Why Firms Should Be Wary of Sticking With What They Know

Avoiding The Competency Trap

Mack Institute senior fellow Charlotte Ren researches how a firm’s past experience can impact their present performance. In her article “Does Experience Imply Learning?” with Louis Mulotte and Jaideep Anand, Ren emphasizes that activities which led to previous success, while tempting for firms to repeat, may actually prove detrimental. This so-called “competency trap” distracts firms from exploring new opportunities.

Ren discussed her findings about the competency trap with the Mack Institute; a transcript of the interview appears below.

My name is Charlotte Ren. I am a senior fellow of the Mack Institute for Innovation Management. I’m a visiting faculty member of the School of Social Policy and Practice at the University of Pennsylvania.

In this research, we have revisited a fundamental topic in the strategy literature – that is, how experience affects performance. We study the worldwide aircraft industry, specifically, the aircraft projects launched globally between 1944 and 2000 through three governance modes: internal development, joint development, and licensing. We analyze the performance implications of a firm’s experience with a focal, new product introduction mode.

Our research shows that in the context of corporate development activities, in addition to the learning effect, there exists an additional causal mechanism that is the selection effect. In other words, firms might have purposely chosen to accumulate their experience in certain ways, leading to the endogenous nature of the experience variable.

When we say experience in operational activities, the settings include chemical processing, ship building, semi-conductive manufacturing, aircraft manufacturing, operational activities about goods manufacturing, and service delivery. In these corporate development activities, we may experience corporate acquisitions, inter-firm alliance, international expansion, new product introduction, and new market entry. For example, in our setting, we study a firm’s experience of using the same mode to launch new products. The mode includes internal development, joint development, and licensing.

The traditional view holds for practice and multiple repetition. Practice and multiple repetition allow firms to draw valid inferences about efficiency of past processes, which leads to future enhanced efficiency. We argue that this is not the case in these corporate development activities because they are very different from operational activities. In these activities, the experience variable is not random; firms choose to accumulate their experience in certain ways, corresponding to the capabilities they already possess.

“Our research shows that because firms are likely to repeat what was done successfully in the past, they may overlook other important opportunities.”

There’s a well-known notion in the literature of the organizational learning competency trap: Firms are good at doing something so they keep doing the same thing. We actually provide further evidence for the notion of the competency trap. It calls for the attention of managers to address this issue even more seriously, because we show that firms do the same thing repetitively because they think they have the capabilities of doing certain things.

If a firm possesses certain capabilities, it will keep engaging in certain activities corresponding to those capabilities. In other words, they will keep engaging in activities with which they have been the most successful in the past, and expect to be the most successful in the future. As a result of this cycle, they will narrow down their choice set, choosing only a few options that they think they are good at.

Our research shows that because firms are likely to repeat what was done successfully in the past, they may overlook other important opportunities. In the language of organizational learning, they may be preoccupied with exploitation of existing opportunities and products. They may overlook the opportunities for more important exploration – that is, the exploration of new products and markets. They may miss the next big thing.

We want managers to be aware of the existence of the repetition effect, the learning effect, and the selection effect. We want managers to be aware of how prevalent this competency trap is in their decision-making.

View Charlotte Ren’s slides about the competency trap (PDF).