The impact of mental models of competition and industry structure

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What are mental models?

Mental models our understanding or map of the current state of play. They are our understanding of how the world works. In business, these include an understanding of the competitive landscape – such as who the key suppliers, customers, and competitors are. Mental models also include our understanding of the relationship between these components – how for example a competitor may react to your strategic actions.

It should first be noted that mental models are hugely beneficial. Without an understanding of the world, we would be trying to compete without knowing anything about the likely response of others. But, at the same time, they are simplified. They are not a full representation of what is happening, but rather, a particular manager’s understanding of the world. Thus, mental models include blind spots and mistakes. There are certain things that managers pay disproportional attention to and others that they ignore. Relationships and opportunities are missed. We can think of mental models as being a simplified representation of reality, and in that simplification, a lot of details are lost.

How do they shape manager's understanding of competition?

If we consider competition, the mental models of managers shape which competitors they pay attention to. Who they consider as competition, and in turn, which actions they consider. They may have a specific view of the top competitors and focus attention with competitor analysis on those companies. 

A danger of mental models thus is that it causes you to miss actions by firms that you are not concentrating on. Substitute industries is a common example of this – firms that we don’t typically conceive of as part of the main industry because their operations are very different. The attention of managers can thus be focused on the direct competitors, causing them to miss or underestimate the threat that substitute firms can pose.

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