Monday, August 15, 2011

What is management knowledge and how do B-schools create that?

This blog post discusses how reasoning can shed light to what 'management knowledge' is in order to clarify what makes management research and management education relevant to managers. My interest in philosophy and psychology of reasoning inevitably got me to consider  how managers think about the issues they face. Despite plenty of reflection by management scholars on their practical relevance, the lack of any attention to the ability of managers to think is striking. When a manager is faced with a lot of information (e.g. market share is dropping, a competitor has introduced new products, and key sales people have resigned), managers will try to conceive reasons for these observations, and to come up with with different actions justified by seemingly good reasons.

Reasoning about an investment
Let's think of a manager who must decide whether to invest into an expensive IT project to improve customer satisfaction. Now, one may approach this decision using a simple financial model: if the NPV of increased profits is greater than the NPV of project costs, that is a pretty good reason to make the investment. One of course will then need a way to reason about the costs and benefits. Alternatively,  a manager who has taken a strategic management course might think in terms of capabilities. Can my competitors imitate or substitute the resource I am seeking to develop for a lower cost than I am investing? The IT system may not be a necessary resource, the first mover advantage may be insignificant, and the cost for competitors to copy the system may actually be lower than the initial cost of developing it through trial and error. If these three considerations are all true then there are  pretty good reasons not to invest.

Finance and strategy provide competing ways to reason about the decision. Both of them include some rather explicit inferences (e.g. formula to calculate NPV; the rule "if 2nd mover advantage is greater than 1st mover advantage then do not be the first mover"). These "ways of reasoning"  also require a lot of tacit knowledge (e.g. how to come up with an estimate of costs associated with an IT project; how to figure out the imitability of a potential new capability).

My hypothesis is that wise and stupid (is there a reason why the concept 'stupid' is absent from all theory?) managers are mostly distinguished by substantive (practical) quality of the reasons they conceive for their actions and choices rather than the logical validity of their thinking. Although cognitive psychologists have found clear and stable individual-level differences in the ability for critical reasoning, the lack of attention to imitability or NPV calculations is more likely to distinguish good and bad managers than the number of logical mistakes they make. Philosophy of mind would have us believe that reasoning has in general relatively  little to do with formal logic and a lot to do with the meanings we hold (I believe this view is advocated by Davidson and also John Searle in Rationality in Action - a book that is all about reasoning and very little about typical rationality).

Management education
The above example suggests that management education should enable students to reason about situations they will encounter at work. Managers ought to have the ability to utilize explicit knowledge in their reasoning (e.g. finance formulas, the VRIN criteria of the RBV -- if you believe in it). However, they should also have tacit skills to reason well -- to know what kind of things make resources imitable or substitutable. Is it not a bit strange that probably more than 95% of basic business strategy courses on this planet teach students that  inimitability is a necessary reason to assume a resource to be a sustainable source of value, yet less than 5% of the courses probably address at all how the imitability of a resource might be inferred!

It may seem quite uncontroversial to say that management education should teach people how to think about business problems and business decisions. Yet, there has been a substantial movement towards evidence-based management. This perspective suggests that management is no different from medicine and the key goal of management education should be to provide the right answers (I should mention that evidence-based medicine has been criticized quite a bit too, so medicine may not be about the correct answers either). The idea is that good management research figures out the right answers to problems faced my managers and that management education communicates these answers to people. While this approach may work in many areas, it seems to me that a lot of problems faced by managers are idiosyncratic and require non-trivial amount of reasoning to figure out. Once some management scholar has evidence on whether firms in industry X should  implement the  IT system Y, the window of opportunity has surely already closed.

If reasoning about problems and solutions is what managers do, then  management education needs to provide managers with theoretical concepts (such as imitability, first mover advantage, net present value) and teach the managers how to competently utilize those concepts.

Relevance of management research
I am working on a paper concerning the practical relevance of management research with my colleagues at Hanken: Saku Mantere and Eero Vaara. The paper is based on the conception of management knowledge as explicit and tacit ability to reason using a certain set of concepts. I am slightly concerned about giving out our argument in this blog because there are no clear rules -- at least in principle the journals want to only publish arguments that haven't been published before. In practice, it would probably make little difference if I published the conclusions of our main arguments in this obscure blog.

One conclusion we'll reach that I am particularly fond of concerns the practical relevance of individual articles. Since evidence-based management has limited applicability (basically answering only questions common to all companies and being very limited in its ability to help in thinking about idiosyncratic problems), we should not consider articles with clear prescriptions as more "practically relevant" than studies without prescriptions. In our mind, an article has practical relevance if it provides explicit or tacit examples of how to use theoretical concepts to think about real-life problems in a productive manner. For example, research on organizational identity has provided us a very useful concept that helps understand and solve problems in organizations even though the research provides almost no  prescriptions (it would be silly to expect evidence-based rules such as "companies in industry X should develop an organizational identity with characteristics Y&Z to improve profits").

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