The science of business

A lot of entrepreneurs focus on their gut feel and intuition to get ahead in the game. This may not be the only or best approach and there is a lot that can be drawn from science, theory and research.

Cognitive research is showing that what we experience as spiritual competencies such as intuition, the power of purpose and instinctive responses, are often just the quick processing of lots of subconscious information and for the recognition of underlying patterns in systems below the surface of normal cognition. This implies that you act in a certain way – because you have seen it before, read it somewhere or reflected on a similar situation.

It is then tempting to act intuitively at all times – without taking the time to train your mind into better patterns of thought and development. It is also tempting to run the business without numbers, controls and just to rely on doing it the same way as it has always been done. It may work for some but as businesses grow it is important to continue processing at the required level of complexity to get all the pieces moving. A brain is an amazing tool that can be used for this complex type of analysis and many argue that this is what makes us so uniquely human.

While the ability to draw deeply from your own thoughts may take years to perfect – there are also analytical tools that are used to break down problems and allow for better holistic reasoning. If we understand the underlying parameters and their implications – we can come to better decisions that take into consideration the limitations that are presented. Tools such as root cause analysis, modelling and forecasting gives us an indication of what will happen in future and gives us a clearer idea of the constraints. We can then come up with clearer strategies that are formed by taking into consideration the parameters that we This type of “innovation within boundaries” is something that no amount of modelling or analysis can reveal. It is just easier to reason and get to the best solution for the business when the data is presented clearly.

With the advent of big-data and a society that is both data-oriented with lots of computing power for analysis – new patterns and structures are being revealed and what was previously seen as intuitive or implied relationships are now being confirmed by large scale research and data sets that are being combined to reveal non-intuitive patterns.

Most interesting in the area of managerial economics and management sciences are the developments that happened as the results of disciplines such as project management, cost accounting, quality management, six sigma, value engineering and process and quality control taking root. These analytical disciplines have taken manufacturing from a haphazard activity to a precise and perfectible exercise. The application of the same principles to services yielded similar results. Large companies have used these approaches to achieve efficiencies where none were apparent or available intuitively. There are many examples where a better risk formula; a better production layout or different approaches to the value chain have disrupted industries and created value.

Most managers will frown when confronted with ideas such as linear programming, stochastic modelling, policy optimisation and business model simulation but in real terms, the complex interactions in large-scale businesses require these analytical dimensions to create new insights into actionable results. Where processes can be optimised and where the next breakthroughs will come from determines the innovation horizon of the modern business.

It is also important to realise that terminology such as internal rate of return (IRR), weighted average cost of capital (WACC), net present value (NPV) and other terms represent well-formed theories and tools that good managers use to decide where to next. Every industry has specific terminology and it is always important to understand what is behind those measures and norms and when to push the limit, and when to work with standards.

So while many managers are people oriented and shy away from analysis – with terms such as “analysis paralysis” being bandied about – we must remember that management has always been a science. Modern management started with the observation of concept such as the efficiency of the division of labour, modernised production systems and the effects of environment and structure on productivity and inspiration of workers.

There are still big questions that have not been answered in management science including a comprehensive analysis of the impact of specific interventions on the performance (financial and otherwise) of the firm. We are getting better but still no holistic theory of the firm has been developed. In part, the challenge is that academic research lags corporate research due to the better funding (driven by the profit motive) that is present in the corporate sector.

Innovation and design thinking is another frontier that is highlighting the need for analytics and data-driven design. More consumer preference information is available and the analysis of this rich source of data is leading to new products, better understanding of preferences and ultimately better products and services to consumers.

We can never forget that customers, employees and shareholders are still human. No amount of analytical thinking will change that. It does mean that we need mastery of spiritual and emotional competencies to effectively manage and build teams and organisations that are purposeful. We can use analytics to better understand aggregate behaviour but we must also be careful not to ignore the different, the strange and the unexplained or unanalysed. We must also not err on the side of ignoring the facts and relying on charisma, intuition and good people skills to drive results.

Conclusion

The aim of this article was to show that management is still a science and while it is often easy to get lost in the detail of day to day management that is important to look up sometimes and ask what is going on here. The science and scientific method in business is required to make sense of the complex arrangements that exist and that can