The Management Fad Litmus Test

 

In last week’s blog I asked whatever happened to “life cycle estimating,” and essentially made the point that it was a management fad, similar in performance and (ironically) life cycle to other management fads. Conventional wisdom holds that whether or not a given hypothesis in the management science realm is valid or a craze is the proverbial test of time – if a business model theory is valid, it will probably make its way into a significant percentage of companies – but even here some invalid but long-lived hypotheses can become regarded as theories, taught by colleges and adapted by many (if not most) organizations. This state of affairs afflicts the management world more acutely than others due to the near-impossibility to conduct a controlled-environment experiment – there are simply too many parameters to identify, much less quantify or control, in the free, open, and competitive marketplace. So, what’s the reading PM population, exposed to hundreds of guidance documents, journal articles, and, yes, blogs, to do when evaluating all of these ideas? I believe I have a usable tool for performing such a discernment: the null hypothesis.

According to Ann Marie Helmenstein, PhD,

In a scientific experiment, the null hypothesis is the proposition that there is no effect or no relationship between phenomena or populations. If the null hypothesis is true, any observed difference in phenomena or populations would be due to sampling error (random chance) or experimental error. The null hypothesis is useful because it can be tested and found to be false, which then implies that there is a relationship between the observed data.[i]

As an example, let’s look at one of the aforementioned long-lived and widely-accepted theories that’s being taught at business schools and has been broadly used throughout many industries, but is, in my opinion, invalid, that the point of all management is to “maximize shareholder wealth.” Can this statement’s null hypothesis be disproven? If “maximize shareholder wealth” had a null hypothesis, I would posit that it would be “there exists several valid management techniques that are highly beneficial to the organization that have a negative impact on that organization’s shareholder wealth.”

Consider the following payoff grid:

Let’s dispense with Scenario C right off the bat. Any management action that harms the organization and decreases shareholder wealth is patently invalid. Similarly, I think we can all agree that Scenario B represents good management.

But to disprove the null hypothesis as stated, one would have to prove that both Scenarios A and D are empty sets, i.e., there are no valid management techniques that benefit the organization while decreasing shareholder wealth, or that the original assertion should have been re-phrased as “maximize shareholder wealth, even if it harms the organization.” Is it true that the A bin is empty, or the original theory cannot stand as phrased?

As for Scenario A, consider a new business. Its owner(s), technically speaking, deplete shareholder wealth beginning the accounting period after they have purchased inventory, due to depreciation. But this effect carries on beyond mere accounting nuance: typically, new businesses’ owners will work themselves excessively, with little or no recompence, in the effort to attract customers away from the competition. Sometimes they will mark down their inventories to cost, or even below, in order to attain market share, a widely-used tactic that, by definition, decreases shareholder wealth. Then there’s my oft-referenced example of the hostile takeover, where the acquiring business will often take a significant hit to their reserves and share price, while the target organizations will almost always see an increase in shareholder wealth. And yet, the organizations performing the takeover do so fully expecting this to happen, and the target organizations will typically resist. If Scenario A is empty, how does one explain these observable phenomena?

Strategies that fall in to Scenario D are common, from “going out of business” sales to actions that can lead to a “piercing the corporate veil.” According the The Balance Small Business website,

Corporations are separate entities from their shareholders, and in normal circumstances, if a corporation is sued, the individual shareholders and officers cannot be brought into the lawsuit. But there are cases in which the corporation's officers and shareholders could be sued for negligence or for debts; the action of bringing in these shareholders to be sued is called "piercing the corporate veil" or "lifting the corporate veil."

In the same way as corporate shareholders, the owners of a limited liability company (LLC), called "members," may also be sued personally for business debts and actions.[ii]

Given these observable management phenomena, Scenarios A and D are not empty sets; therefore, the null hypothesis is not disproven, indicating that a basic tenet of business school teaching is likely invalid.

So, that’s my management fad litmus test: just ask yourself, for any given hypothesis, has its null hypothesis been disproven, or even articulated? If not, you may want to be wary of participating in a fad.

[i] Retrieved from https://www.thoughtco.com/definition-of-null-hypothesis-and-examples-605436 on May 23, 2021, 17:50 MDT.

[ii] Retrieved from https://www.thebalancesmb.com/piercing-the-corporate-veil-definition-398410 , May 23, 2021, 18:23 MDT.