Top Managerial Cognitions Past Performance and Strategic Chance a Theoretical Framework

Advances in Strategic ManagementEmerald Book Chapter: Top Managerial Cognitions, Past Performance, And Strategic Change: A Theoretical FrameworkJerayr Haleblian, Nandini Rajagopalan

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TOP MANAGERIAL COGNITIONS,

PAST PERFORMANCE,

AND STRATEGIC CHANGE:

A THEORETICAL FRAMEWORK

Jerayr Haleblian and Nandini Rajagopalan

Prior empirical work on strategic change and persistence remains bothequivocal and incomplete (Rajagopalan & Spreitzer, 1997). It remainsequivocal because although it has shown that performance downturns are amajor antecedent of strategic change it has not explained why some firms,when faced with performance downturns, respond with strategic changes,while others do not. Moreover, although prior research has shown thatstrong performance leads to strategic persistence, it has not explained whysome firms change their strategy given strong performance. We argue thatlight may be shed on these questions if the cognitive variables of top man-agerial performance perceptions, performance attributions, strategic changeefficacy, and strategic goals are assessed. In addition, the prior work onstrategic change remains incomplete because it has focused on top manag-ers’ reactive, but not proactive, role in the strategic change process. Wedevelop the argument that top managers’ efficacy and goals can proactivelymotivate strategic change. We draw upon cognitive theory within psycho-logy to more accurately assess the mediating and moderating effects of topmanagers’ perceptions, attributions, efficacy, and goals on strategic change.

Strategy Process

Advances in Strategic Management, Volume 22, 63–91

Copyright r 2005 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 0742-3322/doi:10.1016/S0742-3322(05)22003-X

63

JERAYR HALEBLIAN AND NANDINI RAJAGOPALAN64

Finally, we present testable research propositions and identify methodo-logical implications and theoretical extensions for future research.

The empirical strategic change literature has identified poor performanceas a primary antecedent of strategic change (Rajagopalan & Spreitzer, 1997)and strong performance as a crucial incentive for strategic persistence (e.g.,Boeker, 1997). Arguably, strong performance indicates a successful strategythat does not need change, while performance downturns signal that currentstrategies are no longer effective and require change (Ginsberg, 1988).However, in the broader management literature counterintuitive resultshave been reported in which (1) poor performance leads to persistencerather than change and (2) good performance results in change rather thanpersistence (e.g., Sitkin & Pablo, 1992). Given the antecedent condition ofperformance, then, critical questions remain unexplained. First, when facedwith declining performance, why do some firms change their strategies,while others do not? That is, if poor performance is a primary driver ofstrategic change, why do we find variance among firms faced with similarperformance levels? Second, if strong performance is the main driver ofstrategic persistence, why do some firms change their strategy given strongperformance? Existing theories within the strategic change literature do notexplain how poor performance and strong performance can both lead toeither strategic change or persistence. Although we do not present a modeldescribing a complete set of factors that could explain these inconsistencies,we draw upon cognitive theory within psychology to shed some light on thisquestion as we argue for the need to assess the influence of top managerialcognitions to provide better understanding of the effects of past perform-ance on strategic change.

In addition, extant empirical research has been grounded solely in a the-oretical model that adopts a reactive view of the top manager’s role in thestrategic change process. Hence, recent work has assumed that top man-agers primarily react to past performance, and are more likely to changestrategy when performance is poor (e.g., Grimm, Corsi, & Smith, 1993;Fombrun & Ginsberg, 1990). Because of this orientation, the strategy lit-erature has typically not examined how proactive managerial cognitions andactions may influence the strategic change process, such that strategicchange may follow from good performance. Anecdotal accounts from thebusiness press and published case studies of successful organizations (e.g.,Harvard College, 1999; 2000, cases on General Electric, Medtronics) indi-cate that top managers do anticipate future environments and initiate stra-tegic changes. However, empirical studies have rarely examined howmanagers proactively influence and initiate strategic change within their

Top Managerial Cognitions, Past Performance, and Strategic Change 65

organizations (Rajagopalan & Spreitzer, 1997). Hence, we contend anunderlying model of strategic change that has not recognized the role ofproactive managerial cognitions has inhibited empirical work. We drawupon the cognition literature within psychology to identify two proactiveantecedents to strategic change – top managers’ efficacy beliefs and theirstrategic goals. By ‘‘efficacy’’ we mean a managerial belief that the firm iscapable of changing strategy, and by ‘‘goals’’ we mean strivings to drive firmperformance to a given level. We argue these proactive managerial cognit-ions shape organizational responses and hence influence strategic change.

Although a stream of research has examined the effects of managerialcognitions as antecedents to strategic change (e.g., Barr, Stimpert, & Huff,1992; Child & Smith, 1987), our approach differs from this work as weprovide a more complete explication of the underlying causal cognitivemechanisms through which strategic changes emerge. Prior empiricalresearch has revealed variations in managerial perceptions and attributionsacross firms facing the same stimuli (e.g., Ginsberg & Abrahamson, 1991)but has generally not explained the underlying causal mechanisms fordiffering firm responses. Rather than being theory-driven, the approach inprior research has been phenomenon-driven. This has resulted in a some-what fragmented examination of managerial cognitions, in which differentoperational definitions have resulted in limited comparability across studiesand, at times, in contradictory empirical findings (Walsh, 1995). By adopt-ing a theory-driven approach, we not only specify the domain of managerialcognitions but also provide more precisely defined constructs to facilitateempirical testing and cumulative research. Further, prior work on mana-gerial cognitions in strategic change has primarily focused on thosecognitions that represent reactions of top managers to changes in firmperformance. Our framework also incorporates proactive cognitions –efficacy and goal setting – into the context of strategic change.

We first discuss the theoretical arguments on the direct effects of pastperformance, and then we argue that these effects may be better understoodwhen top managerial cognitions are considered. Specifically, we postulatethat reactive managerial performance perceptions relative to aspirationsmediate the effects of past performance on strategic change, while mana-gerial attributions of the causes of performance moderate these perceptions.We then present theoretical arguments on the influence of proactive stra-tegic change efficacy and strategic goals on strategic change. After wepresent our theoretical framework, we provide key definitions, assumptions,and boundary conditions. We conclude by identifying methodologicalimplications, and directions for future research.


THEORETICAL FRAMEWORK AND

RESEARCH PROPOSITIONS

In our framework, we examine the influence of both reactive and proactivecognitive variables on strategic change. Reactive sources that impact stra-tegic change are perceptions and attributions – cognitions that determine the‘‘what’’ and the ‘‘why’’ of performance. Perceptions are first-order cogni-tions that assess what is the performance feedback: positive or negative?After performance feedback is perceived, attributions are second-ordercognitions that attempt to establish why the performance is positive ornegative.

Given similar levels of performance among firms in an industry, topmanagers in one firm may view performance as poor while those in anotherfirm may not, and these differing perceptions can lead to different moti-vational effects on strategic change. Even in the event that performance isperceived similarly across firms, top managers in various firms may stillmake differing attributions as to the underlying causes of the current per-formance level, which may also lead to different motivational effects onstrategic change. Hence, perceptions and attributions have distinct effectson strategic change and should be distinguished. We will argue that theexogenous indicators of performance initially influence (first-order) percep-tions of performance as positive or negative, and then they affect (second-order) attributions about the underlying causes of performance, whichare made on the dimensions of (1) controllability, (2) permanence, and(3) pervasiveness.

Proactive sources of influence – efficacy and goal setting – have rarelybeen examined within the strategic change literature. In the case of efficacy,top managers are more likely to initiate change when they feel the firm hasthe capability to successfully change its strategy. In the case of goals, topmanagers may set standards for future performance that motivate and directstrategic change actions. Specifically, top managers may create a discrep-ancy between current and future desired performance and then select stra-tegic actions to bridge this gap. In contrast to perceptions and attributions,which represent top managers looking at the past to make sense of prioractions, efficacy and goals represent top managers looking forward as theyanticipate future outcomes and strive for given results. Thus, we argue thatboth reactive and proactive managerial cognitions influence strategicchange. Our theoretical framework is presented in Fig. 1.

Firm PastPerformance

•Intensity•Duration

Direct effects

Moderated effects

TMStrategicChangeEfficacy

TMAttributions

•Controllability•Permanence

•Pervasiveness

Magnitude ofFirm Strategic

Change

TMStrategic

Goals

TMPerceptions

of PastPerformance

P1

P2a P2bP3

P4a

P5P6a

Reactive managerial cognitions

Proactive managerial cognitions

P4b

P6b

Fig. 1. Theoretical Model.


EXPLAINING ANTECEDENTS TO STRATEGIC

CHANGE: DEFINITIONS, ASSUMPTIONS, AND

BOUNDARY CONDITIONS

We define strategic change as any change in the ‘‘fundamental pattern ofpresent and planned resource deployments and environmental interactions thatindicates how the organization will achieve its objectives’’ (Hofer & Schendel,1978, p. 25). Prior empirical literature has most frequently examined strategicchange in terms of changes in patterns of resource allocations at either thebusiness or the corporate level (Rajagopalan & Spreitzer, 1997). Examples ofbusiness-level strategic changes include changes in research and developmentexpenditures, marketing expenditures, and product markets (e.g., Fombrun &Ginsberg, 1990; Goodstein & Boeker, 1991). Corporate-level strategic changes


include changes in the type of diversification and the extent of diversification asreflected in the composition of the corporate portfolio (e.g., Haveman, 1992).

Although strategic change is an organization-level phenomenon, we as-sume that top managers primarily drive these changes (Finkelstein &Hambrick, 1996). Strategic choice theorists (Child, 1972), upper echelontheorists (Hambrick & Mason, 1984), and proponents of managerial dis-cretion (Hambrick & Finkelstein, 1987) have all argued that a significantamount of the variance in firms’ strategic responses could be explained ifthere was a good understanding of how top managers perceive, respond to,and proactively initiate strategic responses. Our assumption is consistentwith both the strategic change literature, which relates variations in topmanagers’ characteristics to variations in firm-level strategy (Wiersema &Bantel, 1992), and the broader managerial cognition literature, which showshow managerial perceptions shape specific organizational responses(e.g., Gioia & Chittipeddi, 1991; Pettigrew, 1987). Consistent with thesetwo literatures, we argue that the most salient cognitions in understandingorganizational responses are those formed at the organization’s strategicapex or within its dominant coalition (e.g., Daft & Weick, 1984). Theseindividuals store and interpret information (e.g., Simon, 1991) that influ-ences managerial actions (e.g., Barr et al., 1992; Lant, Milliken, & Batra,1992) and leads to strategic change (e.g., Thomas, Clark, & Gioia, 1993).

Importantly, while our focus is on the impact of top managerial cogni-tions on strategic change, we realize that group processes precede thesecognitions. Because our focus is on how these shared cognitions affect stra-tegic change, the processes that precede and influence the emergence ofshared cognitions are not included within the scope of our model. However,we do want to comment briefly on how group processes often result inshared cognitions, as forming a consensus from the initial preferences ofindividual members is the first task of decision making in groups (Whyte,1989). Specifically, each top manager interprets the firm’s performance andits strategic capability, and these cognitions may vary among team memberswithin a firm. However, research has shown that there is a significant com-monality of perceptions among managerial elites within a firm (Sutcliffe &Huber, 1998). In addition, cognitions often converge and operate at thegroup level, resulting in shared interpretations, which have been referred toin the strategy literature as team mental models (Klimoski & Mohammed,1994), collective cognitive maps (Axelrod, 1976), dominant logic (Prahalad &Bettis, 1986), and strategic consensus (Knight et al., 1999).

Although the dispersion of cognitions around the group average variesfrom small in homogeneous groups to large in heterogeneous groups,


consensus often results in both types of groups. Research clearly demon-strates that consensus is more likely in homogeneous groups with sharedhistory, accomplishments, and norms (Fischer & Ellis, 1990) or similardemographics (Knight et al., 1999). However, in groups that begin withheterogeneous beliefs consensus may also form in two ways: mediation ordomination (Bales & Cohen, 1979). In the case of mediation, differences areresolved as the group process unfolds (Knight et al., 1999; Walsh & Fahey,1986), which involves the exchanging of multiple views after the team hasaccumulated and examined information and the integration of individualbeliefs into a consensus (Gibson, 2001). In contrast, in the case of dom-ination the cognitions of the powerful stand out and become the consensusview (Bales & Cohen, 1979). Hence, while there may be variations in in-dividual top team member cognitions (Pettigrew, 1987), we assume that in amajority of cases a prevailing set of interpretations will emerge, either bymediation or domination, as the team evaluates the causes of poor per-formance and the firm’s strategic abilities.

In the case in which heterogeneous beliefs within the top managementteam (TMT) do not become integrated through a process of consensusbuilding or through domination, a lack of consensus may impede teamactions because successful implementation requires a top team act on acommon set of priorities. This suggests that shared group cognition may beessential for implementation of policies and decisions.

The Influence of Past Performance on Strategic Change

We begin our theoretical model with an assessment of the influence of pastperformance on strategic change. Although the concept has probably beenknown for centuries (Hobbes, 1651), a substantial amount of psychologicalresearch in the first half of the last century acknowledged firmly the im-portant role of past performance, whereby strong performance (i.e., re-wards) tend to increase the likelihood of persistence in current behavior andpoor performance (i.e., punishment) tends to increase the likelihood of be-havioral change (e.g., Mazur, 2001). Research from the management andfinance disciplines has shown a similar relationship between performanceand change. Strong firm performance has been shown to lead to organi-zational persistence (e.g., Audia, Locke, & Smith, 2000; Boeker, 1997;Greve, 1998) while poor firm performance has been associated with CEOchange (e.g., Puffer & Weintrop, 1991) and divestitures (e.g., Kaplan &Weisbach, 1992).


Building on the notion that good performance increases persistence whilepoor performance increases change likelihood, subsequent work in psy-chology has examined two distinct aspects of past performance – its du-ration and its intensity. Intensity captures the extent of change in aperformance dimension during the immediately preceding time period (suchas a year). Duration refers to the number of time periods during which thereis a consistent trend in performance, either a decline or an improvement.Research has shown that persistence increases with the duration (i.e., re-occurrence) of good performance (e.g., Neef, Shade, & Miller, 1964), anddecreases with the duration of poor performance (e.g., Azrin, Holz, & Hake,1963). Studies have also shown that as good performance intensity increases,so does the likelihood of increased persistence. Likewise, as poor perform-ance intensity increases, so does the likelihood of diminution in persistenceand subsequent behavior change (e.g., Neef et al., 1964).

By extension, predicting increased or decreased variance in strategicchange should involve the assessment of both the duration and intensity ofperformance. It is interesting that the effects of poor performance on stra-tegic change remain contradictory. Some studies have found that poor per-formance increases the likelihood of strategic change (e.g., Lant & Mezias,1992; Lant et al., 1992), while other studies have found no such relationship(Oster, 1982; Wiersema & Bantel, 1992; Grimm et al., 1993). However, acloser examination of prior studies indicates a plausible reason for thiscontradiction: duration and intensity are only rarely considered together,resulting in the incomplete measurement of prior performance. For exam-ple, studies that examine prior performance in cross-sectional settings maycapture prior performance intensity but not its duration. This incompleteconceptualization of past performance may explain why these studies findno consistent evidence of a relationship between poor prior performanceand strategic change.

In contrast, when studies perform a more complete assessment of pastperformance, more substantial support is found. For example, Boeker(1989), using a measure of prior performance that assessed both durationand intensity, examined firms’ performance since their founding and dis-covered that poor performance contributed to changes in strategy. In an-other study of strategic change that assessed both duration and intensity,Zajac and Kraatz (1993) also found that organizations with a long history ofprior poor performance were more likely to undergo significant strategicchanges than organizations with fewer periods of poor performance. Theirlongitudinal research design (16 years of performance data) permitted amore complete definition of the performance construct than studies that


only measured performance intensity. Thus, it appears that both the du-ration and intensity of past performance need to be jointly examined inorder to predict subsequent change, suggesting the need for a longitudinal,rather than simply a cross-sectional, assessment of past performance. Tosummarize, empirical evidence suggests that poor consequences do impactstrategic change and that prolonged and intense consequences have a greaterlikelihood of triggering change than infrequent or mild consequences. Thus,the direct effects of past performance are represented in the followingproposition:

Research Proposition 1. The greater the duration and intensity of poorperformance, the greater will be the magnitude of strategic change.

Top Managerial Performance Perceptions

Although the influence of performance consequences was originally em-phasized in psychology (i.e., radical behaviorism), the field gradually shiftedand began to acknowledge the role of cognitions as mediating factors that,together with the effects of performance consequences, explain more var-iance in human behavior than performance consequences alone (Bandura,1986; Mischel, Cantor, & Feldman, 1996). More recently, empirical strategicchange literature has also begun to acknowledge the important role ofmanagerial cognitions in the change process (e.g., Barr et al., 1992; Barr,1998; Lant et al., 1992).

We argue that the causal link from past performance to strategic changeneeds to recognize the crucial mediating role of top managerial perceptionsof performance. That is, while performance influences change, performancelevels may be perceived differently among different firms (Greve, 1998).Hence, a similar level of performance may be viewed as poor within one firmbut not in another.

Variation across firms in the perception of performance is due in part totheir aspiration levels (Grinyer & McKiernan, 1990). Top managers setaspiration levels and then judge performance as poor when it does not meetaspirations. This inevitably leads to different thresholds across firms as towhat constitutes poor performance. Aspiration levels may be set relative toa firm’s prior performance (Cyert & March, 1963; Greve, 1998), whichmeans that they tend to be raised after strong performance (Bandura, 1997).Research has also shown that aspiration levels are set relative to similarothers (Festinger, 1954; Lant et al., 1992), particularly those with highperformance levels (Bandura, 1986). Performance is perceived relative to


aspiration levels because decision makers use aspiration levels to simplify acontinuous performance measurement process into a discrete assessment ofgood or poor performance (March, 1988). If a downturn is perceived aspoor performance, it is likely that this perception will act as a cognitivemotivator to drive top managers toward strategic change actions to improveperformance.

At times, performance will be similarly construed across many firms(Mischel, 1973). As the duration and intensity of poor performance indi-cators increase (e.g., ROA below industry average for 10 consecutive quar-ters), the greater the likelihood that performance will be perceived as poor,because the performance will significantly under-perform aspirations acrossfirms. However, when the duration and intensity of poor indicators are lesssevere (e.g., ROA slightly below industry average for one quarter), the per-ception of performance is open to more interpretation, because top man-agers are less certain about whether to classify the situation as poorperformance.

At the extreme, then, poor performance is construed similarly across topmanagers in different firms and is uniformly perceived as poor performancein every firm. However, in the middle range, where performance indicatorsare not so clear, the perception of poor performance differs across firmsbased, in part, on differing levels of aspirations. Those firms that do notperform up to aspirations will tend to perceive performance as poor and willbe more likely to undertake strategic actions. Moreover, the greater the gapbetween aspirations and performance, the greater is the perceived poorperformance, the greater will be the resulting magnitude of strategic change.These arguments together lead to the next two research propositions:

Research Proposition 2a. The greater the duration and intensity of poorperformance, the more likely top managers will perceive the performanceas poor.

Research Proposition 2b. The poorer the perceived performance, thegreater will be the magnitude of strategic change.

The Moderating Influence of Top Managers’ Attributions

on Strategic Change

Psychological research on performance may explain the basic findings thatstrong performance leads to persistence and poor performance motivateschange (Research Proposition 1). Further, by adding the mediating effectsof top managerial perceptions, differing perceptions may explain why one


firm changes its strategy, while another does not, given similar levels ofperformance (Research Propositions 2a and 2b). Hence, incorporating therole of performance perceptions allows us to account for greater variancebetween firms on strategic change.

Still more variance on strategic change may be accounted for if the effectsof managerial attributions are assessed. Specifically, the effect of perform-ance perceptions on strategic change may be moderated by top managerialattributions, which intensify or attenuate the effect. Perceptions are first-order effects that mediate the influence of poor performance on strategicchange. If top managers perceive that their firms have been punished, thensecond-order effects follow, in which managers make causal attributions –retrospective judgments – as they try to determine the causes of the per-formance downturns (this idea is further developed below). Based on theseattributions, organizations respond differently. Thus, attributions have mo-tivational effects (Bandura, 1997), which moderate the effect of first-orderperceptions on strategic change.

Managerial attributions are retrospective judgments of causes. Top man-agers interpret performance and look for underlying causes to determine whyan event has occurred. Attributions give the event meaning and help peopleanticipate future events (Weiner, 1986). Attribution theory assumes that peo-ple are motivated to understand and predict their environment (e.g., Kelly,1955) and that they are concerned with perceived causes of prior events(Weiner, 1986). The meaning, however, is not inherent in a past event, butrather it depends upon how a person construes the event (Kelly, 1967). Thisargument is not new. Hume (1739) argued that causality is not inherent inenvironmental events and that people do not observe causes – rather, per-ceivers of events construct causes in order to make their environments moremeaningful. In an organization, as top managers assess firm performance aspoor, attributions are made as to the underlying causes. The managers lookback and attempt to make sense of prior performance, and their attributionsof underlying causes influence the likely repetition of future actions. Large-scale empirical studies, however, have tended to ignore attributions asmoderating factors impacting strategic change, even though variability inattributions may result in behavioral differences (Weiner, 1986), and failure toassess attributions may result in under-specified models.

As we will explain, causal attributions for past performance may varybased upon the following three dimensions: controllability, permanence,and pervasiveness. Controllability is concerned with the source of the cause(i.e., personal or environmental), permanence with its length, and perva-siveness with its breadth.


Controllability

The founder of ‘‘attribution’’ thinking is Fritz Heider (1958), who arguedthat people ascribe causal factors either to a person or to the environment.An assumption underlying this characterization is that person-related causesare more controllable than environment-related causes. Subsequent researchhas shown that individuals are more likely to respond to poor performancewith behavioral change when the cause is attributed to person-related ratherthan environment-related factors (Rotter, 1971). Similarly, strategy researchhas found that when managers attributed poor performance to externalfactors, they were less likely to change firm strategies (Lant et al., 1992).

When performance downturns are attributed to external causes such com-petitors’ actions, changes in regulatory rules, shifts in technological standards,and changes in consumer preferences they are more likely to be viewed asuncontrollable rather than controllable. In contrast, when causes are attrib-uted to internal factors such as an outdated product line, poor manufacturingfacilities, or poor customer service, they are more likely to be viewed ascontrollable rather than uncontrollable. Attributions of controllability givemanagers some degree of confidence in their organization’s ability to respondto poor performance, and hence they are positively associated with the like-lihood of strategic change (Barr, 1998; Ford, 1985; Ford & Baucus, 1987). Wewould expect top managerial attributions of poor performance to more un-controllable factors to be less likely to result in the adoption of new behaviorthan the attribution to more controllable factors (e.g., Bettman & Weitz,1983; Fiske & Taylor, 1984; Lant & Mezias, 1992).

A classic illustration of the effect of controllability attributions on or-ganizational responses can be found in the differential responses of twomajor US auto companies to performance decline in the 1970s. Ford MotorCompany’s managers interpreted the poor performance during the late1970s as a problem with the company’s quality standards, and based on thisfirm-level attribution they closed several plants. In contrast, Chrysler Cor-poration interpreted its poor performance as a problem with consumer de-mand, and based on this external attribution it persisted with past behaviorswhile appealing for government assistance (Dutton & Duncan, 1987). Somerecent studies of strategic change have also highlighted the crucial role ofmanagerial interpretations in explaining whether firms respond to decliningorganizational performance. Although research has shown that managersare more likely to attribute poor performance to uncontrollable factors(Wagner & Gooding, 1997), when managers attribute performance declinesto controllable factors (such as poor strategy), they are more likely to in-itiate strategic changes (Barr et al., 1992; Lant et al., 1992; Meyer, 1982).


Permanence

As work on attributions developed, it became apparent that some causes aremore permanent than others (Weiner, 1986). For instance, a more perma-nent attribution might be a ‘‘lack of firm competencies,’’ whereas a ‘‘lack ofcompany-wide effort’’ could be classified as a more temporary attribution.Similarly, if top managers attribute poor performance to a ‘‘recession,’’we would classify this cause as ‘‘temporary,’’ while we would classify a‘‘technological change making our industry irrelevant,’’ as an example of‘‘permanent’’ attribution. Hence, the permanence dimension is concernedwith time, with the underlying causes of poor performance ranging fromtemporary to permanent.

The more permanent the attribution of causes, the more likely topmanagers will be to change future actions based on these attributions(Ford & Baucus, 1987). Moreover, we would expect the converse to betrue: when managers see performance as caused by temporary problemswithin or outside the organization, they are less likely to change their strat-egies. Hence, causal attributions of permanence impact the magnitude ofstrategic change.

Pervasiveness

After the dimensions of controllability and permanence, a third dimension –pervasiveness – was later offered (Abrahamson, Seligman, & Teasdale,1978), which dealt with the extent to which the cause of poor performancewas limited or generalizable across a wider context. In other words, whilepermanence is concerned with time, pervasiveness is concerned with space.Some causes are specific to a narrow area, while others affect multipledomains of performance. Thus, top managers may view poor firm per-formance as being caused by a particular function (e.g., a weak marketingfunction) or an overarching problem that involves numerous functions (e.g.,poor R&D, manufacturing, marketing, and human resources). When thecause of poor performance is seen as pervasive, top managers will be moredeterred by it, and therefore they will be more likely to consider strategicchange (e.g., Dutton & Duncan, 1987).To sum up, controllability, perma-nence, and pervasiveness will moderate the impact of perceived poor per-formance on strategic change. This leads us to the following proposition:

Research Proposition 3. Top managerial attributions will significantlymoderate the effects of perceived poor performance on strategic change.Specifically, the positive effect of perceived poor performance on the


magnitude of strategic change will be stronger:

a.
The higher the attributed level of controllability of the underlyingcause(s).
b.
The higher the attributed level of permanence of the underlying cause(s). c. The higher the attributed level of pervasiveness of the underlying
cause(s).

Proactive Cognitions and their Influence on Strategic Change

In the preceding section, we have argued that assessing performance per-ceptions and attributions can help to explain why poor performance leads tochange. Specifically, the more prior aspirations exceed performance, thegreater the perceived level of poor performance, which then increases thesubsequent magnitude of strategic change. In addition, when the perceivedpoor performance is seen as ‘‘controllable,’’ ‘‘permanent,’’ or ‘‘pervasive,’’the positive relationship between perceived poor performance and strategicchange strengthens. Assessing perceptions and attributions also may helpexplain why poor performance can lead to persistence. In such cases, theunderlying causes of perceived poor performance are seen as ‘‘uncontrol-lable,’’ ‘‘temporary,’’ ‘‘contained,’’ or a combination of the three, whichreduces the motivation for change and may in fact result in strategic per-sistence.

Perceptions and attributions can also explain why good performance maylead to strategic persistence. When performance exceeds prior aspirationsand is classified as good performance, the more likely strategic persistencewill follow. Furthermore, when the perceived good performance is viewed as‘‘controllable,’’ ‘‘permanent,’’ or ‘‘pervasive,’’ the positive relationshipbetween perceived strong performance and strategic persistence strength-ens. In other words, very strong performance gives signals to top managersthat current strategies are effective and should be continued.

Up to this point, though, we have been arguing that top managers react toperformance as they assess its nature and underlying causes; hence, thenotion portrayed is that top managers are influenced by past performanceoutcomes. It is interesting, however, that a history of strong performance (incontrast to recent strong performance) builds top managers’ beliefs regard-ing their firms’ efficacy or strategic capabilities, which aids managersin exerting influence to control the directions of their firms. Thus, a historyof strong performance increases top managers’ confidence in theirfirms’ strategic capabilities as they plan and execute strategy, which helps


to explain the conundrum of why good performance may lead to strategicchange.

A significant amount of work in psychology has been concerned withdiscovering the principles of how cognitions promote change (Bandura,1997). Hence, by drawing on the cognition literature within psychology wemay be able to understand how proactive managerial cognitions promotestrategic change. We will argue that the two critical forms of proactivemanagerial cognitions are beliefs regarding strategic change efficacy and thesetting of strategic goals. Strategic change efficacy consists of top managers’beliefs in their firms’ capability to change strategy, while strategic goals areanticipatory cognitions translated into performance targets that guide ac-tion (Bandura, 1997). It is of interest, however, that the empirical strategicchange literature has practically ignored top managers’ proactive influence.We argue that top managers plan for an organization’s future and set goalsthat motivate and direct organizational actions. So, while past performanceacts on top managers and directs their actions, top managers also act toinfluence future performance (Child, 1972). In other words, a significantproportion of top management effort is directed not just at reacting toperformance declines but toward cognitive activities whereby strategicchange may be influenced by the self-regulation of actions. Thus, anticipatedorganizational futures act as cognitive motivators that impact strategicchange.

Top Managerial Strategic Change Efficacy Beliefs

Albert Bandura is the researcher most associated with work on efficacy,which represent managerial beliefs in the capabilities of firms to exercisecontrol over strategic actions. Efficacy beliefs have been found to be highlypredictive of behavior and a powerful source of influence on choice, indi-cating that perceptions of future states drive present actions (Bandura,1997). It is also interesting that efficacy beliefs may drive actions differentfrom those that past performance outcomes might dictate, so that goodperformance, for example, may lead to change rather than persistence. Inthe context of strategic change, efficacy is the top managerial belief in afirm’s capability to execute a particular strategy. More specifically, topmanagers assess efficacy based on past performance and then develop pro-babilistic causal expectations about future outcomes of strategic actionsbased on assessed capability. These are beliefs about what the firm can dounder different sets of conditions, and these beliefs, in turn, guide strategydevelopment.


Past performance influences the formation of efficacy, as top managersestimate capabilities based on prior experience. For instance, performancesuccess increases efficacy beliefs, with the most resilient forms of efficacyresulting from overcoming obstacles through strong effort. On the otherhand, performance failure decreases efficacy beliefs, especially if failuresoccur early and often and attributions of non-controllability are made forthe failures (Bandura, 1997). Organizational decision-making requires thecoordination, monitoring, and managing of collective efforts, and experi-ence allows top managers to develop rules for effective management. Undersuch conditions, efficacy beliefs exert substantial impact on the quality ofdecision-making (Wood & Bandura, 1989). Thus, efficacy beliefs are influ-enced by prior experience, but they also influence future experience.

Firms will take action when they hold strong strategic change efficacybeliefs and have outcome expectations that make the effort seem worthwhile.It is important, however, to distinguish efficacy from prior work on expect-ancy theory. Specifically, expectancy theory assumes that the expectation ofeffort-driving performance impacts choices. In contrast to effort expectations,efficacy is a broader concept concerned with abilities to produce a level ofperformance, which are based on skills, knowledge, resources, and capabil-ities, rather than on effort alone (Wood & Bandura, 1989). It is also worthnoting that efficacy research has shown that while efficacy expectations con-tribute to performance, effort expectations do not (Bandura, 1997), whichmay account for the relatively weak performance of expectancy theory inpredicting organizational actions (Locke & Latham, 1990). Therefore, whentop managers believe their firms are capable of changing their strategy andbelieve that this change will be effective, they are more likely to take strategicchange actions (Audia et al., 2000).

Efficacy beliefs can also be related to an organization’s ‘‘ability to change’’– a key concept within the strategic change literature (e.g., Dutton &Duncan, 1987). In empirical studies, size and age have been offered asproxies for an organization’s ability to change. These proxies have then beenrelated to strategic change, but with mixed results. Some studies have found anegative relationship either between organization size and strategic change(Fombrun & Ginsberg, 1990), or between organization age and strategicchange (Kelly & Amburgey, 1991). In contrast, other studies have found apositive relationship between these two proxies and strategic change (Boeker,1989; Zajac & Kraatz, 1993). Organizational inertia arguments are offered toexplain negative findings, while resource arguments or experience argumentsare used to justify positive relationships. However, rather than size and agehaving a direct effect on strategic change, these variables may influence


managerial efficacy beliefs, which in turn shape change behaviors. For onething, top managers may construe size and age variously within differentorganizations. For example, while managers in one firm may view size or ageas a significant constraint on their ability to effect change, managers inanother similarly sized or similarly experienced firm may view the largerresource base or increased experience associated with size or age as signif-icant positive influences on their ability to execute change. Thus, by relatingorganizational attributes like size and age to efficacy rather than directly tochange, we may be able to reconcile prior contradictory findings in the em-pirical change literature.

Finally, strong efficacy beliefs promote aspirations, which guide, moti-vate, and regulate actions (Bandura, 1991). The appraisal of abilities influ-ences goal setting: strong efficacy beliefs result in the setting of challenginggoals, contribute to strategic thinking, and help managers to maintain ef-forts toward the goals, even when setbacks are experienced (Bandura &Wood, 1989; Locke & Latham, 1990; Prussia & Kinicki, 1996). In otherwords, efficacy beliefs are an important influence through which goals createmotivational effects. After a difficult accomplishment, those with strongefficacy beliefs tend to set even higher goals that create new challenges to bemastered. Thus, in direct contrast to the notion that good performancebreeds only persistence, strong efficacy beliefs contribute to taking on newchallenges, even when company performance has been good.

Efficacy beliefs, then, are influenced by past performance, and in turn theyinfluence both strategic change and goal setting. This leads us to the fol-lowing propositions:

Research Proposition 4a. Performance will influence managerial strategicchange efficacy. Specifically, the greater the duration and intensity ofstrong performance, the stronger will be the managerial strategic changeefficacy beliefs.

Research Proposition 4b. Top managerial strategic change efficacy beliefswill directly influence strategic change. Specifically, the stronger the ef-ficacy beliefs, the greater will be the magnitude of strategic change.

Research Proposition 5. Top managerial strategic change efficacy beliefswill impact strategic goal setting. Specifically, the stronger the efficacybeliefs, the more challenging will be the strategic goals.

Strategic Goal Setting

Goal-setting theory has academic and management precursors, includingthe work of F. W. Taylor, Peter Drucker, T. A. Ryan, and Kurt Lewin, but


most modern work is associated with Edwin Locke and his colleagues (e.g.,G. Latham, C. Earley, M. Erez, C. Lee). Goals are generally defined as‘‘desired performance outcomes’’ (Locke & Latham, 1990), and as topmanagers identify them the intended outcomes have the effect of directingattention, focusing effort, and contributing to persistence (Locke, Shaw,Saari, & Latham, 1981). More specifically, setting a goal is a cognitivecomparison process in which a valued standard is set as a challenge thatcreates a state of disequilibrium. Performance is then assessed relative to thestandard, which gives direction to action (Bandura, 1997). The necessarycomponents for goal setting, then, are a standard of performance and feed-back that allows the measuring of performance against the standard(Bandura & Cervone, 1983).

Based on prior performance and experience with organizational environ-ments, top managers set goals that direct and motivate organizational ac-tions. Thus, goals are often adjusted based on prior performance: if goalsare reached, top managers may then ‘‘raise the bar’’ and increase theperformance goals for the firm. In other words, the stronger the prior per-formance, the more challenging the goals that top managers are likely to set.As with efficacy beliefs, then, goals are not formed in isolation but are basedon top managers’ reflections on past performance and on their perceptionsof the firm’s resources and capabilities. Higher standards for firm perform-ance are typically set relative to prior performance (though they may also beset in comparison with another firm), and they lead to performance goalsetting (e.g., Lewin, Dembo, Festinger, & Sears, 1944). The more confidencetop managers have in their firms’ competencies, resources, and capabilitiesbased on experience, the more likely they are to set higher goals. After thestandard is attained, top managers will generally have an improved sense oftheir firms’ competencies and are likely to set still-higher standards (e.g.,Ryan, 1970). A new standard is then adopted, and this again creates a stateof disequilibrium that continues to drive motivation. Therefore, goal settingallows top managers to direct their own motivation, rather than to simplyreact to events.

Modern goal-setting work has shown two primary findings. First, goalsthat are challenging (assuming they are accepted) lead to greater effort thando easily achieved goals. Challenging goals direct action to relevant be-haviors, inspire continued effort over a longer term, and lead to more ben-eficial outcomes. Second, specific challenging goals lead to greaterperformance than do vague ‘‘do your best’’ goals (Locke & Latham,1990). The more elaborated or detailed a goal is, the more effective it is inmotivating action (Mischel & Patterson, 1976). Here is an example of a goal


set at General Electric, as described by former chairman Jack Welch(Harvard College, 2002). The goal is both specific and challenging:

We never did more than 5 inventory turns, and we said we’d go to 10. We had no idea

how to get to 10. We published in the annual report that we’d do 10. We’ll do 8 this year.

We all know what we are shooting for – 200,000 people know what we are shooting for.

When the goals are difficult to meet, increased effort may not be sufficient toachieve targets, and problem solving to discover how targets can be reachedmay lead to changes in strategy. For example, goal setting at General Elec-tric was sometimes referred to as ‘‘stretch targets,’’ and the following quotefrom a General Electric executive suggests that problem solving and inno-vation are needed to meet stretch goals (Harvard College, 2002):

People like problem solving. They want to go to that next level. However, stretch goals

could degenerate into a justification for forcing people to work a 60-hour week to

achieve impossible goals. But, it’s the process you are trying to stimulate. You are trying

to get people to think of fundamentally better ways of performing their work.

Importantly, though, goals not only direct attention and mobilize effort butalso influence planning in situations in which goals require the developmentor modification of strategy (Locke & Latham, 1990). This cognitive taskinvolves an attempt to consider the best means to accomplish the goal:complex or difficult goals often require creative problem solving that mayresult in a more efficacious process than previously used (Locke et al., 1981;Naylor & Ilgen, 1984). Research has shown that goals lead to more planning(e.g., Bandura & Simon, 1977; Earley & Perry, 1987; Latham & Baldes,1975), and difficult, specific goals stimulate higher-quality planning (e.g.,Earley, Wojnaroski, & Prest, 1987) and are associated with the most effec-tive strategies (Chesney & Locke, 1991; Klein, Whitener, & Ilgen, 1990). Toachieve a goal, effort must be exerted, and so goals direct attention andaction toward goal-relevant activities. However, if the goal is challenging,sheer effort may not be enough – innovation and problem solving may beneeded in order to discover suitable strategies for reaching the goal. Lessdifficult goals activate stored knowledge and skills relevant to meeting thegoal, but if goals are difficult their achievement requires more than simplyexecuting learned habits. Therefore, goal setting is relevant to strategy be-cause it often entails a change in strategy to meet the demands of the goal(Locke & Latham, 1990).

A strategic change, then, may follow from the setting of goals, partic-ularly if they are difficult and specific. Larry Bossidy, chairman of AlliedSignal, Inc., used specific and challenging stretch targets (e.g., increasingearnings per share by 15% annually). Among other things, to reach these


goals, he encouraged strategic change such as the development of newmarkets and products (Hill & Jones, 2001). In such ways, top managersproactively influence their environment as they set performance standards tocreate a state of disequilibrium. Then, in order to reach the strategic goalsthey have set, they may very well initiate strategic change.

To sum up, then, efficacy beliefs may lead to the setting of high goals, andboth efficacy beliefs and goals may foster strategic change. This leads to thefollowing two propositions:

Research Proposition 6a. Performance will influence managerial strategicgoals. Specifically, the greater the duration and intensity of strong per-formance, the more challenging will be the goals set.

Research Proposition 6b. Top managerial strategic goals will directly in-fluence strategic change. Specifically, the more challenging and specificthe goal, the greater will be the magnitude of strategic change.

To summarize our framework, then, the duration and intensity of poorperformance affect strategic change. Importantly, however, top managersinterpret performance, which contributes to a differing likelihood of stra-tegic change initiatives across firms, even given similar performance. Tobetter understand how top managers interpret performance, we need tounderstand both their perceptions and attributions of performance. In thecase of perceptions, top managers compare their firms’ current performanceto their prior aspiration levels: aspirations exceeding performance are morelikely to be seen as poor performance, whereas performance exceeding as-pirations is more likely to be viewed as a strong performance. Once per-formance is perceived as strong or poor, then attributions are made as to itsunderlying causes – its controllability, permanence, and pervasiveness – andthese attributions, in turn, attenuate or amplify the effects of perceivedperformance on strategic change.

Perceptions and attributions are reactive forms of strategic change, butmore proactive forms of strategic change are also possible. Sustained strongperformance has the effect of boosting top managers’ efficacy beliefs in theirfirms’ strategic capabilities, which in turn increases the likelihood that morechallenging strategic goals will be set. It is interesting, then, that strongperformance sets into motion forces for change, as the confidence of topmanagers in firm capability grows, whereby they are more willing to take onstrategic changes. And since they have met prior goals, they are more willingto set more difficult goals, which increases strategic change likelihood.Therefore, both reactive and proactive forces impact on strategic change.


RESEARCH IMPLICATIONS AND EXTENSIONS

A detailed discussion of the methodological implications of our frameworkis beyond the scope of the current paper. However, in the spirit of dem-onstrating the testability of our propositions, and in order to encourageempirical work, we offer some specific guidelines for future research thatinclude preferred data sources as well as suggested operationalizations andappropriate levels of analyses of variables within the model.

Data Sources and Methodologies for Future Empirical Research

Our framework suggests that the direct effects of firm performance (ex-ogenous variable) and the intervening effects of managerial perceptions andcognitions need to be assessed to explain variance in firms’ strategic changebehaviors. We suggest that direct effects of past performance and strategicchange/persistence can be assessed through archival data sources (such asannual reports) and external experts such as industry analysts, consultants,and academics (Eisenhardt & Bourgeois, 1988; Tushman & Anderson, 1986).However, to assess managerial perceptions and cognitions (endogenous in-fluences), data sources and methods more amenable to a managerial frame ofreference will be needed, such as decision strategic decision scenarios or pri-mary field surveys (Hodgkinson, Brown, Maule, Glaister, & Pearman, 1999;Thomas et al., 1993). Thomas et al. (1993), who used decision scenarios tocapture top manager’s interpretations and archival data sources to measureactual changes in firm performance and behaviors, demonstrated how dif-ferent data sources can be combined to obtain information from both man-agerial and external frames of reference. Our framework can be testedsimilarly, because exogenous antecedents can also be measured based onannual reports or external experts. Then, the members of the TMT can besurveyed with an instrument that utilizes multi-item scales of cognitions thatmap onto the exogenous changes identified through archival sources. Ideally,the exogenous variables would be measured at least one time period prior tothe measurement of cognitions and cognitions would be assessed at least onetime period prior to the evaluation of strategic change.1

Operationalizing Prior Performance, Managerial Perceptions,

and Cognitions

Many of the constructs developed in our theoretical framework have yet tobe operationalized, and prior research offers only limited guidance in this


regard.2 Hence, we offer preliminary suggestions for empirical measures ofour constructs, with the caveat that these measures may need refinementbefore they can be incorporated into a formal empirical test of our prop-ositions.

Intensity and Duration of Past Performance

Intensity can be defined as the degree of change in a performance dimensionduring the immediately preceding time period, usually 1 year. Durationrefers to the number of time periods during which past performance is beingmeasured (e.g., for poor performance it may refer to the number of timeperiods during which past performance on the chosen dimensions has beenbelow the industry median, the firm’s historical median, or has declined).Duration and intensity should be obtained either from archival sources orfrom non-managerial assessments in order to prevent common methodsbias. Since most firms use multiple measures of performance – accountingand financial, qualitative and quantitative – duration and intensity need tobe multi-dimensional constructs so that they can be mapped onto the firm’sframe of reference. A preferred method is to ask experts to weight individualperformance measures by their level of importance and thus create aweighted index of composite performance.3

Perceived Performance

This measure can be based on managerial assessments of the extent to whichthey perceive the firm’s past performance to be below, at, or above theiraspiration levels for (1) the immediately preceding time period correspond-ing to the intensity measure and (2) for multiple time periods correspondingto the duration measure. The lower (higher) the level of managerial satis-faction, the greater will be the degree of perceived poor (strong) perform-ance. Thus, poor performance and strong performance could be assessed onthe same scale, with low scores denoting higher levels of poor performance.Our approach differs from Greve (1998), who assumed homogenous aspi-ration levels across all firms (either industry performance or historical per-formance). We believe, in contrast, that aspirations can themselves varyacross top managers in different firms. Hence, instead of using an objec-tively determined aspiration level and applying the same standard to allfirms, we recommend a perceptually based measure of satisfaction thatallows for variation in managerial aspirations. Thus, we assume that somefirms may compare themselves with the highest performers in the industry toset aspiration levels, while others may use industry average performance,


and still others may aspire to beat the best recent performance of their ownfirm. By assessing managerial perceptions of satisfaction relative to theirsubjective aspirations, we can capture greater variance in the first-orderperceptions of strong and poor performance.

Attributions of Controllability, Permanence, and Pervasiveness

These measures need to be operationalized in relation to managers’ inter-pretations of the underlying causes of the firm’s past performance. An as-sessment of controllability would judge the extent to which managersattribute the firm’s past performance to causes that are within the control ofthe firm. The scale developed by Hodgkinson (1992) to measure senior ex-ecutive’s attributions of controllability is a noteworthy approach.

Perceived Strategic Change Efficacy

Assessing efficacy requires expert knowledge on what it takes to succeed in agiven strategy, perhaps supplemented with interviews and questionnaires, inorder to identify levels of challenge and impediments to successful strategicperformance (Bandura, 1997). Once challenges are understood, top man-agers can be presented with strategic change scenarios portraying differentlevels of strategic challenges. In such cases, they rate the strength of theirbelief in their firm’s ability to implement the strategic change, which is ajudgment of capability, not intention. In the only prior strategic changestudy that assessed efficacy, a two-item scale assessed respondents’ confi-dence in achieving predetermined levels of market share (Audia et al., 2000).However, this measure did not clearly distinguish efficacy from strategicgoals. A preferred measure would rate efficacy in relation to various stra-tegic change options and would separately assess strategic goals.

Strategic Goals

Assessing the degree of specificity and challenge of strategic goals can beconstrued as a three-step process. In the first step, top managers may beasked to specify their relevant performance criteria. Then, when the relevantcriteria are ascertained, top managers may be asked to identify the per-formance levels they are trying to attain for the next year (e.g., Locke,Frederick, Lee, & Bobko, 1984). External experts familiar with the firm’sindustry and past performance may then rate performance goals on thedimensions of specificity and challenge.


Extensions and Directions for Future Research

We limited the scope of our framework in order to explicate the underlyingcausal mechanisms that explain the relationship between firm performanceand strategic change and to identify the crucial role of managerial cognitionsin determining this relationship. This limited scope, however, offers usefuldirections for future research. To keep our model focused and to more fullydevelop the underlying theoretical arguments, we assumed the existence of adominant set of top managerial cognitions as the starting point for ourpropositions. However, future research can extend our model and examinethe antecedents to managerial cognitions. For instance, attributions canstem from variations in top managers’ prior experiences, functional back-grounds, managerial problem domain familiarity (Sitkin & Pablo, 1992),and organizational control systems (Grinyer & McKiernan, 1990). Similar-ly, in addition to prior firm experiences, strategic change efficacy beliefsmay be shaped by vicarious experience as the performance of otherfirms is assessed, or from the influence of analysts, industry experts, orrespected others who might convince top managers of their firm’s capabil-ities (Bandura, 1997). Thus, antecedents to top managerial cognitionsshould be explored. For the sake of simplicity and clarity, we also separatelyexamined the role of reactive (perceived performance and attributions) andproactive (efficacy beliefs and goals) cognitions. However, examining theinteractions between the reactive and proactive components could also use-fully extend our model. These cognitive forces operate simultaneously, andmore work is needed to provide understanding of their relative importanceand mutual interactions in explaining strategic change.

In addition, although we identified the dominant role of managerial cog-nitions in the change process, there are several variables that limit mana-gerial discretion stemming from organizational inertia (Hannan & Freeman,1984) and resource constraints (Pfeffer & Salancik, 1978). While our modelaccommodates these variables through their effects on managers’ efficacybeliefs and strategic goals, we recognize that these factors can also havedirect effects on the magnitude of strategic change. For that reason, em-pirical tests of our model should incorporate controls for other significantbut non-cognitive sources of variations in firm strategies. Including suchcontrols in conjunction with the direct, mediating, and moderating effectsidentified in our model would contribute to a more completely specifiedtheoretical model of strategic change.

To sum up the paper as a whole, we made a distinct theoretical contri-bution by identifying and elaborating upon the underlying cognitive


dynamics and their causal effects in the strategic change process. We believethat our theory provides a compelling and logical justification for the in-fluence of top managerial cognitions on strategic change and that it helps fillthe ‘‘black box’’ between past performance and strategic change.

NOTES

1. Thus, in a longitudinal research design, exogenous changes would be measuredfor t�n to t; cognitions at time t; and strategic change from t to t+i, in which n and icapture the duration over which change is conceptualized.2. The exception to this observation is our dependent variable – magnitude of

strategic change. Operational measures for both corporate and business-level stra-tegic change can be readily found in extant empirical literature (Rajagopalan &Spreitzer, 1997). Hence, we do not offer a distinct measure for this construct.3. Performance measures typically depend on the industry and thus need to be

assessed in relation to accepted industry norms. Single-industry studies that comparemultiple firms using the same performance criteria would offer the simplest and mostaccurate test of our propositions; however, multi-industry studies that carefullycontrol for industry-level variations can also offer a meaningful test of our frame-work.

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