Correcting The Paradox Of Success: A Managerial Cognition Perspective

Abstract

Research has shown that past organizational success leads to strategic persistence, which, in constantly changing environment, might be dysfunctional, and might lead to organizational demise. Such phenomenon was termed as “paradox of success” (Audia & Locke, 2000). Adopting a managerialist view, this paper attempts to explain the paradox of success from a managerial cognition perspective. A system dynamics model is formalized to replicate the paradox of success and to incorporate the process of knowledge structure formation in the top management team. The key to the survival in face of major environmental changes is the awareness of the knowledge structure appropriateness, and the promptness in updating the knowledge structure. One way to safeguard knowledge structure appropriateness is to maintain sufficient degree of heterogeneity of knowledge structure in top management team. The model generates several propositions: (1) The tradeoff between top management team heterogeneity and effectiveness makes cohesive structure a suboptimal choice in stable environment. (2) In fact of major environmental changes, firm performance suffers the most when the knowledge structure of the top management team is converging; firms with loosely coupled knowledge structures in top management team are more responsive and adaptable to changes, thus exhibiting better performance. (3) The benefits of reserving certain heterogeneity in managerial knowledge structure in case of major environmental changes outweigh the benefits of converging knowledge structure to achieve high performance in stable environment. The expected results, taken together, will provide some insights in how to manage firms in face of major changes by maintaining sufficient heterogeneity in knowledge structure of top management teams. Practical suggestions are also provided.

The Paradox of Success

In the business world, success вЂ" interpreted as profit, market share, leading position in technology, or simply survival вЂ" is the life vein of firms and the strive for success has never stopped. However, persistent success is not always a blessing. Research has shown that past organizational success leads to strategic persistence (Miller & Chen, 1994), which, in constantly changing environment, might be dysfunctional, and might lead to organizational demise (e.g., Tushman & Romanelli, 1985). Several studies have documented such phenomenon (e.g., Haveman, 1992; Burgelman, 2002). Audia and his colleague termed it as “paradox of success” (Audia & Locke, 2000).

The two necessary conditions for paradox of success, i.e., an extensive period of success and fundamental environmental changes, may not occur together frequently, but the phenomenon itself is worth studying since it answers to a broader question of why under certain conditions change may be beneficial (Haveman, 1992). In the management and strategy literatures, much attention has been directed to why firms fail to respond to major changes. Explanations range from structural inertia (Hannan & Freeman, 1989), or institutionalization (Zucker, 1988), to path dependence (Toby & Podolny, 1996). These theoretical perspectives, focusing on firm or industry level, explain firm behavior from the external constraints firms face, thus shifting the focus away from managers as a variation source of firm performance. Consequently, how the managerial decisions might lead the firms down the path of paradox of success is left unexplored and the possible correction mechanisms for the paradox of success is largely ignored.

In this paper, I adopt a managerialist view, in which change or inaction results from decisions of the firms’ top managers. It is reasonable to assume that managers have the very incentives to improve firm performance. Therefore, the failure to respond to fundamental changes in the environment after a history of successful performance is interpreted in terms of managerial cognition. The questions then are: How does the managerial cognitive processes play a role in the paradox of success? How can the paradox of success be corrected and prevented from a managerial cognition perspective of view? A system dynamics model is formalized to address these questions.

Managerial Cognition Involved in the Paradox of Success вЂ" Causal Explanation

In managerial cognition perspective, mangers are viewed as “information workers” (McCall & Kaplan, 1985, p. 14). A managerial job is essentially absorbing, processing, interpreting, and disseminating information about opportunities and problems, as well as learning from the feedback information to make proper decisions. Living in a more-and-more complex world, managers meet the information challenge by applying knowledge structure to represent their information worlds. Knowledge structure, similar to schema used by social psychologists, is “a mental template consisting of organized knowledge about an information environment that enables interpretation and action in that environment” (Walsh, 1995). Functioning as cognitive lenses, these knowledge structures help transform complex information environments into manageable ones. However, the cognitive lenses could be poorly calibrated вЂ" they may blind or mislead key decision makers to important changes in the business environments, thus impairing their ability to make sound strategic decision.

The knowledge structure adopted by the top management team, if effective in sensing and interpreting the environment, would lead to proper strategic decision, which, in turn, enhances firm performance. In a stable environment, the appropriate knowledge structure would continuously improve performance, thus producing a “history of success.” The stable environment makes it easy for manager to form cause-effect attribution and the extensive period of success provides strong positive signals of the appropriateness of the knowledge structure in use. It has been found that people tend to attribute successes to internal factors, such as one’s own ability. Knowledge structure is then likely to be given credits for success. Other factors mediating past success and the perceived appropriateness of knowledge structure have been proposed, such as satisfaction, self-efficacy, goals, and information seeking (Audia & Locke, 2000). Once formed, the belief in the virtue of knowledge structure tends to be rigid, which can easily lock people into patterns of actions that are hard to modify. As a result, over time managers pay less attention and devote less effort to update their knowledge structures. It becomes very likely that they would fail