Perception versus reality: how perceived rivalry influences product innovation

Drawing on search and organisational learning theory, this study examines how the rivals that managers subjectively perceive as competitive threats differ from the “objective” rivals in the firm’s structural environment and subsequently affect innovation. Controlling for objective structural rivals and using the Microsoft antitrust case to instrument for perception, I test the effects of perceived rivals on product innovation with a novel dataset on 121 infrastructure software firms from 1995 to 2012.

I find that the perceived rivals that capture managers’ attention have much less overlap with structural rivals than is commonly believed. Intriguingly, I also find that a more “accurate” focus on a few prominent rivals in the firm’s immediate markets does not increase innovation. Instead, firms are more innovative when managers perceive a higher number of rivals that are mostly peripheral and in dissimilar markets.

The results indicate that not only do managers’ subjective perceptions of rivalry affect innovation, but that unconventional and ostensibly inaccurate perceptions enhance performance. The findings contribute to the literatures on organizational learning and managerial cognition.