In an ever-evolving world marked by unprecedented shocks, humanity has been thrust into uncharted territories, facing challenges that were once unimaginable. The advent of the internet revolutionized the way we communicate, work, and access information, ushering in an era of digital transformation. The COVID-19 pandemic, an unforeseen global health crisis, disrupted every facet of our lives, exposing vulnerabilities in healthcare, economy, and global supply chains. These instances are just a few of the many external or “exogenous shocks” that have unveiled firms’ need for innovative solutions to problems that never happened before. When confronted with unprecedented shocks the ability of a firm to originate effective responses becomes paramount, firms can either make or break. Amidst these uncertainties, some firms stand out by displaying high-quality ideas, that is, ideas that are not only highly novel but also exceptionally relevant.
Ilídio Barreto, Professor at CATÓLICA-LISBON, included in the World's Top Scientists list, compiled by Stanford University (2021 and 2023), has just published in the Academy of Management Review (the top scientific publication in Management theory) an innovative theory that explains how and why executives originate (or not) high-quality ideas for their firms’ responses to major, exogenous, and unprecedented events. The theory capitalizes on recent developments in the creativity, psychology, and neuroscience fields, and focuses on three levels of analysis: the individual, the dyadic (groups of two people), and the team level.
“Two key factors compelled me to develop this theory. First, as I built numerous cases for executive programs, delving into global strategic issues, I came to realize that top-tier firms often face challenges in responding appropriately to major shocks, especially when they have an unprecedented nature. Second, in some of my classes, I use a value creation simulation and I observed executive teams wrestling with strategic decisions amid difficult scenarios. It became apparent that the dynamics of interaction within these groups varied significantly, with certain modes of interaction proving more conducive to high-quality decision-making than others." – Ilídio Barreto.
In unprecedented contexts, members of the top management teams are especially important because, among their extremely complex tasks, they monitor and interpret external events and trends, and are responsible for formulating strategic adaptive responses to the environment that are highly consequential for the future of executives’ firms. Until now, no full-fledged theory had been provided for this topic, and in the article titled “Navigating uncharted waters: How executives originate high-quality ideas for strategic responses to unprecedented shocks”, Professor Barreto offers a first and revolutionary answer. Within the domain of cognitive processes, we discern two primary modes of thought (i.e., of information processing in our brains). ). The first is automatic processing, which is a spontaneous and effortless understanding of the situation and its implications based on our “schemas”, i.e., the structures of knowledge stored in our memory and moulded over time by our education, life experiences, and assorted influences. The second mode is controlled processing, characterized by a slower and detailed examination of incoming novel information. This second mode involves actively engaging with new information, analysing it in-depth, and considering various perspectives before arriving at a conclusion. In everyday scenarios, people tend to use automatic processing: in most cases, it suffices for rapid decisions, efficiently navigating our environment. However, some situations require meticulous consideration, critical thinking, particularly amid complex, ambiguous and unfamiliar information – i.e., they require controlled processing. This is the case of unprecedented shocks, in which individuals must interpret new information, and build a new schema to understand the situation and make decisions that are adequate for such circumstances. While controlled processing may lead to more accurate and nuanced understanding of such stimuli, it is a slower processing mode, demands a higher cognitive effort and, important, it is not always activated when they should be.
Confidence as an influencer for the creation of high-quality ideas
The theory proposes that the level of confidence an individual holds in relation to his or her automatic interpretation of the situation (“representational confidence”) plays a pivotal role in determining the transition from automatic processing to controlled processing. When the level of representational confidence is high, individuals, including executives, often rely on the pre-existing schemas in their minds and act accordingly. An executive with a high level of representational confidence will use an automatic processing and apply schemas connected to past situations that may no longer be relevant, particularly when confronted with unprecedented events. Conversely, under unprecedented shocks, an executive with moderate or low level of representational confidence will tend to use a controlled processing and adopt a more critical and analytical assessment of the situation, facilitating the construction of new schemas tailored to the unique circumstances, which may then lead to more informed decision-making and to the creation of high-quality ideas.
“Consider, for instance, Mark Zuckerberg's strategic moves last year, elucidated in a notable post, addressing pivotal issues concerning Facebook and Instagram. The unforeseen surge in demand for services during the COVID era prompted major tech firms, Meta included, to deploy their standard response schema for such disruption—expanding their production capacity by hiring thousands. However, a year later, the realization dawned that this was not a typical business disruption but an entirely unprecedented situation with a temporary, not permanent, surge in demand. In line with broader industry trends, including insights from Zuckerberg himself, major tech firms, Meta included, were later compelled to make a significant course correction, resulting in the subsequent job termination of thousands of employees.”
The level of representational confidence that an executive must hold to create high-quality ideas for unprecedented events is also important at the team level. Executives may also build new schemas (or not) based on the specific dynamics between them and their peers in the decision making.
“I realized that the interactions within pairs of executives, the “dyads”, were very important for new schema creation, and depending on the nature of these interactions, distinct decision-making outcomes emerged. Even when more than two individuals (e.g., individuals A, B, and C) are engaged in a given, simultaneous conversation, their dyadic interactions might differ: when A says something, B might carefully listen and reply, while C might hardly consider A’s views and quickly refute them. These varied (dyadic) interactions are likely to contribute quite differently to the task at hand.”
|
The theory posits that the most productive interaction occurs when both executives in a dyad exhibit moderate confidence, as opposed to high or low levels. In this scenario, both parties are more inclined to listen and share with each other their own perspectives: both will hold a willingness to influence and a willingness to be influenced. These dynamics (termed “two-way dynamics” in this theory), in contrast to other three types of dynamics identified in the paper, may foster a shift from automatic to controlled processing, facilitating the development of new schemas and the generation of high-quality ideas, particularly in response to unprecedented shocks. |
"Why might individuals with high confidence not be the most suitable? My theory posits that executives with high representational confidence may lack a willingness to be influenced; instead, they are inclined to exert influence on others without reciprocating. These individuals tend to express their opinions but may not actively listen. Conversely, executives with low confidence may be open to being influenced and attentive listeners, yet they may lack the assertiveness to influence others in return. The story of Satya Nadella, the CEO of Microsoft, is quite fascinating because he is well-known for adopting a balanced approach to expressing his opinions and listen to others’ opinions. Before he took on the role of CEO, interactions within Microsoft were often characterized as "listening to argue" rather than "listening to learn." Nadella aimed to change these dynamics, encouraging people to listen and learn from one another. Our theory explains that the “listening to argue” attitude might be the result of both members of a dyad having high representational confidence, leading what we termed “half-way dynamics”: both members try to influence each other, but no one is willing to be influenced! Moreover, our theory explains why, in order to build new schemas and, in result, originate high-quality ideas under unprecedented shocks, just listening well is not enough: the dyad’s members also need to share their own thoughts and information (something that is not likely to happen, for example, when both have low levels of representational confidence).”
The interplay between power and confidence for the creation of high-quality ideas
Another crucial factor influencing the development of new schemas in response to unprecedented shocks is power, which is the ability to influence others. When executives within dyads share moderate representational confidence and have power symmetry at an egalitarian level (meaning both members have the same power, like all other peers in the top management team), or if they exhibit power symmetry at a low level (both members have low power), both individuals within the dyad are inclined to influence and be influenced. These dynamics promote controlled processing, which will lead to the creation of new schemas and high-quality ideas for responses to unprecedented events.
Executives with high power often exhibit behaviors such as talking more, interrupting more, speaking out of turn, and directing others' contributions, making them less willing to listen to peers and understand alternative perspectives. Hence, they show a high willingness to influence and a low willingness to be influenced. Consequently, when there is power asymmetry within a dyad (one member has high power and the other has low power), the executive with high power may be less open to be influenced. Similarly, when power symmetry is at a high level (both members have high power), both parties in the dyad are likely to exhibit a low willingness to be influenced. Hence, in both cases the two-way dynamics adequate to promote the creation of high-quality ideas are not likely.
So, what top management teams should do?
In the context of decision-making amidst unprecedented shocks, CEOs play a crucial role in setting an example. It is essential for CEO’s to exhibit a behavior marked by moderate confidence rather than adopting a stance of unwavering authority. This approach encourages a culture where others feel comfortable expressing their opinions and listening to others. If the CEO displays an open attitude, expressing doubt and a willingness to be influenced by others, it sets a powerful precedent for the entire team.
“This theory may have many practical implications. Let me give one example: the creation of a particular task force to tackle unprecedented occurrences within the organization. CEOs are advised to confine their personal viewpoints within the task force in the early stages of the decision-making process. The optimal strategy involves assembling a team predominantly consisting of individuals possessing a moderate level of representational confidence in their approach to crafting a response to the unprecedented shock. Such executives are likely to be involved in two-way dynamics and, thus, to build the required new schemas for the focal shock. Moreover, these team members can cultivate dyadic relationships with both high and low confidence executives who do not belong to the task force, and, by so doing, gradually fostering an environment where everyone (including those outside the task force) feels confident in sharing their insights and opinions. This interaction framework enhances the task force's effectiveness in addressing the complexities presented by unprecedented shocks.”
Empowering Executives: Bridging Theory to Practice
Bridging scientific knowledge with the business classroom enriches learning by incorporating the latest insights and methodologies. In a business school setting, this transfer ensures students gain relevant and up-to-date information, preparing them to navigate the dynamic landscape of the business world. Educators, as facilitators, play a crucial role in translating complex scientific concepts into practical business lessons, fostering creative thinking and adaptability. This integration equips students with the skills needed for informed decision-making and success in the evolving business environment.
"My guiding principle has always been that valuable research should be focused on topics and frameworks that students and executives easily find as relevant in a classroom setting. Some years ago, building on my previous research on dynamic capabilities, I crafted a pioneering course for the Master of Science program, emphasizing strategic change and dynamic capabilities. Notably, this course stands out as perhaps the first in business schools to prominently highlight dynamic capabilities in its title. In the context of this new paper, my aim is similar whereas broader. I am going to incorporate the different components of my new theory (and the supporting literature) into existing and new strategy and creativity courses and introduce innovative contents to executive education."
Daniela Guerra, PhD Comunicadora de Ciência do CUBE, CATÓLICA-LISBON