How Black Swan Events Reveal Known and Unknown Unknowns: the Case of COVID-19
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How Black Swan Events Reveal Known and Unknown Unknowns: The Case of COVID-19 Sina Beßlich Dissertation written under the supervision of Peter V. Rajsingh Dissertation submitted in partial fulfilment of requirements for the MSc in International Management at CLSBE, at Universidade Católica Portuguesa and for the Master of International Business at Smith, at Smith School of Business, 15.06.2020. Abstract Title: How Black Swan Events Reveal Known and Unknown Unknowns: The Case of COVID-19 Author: Sina Beßlich The unknown offers a great puzzle to strategists. Black Swan events, characterized by rare occurrence and retrospective predictability, have extreme impacts on economies and societies (Taleb, 2007). The primary research purpose of this study is to examine whether Black Swan events increase awareness of known and unknown unknowns by discovering perceptions of existing and novel uncertainties. Precisely, we analyze how unexpected tail events enhance consciousness of unknown unknows and alter mental models of known uncertainties. To discover a recent Black Swan phenomenon, we chose the novel Coronavirus (COVID-19) as empirical context. Qualitative examination of 36 semi-structured interviews implies that the Coronavirus crisis considerably changes the range of uncertainties, which can shape future management research and practice. Although the majority of discovered uncertainty areas (72.5%) were recognized ex ante COVID-19, our findings show that the current pandemic also reveals strategically relevant unknown unknowns. Based on the framework of environmental uncertainty developed by Jauch and Kraft (1986), we develop a novel model that illustrates strategic decision-making in the context of Black Swan uncertainties. 2020’s Black Swan, COVID-19, triggers strategic decision-makers to reconsider current interdependencies to reduce the potential harm of future uncertainty shocks. Since our results disclose that uncertainty related to Black Swan events essentially creates novel uncertainties, executives are required to acknowledge that they cannot ignore or eliminate uncertainty. Instead, managers are advised to embrace the occurrence of Black Swans and the existence of known and unknown unknowns for (anti)knowledge exploration. Keywords: Black Swan Events, Uncertainty, Unknown Unknowns, Antiknowledge, Strategy, Disruption, COVID-19 I Resumo Título: Como os Eventos Cisne Negro Revelam Incertezas Conhecidas e Desconhecidas: O Caso da COVID-19 Autor: Sina Beßlich O desconhecido traz um grande quebra-cabeça para estrategistas. Os eventos conhecidos como Cisne Negro são caracterizados por terem uma ocorrência rara e previsibilidade retrospetiva. Estes têm grande impacto nas economias e sociedades (Taleb, 2007). O objetivo principal deste estudo é examinar se os eventos Cisne Negro aumentam a conscientização sobre incertezas conhecidas e desconhecidas, através do descobrimento de perceções sobre incertezas existentes e novas. Para explorar um fenômeno recente do cisne negro, escolhemos o novo Coronavírus (COVID- 19) como contexto empírico. A examinação qualitativa sobre 36 entrevistas semiestruturadas sugere que a crise do Coronavírus altera consideravelmente o leque de incertezas, o que pode resultar na moldura de futuras práticas de gestão e pesquisa. Embora a maioria das áreas de incerteza descobertas (72,5%) tenham sido reconhecidas ex ante COVID-19, nossos resultados mostram que a pandemia atual também revela incertezas desconhecidas estrategicamente relevantes. Com base na estrutura de incerteza do ambiente desenvolvida por Jauch e Kraft (1986), desenvolvemos um novo modelo que ilustra a tomada de decisões estratégicas no contexto das incertezas do Cisne Negro. A COVID-19 faz com que os tomadores de decisão estratégicas reconsiderem as interdependências atuais para reduzir o dano potencial de futuros choques de incerteza. Como nossos resultados revelam que a incerteza relacionada aos eventos do Cisne Negro cria novas incertezas, os executivos devem reconhecer que não podem ignorá-las ou eliminá-las. Em vez disso, os gerentes são aconselhados a adotar a ocorrência de cisnes negros e a existência de incertezas conhecidas e desconhecidas para a exploração do conhecimento (prévio). Palavras-chave: Eventos Cisne Negro, Incerteza, Incertezas Desconhecidas, Conhecimento Prévio, Estratégia, Disrupção, COVID-19 II Acknowledgements First of all, I would like to express my gratitude to all individuals that have stepped aside their personal interests to safeguard our lives and livelihoods in this challenging time. These include doctors and nurses as well as supermarket cashiers, journalists, politicians, truck drivers, farmers, and so on. As this dissertation rationalizes the current global health catastrophe, I would like to underline the importance of those ‘hidden heroes’ within and beyond the Coronavirus situation. Secondly, I would like to thank Professor Peter V. Rajsingh for his constant availability and willingness to support my research process. Specifically, I would like to acknowledge his continuous efforts to challenge my thoughts and his enthusiasm for investigating ‘ugly black bird’ phenomena throughout this process. Thirdly, I would like to recognize all professionals that were willing to take time in these hectic times to share their perspective on the strategic impact of the Coronavirus. I want to thank Alexander Drees, Anthony Dickinson, Dr. Clemens Schwerdtfeger, Gregory Glanzmann, Johnny Sørensen, Karen Frisch, Katrine Brusgaard, Niels Heyer, Orlando Santos, Steve van Houten, Stuart Hardy, Torsten Schneider, Dr. Wilfried Kienzle, Wilfried von Rath and all other 22 anonymous participants that have contributed to the outcome this study. Finally, I would like to express my appreciation towards everyone that has supported me personally along the journey. A special thanks to you, mum and dad, who did not only enable me to pursue an academic education but also act as my closest professional and personal advisors. Thank you, Silas, for always challenging that pure thinking does not change the world. Thank you, JC, for loving me even in the most non-romantic or stressful moments. Thank you, Hannah, Anina, Laura, Ana, and all my other amazing friends for the fantastic time in Lisbon and everywhere else. III Table of Contents ABSTRACT...............................................................................................................................I RESUMO.................................................................................................................................. II ACKNOWLEDGEMENTS ................................................................................................... III LIST OF FIGURES ............................................................................................................... VI LIST OF TABLES ............................................................................................................... VII LIST OF ABBREVIATIONS ................................................................................................ IX 1. INTRODUCTION ............................................................................................................. 1 1.1. TOPIC PRESENTATION ..................................................................................... 1 1.2. RESEARCH QUESTIONS .................................................................................... 3 1.3. ACADEMIC RELEVANCE .................................................................................. 4 1.4. MANAGERIAL RELEVANCE .............................................................................. 4 1.5. OUTLINE.......................................................................................................... 6 2. LITERATURE REVIEW ................................................................................................. 7 2.1. CHAOS THEORY .............................................................................................. 9 2.2. DISRUPTION .................................................................................................... 9 2.3. THE EXTERNAL ENVIRONMENT ..................................................................... 10 2.4. UNCERTAINTY ............................................................................................... 11 2.4.1. Unknown Unknowns ................................................................................. 12 2.4.2. Perceived Uncertainty .............................................................................. 13 2.5. STRATEGY ..................................................................................................... 15 2.5.1. Strategic Uncertainty ............................................................................... 15 2.5.2. Strategy Formulation and Implementation .............................................. 15 2.5.3. Strategic Agility ........................................................................................ 17 2.6. THE INTERNAL ENVIRONMENT ...................................................................... 18 2.6.1. Dynamic Capabilities ............................................................................... 18 2.6.2. Collaboration and Information Styles ...................................................... 18 2.6.3. Decision-Making Styles ............................................................................ 20 2.7. PERFORMANCE OUTCOMES ........................................................................... 21 2.8. COLLECTIVE ACTIONS