This essay seeks to examine and discuss the primary reasons why business theory is inconsistent with business practice.
The main arguments put forth are the changing environmental forces of the market and the folly of assumptions.
The essay further gives explains how two pertinent business theories, Maslow's Need Hierarchy Theory and BCG Matrix fail to stand their ground in reality.
A business theory involves a set of assumptions, propositions, or accepted facts. Business theories were developed to explain cause and effect relationships and to guide management decision-making. (http://www.answers.com/topic/theory)
On the other hand, "business practice encompasses the methods, procedures, processes, and rules employed or followed by a firm in the pursuit of its objectives". (http://www.businessdictionary.com/definition/business-practice.html)
While business practice is reality, business theory is a mere perception of reality.
Business theory is never in tune with business practice. This is due to two reasons. First is due to the constant modernizationÂ and changes in the environment.
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In today's world, innovation is the buzz word. The global market is forever evolving, with the trends fine tuning themselves in accordance to consumer tastes and preferences, government policies and economic factors. Invariably, business theory is always out of sync with business practice.
Â Business theory serves as a guiding force, but never as the concrete truth. Since the future is uncertain and the business environment is constantly changing, even the soundest business theories sooner or later become archaic.Â
A lot of research has been done to highlight how the rate of change is rising exponentially. Much of this change is being driven by innovation, and to compound the complexities, the rate of innovation has itself accelerated. The impact on the global economy is significant, and every industry in every sector has seen major adjustments in recent years. In some industries, the rate of change has drastically risen so much that product life cycles are now thought of in terms of weeks or months, and no longer counted in years.
Hence, with accelerating change, shrinking product life cycles, increasing competition, vast amounts of information, and unrelenting demand for higher quality and productivity, there is significant pressure on organizations to find new ways to manage. Relying on static business theories will prove to be fatal.
(The Theory of Business, Complexity, and Getting Work Done
By Michael Kaufman, Principal, InnovationLabs LLC)
The second reason why business theory is incompatible with business practice can be attributed to the fact that business theories are formulated under many assumptions. Business theories presume ideal conditions, which is never the case in the real world. Most of the managers agree that they barely draw from business theories and academics while conducting their daily affairs.Â
As explained in Richard Whittington's book - what is strategy?...
Business theories are important. They are fundamental assumptions about key relationships in day-to-day business life. Theories guide us on what to expect, in what direction we should tread and what should be the results of our actions and decisions.
These theories are often not very explicit or very formal. Whether building from experience or from books, all tend to have own private assumptions about how things work and how to get things done. Providing the basic grounding for our behavior,Â ArgyrisÂ (1977) calls these assumptions as the 'theories of action'.
(http://strategic-business-planning.suite101.com/article.cfm/comparisons_of_four_theories_of_action Date accessed-23/8/2010)
EXPLANATION THROUGH EXAMPLES:
Most of us are familiar with Abraham Maslow's Hierarchy of Needs. He set up a hierarchy of five levels of human needs. According to him, human beings do not feel the higher level of needs until the lower level of needs have been thoroughly satisfied.
Needs at the bottom of the pyramid are basic physical requirements such as food, water and sleep. Once these lower-level needs have been met, people can move on to the next level of needs, which are for safety and security.
As people progress up the pyramid, needs become increasingly psychological and social. Soon, the need for love, friendship and intimacy become important. Further up the pyramid, the need for personal esteem and feelings of accomplishment take priority. At the highest level, Maslow emphasized the importance of self-actualization, where human beings strive to achieve their maximum potential.
Always on Time
Marked to Standard
Maslow's theory has been frequently mentioned in books of marketing. If a marketer can understand how people think and which their needs are, only then he can segment the market effectively and make the right positioning of their products.
While Maslow's theory has its uses, most modern management experts and psychologists regard it with suspicion. Human behaviour is hard to predict. The role of individuality means that we are all provoked by different needs, impulses and motivations. Marketers believe there's no reason why you couldn't satisfy higher-level needs before completely satisfying all lower-level needs, as long as you understand that some low-level needs are absolutely essential.
External environmental factors influence human needs immensely. In many cultures, social needs are more important. For the youth, esteem needs enjoy a greater precedence over others. There are many products in today's market that may not reflect a consumer's needs, but he shall be more than happy to buy them when offered. Nowadays, marketers have moved from 'satisfying needs' to 'creating needs.' Companies construct their advertisements to create a need in the consumer's mind even if they were not interested in the product in the first place.
BCG Growth-Share Matrix
In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors:
Â Â Â Â Â Â BCG Growth-Share Matrix
Resources are allocated to business units according to where they are situated on the grid as follows:
Cash Cow - a business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units.
Star - a business unit that has a large market share in a fast growing industry. Stars may generate cash, but as the market grows, more investment is required to sustain their lead. If successful, a star will become a cash cow when its industry matures.
Question Mark (or Problem Child) - a business unit that has a small market share in a high growth market. These business units require resources to enlarge their market share. However it is not certain if the business units succeed to become stars.
Dog - a business unit that has a small market share in a mature industry. A dog may not require extensive cash, but it utilizes precious capital that could be exploited elsewhere. A dog should be liquidated if there is little prospect for it to gain market share.
(source: http://www.quickmba.com/strategy/matrix/bcg/ Date accessed 08/01/2010
Internet Center for Management and Business Administration)
As outlined in book "Marketing Management and Strategy", by Peter Doyle and Philip Stern (pg 109):
The assumption that the various SBUs are independent of each other is wrong. If two SBUs share resources, disinvesting in the dog could wane the star.
Using market growth as the only determinant of industry attractiveness and market share that of competitive strength is inadequate. There are numerous other factors that need to be considered.
As explained in Pankaj Ghemawat's "Competition and Businesss Strategy in Historical Perspective", page 51:
Such theories propagated analytical detachment, instead of building on the insight and knowledge that stems from experience.
The model focusses on short-term cost reduction, instead of investing on long-term development of competitiveness.
The determination of how resources should be allocated based on historical performance was inherently incorrect.
As explained By Philip Kotler, in the book "Principles of Marketing", the BCG matrix focussed solely on classifying current business, and offered nothing in relation to future planning.