mental model

Mental models are images, representations, or schemes of how we perceive and understand the world around us. Like all models, mental models are abstractions of reality. The model is less complex than the real world. No matter how well constructed, all models are wrong in some context or time. As the economy evolves, the mental models that were once successful become outdated. Therefore, refreshing the mental model of organization leaders is a chief requirement of a strategic management competency.

See the related term schema.

"The ideas and beliefs we use to guide our actions. We use them to explain cause and effect as we see them, and to give meaning to our experience" (O'Connor, 1997).

Mental models encompass all the beliefs that individuals hold about what drives success in their industry. It is the prevailing dogmas or orthodoxies about what customers to serve, what those customers want, how to price, how to organize, which distribution channels to use and so on (Hamel, 2002).

Importance of explicitly identifying mental models --
The danger of mental models is that if they go undefined they go unrecognized. A mental model unrecognized is a mental trap, a trap that prevents further learning. For example, if mental models of organization structure had not been challenged over time, all businesses today might resemble the strict hierarchy of Henry Ford from the early 1900s. It was Alfred Sloan's questioning of that model that led to GMs divisional model. Many other variations on organizations have continued to evolve over time.

The lack of mental models is just as much a problem as having the wrong mental model. The lack of mental model makes all stimuli a priori equal. The decision maker without mental models to apply is overwhelmed.

Mental models vs. business models (Hamel, 2000, pp 136) --
To redesign business models, the mental models must first be exposed and challenged. Mental models form from and reinforce the current business model.

"A business model is a "thing". The mental model is a set of beliefs about the "thing". The mental model reflects the "central tendency" of beliefs around the key business concept design variables --

• What is our business mission?
• What is our product/market scope?
• What is the basis for differentiation?
• What core competencies are important?
• What strategic assets, do we need to own?
• What core processes are critical?
• How can we best configure our resources?
• How do we go to market?
• What kind of information we need to serve customers?
• What is the kind of relationship we want with our customers?
• How do we price our products and services?
• What is the particular benefit bundle we deliver?
• How do we integrate with suppliers and partners?
• What profit boosters can we exploit?""

Foster & Kaplan on Mental Models (Foster & Kaplan, 2001, p 63-76) --
The originator of the concept of the mental model was Kenneth Craik, a Scottish psychologist who in 1943 proposed that mental models are the manipulation of a vast variety of internal representations of the external world:

If the organism carries a ""small-scale model"" of external reality and of its own possible actions within its head, it is able to try out various alternatives, conclude which is the best of them, react to future situations before they arise, utilize the knowledge of the past events in dealing with the present and future, and in every way to react in a much fuller, safer, and more competent manner to the emergencies which face it.

We form mental models of just about everything-cars, airplanes, corporations, ballet, opera, markets and their evolution, competition, operations, customer loyalty, consumer marketing, innovation, operational excellence, knowledge development and management, and so on. Forecasting, in particular, is an exercise in applied mental modeling. Some of these models may be static, while others-frequently the most useful ones-are dynamic. Some are quite real; many are symbolic. Some may be visionary. Some may have multiple legitimate interpretations, which depend on the perspective and context of the viewer.

Few business strategies are elaborated today without recourse to mental models, which depict the corporation and its role in the market, the economy, the competitive landscape, and the world as a whole. More often they are implicit and inarticulate, and often hidden or invisible. But they are there nonetheless. We cannot function without them. They are essential to reasoning. Anton Pavlovich Chekhov, the Russian playwright and poet who wrote hauntingly about the inability of people to communicate with one another, maintained that one must ""snatch at small details, grouping them in such a manner that after reading them one can obtain the picture on closing one's eyes."" Mental models are the mechanism by which we ""snatch the small details"" and group them. As Albert Einstein observed, ""Man seeks for himself a simplified and lucid image of the world.""

Philip N. Johnson-Laird, a cognitive psychologist at Princeton University, notes, ""Small scale models of reality need neither be wholly accurate nor correspond completely with what they model in order to be useful."" In other words, there is some give and take. The painter, the poet, the speculative philosopher, and the natural scientist, each in his own way, make mental models of the world they intend to represent to others. So, too, with great investors or great managers, like Charlie Munger. John Akers, we could safely say, needed to apply more effort to the creation and use of mental models.

There are many examples of how models simplify the world without ignoring useful information. In the physical world, the science of data compression is focused precisely on this task. Data compression is an essential art in the computer and telecommunication industries. The mechanism for the compression is the removal of all nonessential data. What is nonessential information? Nonessential information is defined as all the information between two points that does not change-the white spaces on a page, for example. If all the white spaces-the areas where there is no information-are removed, while an accurate, but short, note is made of which white spaces were excised, where they began and where they terminated, one would have a shorter but accurate ""model"" of the page. In this way, the message is simplified without losing its exact character. This is essentially the way mental models work.

Virginia Woolf once said, ""If there is one gift more essential to a novelist than another, it is the ability to develop single vision."" The concept of ""vision"" is clearly a mental model of the future order of things. In business, visions are simplified representations of what the corporation stands for, where it is going, and which actions are acceptable and unacceptable. Members of the organization need to understand management's vision in order to assess whether their rewards are sufficient to justify their participation in it.

Of course, corporations have more than one mental model. There are, indeed, many mental models within a corporation. The mental model at a traditional manufacturing company, for example, may be built on the image of the company as a manufacturing process, with billing, receivables, and payables. A computer company may see itself as a network of interconnected nodes.

Whatever the specific representation, the mental models formed at the highest levels of the organization filter down to the divisional level. Lower- level models may be smaller versions of the corporation's larger mental model, or they may be different. But in either case, they must fit compatibly with the overarching model of the corporation if the corporation is to function smoothly.

THE POWER OF MENTAL MODELS
Craik would agree with Charlie Munger that mental models help investors and managers better understand the world, since they simplify an incomprehensibly complicated world. The need to simplify arises from our limited cognitive capacities. Our mental capacities, cognitive psychologists tell us, are quite limited compared to the complexities of life. We have limitations in our attention span, memory, recall, and information processing. The human mind's solution to the overwhelming complexity of today's world is to form mental models.

Johnson-Laird elaborated on the usefulness of this in his 1983 book Mental Models:

Mental models play a central and unifying role in representing objects, states of affairs, sequences of events, the way the world is, and the social and psychological actions of daily life. They enable individuals to make inferences and predictions, to understand phenomena, to decide what action to take and to control its execution, and above all, to experience events by proxy; they allow language to be used to create representations comparable to those deriving from direct acquaintance with the world; and they relate words to the world by way of conception and perception.

Mental models are useful to the extent that they edit the world around us down to what we perceive as the essentials. ""A tight analogy or model permits us to know more about the world with less work,"" notes Dean Keith Simonton, cognitive psychologist, historiographer, and noted researcher on the process of creativity at the University of California- Davis. As such, mental models can facilitate success or, if inaccurately shaped, bring failure. They help us determine how to take advantage of opportunities and how to hedge risks. They help us spot problems and work out solutions. Mental models and the rules of conduct generated from them-whether explicit or implicit-are at the core of most man- agers' reasoning processes.

Mental models aid managers in problem solving, as well, particularly the complex problems that corporate decision makers face. Without recourse to mental models, our cognitive systems would be too overloaded with data to function successfully. The great virtue of mental models is their ability to simplify complex situations and distribute decision making so that thousands of people in a company can make decisions day in and day out without having to coordinate each of them with everyone else in the organization. However, there is great risk as well, since inaccurate mental modeling can leverage a myriad of decisions.

Mental models also facilitate dialogue and discussion. They allow us to interpret the language and acts of others. Language is essential to the construction of mental models. As James March, a professor of political science and sociology at Stanford University, noted, ""Language is used to create new meaning out of old, to make metaphorical leaps, to discover what a person might come to understand.""

John Akers had a mental model of IBM, but it was wrong. Bill Gates, too, had a mental model, which was right for a while, until he recognized it had to be changed. George Soros, Warren Buffet, and Charlie Munger all had mental models that worked very well for a while and now are under stress. As Brian Arthur, a professor at the Santa Fe Institute and, in the eyes of many the ""chief economist"" of the New Economy, has noted, competition is competition within an "ecology of mental models."

THE LIMITS OF MENTAL MODELS
As useful as mental models are for a while, they clearly have a dark side, as John Akers discovered. When faced with discontinuous conditions, the mental factors that people generally favor, based on experience, expertise, knowledge, and learning, become liabilities. The very mental models that are at the heart of managerial strength are also at the heart of managerial weakness in an age of discontinuity. This is precisely the environment that has been increasingly prevalent in today's market, one that will become even more common in the future.

When accurate, of course, mental models can help predict the future, and offer a distinct competitive advantage. But as appealing as they are, managers must remain vigilant, because mental models can be fraught with uncertainty, ambiguity, and errors. Inaccurate mental models can propagate errors in judgment and system design, result in errors of action, and, finally, result in poor performance. Shifting mental models requires real work. Because so many of our mental models lie hidden beneath the fabric of corporate life, shifting course can be difficult.

There are four general problems associated with mental models and their use: First, they can be wrong because they are limited by the simplifications that made them useful. Second, they can be improperly used. Third, they can lead to wrong answers if fed by incorrect information. And fourth, their effectiveness is rarely assessed. We will cover each of these points in turn.

They Can Be Wrong --
The effectiveness of mental models can be limited by the very simplifications that underlie them. Oversimplification can lead to systematic errors of judgment, logic, and forecasting. For example, an online marketer who assumes that consumers are going to continue to provide data about their habits, practices, and desires for free is making an assumption that could easily turn out to be incorrect. Already, some marketers are beginning to see that for relatively small fees they can circumvent major potential privacy liability.

Professor Kurt Godel (1906-1978) of the Institute for Advanced Study at Princeton proved in the 1930s that no system can be both complete and consistent and that the errors inherent in mental models are inevitable. That is why those using mental models must be aware of their potential limitations and find ways to reduce the consequences of those limitations.

They Can Be Improperly Used --
When the environment becomes truly complex, decision makers fail to respond appropriately by constructing new mental models. Instead they seem to revert to older, simpler models, as John Sterman suggested. Sterman observed that decision makers, for example, often forecast by averaging past values and extrapolating past trends rather than rethinking the forces at work in the industry and imaging how they might play out. Yet such complex relationships are increasingly common in the wired world of the Internet.

To the extent that mental models are inaccurate, they lead directly to risk (although it is often hidden risk, since the model does not alert the modeler to it). For example, in the last chapter we discussed the disastrous collapse of semiconductor returns in the early '80s. The surprise in this was that no one anticipated it, even though it was well known that the Japanese were building new semiconductor plants at a large enough scale to swamp the industry with chips and cause prices to collapse. This is exactly what happened. But the mental models American semiconductor companies used led them to believe that prices could not decline as much as they did. The collapse took several companies with it, including Mostek, one of the leading players at the time. Mostek completely missed the impending collapse-and paid for that flawed mental model with its corporate life.

Require Correct and Timely Information --
Mental models are only as strong as the information they are based on. That information can be wrong, late, incomplete, distorted through emotion, ambiguous, or irrelevant, or it can be the result of inept measurement due to selection or other cognitive biases. Such imperfect information will inevitably misrepresent reality. If one does not have accurate and timely input, one will never get an accurate or timely output.

Require Assessment --
The construction and use of mental models, as Piaget pointed out, is often a process generally hidden from view, rather than a managerial process that is open to debate and challenge. Yet, as we've seen, the fact that mental models exist does not mean they are correct.

Rarely are ""quality control"" processes used to check and test the validity of a mental model before it is put into use, or when it is in use to see if it is still accurate. Among the testing used to verify the effectiveness of other products, such as pharmaceuticals, are the use of ""double-blind"" procedures to ensure that the absence of negative effects is not confused with the confirmation of a positive effect; actively seeking contradictory evidence, rather than seeking only evidence that confirms effectiveness; and searching for and considering alternatives to help ensure that the best alternative is selected rather than simply selecting an alternative that works. Without such quality control, the modeling process is open to error. Yet rarely are any of these procedures used, or even considered.

The need for new mental models can be obscured by contradictory data and incremental fixes to existing models. Changes in context should trigger reexamination of one's mental model, but often they do not. Since the mental models decision makers use specify the information they require, decision makers frequently reject information that challenges the relevance of the model itself. As the context changes, there is a strong preference for a leader to retain the existing model-for example, as the case of John Akers's insistence on relying on ""big iron.""

Loyalty to a flawed model can be costly. If a mental model becomes outmoded-in the sense that it no longer provides an accurate simplification or rendering of reality-then any conclusions or predictions derived from it will be distorted as well. There is a reluctance on the part of managers to change models because there is no guarantee that the new models will be more effective than the ones they are replacing. Consequently, if the existing models seem to be working, managers are reluctant to abandon them. Moreover, the leaders who created the existing mental models often have a vested interest in protecting them. They are unlikely to abandon them unless a change in leadership of the organization ushers in a new, more appropriate mental model. Studies show that decision makers seek data that confirms existing mental models, rather than data that contradicts such models. There is a natural human bias toward confirmation.

James March offers a telling illustration of the difficulties in changing mental models in his report about the accidental discovery of the hole in the Antarctic ozone layer:

The NASA scientists' belief that low ozone readings must be erroneous (because they knew the ozone layer existed) led them to design a measurement system that made it impossible to detect low readings that might have invalidated their models. Fortunately, NASA had saved the original, unfiltered data and later confirmed that total ozone had indeed been falling since the launch of Nimbus 7. Because NASA created a measurement system immune to disconfirmation, the discovery of the ozone hole and the resulting global agreements to cease CFC production were delayed by as much as seven years.

Richard Foster had a similar experience in 1987 in China, while visiting a preeminent hospital there. When he asked the head of the hospital's diagnostics lab about the incidence of AIDS in China, the hospital administrator replied, ""We have no AIDS in China."" Amazed, Foster pressed further. ""In all your blood testing in China, you have never found a single case of AIDS?"" he asked. ""Oh, no,"" the administrator replied, ""we know we don't have AIDS in China, so we don't test for it."" As James March observed, ""Experience is edited to remove contradictions.""

Dean Keith Simonton offers a possible reason for this potentially dysfunctional cognitive behavior:

To give up one's intellectual framework willy-nilly simply to accommodate the confusion of random events is to risk expanding psychological disorder, with a corresponding loss in behavioral adaptiveness.

The ability to dismiss disconfirming data is an ancient art. One way that people do it is through ""issue avoidance,"" by simply avoiding threatening or negative data. Chris Argyris, the James Bryant Conant Professor of Education and Organizational Behavior at Harvard, calls this form of avoidance a ""defensive routine."" Defensive routines may result in avoiding alternatives, or denial. ""You're wrong. We are innovating, changing, and keeping up with the markets, perhaps now more than ever,"" an executive might argue when, in fact, all the innovation is incremental.

In a more contemporary example, when former McDonald's chairman Mike Quinlan was asked by Business Week whether, in view of McDonald's flagging performance, they needed to change their approach, Quinlan replied, ""Do we have to change? No, we don't have to change. We have the most successful brand in the world."" His admission was apparently so starkly wrongheaded in the eyes of the company's board that they fired Quinlan and found a new CEO.

The evidence is overwhelming that mental models, built to assist in decision making, once constructed often become the single most important barrier to change. We believe this problem will become increasingly pervasive as discontinuous shifts occur in industry after industry. The move to the Internet is just the first in a long series of what are likely to be confusing changes in context that will face most business leaders.

In this era of rapid change and increasing complexity, mental models represent a tool of tremendous promise-but also of tremendous risk. To the extent they are built on the assumption of continuity, they are more of a liability to the user than a benefit. We cannot avoid using mental models, however. It is the way we are wired. Our only choice lies in deciding which one to use, and how to use it. This means recognizing the need to change mental models, and finding a way to change them that is less costly than holding on to mental models that do not work. The executives at Mostek could compellingly discuss the costs of remaining with an inaccurate mental model.

CREATING AND CHANGING MENTAL MODELS --
Piaget's research showed that we unconsciously create mental models from our earliest days. As we age we learn, from both formal and informal processes. Learning is one way of characterizing the process of changing mental models. ""The most powerful learning comes from direct experience,"" says Peter Senge, author of The Fifth Discipline. We use our experience to change our mental models.

Jay Forrester, well-known inventor of magnetic-core memory storage, a precursor to today's RANI technology, and father of ""system dynamics,"" a systematic method of modeling complex structures, commented in 1971 on the simplicity of the mechanisms for changing our mental models:

A mental model changes with time and even during the flow of a single conversation. The human mind assembles a few relationships to fit the context of a discussion. As the subject shifts so does the model. Each participant in a conversation employs a different mental model to interpret the subject. Fundamental assumptions differ but are never brought into the open.

James March agrees. Mental models are often changed through the extended and informal process of corporate dialogue. This happens through ""myths, symbols, rituals, and stories. They are the ligaments of social life, establishing links among individuals and groups across generations and geographic distances."" March says elsewhere: ""They give context for understanding history and for locating oneself in it.""

During the dialogue process, mental models are adjusted to reflect local context. These adjustments are then fed back into the mental models of top management. In this way, the mental models change. As March noted about ""visions""-mental models in the process of formation ""cannot be established in an organization by edict, or by the exercise of power or coercion. It is more an act of persuasion, of creating an enthusiastic and dedicated commitment . . . because it is right for the times, right for the organization, and right for the people who are working in it. By focusing attention on a vision [mental model], the leader operates on the emotional and spiritual resources of the organization, on its values, commitment, and aspirations.""

Sterman also attests to the power of informal processes to change mental models:

Active modeling occurs well before sensory information reaches the areas of the brain responsible for conscious thought. Powerful evolutionary pressures are responsible: our survival depends so completely on the ability to rapidly interpret reality that we long ago evolved structures to build these models automatically.

Forrester's, March's, and Sterman's comments on the importance of conversation as a tool for aligning different mental models offer an important insight into how corporations can change mental models in a visible way, which we will explore in more detail in Chapter 11.

But more than conversation and dialogue is required to change a company's mental models. ""The constructive process is guided by contextual cues and implicit inferences based on general knowledge,"" says Johnson- Laird. Contextual clues provide the puzzle edges that let us know where we are going-but only if we can interpret them (i.e., the context) correctly. Often the culture of the organization sets the context. Language, visual imagery, beliefs and behavior are the primary carriers of the culture and thus set the context.

Johnson & Johnson's response to the Tylenol crisis in the mid-'80s provides an example of the power of context for establishing new mental models, in this case a mental model of the right approach for dealing with the crisis. The crisis presented a complex problem for J&J because the causes were not clear, the consequences of not dealing with it were enormous (seven people in the Chicago area died after taking the pills), and the cost of stopping and fixing the problem was very large-large enough to jeopardize the market value of the corporation.

But one of the beliefs underlying Johnson & Johnson is its Credo, crafted by Robert Wood Johnson, which is still used as a guide to decision making and behavior today. The Credo establishes the hierarchy of values at J&J: mothers first, employees second, community third, and investors fourth (the assumption is that if the first three are done well, the fourth will follow). The clarity of the Credo, and the dedication of the management and staff of J&J to the Credo, allowed Jim Burke to easily and rapidly decide what to do and how to act. His immediate decision was to recall Tylenol from drugstore shelves across the nation when there was a threat that the widely used pills were tainted. The incident cost J&J a reported $100 million that year, but the decision was made in hours when the threat to consumers became clear. In other corporations, recalls are not handled as quickly, and perhaps not as effectively, as they are at J&J because they do not have J&J's Credo. The Credo is a key element of J&J's culture, which plays a strong role in establishing the company's mental models when it faces a new situation, or in deciding when old ones are in need of repair.

Rarely do companies say they are ""setting out to build a new mental model."" But they do say they will ""develop a strategy to capitalize on the new opportunities in electronic commerce,"" or that they will ""reexamine the principles on which our organizational structure is based to compete more effectively in the future."" These are examples of statements of intent to create new mental models. Once built, mental models are enormously powerful in determining how the corporation responds to opportunities and challenges.

HOW MENTAL MODELS AFFECT CORPORATE BEHAVIOR --
Mental models have an impact on four primary areas of conventional ""corporate architecture"": information systems, decision-making processes, executional capabilities, and control systems.

INFORMATION SYSTEMS
The amount, type, quality, form, and frequency of data are effectively determined by senior management's mental model, whether that model is explicit or implicit. For example, many corporations believe that their performance is more dependent on sales margins than on capital employed. In these companies, the monthly profit-and-loss statements therefore capture information on sales and cost of goods sold (so that margins can be calculated), but do not reflect the capital employed in the business at all, despite the fact that investors are very much concerned with how much capital a corporation will need in the future.

DECISION-MAKING PROCESSES
The major decision-making processes of the corporation-planning systems, calendar management, agenda setting, decision criteria, and all the rest-are designed to be compatible with the mental models of the corporation. Needless to say, these decision-making systems are fed by, and therefore have to be compatible with, the information systems of the corporation. If the corporation feels that it is driven by the product- development cycle, as semiconductor manufacturers like Intel and Texas Instruments are, then this cycle drives the key decision-making processes (e.g., the decision to start the design of a new chip, or the decision to begin considering construction of a new plant, or the decision to switch suppliers for the next product offering), the executive calendar, the agendas of the major management meetings, and the strategic planning process. For a consumer retailer like Saks Fifth Avenue or the Gap, the calendar is driven by the major seasonal merchandising decisions, as well as very close monitoring-often day by day-of store sales to determine when a holiday sale (that is, selling their merchandising at lower prices to reduce inventories of already purchased products) should be started, stopped, or have its terms changed.

EXECUTIONAL CAPABILITY
Third, the mental model must be compatible with the executional capability of the organization. The human resources processes, staffing, evaluation procedures, and so on are determined within the context of the mental models of the corporation. For chemical companies like DuPont, international experience may be seen as key, since they see themselves very much as global players; indirect experience of, say, the business practices in China will not be sufficient. Direct line experience is preferred. For air-line companies such as AMR, the parent of American Airlines, customer experience may be considered key, and those who have had frontline experience are seen as the most valuable.

CONTROL PROCESSES
Last, the control processes-whether they be the operational control processes, the compensation systems, or the capital allocation processes of the corporation-all are determined by the mental models of the corporation. A company that has slim margins, such as an electric utility like Con Edison, will value those people most who know how to control costs on a day-to-day basis. A pharmaceutical company like Merck, Pfizer or Johnson & Johnson, which values the transformational innovation required for the discovery of new drugs, will not look at cost control as the most important control process, but will focus much more on finding the right scientists and giving them the freedom of time and resources necessary to maximize the chances that they will discover the new chemical entities that will be the key to more effective treatment of disease.

These four elements, as well as the mental models that determine how they interact, constitute what we call the architecture of the corporation. We call this corporate architecture ""MIDAS""-Models, Information, Decisions, Actions, and Systems of Control-to make it easier to remember. The elements of the corporate architecture change as the corporation matures and the mental models change. And it is the evolution of corporate architecture—with the mental models steering the direction—that determines the competitiveness of the corporation. Thus the process of building mental models—whether these processes are explicit and examined or implicit and unexamined—is the core managerial process of the corporation.