The effect of Cognitive Flexibility on Multi-Level Competitive Categorization

Abstract

Managers’ cognitive capabilities – i.e., their abilities to perform activities involving cognition – allow organizations to effectively enact strategic changes that are needed to adapt to environmental dynamics. Research has shown how heterogeneity in managers’ cognitive capabilities helps to explain why some firms outperform rivals in competitive situations. An important cognitive capability, cognitive flexibility allows managers to shift between mental modes to match the types of problems they face and the tasks to deploy in order to face them. In doing so, it helps them overcome cognitive inertia and yields their firms strategic flexibility. Cognitive flexibility also affects other cognitive processes, such as managers’ perception of their market’s competitive landscape and specifically competitive categorization – or the ability to categorize rivals into different groups – which shapes competitive relationships among firms and affects their performance. Yet, research on the contribution of managers’ cognitive flexibility to their categorization process is still limited. To address this gap, we built a multi-level simulation to explore how managers’ differences in cognitive flexibility affect competitive categorization and, through it, firm performance. Results highlight the link between cognitive capabilities – in particular, cognitive flexibility – and firms’ strategic activities. We close by discussing theoretical contributions and managerial implications of our findings.