Key Concept

A company’s ability to develop new products is not solely a function of its resources. Managerial cognition and organizational context play a big part. Negative perceptions of changes in the operating environment and defensive strategies are likely to lead to less innovative products and stifle creativity and entrepreneurship. We need to take an integrated, multi-dimensional approach to understanding innovation and new-product development decisions.

Idea Summary

Business environments evolve quickly and constantly, and changes in technologies, demand or regulation often lead to the development of new products and services. But what determines the quality of these products and services — and the degree of innovation of companies?

A study of data from 84 firms supplying the German car industry shows that the degree of managerial negativity and the environment of the organization have a big impact.

The study set out to examine the effect of ‘negative cognition’ on innovation and entrepreneurship. Since the way managers see the world is often the result of their environment, it also looked at the interplay between ‘managerial negativity and firm context’, investigating how they jointly and severally influence entrepreneurial activity.

It found that managers who viewed external changes and triggering events as likely to lead to losses for the company — i.e. negatively — were less likely to seek out the kind of information that would lead to the development of more innovative products. (Feeling threatened, they tended to focus on more familiar information.)

It also found that the degree of negativity was closely linked to the overall context in which people worked. Defensive strategies, focused on maintaining market position, led to negative cognition. More offensive strategies, on the other hand, characterised by a constant search for new markets, meant managers were more likely to perceive changes in the external environment as opportunities.

Strategy was shown to affect innovation in two ways: by guiding the company’s values and objectives; by influencing the perceptions of managers.

The research also shows that company size and wealth have an impact. Challenging the idea that bigger firms impede innovation (through, for example, more formal rules and control mechanisms), it finds that high levels of resources are important — to the extent that they make managers respond less negatively.

The research concludes that companies with a defensive strategy may need to change, confirming that negative interpretation of a trigger event is associated with products that are less innovative.

Business Application

Consider the following recommendations:

• Adjust for cognitive influences by reaching outside the company — get an external perspective by, for example, collaborating with other firms, attending conferences and networking events, and discussing the implications of industry change with as wide a group of people as possible.
• Take a pro-active, rather than a reactive, approach to new product development. (Don’t wait for triggering events — they might be perceived as negative by managers.)
• Influence managerial cognition by a balanced attitude to change. Make sure planning and strategy development sessions emphasise opportunities as well as risks and threats. Don’t retreat to a defensive position.