These are people who avidly read business literature. Unfortunately, business leaders are the largest consumers of both good/bad business and management theories.
This article seeks to highlight the qualities of a good business-related theory. By so-doing, it is intended to help readers sharpen the ‘resolutions’ of their own intellectual ‘telescopes’ in order to make a careful and judicious selection of useful theory.
What is a theory?
A theory is simply a statement of what is associated with what and why or what causes what and why. Anything less is a fad, or ‘bubblegum theory’. Unfortunately, many conferences and ‘authors-for-profit’, as one commentator puts it, peddle ‘bubblegum theory’.
Bad business theory
To identify bad business theory, one needs to understand what it is constituted of. A theory consists of three broad interrelated categories. The first layer of a business theory (or any other theory), are the carefully-made and measured insightful observations about business phenomena. These careful observations are called constructs. The second layer of a theory consists of classifications of the insights gathered in the first layer into categories. In other words, insights are grouped into patterns. These categories are called frameworks or typologies.
The third layer of a business theory is made after finding out how the insights grouped in categories of interest in the second layer relate to some outcome of interest. From this third layer comes a statement to the effect that; ‘if you see this happening you will see that happening’. This is called a model. Some prefer to call it correlation.
Bad theory arises when researchers/theorists short-circuit the three steps. When a researcher does a commendable job in coming up with careful insights from observing business phenomena and goes on to preach that ‘if your business acquires these traits it will succeed’, you immediately know that it is bad theory. It is what is called a management fad. Simply put, constructs, frameworks or typologies on their own are not theory, but are part of the theory-building process.
Many so-called business best-sellers are guilty of the transgression of propagating constructs and frameworks as business theory. Typically, this happens when a researcher studies a number of successful companies and looks for common traits among these, totally leapfrogs the categorisation step, and rushes to put pen to paper, and publishes a book telling gullible business leaders that if they can make their businesses acquire the traits of the successful companies as identified in their research, they too will reap success.
Identifying good business theory
The primary trait of a good business theory is that it identifies the specific circumstances under which the results predicted by the model (statement of what causes what) are guaranteed and why those circumstances lead to the predicted results.
Good business theory categorises phenomena according to circumstances instead of the phenomena themselves. This helps a business leader to say, ‘I am in these circumstances, not in those, and thus this is what I should expect to get if I do X’. To be able to transition to circumstance-based categorisations, theory moves from correlation to statements of what causes what under what circumstances. This big leap is made after careful field-based observations are made during business model-testing, leading a researcher to establish why what is associated with what. Put differently, there is a transition from correlation to causality.
At this stage, the preoccupation is on identifying the exact circumstances or conditions under which one expects the causal mechanism to yield a predictable result. When these circumstances yield an unexpected outcome, the theory is not discarded, but a search for a new category of circumstances is sought. This process of identifying new circumstances is endless. This enriches the portfolio of circumstances business leaders are likely to face and what results to expect.
Good business theory example
It has been observed that when technology changes, incumbent firms either survive or vanish, giving way to start-ups.
The first attempt to explain this phenomenon was done by researchers who carefully went through the three stages of theory-building (observation, categorisation and association). From their careful observations, the researchers who first tried to crack the dilemma of why some incumbent firms survive while others die in the face of technological change identified two categories. They framed these as incremental versus radical changes. Their conclusion was that incumbents survive when technological change is incremental but struggle when technological change is radical.
Another researcher tested the model and found that some incumbent firms did well in the face of radical change. This did not invalidate the seminal theory, but meant that another categorisation was needed to account for the anomaly. This second generation of researchers revisited the categorisation scheme and reframed it as competence-enhancing versus competence-destroying technological change. They asserted that incumbents flounder when faced with technological change that destroys the competences they already have.
Thus a board of directors trying to assess the impact of a new technology relevant to their business would just need to identify which circumstances they are in. They would need to ask: Is this technology radical or incremental? If the business leaders evaluate the new technology and conclude that the new technology is radical, then they would probably conclude that the risk of their businesses’ demise was extremely high. If, say, all the board members but one were only aware of the radical versus incremental circumstances, they would likely overstate the risk.
One board member, aware of the improved theory could say; ‘Yes, the new technology is radical, but is it competence-enhancing or competence-destroying?’ Using this new set of theoretical lenses, it could have been concluded that the new radical technology was competence-enhancing, which in that regard would lead to downgrading the risk of the business being decimated.
Another group of researchers uncovered field cases where incumbent firms floundered in the face of incremental change. They revisited the categorisation scheme and reframed it as modular versus architectural change. They concluded that when incumbents are faced with technological change that affects the components of a product and not how the components relate, they would survive.
However, if the change in technology brought new relationships among the components (architectural change), incumbents were expected to fail to cope. Later, researchers found other sets of circumstances that explained anomalies to earlier work, disruptive versus sustaining technological change being a more recent and perhaps the most popular of the technological change research genre.
In all these cases, the researchers identified the reasons for expecting the predicted results under specific circumstances. That’s the hallmark of good business theory.
Thus, if, say Telecel wants to assess business risk of a new telecoms-related technology, they would have to ask a series of questions built around the up-to-date portfolio of circumstances. Telecel’s executives and board would have to ask the following questions: Are we faced with radical or incremental change; competence-enhancing or competence-destroying change; modular or architectural change; disruptive or sustaining change; are we framing the disruptive change as a threat or an opportunity?
It is clear that good business theory is highly practical. Some business theory-builders have argued that good business theory is more accurate than data. In what sense you might ask? Simple. When you are looking into the future there is no data to base your decisions on. The only way to make decisions about the future is through good theory.
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