Strategic Intelligence: The Cognitive Capability to Anticipate Competitor Behavior
| DOI | http://doi.org/10.1002/smj.2660 |
| Published date | 01 December 2017 |
| Author | Sheen S. Levine,Mark Bernard,Rosemarie Nagel |
| Date | 01 December 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 2390–2423 (2017)
Published online EarlyView 11 September 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2660
Received 26 June 2016;Final revisionreceived 21 March 2017
Strategic Intelligence: The Cognitive Capability
to Anticipate Competitor Behavior
Sheen S. Levine,1*Mark Bernard,1and Rosemarie Nagel2
1Organizations, Strategy and International Management, Naveen Jindal School of
Management, University of Texas at Dallas, Dallas, Texas
2Catalan Institution for Research and Advanced Studies (ICREA), Universitat
Pompeu Fabra, and Barcelona Graduate School of Economics, Barcelona, Spain
Research summary: Pursuing sources of entrepreneurialand competitive advantage, researchers
have been exploring cognition. We examine how cognitive capabilities affect competitive
performance, drawing on two constructs rooted in psychology and economics. A familiar one
is analytic skill, the ability to solve abstract problems. To that, we add strategic intelligence —
the ability to anticipate competitors’ behavior and preempt it. Using incentivized experiments, we
measure the constructs in participants, then let them compete for cash in a highly competitive
market. Although the market is designed to eliminate any advantages, whether from market
structure or strategic resources, some prot much more than others. We trace performance
differences to heterogeneityin analytic skill and strategic intelligence, and show how the two fuel
superior performance, even against tough competition.
Managerial summary: Why do some entrepreneurs outperform others? How can companies
succeed against tough competition? Certainly, some benet from unique resources, such as
patents, and others can winnow competition, as through mergers. But some have entered highly
competitive markets, lacking obvious resources,yet managed to achieve impressive success: think
Under Armour,Wal-Mart or Home Depot. Here we test how advantage can stem from managerial
cognition. We measure two kinds of cognitive skill in market participants, and then let them vie
for cash in intensely competitive markets. Some end up with far more prot than others. Tracing
the root of high performance, we nd it is predictedby a combination of analytic skills, the ability
to solve abstract problems, and strategicintelligence —ability to anticipate competitors’ behavior
and preempt it. Copyright © 2017 John Wiley & Sons, Ltd.
“Professional investment may be likened to
those newspaper competitions in which the
competitors have to pick out the six pretti-
est faces from a hundred photographs, the
prize being awarded to the competitor whose
choice most nearly corresponds to the average
preferences of the competitors as a whole; so
that each competitor has to pick, not those
Keywords: behavioral strategy; game theory; experiment;
market; competition; performance
*Correspondence to: Sheen S. Levine, 800 W Campbell Road,
Richardson, TX 75202. E-mail: sslevine@sslevine.com
Copyright © 2017 John Wiley & Sons, Ltd.
faces which he himself nds prettiest, but
those which he thinks likeliest to catch the
fancy of the other competitors, all of whom
are looking at the problem from the same
point of view…we devote our intelligences
to anticipating what average opinion expects
the average opinion to be.
John Maynard Keynes (1936, p. 156)”
“”.
“Know the enemy and know yourself; in a
hundred battles you will never be in peril”.
Sun Tzu (1963, p. 84)
Strategic Intelligence 2391
Playing college football, Kevin Plank was both-
ered by sweaty undershirts. Under their protective
pads, he and the other players wore cotton T-shirts.
During practice or play, these quickly became
sweaty, heavy, and uncomfortable. Noticing the vel-
vety microber used in women’s undergarments,
he imagined a lighter-weight, faster drying T-shirt
made from the synthetic material. He browsed fab-
rics at a tailor shop, spent $500 buying some, and
began sewing prototypes, handing them to friends
for testing. After graduation, he started a busi-
ness, which he named Under Armour. In his grand-
mother’s basement, he spread and cut fabric, made
sales calls, and packaged shipments. Friends from
his college team, who went on to become pro-
fessional football players, spread the word about
the startup. After a few months, a university team
placed a big order, asking for 350 shirts. At the
time, he had only 60. He delivered in installments,
and soon more orders followed. The major mak-
ers of athletic wear, such as Adidas and Nike,
seemed oblivious to the startup. After all, they had
multimillion-dollar marketing budgets, and Plank
could afford only a fraction of that. Yet the company
grew quickly, its products adopted by college play-
ers, professionals, and fans. In 2003, Under Armour
brought a revenue of $110 million. In 2012, he
was the youngest on the Forbes list of billionaires,
with an estimated wealth of $1.35 billion. In 2016,
the company’s market capitalization was more than
$17 billion (Bruke, 2012; John, 2016; Palmisano,
2009; Plank, 2003).
Where does competitive advantage come from?
This question, which lies at the heart of strategy,
has been receiving answers of different kinds: Some
focus on the industry, others on rm resources and
capabilities (Hoskisson, Hitt, Wan, & Yiu, 1999).
One school of thought suggests that success comes
from consciously choosing which industry to enter,
and then shaping a position within it. By erecting
barriers to entry, maintaining an oligopoly, increas-
ing customer switching costs, or otherwise curb-
ing competition, rms can reap supernormal prots
(Caves & Porter, 1977; McGahan & Porter, 1997;
M. E. Porter, 1980, 1981). Another school seeks
competitive advantage inside the rm, speaking of
unique resources and capabilities that thrust a rm
to outperform its rivals (Barney, 1991; Wernerfelt,
1984).
But neither offers an obvious explanation for, let
alone a clear prediction of, the ascendance of Under
Armour: The startup entered a market characterized
by low barriers to entry and dominated by large
competitors, whose apparent resources included, at
the very least, well-established brand names. Under
Armour could not match their spending on mar-
keting or research and development (R&D). Plank
may have pioneered using microber in athletic
wear, but the fabric was widely available and not
patentable. Imitation was easy. Reviewing every-
thing the edgling company possessed— without
succumbing to tautological reasoning (Priem &
Butler, 2001)— it is difcultto see what could have
foretold Under Armour’s success. Using microber
may be valuable, but it is hardly rare, inimitable, or
nonsubstitutable, thus failing the tests for sustain-
able competitive advantage (Barney, 1991).
Under Armour is not a single case: Walmart in
retail, Home Depot and Menards in home improve-
ment, KB Home in construction, and Enterprise
in car rental all entered highly competitive mar-
kets with no obvious paths to strategic resources.
Their products may have been clever (KB Home
slashed house prices by eliminating basements),
but technology was common, methods visible in
use, and intellectual property unprotected. Even
if these innovators had some initial advantages,
they operated in a competitive environment that
eased imitation and thus thwarted appropriation
of innovations (Jacobides, Knudsen, & Augier,
2006; Levin et al., 1987; Teece, 1986). Yet these
innovators, and many like them, have managed
to become multibillion-dollar behemoths. Now, of
course, they have advantages from market dom-
inance and difcult-to-imitate resources, such as
brand name, but what could account for their ini-
tial success, in crowded markets and with no obvi-
ous resources? We can only guess: Perhaps Under
Armour’s success had to do with the managerial
cognition of Plank, the founder. Perhaps he grasped
that his gigantic competitors were too preoccupied
to notice the emerging niche in athletic wear. Per-
haps other companies have likewise eluded com-
petitors. But how, exactly?
In recent years, scholars have rekindled the inter-
est in the role of individuals, an interest that dates
back to Simon (1947), Penrose (1959), and Cyert,
March, and their associates (K. J. Cohen & Cyert,
1961, 1965; Cyert, Feigenbaum, & March, 1959;
Cyert & March, 1963). Building on their work, Nel-
son and Winter (1982) offered a robust alternative
to a central behavioral assumption— that of cal-
culative, rational decision-makers, an assumption
inherited from neoclassical economics. Because
Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2390–2423 (2017)
DOI: 10.1002/smj
2392 S. S. Levine, M. Bernard, and R. Nagel
individual rationality is bounded, they reasoned,
an organizational advantage comes from routines,
patterns of interaction between people. Their
perspective gave rise to the notion of dynamic
capabilities, dened as routines that govern other
routines (at least in part, see Eisenhardt & Mar-
tin, 2000; Peteraf, Di Stefano, & Verona, 2013;
Teece, Pisano, & Shuen, 1997; Zollo & Winter,
2002). And, more recently, the strategic role of
individuals— and their cognitions— has returned
to center stage. Some scholars have been theorizing
on the cognitive capabilities that can build a
competitive advantage, whereas others have been
calling for more empirical evidence for the role
of individuals and their patterns of interaction
(Abell, Felin, & Foss, 2008; Coff & Kryscynski,
2011; Felin & Foss, 2005; Foss, 2011; Gavetti,
2005; Hodgkinson & Healey, 2011; Teece, 2007;
Winter, 2013). Also, more empirical evidence
came to illuminate decision making in strategically
important situations (e.g., Gary, Wood, & Pillinger,
2012; Lovallo, Clarke, & Camerer, 2012; Mitchell,
Shepherd, & Sharfman, 2011; Park, Westphal, &
Stern, 2011). Contributing to the growing interest
in behavioral strategy and micro-foundations, here
we examine the role of mental processes. These,
as Helfat and Peteraf (2015) lament, are perhaps
the least understood area of managerial cognition.
And, as they recognize, “heterogeneity of …
cognitive capabilities may produce heterogeneity
of dynamic managerial capabilities among top
executives, which may contribute to differential
performance of organizations under conditions of
change” (831).
Research Question
We aim to understand how cognitive skills, such as
those of an entrepreneur or a CEO, affect perfor-
mance in an exemplary strategic environment—a
highly competitive market. Taking advantage of
recent empirical evidence in experimental eco-
nomics, psychology, and cognitive science, we
hypothesized that performance in competition is
related to two kinds of cognitive skills, one focused
internally and the other— externally. To understand
the role they can play in performance, we created
instruments to measure the two and built in a labo-
ratory a highly competitive market.
We individually measured the two sets of cogni-
tive skills in participants and then let them compete
for prots, paid in cash, in a market designed
to eliminate most possibilities of performance
differences, including advantages from ex-ante
or ex-post limits to competition, or from limits
to resource mobility (Peteraf, 1993). To suppress
sources of advantage that are unrelated to cognition,
such as market structure or rm resources, our
design features the ve characteristics of a compet-
itive market per economic theory: Competitors are
atomistic, products are homogenous, information is
complete and public, everybody has equal access to
technology and resources, and entry is free (Cabral,
2000, pp. 85– 86). In such situations, theory
stipulates, price should be equal to marginal cost
(p=MC), leaving no room for prots.1Yet, even
in this highly competitive setting, where theory
predicts no competitive advantage and identical
(normal) prots, some competitors do much better
than others. Wetrace the performance differences to
measurable ex-ante differences in the two cognitive
skills: analytic skill, or the ability to reason through
abstract problems, and strategic intelligence, or the
ability to anticipate competitors’ behavior— and
preempt it. Wend that the two are uncorrelated and
each considerably boosts competitive performance.
In an organizational setting, analytic skills could
relate to technical know-how, domain-specic
expertise, and problem-solving skills. In contrast,
strategic intelligence is outward gazing: focused
externally on understanding and anticipating others,
especially competitors (as opposed to bettering the
internal workings of the rm). Per the taxonomy
of Adner and Helfat (2003), both skills stem from
cognition.2And both t the broad denition of
managerial cognitive capability (Helfat & Peteraf,
2015), yet they differ in how the capability is
applied and what the consequences are.
We nd that analytic skills and strategic intelli-
gence benet performance independently, but also
1Much of the scholarship in strategic management has been
seeking ways to weaken perfect competition, for instance, by
erecting barriers to entry or by developing capabilities to improve
quality or reduce cost, thereby lessening homogeneity (e.g.,
Barney, 1986; Porter, 1980; Winter, 1995). Diminish any of the
ve characteristics, and a rm can move closer to a monopoly
position, giving it more control over prices and quality (Tirole,
1988).
2As in prior literature (e.g., Helfat & Peteraf, 2015), we follow
the common denition of cognition in psychology: “processes
of knowing, including attending, remembering, and reasoning;
also, the content of the processes, such as concepts or memo-
ries” (American Psychological Association, 2009) and “the men-
tal activities involved in acquiring and processing information”
(Colman, 2006).
Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2390–2423 (2017)
DOI: 10.1002/smj
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