LAUSR

Abstract We examine how analogical reasoning affects cognition and investment decisions in the face of technological change. Our research design is an in-depth, longitudinal case study of Nokia and its response to mobile Internet between the late 1990s and the mid-2010s. We show that Nokia diligently analyzed the competitive dynamics of other industries, such as the personal computer industry, that had already been affected by the same technological discontinuities and used the lessons from these industries to anticipate future competition outcomes in the mobile phone business. We also show that analogical reasoning helped Nokia's managers change the beliefs developed through their prior experiences. However, Nokia's managers became overconfident in their new beliefs, and this overconfidence constrained their cognitive processes of attention and interpretation, thereby increasing organizational inertia. This constraint was particularly evident in the new belief that the software operating system was the essential source of product differentiation. This belief directed key investment decisions for over a decade and contributed to the eventual decline of Nokia by leading the company to embrace Microsoft's Windows Phone rather than Google's Android.