The study of cognitive processes in strategy has traditionally focused on limits to
rationality in the strategic planning process. Important concepts, such as bounded
rationality, mental maps, framing, and dominant logic, have emerged from this stream of
research [19, 31, 38, 39]. The major application of this research has been to provide a
range of explanations for strategic errors and mistakes.
More recently, several authors have begun to call for an investigation of the
normative implications of cognition [15, 16, 36]. If cognitive ability is not uniformly
distributed among managers then the ability to capture this resource may ...view middle of the document...
This study focuses on cognitive capacity as one facet of cognition. Cognitive
capacity is defined as the capacity to “...register, store, use and make sense of data” .
It is possible to identify a number of propositions in the theoretical literature concerning
the effects of cognitive capacity on performance.
Prahalad and Bettis  have argued that the size of a diversified firm is limited
by the ability of the top management team to manage strategic variety, where strategic
variety refers to “...the differences in strategic characteristics of the businesses in the
portfolio of the firm” [31, p. 490]. According to this view, the complexity of the top
management process is a function of strategic variety. Similar businesses can be managed
in the same way, that is, with a single dominant general management logic. Increasing
strategic variety requires the addition of new dominant logics or ways of managing,
especially among the top management team, who are usually responsible for the
allocation of resources among business units. Prahalad and Bettis  view the inability
of the top management team to assimilate new dominant logics as a major limiting factor
in diversification. As a corollary, a top management team that attempts to stretch a single
dominant logic over a range of unrelated businesses will perform poorly relative to a
more tightly focused team.
A relationship therefore exists between cognitive capacity and the number