Observational Learning in Networks of Competition: How structures of attention among rivals can bring interpretive advantage

Abstract

Much of social network analysis has focused on learning in communication networks among collaborators in which actors can make direct inquiries to seek clarification about alters’ behavior or views. But such inquiries are typically not possible among rivals. Learning among rivals occurs primarily in observational networks in which actors must make inferences of the logics guiding their competitors’ behavior in markets. What promotes interpretive advantage in these networks of observation? We combine multimarket competition theory and structural-hole theory to highlight the benefits of multiple exposure to disconnected competitors. In network-analytic terms we suggest that competitors’ interpretative advantage lies in non-redundant dyadic closure, especially when dealing with uncertain market niches. Dyadic closure, measuring ego’s exposure to her direct competitors in multiple markets, increases the ability to interpret competitors’ observed behavior. Redundancy, measuring the extent to which ego’s competitors are exposed to each other, reduces the diversity of views to which ego is exposed and hence the capacity to cope with uncertainty. We test our hypothesis by analyzing the network of competition created by securities analysts and the stocks they cover. We find that estimates issued by an analyst with multiple exposures to disconnected competitors are more accurate when confronted by more challenging, high risk, high reward, volatile stocks. Shifting the focus from direct social ties to the cognitive ties that link actors based on the objects, problems, or issues to which they pay attention, we develop a new approach to network analysis. Observation networks, we argue, operate neither as pipes nor as prisms but can be better conceived as scopes.

We act therefore we are: A theory of action‐driven strategy

“…Within the logic followed in our study, firms deploying competitive actions that offer a larger exposure to the competitive environment are better positioned to obtain relevant and varied experience and knowledge to evaluate the results of such actions in competitors and customers. In competitive dynamics research, learning is competitor-centered as it aims to assess and understand competitors' likelihood to retaliate; recent studies show that learning from other market participants is beneficial for firms' understanding of their environment (Prato & Stark, 2023). Hence, it is reasonable to suggest that by exposing the firm to a larger set of market participants, competitive actions with broad scope generate more learning opportunities that are likely to impact future decisions.…”

“…The experience and knowledge of founding members (Burton et al, 2002; Eggers & Kaplan, 2013; Klepper & Sleeper, 2005; Shane & Khurana, 2003), the membership in communities of practice (Kogut & Zander, 1996; Lave & Wenger, 1991), and the influence of competitors and social structures (Kaplan, 2011; Levitt & March, 1988; Porac et al, 1989; Prato & Stark, 2023) are used to incorporate relevant experience and knowledge in firms' systems and learning processes (March, 2006). Competitive actions enable firms to access to market information and assess the effects of their competitive actions on other market players, while improving skills to recognize opportunities and ideas for new competitive actions (Andrevski et al, 2016; Derfus et al, 2008; Miller & Chen, 1994; Nair & Selover, 2012).…”

“…Therefore, decision‐makers rely on recent experience and on information that is salient and quickly accessible to decide (Frederiks et al, 2015; Liedtka, 2015). Firms also tend to weigh more favorably recent experiences in predictions of their outcomes (Argote et al, 2021; Gavetti & Levinthal, 2000; Li et al, 2013) and are likely to focus their attention on competitors they deem more significant (Prato & Stark, 2023; Thatchenkery & Katila, 2023; Tsai et al, 2011). Further strengthening our argument, the availability of novel and salient information in locations selected by top managers was associated with new product innovation (Li et al, 2013).…”

“…Further strengthening our argument, the availability of novel and salient information in locations selected by top managers was associated with new product innovation (Li et al, 2013). Decision‐making is also influenced by expectations of competitors' behaviors (Hill et al, 2019) and shaped by observational learning that results from exposure to competitors (Prato & Stark, 2023). Therefore, we expect that experience and market knowledge that firms gather from competitive actions is salient and readily available to their managers, narrowing the set of available alternatives for strategic choice and determining the adoption of diversification strategies.…”

“…Competitive actions enable firms to access to market information and assess the effects of their competitive actions on other market players, while improving skills to recognize opportunities and ideas for new competitive actions (Andrevski et al, 2016; Derfus et al, 2008; Miller & Chen, 1994; Nair & Selover, 2012). Learning in the competitive environment is competitor‐oriented but can also derive from exposure and observation of other participants (Prato & Stark, 2023), sparking new knowledge that should lead to better strategic choices (Katila et al, 2012; Li et al, 2013). The more diverse the market, the richer the information it offers; diverse markets broaden managers' understanding of the competitive environment, offering exposure to new consumers and competitors and creating awareness to new opportunities, such as acquisitions, that entail new ways of competing (Miller & Chen, 1994).…”