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4. Thinking Strategically About Thinking Strategically

4. Thinking Strategically About Thinking Strategically

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Strategic Management Journal
Strat. Mgmt. J.
,
30
: 737–763 (2009)Published online 26 February 2009 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.757
 Received 11 May 2006 
;
Final revision received 5 January 2009
THINKING STRATEGICALLY ABOUT THINKINGSTRATEGICALLY: THE COMPUTATIONALSTRUCTURE AND DYNAMICS OF MANAGERIALPROBLEM SELECTION AND FORMULATION
MIHNEAMOLDOVEANU*
Marcel Desautels Centre for Integrative Thinking, Rotman School of Management,University of Toronto, Toronto, Ontario, Canada
 A new model of managerial problem formulation is introduced and developed to answer thequestion: ‘What kinds of problems do strategic managers engage in solving and why?’ Thearticle proposes that a key decision metric for choosing among alternative problem statementsis the computational complexity of the solution algorithm of alternative statements. Managerial problem statements are grouped into two classes on the basis of their computational complexity:P-type problems (canonically easy ones) and NP-type problems (hard ones). The new modelof managerial cognitive choice posits that managers prefer to engage with and solve P-type problems over solving NP-type problems. The model explains common patterns of managerialreasoning and decision making, including many documented ‘biases’ and simplifying heuristics,and points the way to new effects and novel empirical investigations of problem solving-oriented thinking in strategic management and types of generic strategies, driven by predictions about thekinds of market- and industry-level changes that managers will or will not respond to.
Copyright
2009 John Wiley & Sons, Ltd.
INTRODUCTION
What kinds of problems do strategic managersengage with and try to solve, and why those andnot others? How much should and how much
do
managers think about a strategic decision problem?Under what conditions do they
switch
among dif-ferent problem statements to make sense of a givenpredicament? I introduce a model of strategic prob-lem formulation based on distinctions drawn fromcomputational complexity theory (reviews can be
Keywords: managerial problem solving; strategy formu-lation; complexity
Correspondence to: Mihnea Moldoveanu, Marcel DesautelsCentre for Integrative Thinking, Rotman School of Management,University of Toronto, 105 St. George Street, RSM 473, Toronto,Ontario, Canada, M5S 3E6.E-mail: micamo@rotman.utoronto.ca
found in Garey and Johnson, 1979; Cormen, Leis-erson, and Rivest, 1990), and contribute a canon-ical representation and taxonomy of managerialproblems based on their computational complexityto create a framework for addressing such ques-tions. I develop a model of cognitive choices thatmanagers implicitly make among alternative prob-lem complexity classes. The model uses a well-known, established quantization of problem com-plexity measures to build a lexicographic modelof managerial problem formulation.
-hard, orpolynomial-time hard problems, are those withsolution algorithms that require a number of oper-ations that is at most a polynomial function of thenumber of independent variables and constraints.By contrast,
NP
-hard problems, or nondeterminis-tic polynomial-time-hard problems, have solutionalgorithms that require a number of operations thatis a greater than any polynomial (e.g., exponential)function of the problem’s variables and constraints.
Copyright
2009 John Wiley & Sons, Ltd.
 
738
M. Moldoveanu
The model of problem selection put forth in thisarticle posits that managers,
ceteris paribus,
pre-fer to conceptualize their predicaments in termsof 
-hard problems over conceptualizing them interms of 
NP
-hard problems. The model allowsresearchers to make sense of a wide-ranging lit-erature on cognitive simplifications, and to makepredictions about the kind of problems managersattempt to solve, the environmental variables theypay attention to, and the types of strategies theyconsequently adopt.
Background: shortcomings of current modelsof problem selection and formulation
Following the example of Simon and his co-workers, (Simon, 1947; March and Simon, 1958;Cyert and March, 1963), researchers have lookedat the phenomena of strategy formulation andselection using the vocabulary of information pro-cessing operations. In this framework, the orga-nization is represented as processing informationfrom its environment so as to produce adaptivepatterns of behavior, whose instantiation, reliabil-ity, and success are constrained by the boundedrationality of organizational actors (Simon, 1996;March, 1994). The resulting picture of the orga-nization is that of a large device for registeringnew information and carrying out computationsthat ‘solve problems(March and Simon, 1958).Early work guided by this model simulated theprocesses by which organizations solve problems,make decisions, and address ‘issues’ as haphaz-ard and unstructured (Cohen, March, and Olsen,1972) and formulated preliminary process mea-sures, such as the difficulty of making an orga-nizational decision, but stopped short of formal-izing organizational information processing to thepoint where specific decisions and problems can bemapped into different levels of difficulty or com-plexity. Accordingly, I focus here specifically onthe question of problem formulation and selection:If a problem statement (i.e., a mismatch betweenan identified ‘currentstate of the world and a‘desired’ state of the world, coupled with a desireto get to the desired state of the world subjectto some constraints [Newell and Simon, 1972;Simon, 1996; Newell, 1990]) is what guides com-putation, then how are problem statements them-selves chosen or generated? Are there general pat-terns of problem selection that would give greaterexplanatory punch to the thrust of information-processing explanations of managerial problem-solving behavior? I introduce a way of thinkingabout such patterns and argue that it is possible tomake predictions about the problems that managersengage with and choose to solve, the strategiesthey will come up with, and the variables they payattention to. In this way, I connect the problemselection and formulation process to models of theexpected span, structure, and dynamics of manage-rial attention (Ocasio, 1997), which has also beenstudied in the information processing tradition.Apart from the formal information processingapproach to representing organizations, the pro-cesses of problem diagnosis (Mintzberg, Raising-hani, and Theoret, 1976), definition (Kilmann andMitroff, 1979), or discovery (Pounds, 1969) havebeen studied empirically and analytically for sometime (Taylor, 1975; Lyles and Mitroff, 1980; Nutt,1984; Cowan, 1986) with an eye to identifyingeither correlations between environmental condi-tions and structural elements of a problem state-ment, or typical problem-formulation behaviorsthat together would amount to a model of prob-lem formulation or selection. Because ‘problems’are difficult to define (Agre, 1982) as a class of entities, it has been difficult to speak of problemsin general, without referring to either a specificset of problems (Nutt, 1984), or to a specific setof processes that qualify as ‘problem-formulationbehavior’ (Kilmann and Mitroff, 1979). The com-plexity of a problem has been difficult to captureby empirically minded researchers, as attested toby the difficulties of Volkema’s (1988) attemptsto characterize the complexity of problem state-ments using the number of independent logicalclauses in the problem statement. These difficultiesstem from the fact that we can construct ‘simple’many-clause problem statements and complicatedfew-clause problem statements, which renders theuse of clause-based complexity measures ambigu-ous. The present work makes describing the prob-lem formulation process precise by introducing acomplexity measure along which strategic prob-lems can be described and separated into differentclasses, making it possible to discuss problem for-mulation in terms of complexity class selection.Complexity considerations have not been irrele-vant to researchers’ study of managerial cognition.Managers have been argued to be cognitive sim-plifiers (Schwenk, 1984)—as are lay persons more
Copyright
2009 John Wiley & Sons, Ltd.
Strat. Mgmt. J.
,
30
: 737–763 (2009)DOI: 10.1002/smj
 
Thinking Strategically about Thinking Strategically
739
generally (Rokeach, 1960; Tversky and Kahne-man, 1986; Hogarth, 1975, 1980). Cognitive sim-plification processes, such as anchoring, escalat-ing cognitive commitment to a previously chosencourse of action, prior hypothesis bias, limitedand anchor-biased search among lists of alterna-tives, have been identified as sources of ‘skew’in managerial information processing, presumablyrelative to a non-skewed, ‘ideal’ mind. However,the question of finding an underlying mecha-nism for all or most of the identified simplifica-tion processes is open. I argue that computationalcomplexity-guided problem choice is a viable can-didate. The question I take up is: Can we reachmore deeply than a description of surface heuristicsand come up with a model of managerial cogni-tion that is explanatory of the cognitive behaviorof managers and amounts to more than a collectionof stylized facts? To answer this, I deploy a modelof cognitive operations, which explains the simpli-fying moves observed by researchers by introduc-ing a space in which managerial problems can bedescribed, and shows how various simplificationmaneuvers can be understood as complexity-drivenchoices among and within regions of this space.The model of managerial cognitive choiceamong alternative problem statements developedhere is relevant to the classification of differ-ent managerial strategies; it helps state conditionsunder which we can expect certain strategies toexist in the first place, such as those whose pursuitrequires managers to have antecedently thought acomplex problem through to an optimal solution.Researchers who developed new taxonomies of firm-level strategies (Chrisman, Hofer, and Boul-ton, 1988; Hambrick, 1983; Miller and Friesen,1978, for instance) have focused on the presence(rather than the
absence
) of strategies and strategytypes, as Inkpen and Choudhury (1995) point out.This ‘presence bias’ in strategy research—togetherwith the multiplicity of possibly equally well cor-roborated strategy types—raises questions for theresearcher interested in more realistic insight intomanagerial thinking and reasoning: How doesone choose among the ‘presenceand ‘absence’hypotheses when searching for and classifyingstrategies? How does one choose among variouspossible taxonomies of strategies, given all of themare well corroborated and have led to fruitful pro-grams of empirical research?A methodological answer that comes from thecomputational study of ‘mind’ (Newell, 1990;Simon, 1996) is a form of psychological realism,which posits that we want to seek strategy typolo-gies that are maximally plausible or explicablefrom a psychological perspective (but, addition-ally, are based on algorithmically tractable rep-resentations of mental processes, that are them-selves amenable to machine implementation (Tur-ing, 1997). Rather than treating managers
as if 
they were intendedly and strategically (albeitboundedly) rational, psychological realism encour-ages researchers to investigate in greater detailthe cognitive and epistemological states of theirsubjects. The approach proposed here is a con-tribution to this psychologically realistic researchprogram in the study of managerial cognition. It isbased on the introduction of a space in which man-agerial problem solving and problem formulationprocesses can be represented in a psychologicallyintuitive fashion.A direct intellectual precursor of the approachof this study is the behaviorist and cognitive reap-praisal of game theory and game-theoretic resultsbrought about by experimental economists. Clas-sical game-theoretic analyses of strategic man-agement (Kreps, 1990; Gintis, 2000) assume thatagents are rational, know that they are rational,and reasonably assume that others are rational aswell, in spite of the empirically unrealistic ‘log-ical omniscience’ that such assumptions requireagents to posses, which entails that all agentsknow or believe all of the logical consequences of their current beliefs. By contrast, behavioral game-theoretic analyses test assumptions about individ-ual rationality piecemeal and craft parametric mod-els of individual cognition and behavior (Camerer,1997). They are concerned with what is or isnot the case in strategic and competitive scenar-ios, rather than with providing an explanation of strategic behavior based on assumptions that arereasonable, but, likely to be empirically false. Themodel put forth in this study bridges between mod-els of reasoning developed by experimental gametheorists and classical game-theoretic approaches,by providing a general way of thinking about thesimplification processes that take the modeler from‘fully rational’ to ‘boundedly rational’ models of strategic thinking. It is based on the insight thatknowledge by a manager of some or all of thevariables of a competitive game (players, strate-gies, payoffs) is not—as traditional game theoristsassume—necessarily accompanied by an explicit
Copyright
2009 John Wiley & Sons, Ltd.
Strat. Mgmt. J.
,
30
: 737–763 (2009)DOI: 10.1002/smj

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