagner, 1986). Human memory, especially visual memory, is generally accurate and virtually unlimited. Reports of robust human expertise in chess, physics, mathematics, programming, medical diagnosis, accounting, financial analysis, and scientific discovery, all document amazing human cognitive capabilities (Slatter, 1987), and they serve to counterbalance the tendency to place too much confidence in findings of cognitive simplification. In management, it has been found that executive-professionals can reason consistendy and well (see studies of accounting professionals: Libbey and Lewis, 1982). Beyond merely finding that expertise is 'real', investigators are probing the specific cognitive aspects of expert performance that distinguish it from novice performance. Studies not only report that experts bring an extensive repertoire of domain-specific knowledge to bear in problem-solving, but they document the details of that knowledge, its content, its organization, and its operation. Some studies find astonishing abilities. For instance, chess experts can recognize up to 50,000 different board patterns (Chase and Simon, 1973)! Research on expertise has progressed to the point where it is now feasible and cost-effective to translate detailed expert knowledge into computer programs called expert systems. Expert systems. The field of expert systems banks on the existence of outstanding human cognitive capabilities. If genuine expertise were not real, then useful expert systems could not be built. Putting expertise into programs has become a major business. Expert systems have generated an avalanche of applications (Harmon and King, 1985; Waterman, 1986), and are now widely used in law, auditing, financial analysis, production, insurance, and personnel (Silverman, 1987). They are used for a wide variety of purposes: diagnosis, interpretation, design, prediction, debugging, repairs, training and control. Luconi et al. define expert systems as: '. . .computer programs that use specialized symbolic reasoning to solve difficult problems well' (1986, p. 4). They are intelligent programs developed from the subjective (!) knowledge of bonafide experts in fields where measurable expertise is found. To build these programs, expert knowledge is translated into a set of conditional-action rules. The programs reason about the domain knowledge according to various types of logic, such first-order predicate logic. Although an expert program operates according to logical principles, the resulting reasoning is not necessarily valid, because the knowledge base may contain errors, and the logical rules are heuristic ones. Expert programs can solve problems that thwart traditional algorithmic programs. The applied reasoning power of an expert system resides in the quality and depth ofthe substantive information contained in its knowledge-base, not in complicated computations (Waterman, 1986). By avoiding overwhelming calculations expert systems extend dramatically the domain of computationallytractable problems. Schendel and Hofer could hardly anticipate the relevance of research on expertise and expert systems for the strategic management process. Those fields barely existed in 1977, and their connection to strategic management was far from obvious. But the timing of developments could not be better, because research into expertise and expert systems can help managers cope with some ofthe complex cognitive tasks inherent in Schendel and Hofer's six-step process

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for strategic management. A significant amount of applied research is already under way to build expert systems which can directly support strategic business analysis and decision-making (STRATASSIST, Green, 1984; EXPERT CHOICE, Saaty, 1986; INNOVATOR, Silverman and Moustakis, 1987; Applegate et al., 1987. By way of Ulustration, EXPERT STRATEGY REVIEW, a commercial product, is targeted at executives in financial organizations. It uses 'knowledge' from Porter, PIMS, BCG, and other sources to construct a specific profile of a financial institution's strategy, its plans, risks, corporate culture, markets, etc. Then EXPERT STRATEGY REVIEW answers questions about opportunities and threats, strengths and weaknesses, and lists recommendations. In the future one expects ever-greater refinements in this technology as it can apply to strategic management. Summary. Research on expertise goes a long way toward reconciling the paradoxiczd contrast between the results of experimental research on heuristic inferences versus the discovery and programming of powerful human expertise. Whereas the experimenters took the chief point as the poor quality of heuristic inferences compared to statistical or logical desiderata, the expert systems work highlights the role oi knowledge supporting inferences. Research on expertise seems to show that heuritics are neither generically helpful nor harmful to making inferences in themselves. Indeed, expert systems are built from such heuristic rules. Rather, it is the extent and quality of knowledge that goes into a heuristic process which makes the crucial difference in the quality of inferences. Retrospectively, one might argue that the experimental settings - college sophomores, removed from the context any expert knowledge, unfamiliar tasks - screened out the role of expertise and real-world knowledge. For example, research now shows that human performance in deductive reasoning improves markedly when familiar symbols and a familiar context frames the deductive task (Rogoff and Lave, 1984). The implications of this work for the strategic management paradigm are substantial. First, it focuses close attention on the relationship between the paradigm and the cognitive demands that it generates. This means that scholars must produce a fine-grained task analysis of strategic management. Second, it focuses attention on managers' knowledge. If the expert system builders are correct, managers may know a lot more than scholars give them credit for knowing. Scholars should learn more about managerial knowledge. Third, even a 'balanced view' of managerial cognition identifies several tasks in strategy formulation which pose real cognition problems for managers, such as environmental scanning and integrating information from SWOT (strengths, weaknesses, opportunities, threats). Here, the research task directs scholarly attention toward man-machine systems for strategy.

SUMMARY

Research topics such as categorization, semantic networks, and expertise each demonstrate how cognitive science principles can be brought to bear on issues generated by Hofer and Schendel's strategic management process. By devoting

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more research resources to such topics, strategic management can start to fill in the 'missing link' in the strategic management process. Many other areas in cognitive science also offer research relevant to that 'missing link' in strategic knowledge, including research on attention (Schneider and Shiffrin, 1977), memory (Anderson and Kosslyn, 1984), problem-solving (Newell and Simon, 1972), analogies (Gick and Holyoak, 1983), and creativity, (Langley et al., 1987). In sum, strategy researchers can take advantage of an impressive, rigorous, empirical body of work that is already in place awaiting applications to their field.

CONCLUSION To succeed as a discipline, strategic management must first establish its credentials. To do so strategic management must serve two main constituencies, professional managers and academia. Each of these communities applies different standards to the work of this discipline. Our field is now uncomfortably stretched between its two separate constituencies. Furthermore, it is not clear whether strategic management has established solid credentials with either community. The scholarly community complains that scholarship is not meeting a sufficiently elevated level of precision and rigour, while managers and the business press simultaneously complain that strategy scholarship is of obscure worldly relevance for managers! Perhaps the discipline is now receiving the worst of both worlds. Facing this two-pronged challenge, the discipline now faces some difficult choices about how to invest its own scarce resources. If strategy scholars cannot convince at least one of their constituencies about the merits of strategy research, then the long term prospects for the discipline are indeed ominous. The vital question is, 'How can strategic management establish itself on secure ground with at least one, preferably both, constituencies'. It is within this context of disciplinary insecurity that the relative merits of studying managerial cognition ought to be assessed. As it stands today, managerial cognition is only a marginal topic in strategy research. Moreover, academic journals already contain an amazing variety of topics which name themselves as strategic management. Topics such as competitive strategy, diversification, population ecology, environmental scanning, human resources strategy, strategy typologies, planning, etc., have already laid a tentative claim for scholarly attention and some have established a precarious managerial constituency. Consequently, a managerial cognition perspective on strategy must fight an uphill battle to win attention, to gain adherents. As shown above, managerial cognition became a pivotal topic when Schendel and Hofer prescribed an analytical strategic management process. But academics, perhaps under the baleful influence of economics, did not recognize immediately the pivotal role of managerial cognition in the strategic management process. That oversight left a 'missing cognitive link' in strategic management. Now that this oversight has become clear, managerial cognition (and its parent discipline, cognitive science) are the site where our discipline can probe for ways to repair the damage. To demonstrate what managerial cognition has to offer, I described three research topics that can help bridge the 'missing link': managerial categories, semantic networks, and expert systems. Category topics draw on empirical

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research, semantic networks draw on theory, and expert systems represent a practical tool for strategy. Strategic management stands to benefit significantly from an infusion of relevant empirical fmdings, stronger theory, and additional support for strategic planning. To sum up, managerial cognition offers a viable route toward raising the discipline's contribution to its two constituencies.

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