In Defense of Business Theory
Perhaps no other word is as misused in the business world as the word 'theory'. It's one of those words that seems to have different meanings to business scholars and practitioners, and as result a gap develops between two groups who are ideally suited to each help other.
So, what is a theory? A theory is a scientific attempt to explain a phenomenon. That's it. When we hear the word 'theory' used on TV shows like Law & Order it's generally something in a context such as "what is your theory of the crime?". The actors should say "what is your hypothesis?". There is a huge difference between the two.
Simply stated, here is how a theory is developed: A researcher develops research questions and hypotheses (an hypothesis is essentially an educated guess as to what the outcomes will be); then collects data via a survey and/or qualitative methodology. The data is analyzed, generally using multivariate (i.e. measuring the influence of independent variables on a dependent variable) statistical techniques, and findings are produced that support or do not support the hypotheses. Findings are published and the study is replicated to see if the same findings are generated. If, after multiple tests, findings are predictable a theory is formed. A theory isn't a law. A theory isn't an absolute fact, it's simply to tool to help people in their decision making.
For example, let's take a look at Herzberg's Two-Factor Theory, one of the most frequently cited organizational behavior theories in MBA programs. Common sense tells us people are motivated by money, right? A lot of managers still believe this to be a self-evident truth. However, in 1959, Dr. Fredrick Herzberg found that employees are generally not motivated by money. They are satisfied by money, but are motivated by factors such as recognition and achievement. Dr. Herzberg's findings have been replicated and supported numerous times.
Some people, of course, are motivated by money. You may know someone who is. But, theoretically speaking, most employees will be motivated by non-monetary factors. Yes, they expect to be compensated fairly, but managers who assume the promise of paying an employee more will enhance their performance are likely to be disappointed. To improve employee performance the manager should be focusing on issues of advancement, job design, giving responsibility etc.
Managers and entrepreneurs who disavow business theory as fluff, or not reflective of the real-world are doing themselves a disservice. A business theory is actually a scientifically produced reflection of a real-world problem. That said, professors and researchers have to remember that one study does not make a theory. Findings that support a hypothesis are a great start, but scholars need to be committed to replicating the findings to add practical value.
