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Strategic Management JournalStrat. Mgmt. J., 32: 15001516 (2011)

Published online EarlyView in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.964

Received 15 January 2009; Final revision received 9 September 2010

PSYCHOLOGICAL FOUNDATIONS OF DYNAMIC

CAPABILITIES: REFLEXION AND REFLECTION

IN STRATEGIC MANAGEMENT

GERARD P. HODGKINSON1* and MARK P. HEALEY2

1 Warwick Business School, University of Warwick, Coventry, U.K.2 Manchester Business School, University of Manchester, Manchester, U.K.

In recent years, there has been a move to identify the behavioral foundations underpinning theevolutionary and economic fitness of the enterprise. Indeed, the dynamic capabilities projectnow occupies center stage in the field of strategic management. Yet the accounts developedthus farlike much of the fields theory and research more generallyare predicated upon a

cold cognition logic that downplays the significance of emotional/affective and nonconscious

cognitive processes for strategic adaptation. In this article, we rectify this imbalance by drawingupon contemporary advances in social cognitive neuroscience and neuroeconomics to developa series of countervailing insights and new prescriptions for the development of dynamic

capabilities. Using Teeces (2007) influential framework to organize and illustrate our arguments,we demonstrate how the fundamental capabilities of sensing, seizing, and transforming eachrequire firms to harness the cognitive and emotional capacities of individuals and groups toblend effortful forms of analysis with the skilled utilization of less deliberative, intuitive processes.Copyright 2011 John Wiley & Sons, Ltd.

The decision-making paradigm, as it hasdeveloped, is the product of a marriagebetween cognitive psychology and econo-mics. From economics, decision theory inher-ited, or was socialized into, the languageof preferences and beliefs and the religionof utility maximization that provides a uni-tary perspective for understanding all behav-ior. From cognitive psychology, decision the-ory inherited its descriptive focus, concernwith process, and many specific theoreticalinsights. Decision theory is thus the bril-liant child of equally brilliant parents. Withall its cleverness, however, decision theory

Keywords: dynamic capabilities; intuition; emotionsin strategic decision making; organizational adaptation;strategic change; strategic cognition; behavioral strategy Correspondence to: Gerard P. Hodgkinson, Warwick BusinessSchool, University of Warwick, Coventry CV4 7AL, U.K.E-mail: [email protected]

is somewhat crippled emotionally, and thusdetached from the emotional and visceralrichness of life. (Loewenstein, 1996: 289)

INTRODUCTION

Since its earliest days, the field of strategic man-agement has been preoccupied with developingrational and analytical models and theories (e.g.,Ansoff, 1965; Hofer and Schendel, 1978) to under-stand the nature and causes of sustainable enter-prise performance (Teece, Pisano, and Shuen,1997). From Porters (1980) analysis of competi-

tive positioning informed by the structure-conduct-performance paradigm, to game theoretic analy-ses of competitive interaction (Brandenburger andNalebuff, 1996), to the more recent evolutionary(e.g., Nelson and Winter, 1982) and resource-based(e.g., Barney, 1991; Wernerfelt, 1984) perspectives

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Psychological Foundations of Dynamic Capabilities 1501

informed by Penroses writings linking internalresources to rent generation, there is no questionthat the dominant perspectives in classic and con-temporary strategic management emanate from thefield of economics. Over the past two decades,however, a growing body of work has sought to

incorporate the insights of human psychology torefine understanding of a wide variety of topics,from the evolution of competitive industry struc-tures (Peteraf and Shanley, 1997; Porac et al.,1995) to the nature and sources of cognitive bias instrategic investment decisions (Bateman and Zei-thaml, 1989; Schwenk, 1984).

Reflecting the fields shift away from an anal-ysis of the organizations external environment toa focus on its internal resources and capabilities,strategy scholars have paid increasing attentionto the cognitive and behavioral processes under-

pinning the capabilities that promote organiza-tional learning, adaptation and performance (e.g.,Adner and Helfat, 2003; Alvarez and Busenitz,2001; Amit and Schoemaker, 1993; Gavetti, 2005;Helfat et al., 2007; Kaplan, 2008; Lane, Koka,and Pathak, 2006; Teece et al., 1997; Tripsasand Gavetti, 2000; Winter, 2000; Zollo and Win-ter, 2002). This body of theory and research hasaccomplished much. However, this article arguesthat recent advances in the emerging fields ofsocial cognitive neuroscience (Lieberman, 2007;Ochsner and Lieberman, 2001) and neuroeco-

nomics (Brocas and Carrillo 2008; Loewenstein,Rick, and Cohen, 2008), and indeed the widerorganizational sciences (Gavetti, Levinthal, andOcasio 2007; Hodgkinson and Healey, 2008), callinto question its adequacy as a foundation forfuture theory building and research in the strategyfield. We demonstrate that the extant literature onthe psychology of strategic management, like itseconomics-based counterpart, has emphasized thebehavioral and cognitive aspects of strategy for-mulation and implementation at the expense ofemotional and affective ones, leading to an inade-

quate portrayal of strategic management as a seriesof rational and dispassionate activities. Our anal-ysis provides fresh insights into the origins anddevelopment of dynamic capabilities.

Teeces (2007) framework is the most compre-hensive to date for analyzing the psychologicalfoundations of capabilities development. Accord-ingly, we utilize this framework as a basis fororganizing our critique of the wider dynamic capa-bilities literature as a whole.

PSYCHOLOGICAL FOUNDATIONS OFDYNAMIC CAPABILITIES REVISITED

Teece (2007) posited three generic, behaviorallybased dynamic capabilities as the foundations ofthe evolutionary and economic fitness of the enter-

prise, namely: (1) sensing (and shaping) opportu-nities and threats; (2) seizing opportunities; and(3) reconfiguring assets and structures to maintaincompetitiveness. Sensing requires searching andexploring markets and technologies both local toand distal from the organization. Seizing, in con-trast, necessitates making high-quality, interdepen-dent investment decisions, such as those involvedin selecting product architectures and businessmodels. The final capability, reconfiguring, entailscontinuously transforming the firm in response tomarket and technological changes, such that it

retains evolutionary fitness.Consistent with most traditional dynamic capa-

bility formulations, the microfoundations ofTeeces (2007) framework rest on an outmodedconception of the strategist as a cognitive miser.This conception stemmed from several interre-lated bodies of theory and research in the cog-nitive sciences, not least Simons seminal notionof bounded rationality and classical behavioraldecision research, which ultimately reinforced theidea that human cognition operates in two dis-crete modes of information processingone rela-

tively automatic, the other more effortful and con-trolled (e.g., Schneider and Shiffrin, 1977). Thiscore assumption has long underpinned a number oflines of inquiry in strategic management, beyondthe dynamic capabilities project per se, each ofwhich has privileged effortful forms of reasoningand dispassionate analysis as the means of over-coming cognitive bias and strategic inertia (e.g.,Dutton, 1993; Hodgkinson et al., 1999; Louis andSutton, 1991; Reger and Palmer, 1996). However,as indicated in Table 1 contemporary social neuro-science is questioning the veracity of these earlier

conceptions of dual-process theory and boundedrationality. Recent developments suggest that thebiases and inertial forces that undermine sensing,seizing, and transforming capabilities have emo-tional roots as well as cognitive ones. Building onthis fundamental insight, we maintain that althoughthe tools and processes commonly touted for engi-neering cognitively effortful reasoning and judg-ment are undoubtedly a necessary component ofdynamic capabilities, in practice they are rarely

Copyright 2011 John Wiley & Sons, Ltd. Strat. Mgmt. J., 32: 15001516 (2011)

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a sufficient psychological mechanism for ensuringthe long-term adaptability of the enterprise. Indeed,as we shall demonstrate, in some circumstances,conventional approaches for augmenting strategiccognition exacerbate the very problems they seekto alleviate.

According to a growing body of work in socialcognitive neuroscience, a reflexive system under-pins more automatic and basic affective formsof social cognition, such as implicit stereotyping,automatic categorization, and empathizing withothers, while a reflective system, a more con-trolled system that developed latterly in evolution-ary terms, underpins higher forms of cognition,such as logical reasoning, planning, and hypothet-ical thinking (Lieberman, 2007; Lieberman et al.,2002). Within this view, the two systems operate ina dynamic interplay, reflexion variously facilitating

and inhibiting the reflective processes underpin-ning consciously effortful reasoning and decisionmaking (see also Bechara, Damasio, and Damasio,2000).

While acknowledging the distinction betweenautomatic and controlled processes, neuro-economics emphasizes the distinction betweenemotional and analytical processes. Bernheim andRangel (2004), for example, view the brain asoperating in either a cold cognitive mode ora hot emotional mode, while Loewenstein andSmall (2007) similarly distinguish between emo-

tional and deliberative systems. One of thekey contributions of neuroeconomics has been toshed light on the conditions under which visceralfeelings overcome deliberative thinking in judg-ment and decision making (for an overview, seeLoewenstein et al., 2008).1

In sum, the left-brain/right-brain cognitive sci-ence underpinning Teeces (2007) analysis, whichcharacterizes intuition and heuristic processes asprimitive sources of bias, is giving way to themounting evidence that less deliberative forms ofcognition are central to skilled functioning. Rather

than acting simply as a disturbance to the reflec-tive system, to be suppressed at every opportunity,

1 Because the fields of social cognitive neuroscience and neu-roeconomics are in their infancy, some of their conclusions aretentative. Hence, wherever possible we avoid drawing on iso-lated findings relating very specific neural regions to specificbehaviors. Rather, we stand back to look at the more genericinsights concerning the nature and function of multiple cogni-tive and affective systems that are rapidly gaining widespreadsupport from multiple methods employed in diverse programsof study.

affect and emotion are integral to the very natureof cognition, infusing reasoning, learning, deci-sion making, and action (LeDoux, 2000). How-ever, as depicted in Figure 1, the bulk of the-ory and research on the psychology of strategicmanagement has hitherto focused on but one por-

tion of the available conceptual space (i.e., thelower right-hand quadrant of the circumplex). Thismyopia has yielded an impoverished portrayal ofdynamic capabilities. Accordingly, the overarchinggoal of this article is to open up the wider concep-tual space pertaining to the cognitive, affective,and behavioral microfoundations of organizationaladaptation (cf. Gavetti et al., 2007). To this end,we explicate alternative psychological foundationsfor the three dynamic capabilities identified byTeece (2007) and consider the implications for the-ory building, research, and practice.

SENSING (AND SHAPING)OPPORTUNITIES AND THREATS

The predominance of the information process-ing view of the firm has ensured that currentconceptions of sensing capabilities are decidedlyaffect free (Day and Schoemaker, 2006; Gavettiand Levinthal, 2000; Prahalad, 2004; Teece, 2007;Tripsas and Gavetti, 2000). However, to the extent

Figure 1. The core dimensions of strategic cognition


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1504 G. P. Hodgkinson and M. P. Healey

that affect controls attention (Compton, 2003), themoods and emotions of managers likely determineto a significant degree what the firm attends to andhow it responds, to say nothing of the emotionalsignificance of the stimuli for the individuals con-cerned. For instance, high anxiety might narrow

attention to a subset of events, whereas an overop-timistic mood might lead to a neglect of certainsignals. We postulate that affect is also crucial foreffective sensing because it provides the motiva-tion for cognitive adaptation.

Affective mechanisms of cognitive change

The ability to update decision makers mental rep-resentations (variously labeled schemas, men-tal models, and cognitive maps) in response tochanges in the external environment is a criti-

cal sensing capability (Barr, Stimpert, and Huff,1992; Gavetti, 2005; Gavetti and Levinthal, 2000;Levinthal and March, 1993). Current conceptionsof adaptive cognitive change assume that the mereeffortful processing of schema inconsistent infor-mation disconfirms expectations and jolts deci-sion makers into conscious reflection, thereby forc-ing them to revise their beliefs (e.g., Dutton,1993; Hodgkinson et al., 1999; Louis and Sut-ton, 1991; Reger and Palmer, 1996). However,recent research in neuroeconomics shows that peo-ple actively try to shield themselves from infor-

mation that causes psychological discomfort, theso-called ostrich effect of burying ones head inthe sand (Karlsson, Loewenstein, and Seppi, 2009).In keeping with this observation, studies in socialcognitive neuroscience show that conflicting infor-mation is not the fundamental mechanism of beliefrevision, but rather how decision makers handlethe affective response to that conflicting informa-tion (Lieberman, 2000; Lieberman et al., 2001).Hence, the ability to recognize affective signalsand utilize affect as information (Finucane et al.,2000; Slovic et al., 2004) is an essential, but hith-

erto neglected, component of organizational sens-ing capabilities. By way of illustration, considerthe London Stock Exchanges decision to investin the Taurus software package to support a trans-actions settlement IT system (Drummond, 2001).Decision makers experienced deep unease in theearly stages of the commissioning process, butunable to articulate the logical basis of their illfeelings, they chose to invest on more reasonedgrounds. However, having eventually abandoned

the ineffective system, at a cost of 80 million,they then expressed considerable regret at havingignored their initial misgivings. This case demon-strates that when individuals reasoned reflectiveresponses and visceral reflexive reactions are dis-cordant, effective sensing requires resolution of the

disequilibria.Tensions between reflexive and reflective reac-tions to opportunities and threats can also occurbetween individuals and groups, as Tripsas andGavettis (2000) account of cognitive adaptation atPolaroid illustrates. In this case, senior executivesheld to a maladaptive belief in an instant imagingbusiness model that discouraged search and devel-opment efforts in the growth area of digital imag-ing, while managers closer to industry changesdeveloped representations that encompassed theemerging digital landscape. Tripsas and Gavettis

(2000) view that the dissonance between the twogroups resulted from differences in the industrysignals they were receiving construes managersas passive victims of their informational circum-stances. The logical extension of this view is thatproviding the two parties with the same infor-mation would have yielded consonant representa-tions. Our analysis suggests an alternative inter-pretation: because the new information conflictedwith executives assumptions, they likely experi-enced unease at the mismatch, motivating them toneglectif not actively rejectthe painful infor-

mation. In contrast, junior managers likely expe-rienced consonance between reflexion and reflec-tion. Put differently, the developments excited onegroup but troubled the other, leading, respectively,to approach and avoidance. Dissonance betweenindividuals and groups should signal the need to re-evaluate and reconcile competing interpretations ofstrategic events (cf. Burgelman and Grove, 1996).At Polaroid, such reconciliation was noticeablyabsent, perhaps due to executives unwillingness tolose self-esteem by relinquishing their embeddedassumptions.

Our reanalysis of the Polaroid case highlights theimportance of meta-cognitive capabilitiesthat is,the ability to develop self-awareness of, and to reg-ulate, cognitive and emotional processes (e.g., Nel-son, 1996; Ochsner et al., 2002). Managers needto test the validity of their reflexive reactions toa given strategic issue; if those reactions are war-ranted, the firm should take whatever course ofaction is deemed appropriate. In cases where fur-ther analysis reveals those reflexive responses are


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due to managers underlying beliefs being out ofline with the overall attractiveness of the oppor-tunity or threat in question, this likely signalsthe need to update the executive knowledge base.While recalibrating decision makers is often dif-ficult, because individuals are typically unable to

step outside their own framings of the problemat hand (Fischhoff, 1982), group approaches pro-vide a potentially useful means of crosscheckingaffectively rooted assumptions.

Effective sensing also requires the developmentof a psychologically secure learning climateonethat takes account of affective signals and intu-itive cognitions but also enables, where appropri-ate, effortful, deliberative processing. Routines thatoverly focus on planning for the negative conse-quences of events are likely to heighten negativeaffect and threat rigidity and ultimately induce

avoidance behavior (Staw, Sandelands, and Dut-ton, 1981). The converse approach of buildingroutines that mitigate negative affect and createthe psychological space for building positive affectaround opportunities and threats is conducive toadaptation, because positive affect boosts respon-siveness to events by broadening the scope ofattention, cognition, and action repertoires (Ashby,Isen, and Turken, 1999; Fredrickson and Brani-gan, 2005). The preceding arguments suggest thefollowing proposition:

Proposition 1: Organizations that rely on hotcognition enhancing technologies (i.e., tools

and processes aimed at mental model change

underpinned by emotionally supportive mech-

anisms) as an aid to sensing will be signifi-

cantly less likely to fall prey to cognitive blind

spots and strategic inertia than organizations

that rely on cold cognition enhancing tech-

nologies (i.e., tools and processes aimed at men-

tal model change in the absence of emotionally

supportive mechanisms).

To illustrate the practical implications of thisproposition, consider the role of scenario plan-ning as an aid to sensing, commonly employedto stretch actors beliefs regarding future uncer-tainties (e.g., Schoemaker, 1993). Hodgkinson andWrights (2002) case analysis illustrates the dan-gers of designing interventions based solely on acold cognition logic. The goal in this case wasto inculcate mental model change. However, forc-ing the management team to envisage threatening

future scenarios in a vivid manner raised decisionalstress and conflict to unacceptably high levels,leading it to adopt dysfunctional coping strate-gies. In contrast, Doz and Kosonen (2008) observehow organizations such as IBM and Nokia meetthe need for psychological security by building

a culture of care when seeking to reform thebeliefs of actors facing threatening changes. Practi-cal steps include adopting routines that encouragemanagers to share their emotions and empathizewith one another and the use of techniques thatconstrue strategic change in such a way that thoseaffected do not disconnect the new requirementsfrom enduring sources of pride.

Incorporating intuition into the sensing process

As we have indicated, strategy research has con-

ventionally equated what Teece (2007) outlined assensing (and shaping) capabilities with explicit,deliberative learning and elaborative formal rea-soning and analysis (e.g., Porter, 1980; Zollo andWinter, 2002; for an exception, see Levinthal andRerup, 2006). However, this view understates theadvantages of nonconscious forms of cognitionfor navigating the social environment (Bargh andChartrand 1999; Bargh and Ferguson 2000). A par-ticular advantage of reflexive processes is theirability to cut through masses of information abouttrends in the business environment to reach effec-

tive judgments on opportunities and threats. As SirMartin Sorrell, CEO of WPP recently observed,the reality is that leaders must, on the spur ofthe moment, be able to react rapidly and graspopportunities (Sorrell, Komisar, and Mulcahy,2010: 46).

Dane and Pratts (2007: 40) succinct definition,affectively-charged judgments that arise throughrapid, nonconscious, and holistic associations,renders abundantly clear why intuition is appo-site to the sensing process. While the reflective(i.e., deliberative) system, restricted to the serial

processing of small numbers of items, becomesoverloaded when faced with complex strategic sit-uations, intuition brings to bear large quantitiesof implicit knowledge in a focused manner (cf.Dutton, 1993). Moreover, in many strategic situ-ations, executives must operate under time con-straints, from the early detection and evaluation ofemerging opportunities and threats, to the defenseof hostile takeovers, to interventions by regula-tors. There is a wealth of evidence to suggest


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that the nonconscious pattern-matching and vis-ceral processes at the heart of intuitive judgment(Lieberman, 2000) likely play a critical role in

these circumstances (for overviews see Dane andPratt, 2007; Hodgkinson, Langan-Fox, and Sadler-Smith, 2008; Hodgkinson et al., 2009; Hogarth,

2001; Klein, 2003).2

Incorporating intuition into the sensing processdemands a reconsideration of the role of infor-

mation technologies of the sort widely advocatedas an aid to organizational responsiveness (cf.Teece, 2007). Knowledge management systems,

databases, and expert systems designed to exter-nalize knowledge ultimately transfer the tasks ofsearch and sensemaking from the decision maker

to the technology. This move precludes the rapidpattern-matching processes that characterize expertdecision making, thus undermining true sensing.

Mintzberg (1994: 299) illustrated the problemswith such architectures in his analysis of elab-orate strategic planning systems that offered no

improved means to deal with the information over-load of human brains; indeed, they often madematters worse. . . The formal systems could cer-

tainly process more information. . . But they couldnever internalize it, comprehend it, synthesizeit. Giving due credence to reflexion in sensing

requires that supporting analytical technologies bedeployed in ways that exploit managers implicitknowledge and intuitive expertise. The goal is to

design search architectures to take advantage ofreflexion rather than replace it with technologyor effortful reasoning (Jolls, Sunstein, and Thaler,

1998). Hence:

2 Another form of cognition integral to the strategic sensing pro-cess is analogical thinking, which involves the comparison ofa novel strategic problem (i.e., the target) to one previouslyencountered (i.e., the source problem). Gavetti, Levinthal, andRivkin (2005: 695) depict the use of analogy in strategic manage-ment as an explicit reasoned process whereby having identifiedthe problem at hand, managers use some computational pro-

cedure to scour other settings with which she is familiar. Thisview, which privileges effortful cognition at the expense of non-conscious cognitive/affective processes, typifies the wider fieldsoverriding preoccupation with rationality. In marked contrast,cognitive psychologists such as Holyoak and Thagard (1995)define analogy as an implicit cognitive process applied to explicitknowledge. Hence, a more accurate portrayal of the way strate-gists form analogies would recognize the reliance on relativelyautomatic, creative processes to form mental leaps betweennovel and familiar strategic problems via implicit reference tothe abstract concepts that link them. This depiction is consistentwith our overarching argument that strategic learning requiresthe blending of reflective and reflexive capabilities.

Proposition 2: Organizations that incorporate

intuition into their repertoire of sensing capa-

bilities will identify and respond to opportunities

and threats more effectively than organizations

that rely solely on analytic approaches.

One means of incorporating intuition into therepertoire of sensing capabilities is to configuredecision making units so as to possess the req-uisite mixture of individuals with analytical andintuitive cognitive styles (Hodgkinson and Clarke,2007). Other prescriptions range from recogniz-ing and rewarding those who effectively rely onexpert intuition rather than fall back on establishedprocedures (Klein, 2003), to building in men-tal time-outs to allow creative ideas to incubate(Sadler-Smith, 2010). However, recognizing whento rely on intuition is a vital skill in itself. Kah-neman and Klein (2009, 2010) suggest that intu-ition is appropriate for informing executive actionwhen: (1) there is sufficient environmental regular-ity to learn the cues that enable the recognition ofpatterns and irregularities and (2) decision mak-

ers have learned those cues. The latter criterionemphasizes the domain-specific nature of intuitiveexpertise. For example, although a manager with10 years experience in a particular sector mightwell provide valid intuitive judgments on devel-opments within that sector, it is unlikely that the

validity of those judgments would generalize toother sectors.

SEIZING OPPORTUNITIES

It is clear from Teeces (2007) analysis that two

major psychological barriers potentially undermineseizing capabilities. First, organizations must beable to evaluate sensed opportunities and threats ina progressive, forward-looking manner and, where

appropriate, commit to them in a timely fash-ion. Second, in order to do so, they must beable to unlock dysfunctional fixations with exist-ing strategies to mitigate or remove decisionalbias, inertia, and strategic persistence. As indi-cated in Table 1, we maintain that developingroutines commensurate with the affective mecha-nisms underpinning decision making provides theultimate bases for meeting both of these chal-lenges.


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Evaluating and selecting new opportunities

A well-documented tendency is for organizationsto shun innovative investment choices in favor ofincremental improvements in keeping with theirprevailing competencies (Henderson and Clark,1990; Nelson and Winter, 1982). Drawing on

the insights of prospect theory (Kahneman andLovallo, 1993; Kahneman and Tversky, 1979),Teece (2007) attributes this dysfunction to biasesin the computational mechanisms of subjectiveprobability assessment, centered on loss aversionand the certainty effect. From this consequentialistperspective, organizations shun innovative invest-ment choices because their decision makers under-value new alternatives, based on biased calcula-tions of their likelihood of success. However, morerecent evidence that valuation by feeling explainsmany significant economic behaviors has erodedthe long-held assumption that valuation proceedsby calculation and computation alone (Kahneman,Ritov, and Schkade, 1999).

Contemporary developments in the decision sci-ences highlight the critical influence of felt emo-tions on choice. Loewenstein et al.s (2001) risk-as-feelings model, for example, emphasizes thatpeople typically act based on the emotions theyexperience at the time of choice in reaction totheir mental images of choice outcomes rather thancalculations of the probability or expected utility

of those outcomes. A welter of evidence demon-strates that when assessments based on affect areat odds with those based on computation, thevisceral often overpowers the rational to deter-mine behavior (Loewenstein, 1996; Loewensteinet al., 2001, 2008; Rottenstreich and Hsee, 2001).The work of Damasio and colleagues (Bechara

et al., 2000; Damasio, 1994) shows that the affec-tive consequences of potential courses of actionare encoded in somatic markers, which the pre-frontal cortex translates for the brains emotioncenters to guide behavior. Mere activation of a

marker provides an immediate basis for actionwithout deliberation, although the markers vis-ceral information often informs subsequent delib-eration. Crucially, whether instigated by cogni-tive appraisal or the more direct routes empha-sized by Damasio (1994) and others, it is theresultant feeling states that determine overt behav-ior (see also Finucane et al., 2000; Sanfey et al.,2003; Slovic et al., 2004; Zajonc, 1980). Thisgeneral point was well appreciated in Janis and

Manns (1977) classic treatise on decision making,but has been overlooked in contemporary strategyresearch.

The crucial implication of these developmentsis that harnessing, rather than suppressing, vis-ceral reactions to strategic alternatives is critical

to seizing capabilities. In cases where negativeaffective reactions to new opportunities outweighthe positive feelings invoked, it is unlikely thatdecision makers will commit fully to pursuing thedevelopments in questioneven where more dis-passionate, consequentialist analyses are favorable.Because affect arises from salient imagery linkedto the experience of choice outcomes, the vivid-ness and valence of such imagery play a vital rolein determining affective valuation and subsequentapproach-avoidance behavior. By way of illustra-tion, consider again the Tripsas and Giavetti (2000)

case, in which Polaroid was contemplating a moveaway from its existing business model to one thatprioritized alternative offerings. On one hand, thenew model may have brought forth imagery asso-ciated with technological developments and rapidmarket growth, in turn stimulating excitement andhope; such positive emotional reactions are favor-able to seizing. On the other hand, the negativemental imagery associated with potential job lossesarising from the implementation of the new modelmight well have stimulated fear and unease. Thefact that people tend to overreact emotionally to

new risks (Loewenstein et al., 2008) and weighnegative affect more heavily than positive affectin decision making (Ito et al., 1998) compoundssuch affective barriers to seizing. The foregoinganalysis suggests the following proposition:

Proposition 3: The greater the extent to which

firms foster emotional commitment to new invest-

ment opportunities, the greater the likelihood

they will seize those opportunities.

To illustrate the practical implications of this

proposition consider again the role of scenarioplanning. In the light of the foregoing analysis,the next generation of scenario planning techniquescould be adapted explicitly for building emotionalas well as cognitive commitment to emergingprospects. In the context of seizing, the affect-inducing properties of scenario analysis, whenskillfully deployed, could serve as a vehicle to gen-erate and foster strong and vivid positive mentalimagery pertaining to new opportunities, in turn


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stimulating the required visceral reactions to seizethe most promising ones (Healey and Hodgkinson,2008).

Notwithstanding the potency of building emo-tional commitment as a mechanism for foster-ing seizing, there are situations when too much

emotional commitment can be problematic. Marksand Spencers (M&S) acquisition of the BrooksBrothers retail chain for $740 million during thelate-1980s exemplifies this problem (Finkelstein,Whitehead, and Campbell 2008). Despite a welterof analytical evidence that this move was inadvis-able, M&S Chairman Derek Rayner drove throughthe purchase, fueled by the overwhelming pos-itive feelings he experienced in reaction to thelong-standing imagery he associated with BrooksBrothers exclusive clothing products. This deci-sion was to cost more than $1 billion, upon sub-

sequently divesting the poorly performing acqui-sition for just $225 million. More generally, thiscase illustrates that when visceral reactions to alow probability/utility but affect-laden alternativeoutweigh reasoned reactions to a high probabil-ity/utility but affect-free alternative, the primacyof the emotional reaction dictates a potentiallysuboptimal course of action. In all probability,seizing the opportunity in question in such cir-cumstances is ill advised. Finkelstein et al. (2008)outline various safeguards available to help organi-zations overcome inappropriate emotional attach-

ments to strategic issues and courses of action.These include monitoring processes designed toidentify so-called red-flag situations, in whichdecisions are proceeding based on such attach-ments, and the separation of decision and gov-ernance mechanisms to counter individuals emo-tional fixations.

Unlocking fixations with existing strategies

It is important to recognize that although acts ofomission (i.e., the failure to pursue fruitful new

avenues) can prove more costly than errors ofexcessive commission (i.e., the tendency to embarkon new, ultimately flawed, courses of action), suchomission often stems from overcommitment toexisting projects (Bazerman and Watkins, 2004).In order to pursue new opportunities, therefore,firms must often shedor at least lessentheircommitment to existing directions (Eisenhardt andMartin, 2000; Teece, 2007; Teece et al., 1997).One of the most significant biases that militates

against this requirement is escalation of commit-ment, the tendency to throw good money afterbad in support of failing investments in an attemptto justify prior choices (Staw, 1976; Staw andRoss, 1987).

Hitherto, and again based on early behavioral

decision research that saw biases such as fram-ing and overconfidence as resulting from intu-itive processes (e.g., Gilovich, Griffin, and Kah-neman, 2002), strategy scholars have generallyassumed that the means for overcoming escala-tion of commitment and related dysfunctions is toengage decision makers in more effortful and ana-lytical information processing (Hodgkinson et al.,1999, 2002; Schwenk, 1986; Wright and Good-win, 2002). Drawing upon this conventional lineof reasoning, Teece (2007: 1333) suggests that,overcoming biases almost always requires a cog-

nitively sophisticated and disciplined approach todecision making. However, merely encouragingrational and effortful information processing perse can exacerbate escalation of commitment andrelated problems. Indeed, individuals with ratio-nal thinking styles (who favor effortful, analyti-cal reflection) are particularly prone to escalationbecause they feel the pressure for vindication moreintensely (Wong, Kwong, and Ng, 2008). Fortu-nately, recent work has begun to provide mecha-nisms for addressing the core emotional roots ofescalation and related decision biases. For exam-

ple, stimulating negative affect when consideringwhether to reinvest in a failing course of actionreduces escalation because decision makers with-draw their commitment to avoid future regret andthe anxiety associated with costs sunk in error (Ku,2008; Wong, Yik, and Kwong, 2006). Hence:

Proposition 4: The greater the strategic decision

making units tendency to incorporate salient

negative affectivity associated with extant

courses of action, the lower the likelihood it will

fall prey to escalation of commitment and related

dysfunctional decision traps.

This analysis highlights the capacity for self-regulation as an important means of overcomingdysfunctional fixations. Self-regulation involvescontrolling internal ego-protective goals (Lordet al., 2010), which are the root cause of the desireto justify specific choices to the self and oth-ers in escalation situations. One means of imple-menting this requirement for self-regulation is to


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reflect on how new courses of action facilitate theattainment of self-esteem enhancing goals, whichessentially transfers the basic drive for self-esteemprotection from maintenance of the status quoto the active pursuit of new directions (Hen-derson, Gollwitzer, and Oettinger, 2007; Zhang

and Baumeister, 2006). Sivanathan et al. (2008)demonstrated the effectiveness of this approachin a study of de-escalation in financial decisionmaking. Giving decision makers the opportunityto affirm their overall self-esteem and personalintegrity after they had committed resources toan ineffective strategy made them less inclined toinvest further because confidence in the self hadalleviated the desire for self-justification that moti-vates escalation.

RECONFIGURING ASSETS TOMAINTAIN COMPETITIVENESS

Teeces (2007) explication of the psychologicalfoundations of transforming/reconfiguring is rel-atively underdeveloped in comparison with his

analysis of sensing and seizing, in part becausestrategy research on the human aspects of the lat-ter capability has been in short supply. However,as noted by Augier and Teece (2009), one of theforemost behavioral challenges associated with the

reconfiguration of the enterprise concerns man-aging the effects of transformation on the coreidentities and motivations of key individuals andgroups. We extend and deepen Teeces frameworkby explicating how the capacity to reconfiguresocial identities using reflexive and reflective pro-cesses in concert is critical to successful organiza-tional transformation.

When change threatens the salient identities andassociated self-concepts of managers and employ-ees, considerable resistance can breed at all levelsof the organization (Gioia, Schultz, and Corley,

2000; Haslam, Eggins, and Reynolds, 2003; Hoggand Terry, 2000); actors cling to and defend olddirections and ways of thinking intertwined withprevailing identities and actively resist new strate-gic initiatives that challenge those identities (Els-bach and Kramer, 1996; Hogg and Terry, 2000;Nag, Corley, and Gioia, 2007). In this sense, thefundamental identity of the firm becomes a trapthat constrains its adaptive capacity (Bouchikhiand Kimberly, 2003, 2008).

As with earlier work on overcoming dysfunc-

tions in sensing and seizing, the bulk of theory and

research concerning the problem of identity iner-

tia during strategic change has focused on cold

cognition routes to identity change. Building a

common group identity that embraces the extant

identities under threat (Hogg and Terry, 2000)and establishing a fluid organizational identity that

facilitates adaptation (Gioia, Schultz, and Corley,

2000) are the favored solutions. However, this

cold cognition logic overstates the ease of cog-

nitive identity reconstruction and underestimates

the emotional difficulties associated with identity

threat and the affective processes that mediate the

transition to new identities. Given that the social

pain caused by identity threat activates the same

neural networks as physical pain (Lieberman and

Eisenberger, 2009), addressing emotional mecha-

nisms underpinning successful identity change is

critical to reconfiguring. As indicated in Table 1,

the emerging evidence in social cognitive neu-

roscience emphasizes the importance of actors

capabilities to regulate automatic and emotional

reactions to self and social identity threats, espe-

cially heightened anxiety (Scheepers and Ellemers,

2005), which affect the ability to see new direc-

tions without prejudice and embrace changes that

impinge upon extant salient identities.

Since much of the bias against the people (e.g.,

the champions of particular strategic change ini-tiatives) and events (e.g., restructuring to meet the

challenges of new opportunities and threats) at

the heart of reconfiguring stems from automatic

social categorization and stereotyping processes

controlled by the reflexive system (Amodio, 2008;

Dovidio, Pearson, and Orr, 2008), merely encour-

aging the conscious monitoring and adjustment

of prejudices through reflective processes is an

insufficient basis for overcoming them. Similar to

the alleviation of escalation of commitment, the

self-regulation of emotional response is a crucialmechanism for overcoming identity-based resis-

tance to change (Amodio, 2008; Derks, Inzlicht,

and Kang, 2008; Klein, Rozendal, and Cosmides,

2002). However, whereas self-regulation in seiz-

ing concerns top managers ability to regulate

their own feelings, self-regulation in transforming

concerns the ability of managers at all levels to

identify, interpret, and respond to the emotions

of stakeholders throughout the organization (cf.


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Huy, 1999, 2002). Because threats to social identi-ties threaten, by extension, the identities and self-concepts of individuals who identify strongly withthe entity in question, affirming those aspects of thesalient identities unaffected by the required strate-gic change can help reduce the desire to cling to

and defend the extant identity of the organizationas a whole. In consequence, actors will be moreinclined to embrace the new direction and accom-panying work practices. It thus follows that:

Proposition 5: The greater the capacity of the

organization to regulate identity-based affective

responses to change, the greater the likelihood

of successful strategic transformation.

As with sensing and seizing, one of the mostsignificant practical requirements for supporting

identity transition during strategic transformationis the creation of a psychologically secure emo-tional climate. Practices suitable for this pur-pose include training and coaching in the artof emotional balancingi.e., attending to feel-ings expressed during identity-threatening changeepisodes, while building emotional commitment toidentity attributes consonant with the new strategicdirection (cf. Huy, 1999, 2002).3

GEs recent ecomagination project and theongoing transformation of the Intel Corporation(Heath, 2010) illustrate these principles in action.

In highlighting its own industry-leading greenproducts to its employees, GE is demonstratingthat it already has the people and skills needed tosucceed in a world focused on sustainability. Byappealing on impassioned grounds to a new direc-tion that fits with aspects of the firms core, theorganization is easing the transition to a new iden-tity as an innovator of sustainable solutions in away that reassures rather than threatens. In similarvein, as PC growth slows, the Intel Corporation istransforming itself into a provider of digital plat-forms for health, entertainment, and mobile appli-

cations by using inspiration and motivation ratherthan intellectual justification. One potential barrier

3 Perhaps readers will be tempted to conclude that the moststraightforward way to alleviate the emotional problems associ-ated with sensing, seizing, and transforming is to routinize highlevels of turnover within the organization, a practice advocatedby some change management theorists and endorsed by Teece(2007). However, the short-term benefits of such practices needto be weighed carefully against the concomitant losses of deep-seated situational judgment, knowledge, and expertise, whichtake many years to accumulate but only seconds to destroy.

to this project is that the senior engineers whobuilt their careers around Intels identity as a chipbuilder feel directionless. Sensitized to this dan-ger, Intels recent national advertising campaignfeatures star engineer Anjay Bhatt, coinventor ofthe USB, walking into a canteen cheered on by

adoring employees. The message is that Intelsheart already fits with the new focus on productinnovation. As with GEs attempts, this approachseeks to facilitate identity transition using emotion-ally supportive mechanisms.

IMPLICATIONS

We prefaced this article with Loewensteins (1996)provocative critique of decision theory because itresonates strongly when stepping back to gazecritically upon the behavioral microfoundationsof contemporary strategic management theory.Teeces (2007) framework is not alone in privi-leging calculation and computation through cold,effortful processes as the primary route to orga-nizational adaptation and performance. Like ear-lier work that investigated strategic issue diagno-sis (Dutton and Jackson, 1987; Jackson and Dut-ton, 1988) and competitive positioning strategy(Hodgkinson, 1997; Peteraf and Shanley, 1997;Porac et al., 1995; Reger and Palmer, 1996) from

a cognitive standpoint, the dynamic capabilitiesproject as a whole divorces cognition from emo-tion and affect and affords only a minimal role toautomatic and nonconscious processes (see, e.g.,Adner and Helfat, 2003; Alvarez and Busenitz,2001; Amit and Schoemaker, 1993; Gavetti, 2005;Kaplan, 2008; Lane et al., 2006; Tripsas andGavetti, 2000).

Our article has demonstrated how the devel-opment and maintenance of dynamic capabilitiesrequires firms to harness managers reflexive andreflective abilities, to utilize implicit and explicit

cognitive and emotional processes in harmony, tofacilitate sensing, seizing, and reconfiguration. Inso doing, it responds to Gavetti et al.s (2007) callto render theories of capabilities development andorganizational adaptation consistent with what weknow about human functioning from contempo-rary advances in the psychological sciences. Theresult of this endeavor is a behaviorally more plau-sible depiction of organizations: driven by thinkingand feeling inhabitants who are fired by affect,


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and often as reliant on inspiration and the skil-ful management of emotion and intuition as oncalculating cognition.

Implications for future research

Our analysis opens up fertile terrain for a newwave of behavioral strategy research. Accordingly,we call for a systematic program of work that con-ceives metacognition, emotion management, andself-regulation as core dynamic managerial capa-bilities. Such a project would build on Banduras(1991) observation that purposive organizationalactivity requires more than applying cognitiveoperations to existing knowledge to generate solu-tionsa tenet of knowledge-based theories of thefirm (Grant, 1996) because affective and emo-tional self-regulatory processes ultimately deter-mine how well human information processing sys-tems function (see also Bandura, 1986).

As a first step, we envisage a program of empiri-cal studies designed to test our basic propositions.Our first two propositions predict that organiza-tions that explicitly incorporate affective signalsand intuitive processes into their sensing routineswill be less likely to fall prey to the vagaries ofcognitive blind spots and cognitive inertia. Thesepropositions could be tested directly by comparingthe outcomes enjoyed by firms whose prevailing

cognitive climates (Kirton and McCarthy, 1988)support the use of hot cognition enhancing tech-nologies and processes with the outcomes of firmsthat fall back on conventional analytical tools andapproaches to sensing. Instruments designed toassess individuals chronic preferences for analyti-cal and/or intuitive approaches to decision making(e.g., Epstein et al., 1996) could be readily adaptedto assess the prevailing cognitive climate withinorganizational subunits and strategic decision mak-ing teams. In-depth qualitative analyses, of the sortundertaken by Brown and Eisenhardt (1997) and

Huy (2002), could complement such large-scalestudies, by identifying the routines used variouslyto suppress or harness affective signals in sens-ing. In a related vein, analyzing the role that affectand emotion play in strategic issue diagnosis couldbroaden this line of inquiry by assessing, for exam-ple, emotional response as a basis for issue cate-gorization, to refine understanding of the approachand avoidance mechanisms at play (cf. Dutton andJackson, 1987; Jackson and Dutton, 1988).

Our third and fourth propositions highlight the

need to examine the nature and effects of felt emo-

tion in strategic decision making, both in reduc-

ing commitment to outmoded courses of action

and in seizing emerging opportunities. Strategy

researchers stand well placed to utilize the labora-

tory methods of behavioral economics to study theefficacy of affect-inducing techniques for variouslybuilding or reducing, as appropriate, emotional

commitment to investment prospects. One promis-

ing direction here is to use organizationally rel-

evant vignettes and controlled decision tasks to

analyze the extent to which decision makers com-

mit resources to prospects framed in cold cogni-

tive terms versus ones framed in affective terms,

through the vivid imagining of choice outcomes.

In this article, we have deliberately positioned

emotion as a positive resource for organizational

adaptation. Going forward, however, we need abetter understanding of both the positive and neg-

ative effects of emotion on strategic choice (Shiv,

Loewenstein, and Bechara, 2005). Using survey-

based field studies, researchers could examine the

impact of emotion on the speed and quality of

strategic decision processes and concomitant orga-

nizational outcomes (cf. Baum and Wally, 2003).

Case study analyses could further elucidate how

firms manage emotion when seeking to acceler-ate strategic decision making in dynamic situations

(cf. Doz and Kosonen, 2008; Eisenhardt, 1989).

In order to test our fourth proposition, researchers

might examine the extent to which high levels

of self-esteem resources in the strategic decision

making unit enable firms to avoid the perils of

escalation of commitment and related dysfunc-

tions rooted in affective mechanisms. Survey mea-

sures of core self-evaluation applied to the strategy

domain (Hiller and Hambrick, 2005) appear par-

ticularly useful for this purpose.

Our final proposition requires comparative case

analyses to observe how executives more or less

skilled in the art of emotion management seekto monitor and influence the affective processes

underpinning identity transition in strategic trans-

formation at different levels of the organization

(cf. Sanchez-Burk and Huy, 2008). A pressing

need here is to examine whether emotion manage-ment routinesi.e., emotional capabilities (Huy,

1999) prove more efficacious for overcoming

identity barriers to adaptation than cold cognitive

mechanisms in isolation.


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Implications for practice

Our analysis points to a need for tools and prac-tices that will enhance sensing, seizing, and trans-forming by augmenting the cognitive and affec-tive capabilities of individuals and teams. Severalcommentators have recently offered behavioral

prescriptions for strategic intervention which, atfirst glance, appear to be consistent with our anal-ysis for example, sharing diverse perspectives,gathering disconfirmatory evidence, discussinguncertainties, and confronting cognitive biases (forrepresentative examples see Day and Schoemaker,2006; Kahneman and Klein, 2009, 2010; Lovalloand Sibony, 2010). However, upon closer inspec-tion, many of these prescriptions are predicated ona cold information processing logic. One reasonexecutives are often reluctant to embrace prac-tices that involve questioning their personal judg-ments is precisely because these practices raise,rather than assuage, emotional barriers. It is tempt-ing, therefore, to call for a two-step approachfor intervening in the strategy processan initialemotional screening phase followed by the usualgamut of decision-aiding techniques (cf. Elsbachand Barr, 1999). However, such an arrangementruns the risk of perpetuating the error of separat-ing reason from emotion in the strategy arena (cf.Damasio, 1994). Accordingly, we have sought todemonstrate throughout how some of the funda-

mental tools of strategizing, when suitably embed-ded in an emotionally supportive climate, can beadapted to integrate cognition and affect.

Our analysis overall signals the need for a newgeneration of knowledge elicitation and decision-aiding techniques, predicated on hot cognitionprinciples, for both intervention and research pur-poses. Rather than focusing on the mapping ofstrategists conceptual knowledge per se (e.g.,Eden and Ackermann, 1998; Hodgkinson, Maule,and Bown, 2004; Huff, 1990), extant cognitivemapping techniques could be modified to elicit and

represent feelings and affective reactions to strate-gic issues and choices, thereby integrating mul-tiple modalities of thought. Such practices couldbe particularly valuable in helping managers makesense of how they and others react to particu-lar problems, as an aid to sensing, seizing, andtransforming.

Techniques commonly used for overcomingdecision traps might be similarly adapted to con-vert them from cold cognition to hot cognition

enhancing technologies. By way of illustration,the frame analysis worksheet (Russo and Schoe-maker, 1989) might be adapted to assist decisionmakers in comprehending the emotional tags theyand others hold for a given strategic problem,as a basis for recognizing dissonant reactions to

the issues at hand. The goal here would be toenhance multiple frame awareness by incorporat-ing affective information into the exercise.

CONCLUDING REMARKS

In his closing remarks, Teece (2007: 1341)observes that enterprises may be more like biolog-ical organisms than some economists, managers,and strategy scholars are willing to admit. Ouranalysis takes this biological metaphor to a new

level by illuminating the ways the individuals andgroups who manage these entities are governedby thoughts and feelings: always boundedly ratio-nal, but manifestly driven by emotion. The con-tinued negation of this fundamental insight risksstymieing the field of strategic management frommaturing in alignment with economics and psy-chology, the base disciplines that have hithertoprovided its behavioral microfoundations.

ACKNOWLEDGMENTS

An earlier version of this paper won the Busi-ness Policy and Strategy Divisions SumantraGhoshal Research and Practice Award at the 2009Annual Meeting of the Academy of Management(Chicago, Illinois) and appeared in the Best PaperProceedings. We are grateful to Dan Lovallo andthree anonymous reviewers of Strategic Manage-ment Journal for constructive and insightful com-ments on previous drafts.

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