Why Hard-Nosed Executives Should Care About Management Theory

You’ve got a problem to solve. Perhaps a decline in profitability, a rise in workforce turnover, delays in product development. The management books, articles, and consultants’ reports amassed in your office are brimming with conflicting suggestions: “Decentralize decision making in your company!” “Vertically integrate!” “Focus on your core competencies!” “Branch out!”

Each practice sounds promising—and comes with impressive stories about companies that successfully applied it. But how do you sift through the contradictions? And what about that time you tried applying an intriguing new practice—with disastrous results? Which management theories should you trust?

The problem is that a theory that helps one company succeed can be fatal for another operating under different conditions. When Lucent, for example, followed advice to decentralize into independent “hot businesses” in an effort to become leaner, faster, and more responsive, disaster ensued: Costs soared, service faltered, and customers complained. Why? Decentralization can make some companies more flexible—if business units are selling modular, self-contained products, for example. Lucent’s customers, however, operated massive telephone networks and required complex system solutions with interdependent components. Under these conditions, decentralization only made it more difficult for employees to coordinate their interdependent activities to design, sell, and service the systems.

So how can you become a discerning consumer of managerial theory—selecting the practices most likely to help your company, given its unique circumstances? Understand what constitutes sound management theory. Then shrewdly evaluate the claims you encounter—no matter what their source.

The Idea in Practice

How Theories Develop

Theories are statements predicting which actions will lead to what results—and why. Sound theories help us make predictions (“If we do X, then Y will happen”) and interpret the present (“Here’s what’s happening now and why”). Researchers develop theories by refining hypotheses to predict with increasing accuracy how a phenomenon should work in a widening range of circumstances. Theories develop in three stages:

• companies—for example, diversification strategies that succeed. At this early stage, researchers risk laying a foundation for unsound theories by simply observing a few successful companies, identifying some practices that they have in common, and concluding that these practices will work at .

• phenomena—for instance, vertical versus horizontal diversification strategies. This process highlights meaningful differences among complex .

• Formulate a hypothesis of what causes the phenomenon, and why.

What Theories Do

Sound theories accomplish the following:

• theory Correlation and causation aren’t the same. For example, just because some successful companies have used venture capital funding doesn’t mean such funding caused their success. It may have. But until we know what it is about venture capital that contributes to firms’ success, we haven’t pinpointed the . Venture funding remains merely an attribute or characteristic. We don’t yet have a .

• success Theories enable predictability when they identify the causes behind results the circumstances in which that causal mechanism will—and won’t—result in .

• recommendations When companies do exactly what a theory prescribes but don’t get the expected results, these “failures” become valuable opportunities for researchers to further hone their theories—by analyzing the phenomenon more closely and fine-tuning the theory. Failures help researchers avoid making one-size-fits-all .

Become a Discerning Consumer of Theory

How to avoid buying into unsound theories? Consider these guidelines:

• Beware of articles and books urging revolutionary change of everything. No single finding applies to all companies in all situations. You need to know not only where, when, and why things should change, but also what should stay the same.

• Watch for research that classifies phenomena into categories based solely on attributes or characteristics. Such studies represent only a preliminary step toward reliable theories.

• Look for adjectives in correlation statements masquerading as causation. For example, “ funding helps start-ups succeed.” Sound theories describe something works.

Example: 

Venture capitalists mete out small amounts of funds for many experiments. That encourages start-ups to abandon unsuccessful initiatives immediately and try new approaches—boosting their chances of success.

• Rarely consider positive research findings the final word. Progress comes when researchers refine a theory to explain situations in which the theory previously .