Sacha Chua

“We aim to foster independent minds with an impact on international business and society at large by offering research-based teaching that meets the highest international standards.” This might sound familiar. It is part of the Economics & Business department’s mission statement.

During my graduate studies, I shared a flat with Richard Engelfriet. If ever I’ve met someone with an independent mind, it is Richard. In the past few years, Richard has become a best-selling author of several management books. He recently published a book about management theories. Richard’s message: The secret behind managerial success is… still a secret.

In his book, Richard challenges a phenomenally large number of management theories: Simon Sinek’s golden circle, unique selling proposition, SMART targeting, disruptive innovation, customer intimacy, nudging, neuro-linguistic programming, influencers, Maslow’s pyramid, Kotter’s 8-step change model, lean and agile supply chains, insights discovery, Myers-Briggs Type Indicator, and De Caluwé’s color model and whatnot. You may have seen some of those theories discussed in your courses. According to Richard, a red ‘BULLSHIT!’ button should have started flashing in your independent mind when you first heard about those theories. His point is that those theories lack (1) a good theoretical foundation and (2) empirical support.

An example: Simon Sinek’s golden circle. Sinek’s TED Talk “How great leaders inspire action” went viral with over 30 million views. Sinek argues that great and inspiring organizations start with the ‘why’ of their products (“we believe in challenging the status quo”) then communicate ‘how’ they do it (“we make our products beautifully designed and easy to use”) and only then their ‘what’ (“we sell great computers”). Sinek claims that his theory is founded in biology: Our neocortex, the outer layer of our brains, would correspond to the ‘what’ level and our midbrain areas would be responsible for ‘why’ and ‘how’. Is there any scientific evidence that supports this claim? No, according to neuroscientist Paul Middlebrooks: “This is another example of someone co-opting popular brain science to tell a story, without regard for accuracy. I have a neuroscience PhD and can tell you we do not understand brain systems anywhere close to the point to make a claim like that. It’s laughable.”

For lack of theoretical underpinning, Richard searched for empirical evidence behind Sinek’s theory. He did not find any. He started with introspection: Why exactly did I buy the shoes I am currently wearing? Did the ‘why’ of the producers convince me? Or was it simply because the shoes fitted so well or looked so nice? Arguably, introspection is not hard empirical evidence (even though it may serve as quite a good bullshit detector). Sinek himself brings some empirical support to the fore, based on Apple. Apple is successful, says Sinek, because it starts with the ‘why.’ But does it really? Steve Jobs seems to claim something quite different: “Apple is a product company. We put the product ahead of anything else.”

I tend to agree with Richard’s assessment of Sinek’s golden circle. At the same time, my independent mind is critical of Richard’s claim that the secret behind managerial success… is still a secret. Take the unique selling proposition (USP). USP does have a sound theoretical foundation that has empirical support.

The theoretical underpinning comes from game theoretic models of product differentiation. I discuss such models in my textbook, Economics of Organizations and Markets, that you may have come across in my course. Here is a simple example of such a model. Imagine a beach full of sunlovers. Two ice cream vendors, Ben and Jerry, sell the exact same ice cream. At the start of the day, they decide where to locate their ice cream stands on the beach. After choosing their locations, they independently fix the price of the ice cream. Is Ben better off in a different location from Jerry (USP) than standing next to him (no USP)? The answer is ‘Yes!’ If Ben located next to Jerry, both would compete fiercely for the same consumers and gain little in profits. Ben is better off locating somewhere else (I will not bore you with the proof now – wait until you follow my course). The economics literature also presents empirical evidence that is consistent with the predictions of the theory. Driving schools charge higher prices when competitors are further away. High price-cost margins in the ready-to-eat cereal industry and in the beer market are to a large extent explained by product differentiation.

Your independent mind might now be shouting that these empirical studies need not prove that a USP is a successful business strategy. Indeed, while my textbook has a USP (it is the first textbook to combine industrial organization and organizational economics), I hardly sell a copy outside our university (probably because most Econ programs treat industrial organization and organizational economics in separate courses). Moreover, a high price-cost margin need not imply large profits if the firms’ sales are low. And if USP and business success are related, does the first cause the second or is it merely correlation?

All in all, I believe Richard provides a great service to the business community by scrutinizing popular management theories.

(As an aside, my sister is a management trainer and a dedicated believer in insights discovery, Myers-Briggs Type Indicator, and De Caluwé’s color model. Richard’s book helped me develop a simple three-step procedure to retort to my sister saying things like “such an argument can only come from a ‘blue’ person”: 1. claim that her theory lacks underpinning; 2. ask for empirical support; 3. argue that the empirical evidence (if any) is unscientific because the suggested causal inference is based on invalid identifying assumptions.)

More importantly, I hope this column has contributed to the independence of your mind in the way you think about management theories… so that I, in turn, have contributed to the department’s mission (even though Richard’s book makes me wonder whether the mission statement in and of itself contributes in any way to the department’s success).