www.hbr.orgManagers often makesignificant business decisionsbased on little more thanconvincing book

www.hbr.orgManagers often makesignificant business decisionsbased on little more thanconvincing book jacketblurbs. They should holdthemselves—and theexperts—to a higherstandard.Why Hard-NosedExecutives ShouldCare AboutManagementTheoryby Clayton M. Christensen and Michael E. RaynorReprint R0309DManagers often make significant business decisions based on littlemore than convincing book jacket blurbs. They should holdthemselves—and the experts—to a higher standard.Why Hard-NosedExecutives ShouldCare AboutManagement TheoryCOPYRIGHT © 2003 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.by Clayton M. Christensen and Michael E. RaynorImagine going to your doctor because you’renot feeling well. Before you’ve had a chanceto describe your symptoms, the doctor writesout a prescription and says, “Take two of thesethree times a day, and call me next week.â€â€œBut—I haven’t told you what’s wrong,†yousay. “How do I know this will help me?â€â€œWhy wouldn’t it?†says the doctor. “Itworked for my last two patients.â€No competent doctors would ever practicemedicine like this, nor would any sane patientaccept it if they did. Yet professors and consultants routinely prescribe such generic advice,and managers routinely accept such therapy, inthe naive belief that if a particular course of action helped other companies to succeed, itought to help theirs, too.Consider telecommunications equipmentprovider Lucent Technologies. In the late1990s, the company’s three operating divisionswere reorganized into 11 “hot businesses.†Theidea was that each business would be runlargely independently, as if it were an internalentrepreneurial start-up. Senior executives pro-harvard business review • september 2003claimed that this approach would vault thecompany to the next level of growth and profitability by pushing decision making down thehierarchy and closer to the marketplace,thereby enabling faster, better-focused innovation. Their belief was very much in fashion; decentralization and autonomy appeared to havehelped other large companies. And the startups that seemed to be doing so well at the timewere all small, autonomous, and close to theirmarkets. Surely what was good for them wouldbe good for Lucent.It turned out that it wasn’t. If anything, thereorganization seemed to make Lucent slowerand less flexible in responding to its customers’needs. Rather than saving costs, it added awhole new layer of costs.How could this happen? How could a formula that helped other companies becomeleaner, faster, and more responsive havecaused the opposite at Lucent?It happened because the management teamof the day and those who advised it acted likethe patient and the physician in our opening vi-page 1 of 9Why Hard-Nosed Executives Should Care About Management TheoryClayton M. Christensen is the Robertand Jane Cizik Professor of Business Administration at Harvard Business Schoolin Boston. Michael E. Raynor is a director with Deloitte Research and aprofessor at the Richard Ivey School ofBusiness in London, Ontario, Canada.This article elaborates on a centraltheme of their forthcoming book, TheInnovator’s Solution (Harvard BusinessSchool Press, 2003).gnette. The remedy they used—forming small,product-focused, close-to-the-customer business units to make their company more innovative and flexible—actually does work, whenbusiness units are selling modular, self-contained products. Lucent’s leading customersoperated massive telephone networks. Theywere buying not plug-and-play products but,rather, complicated system solutions whosecomponents had to be knit together in an intricate way to ensure that they worked correctlyand reliably. Such systems are best designed,sold, and serviced by employees who are nothindered from coordinating their interdependent interactions by being separated into unconnected units. Lucent’s managers used a theory that wasn’t appropriate to theircircumstance—with disastrous results.Theory, you say? Theory often gets a bumrap among managers because it’s associatedwith the word “theoretical,†which connotes“impractical.†But it shouldn’t. A theory is astatement predicting which actions will lead towhat results and why. Every action that managers take, and every plan they formulate, isbased on some theory in the back of theirminds that makes them expect the actions theycontemplate will lead to the results they envision. But just like Monsieur Jourdain inMolière’s Le Bourgeois Gentilhomme, whodidn’t realize he had been speaking prose all hislife, most managers don’t realize that they arevoracious users of theory.Good theories are valuable in at least twoways. First, they help us make predictions.Gravity, for example, is a theory. As a statement of cause and effect, it allows us to predictthat if we step off a cliff we will fall, withoutrequiring that we actually try it to see whathappens. Indeed, because reliable data areavailable solely about the past, using solid theories of causality is the only way managers canlook into the future with any degree of confidence. Second, sound theories help us interpretthe present, to understand what is happeningand why. Theories help us sort the signals thatportend important changes in the future fromthe noise that has no strategic meaning.Establishing the central role that theoryplays in managerial decision making is the firstof three related objectives we hope to accomplish in this article. We will also describe howgood theories are developed and give an idea ofhow a theory can improve over time. And, fi-harvard business review • september 2003nally, we’d like to help managers develop asense, when they read an article or a book, forwhat theories they can and cannot trust. Ouroverarching goal is to help managers becomeintelligent consumers of managerial theory sothat the best work coming out of universitiesand consulting firms is put to good use—andthe less thoughtful, less rigorous work doesn’tdo too much harm.Where Theory Comes FromThe construction of a solid theory proceeds inthree stages. It begins with a description ofsome phenomenon we wish to understand. Inphysics, the phenomenon might be the behavior of high-energy particles; in business, itmight be innovations that succeed or fail inthe marketplace. In the exhibit at right, thisstage is depicted as a broad foundation. That’sbecause unless the phenomenon is carefullyobserved and described in its breadth andcomplexity, good theory cannot be built. Researchers surely head down the road to badtheory when they impatiently observe a fewsuccessful companies, identify some practicesor characteristics that these companies seemto have in common, and then conclude thatthey have seen enough to write an article orbook about how all companies can succeed.Such articles might suggest the following arguments, for example:• Because Europe’s wireless telephone industry was so successful after it organizedaround a single GSM standard, the wireless industry in the United States would have seenhigher usage rates sooner if it, too, had agreedon a standard before it got going.• If you adopt this set of best practices forpartnering with best-of-breed suppliers, yourcompany will succeed as these companies did.Such studies are dangerous exactly becausethey would have us believe that because a certain medicine has helped some companies, itwill help all companies. To improve understanding beyond this stage, researchers need tomove to the second step: classifying aspects ofthe phenomenon into categories. Medical researchers sort diabetes into adult onset versusjuvenile onset, for example. And managementresearchers sort diversification strategies intovertical versus horizontal types. This sorting allows researchers to organize complex and confusing phenomena in ways that highlight theirmost meaningful differences. It is then possiblepage 2 of 9Why Hard-Nosed Executives Should Care About Management TheoryPredictionFormation of a theory:A statement of whatcauses what and whyCategorizationObservation and descriptionof the phenomenonharvard business review • september 2003ConfirmationAnomalyCopyright © 2003Harvard Business SchoolPublishing Corporation.All rights reserved.to tackle stage three, which is to formulate ahypothesis of what causes the phenomenon tohappen and why. And that’s a theory.How do researchers improve this preliminary theory, or hypothesis? As the downwardloop in the diagram below suggests, the processis iterative. Researchers use their theory to predict what they will see when they observe further examples of the phenomenon in the various categories they had defined in the secondstep. If the theory accurately predicts whatthey are observing, they can use it with increasing confidence to make predictions in similarcircumstances.1In their further observations, however, researchers often see something the theory cannot explain or predict, an anomaly that suggests something else is going on. They mustthen cycle back to the categorization stage andadd or eliminate categories—or, sometimes, rethink them entirely. The researchers then buildan improved theory upon the new categorization scheme. This new theory still explains theprevious observations, but it also explains thosethat had seemed anomalous. In other words,the theory can now predict more accuratelyhow the phenomenon should work in a widerrange of circumstances.To see how a theory has improved, let’s lookat the way our understanding of internationaltrade has evolved. It was long thought thatcountries with cheap, abundant resourceswould have an advantage competing in industries in which such resources are used as important inputs of production. Nations with inexpensive electric power, for example, wouldhave a comparative advantage in making products that require energy-intensive productionmethods. Those with cheap labor would excelin labor-intensive products, and so on. This theory prevailed until Michael Porter saw anomalies the theory could not account for. Japan,with no iron ore and little coal, became a successful steel producer. Italy became the world’sdominant producer of ceramic tile, eventhough its electricity costs were high and it hadto import much of the clay.Porter’s theory of competitive clusters grewout of his efforts to account for these anomalies. Clusters, he postulated, lead to intensecompetition, which leads companies to optimize R&D, production, training, and logisticsprocesses. His insights did not mean that priornotions of advantages based on low-cost resources were wrong, merely that they didn’t adequately predict the outcome in every situation. So, for example, Canada’s large pulp andpaper industry can be explained in terms of relatively plentiful trees, and Bangalore’s successin computer programming can be explained interms of plentiful, low-cost, educated labor.But the competitive advantage that certain industries in Japan, Italy, and similar places haveachieved can be explained only in terms of industry clusters. Porter’s refined theory suggeststhat in one set of circumstances, where someotherwise scarce and valuable resource is relatively abundant, a country can and should exploit this advantage and so prosper. In anotherset of circumstances, where such resources arenot available, policy makers can encourage thedevelopment of clusters to build process-basedcompetitive advantages. Governments of nations like Singapore and Ireland have used Porter’s theory to devise cluster-building policiesthat have led to prosperity in just the way hisrefined theory predicts.We’ll now take a closer look at three aspectsof the theory-building process: the importanceof explaining what causes an outcome (insteadof just describing attributes empirically associated with that outcome); the process of categorization that enables theorists to move fromtentative understanding to reliable predictions;and the importance of studying failures tobuilding good theory.Pinpointing CausationIn the early stages of theory building, peopletypically identify the most visible attributes ofthe phenomenon in question that appear tobe correlated with a particular outcome anduse those attributes as the basis for categorization. This is necessarily the starting point oftheory building, but it is rarely ever more thanan important first step. It takes a while to develop categories that capture a deep understanding of what causes the outcome.Consider the history of people’s attempts topage 3 of 9Why Hard-Nosed Executives Should Care About Management Theoryfly. Early researchers observed strong correlations between being able to fly and havingfeathers and wings. But when humans attempted to follow the “best practices†of themost successful flyers by strapping featheredwings onto their arms, jumping off cliffs, andflapping hard, they were not successful because, as strong as the correlations were, thewould-be aviators had not understood the fundamental causal mechanism of flight. Whenthese researchers categorized the world interms of the most obvious visible attributes ofthe phenomenon (wings versus no wings,feathers versus no feathers, for example), thebest they could do was a statement of correlation—that the possession of those attributes isassociated with the ability to fly.Researchers at this stage can at best expresstheir findings in terms of degrees of uncertainty: “Because such a large percentage ofthose with wings and feathers can fly whenthey flap (although ostriches, emus, chickens,and kiwis cannot), in all probability I will beable to fly if I fabricate wings with feathersglued on them, strap them to my arms, and flaphard as I jump off this cliff.†Those who use research still in this stage as a guide to actionoften get into trouble because they confuse thecorrelation between attributes and outcomeswith the underlying causal mechanism. Hence,they do what they think is necessary to succeed,but they fail.A stunning number of articles and booksabout management similarly confuse the correlation of attributes and outcomes with causality. Ask yourself, for example, if you’ve everseen studies that:• contrast the success of companies fundedby venture capital with those funded by corporate capital (implying that the source of capitalfunding is a cause of success rather than merelyan attribute that can be associated with a company that happens to be successful for somecurrently unknown reason).• contend that companies run by CEOs whoare plain, ordinary people earn returns toshareholders that are superior to those of companies run by flashy CEOs (implying that certain CEO personality attributes cause companyperformance to improve).• assert that companies that have diversified beyond those SIC codes that define theircore businesses return less to their shareholdersthan firms that kept close to their core (thusharvard business review • september 2003leaping to the conclusion that the attributes ofdiversification or centralization cause shareholder value creation).• conclude that 78% of female home ownersbetween the ages of 25 and 35 prefer this product over that one (thus implying that the attributes of home ownership, age, and gendersomehow cause people to prefer a specificproduct).None of these studies articulates a theory ofcausation. All of them express a correlation between attributes and outcomes, and that’s generally the best you can do when you don’t understand what causes a given outcome. In thefirst case, for example, studies have shown that20% of start-ups funded by venture capitalistssucceed, another 50% end up among the walking wounded, and the rest fail altogether.Other studies have shown that the success rateof start-ups funded by corporate capital ismuch, much lower. But from such studies youcan’t conclude that your start-up will succeed ifit is funded by venture capital. You must firstknow what it is about venture capital—themechanism—that contributes to a start-up’ssuccess.In management research, unfortunately,many academics and consultants intentionallyremain at this correlation-based stage of theorybuilding in the mistaken belief that they can increase the predictive power of their “theoriesâ€by crunching huge databases on powerful computers, producing regression analyses that measure the correlations of attributes and outcomes with ever higher degrees of statisticalsignificance. Managers who attempt to beguided by such research can only hope thatthey’ll be lucky—that if they acquire the recommended attributes (which on average areassociated with success), somehow they toowill find themselves similarly blessed with success.The breakthroughs that lead from categorization to an understanding of fundamentalcausality generally come not from crunchingever more data but from highly detailed fieldresearch, when researchers crawl inside companies to observe carefully the causal processes atwork. Consider the progress of our understanding of Toyota’s production methods. Initially,observers noticed that the strides Japanesecompanies were making in manufacturing outpaced those of their counterparts in the UnitedStates. The first categorization efforts were di-page 4 of 9Why Hard-Nosed Executives Should Care About Management TheoryUnfortunately, manymanagement researchersare so focused on howcompanies succeed thatthey don’t study failure.rected vaguely toward the most obvious attribute—that perhaps there was something inJapanese culture that made the difference.When early researchers visited Toyotaplants in Japan to see its production methods(often called “lean manufacturingâ€), though,they observed more significant attributes of thesystem—inventories that were kept to a minimum, a plant-scheduling system driven by kanban cards instead of computers, and so on. Butunfortunately, they leaped quickly from attributes to conclusions, writing books assuringmanagers that if they, too, built manufacturingsystems with these attributes, they wouldachieve improvements in cost, quality, andspeed comparable to those Toyota enjoys.Many manufacturers tried to make their plantsconform to these lean attributes—and whilemany reaped some improvements, none cameclose to replicating what Toyota had done.The research of Steven Spear and KentBowen has advanced theory in this field fromsuch correlations by suggesting fundamentalcauses of Toyota’s ability to continually improve quality, speed, and cost. Spear went towork on several Toyota assembly lines for sometime. He began to see a pattern in the way people thought when they designed any process—those for training workers, for instance, or installing car seats, or maintaining equipment.From this careful and extensive observation,Spear and Bowen concluded that all processesat Toyota are designed according to four specific rules that create automatic feedbackloops, which repeatedly test the effectivenessof each new activity, pointing the way towardcontinual improvements. (For a detailed account of Spear and Bowen’s theory, see “Decoding the DNA of the Toyota Production System,†HBR September–October 1999.) Usingthis mechanism, organizations as diverse ashospitals, aluminum smelters, and semiconductor fabricators have begun achieving improvements on a scale similar to Toyota’s, eventhough their processes often share few visibleattributes with Toyota’s system.Moving Toward PredictabilityManned flight began to be possible whenDaniel Bernoulli’s study of fluid mechanicshelped him understand the mechanism thatcreates lift. Even then, though, understandingthe mechanism itself wasn’t enough to makemanned flight perfectly predictable. Furtherharvard business review • september 2003research was needed to identify the circumstances under which that mechanism did anddid not work.When aviators used Bernoulli’s understanding to build aircraft with airfoil wings, some ofthem still crashed. They then had to figure outwhat it was about those circumstances that ledto failure. They, in essence, stopped asking thequestion, “What attributes are associated withsuccess?†and focused on the question, “Underwhat circumstances will the use of this theorylead to failure?†They learned, for example,that if they climbed too steeply, insufficient liftwas created. Also, in certain types of turbulence, pockets of relatively lower-density airforming under a wing could cause a suddendown spin. As aviators came to recognize thosecircumstances that required different technologies and piloting techniques and others thatmade attempting flight too dangerous,manned flight became not just possible but predictable.In management research, similar breakthroughs in predictability occur when researchers not only identify the causal mechanism thatties actions to results but go on to describe thecircumstances in which that mechanism doesand does not result in success. This enablesthem to discover whether and how managersshould adjust the way they manage their organizations in these different circumstances.Good theories, in other words, are circumstancecontingent: They define not just what causeswhat and why, but also how the causal mechanism will produce different outcomes in different situations.For example, two pairs of researchers haveindependently been studying why it is so difficult for companies to deliver superior returnsto shareholders over a sustained period. Theyhave recently published carefully researchedbooks on the question that reach opposing conclusions. Profit from the Core observes that thefirms whose performance is best and lasts longest are, on average, those that have soughtgrowth in areas close to the skills they’d honedin their core businesses. It recommends thatother managers follow suit. Creative Destruction, in contrast, concludes that because mostattractive businesses ultimately lose their luster, managers need to bring the dynamic workings of entrepreneurial capitalism inside theircompanies and be willing to create new corebusinesses.page 5 of 9Why Hard-Nosed Executives Should Care About Management TheoryFor most managers,trying out a new idea tosee if it works is simplynot an option: There istoo much at stake.Because they’ve juxtaposed their work insuch a helpful way, we can see that what theresearchers actually have done is define thecritical question that will lead to the predictability stage of the theory-building cycle: “Under what circumstances will staying close to thecore help me sustain superior returns, andwhen will it be critical to set the forces of creative destruction to work?†When the researchers have defined the set of different situationsin which managers might find themselves relative to this question and then articulated a circumstance-contingent theory, individuals canbegin following their recommendations withgreater confidence that they will be on theright path for their situation.Circumstance-contingent theories enablemanagers to understand what it is about theirpresent situation that has enabled their strategies and tactics to succeed. And they help managers recognize when important circumstancesin their competitive environment are shiftingso they can begin “piloting their plane†differently to sustain their success in the new circumstance. Theories that have advanced to thisstage can help make success not only possibleand predictable but sustainable. The work ofbuilding ever-better theory is never finished. Asvaluable as Porter’s theory of clusters hasproven, for example, there is a great opportunity for a researcher now to step in and find outwhen and why clusters that seem robust candisintegrate. That will lead to an even more robust theory of international competitive advantage.The Importance of FailuresNote how critical it is for researchers, oncethey have hypothesized a causal mechanism,to identify circumstances in which companiesdid exactly what was prescribed but failed. Unfortunately, many management researchersare so focused on how companies succeed thatthey don’t study failure. The obsession withstudying successful companies and their “bestpractices†is a major reason why platitudesand fads in management come and go withsuch alarming regularity and why much earlystage management thinking doesn’t evolve tothe next stage. Managers try advice out because it sounds good and then discard it whenthey encounter circumstances in which therecommended actions do not yield the predicted results. Their conclusion most often is,harvard business review • september 2003“It doesn’t work.â€The question, “When doesn’t it work?†is amagical key that enables statements of causality to be expres…