Whenever I hear people talking about improving a firm’s performance, I want to know two things:
- Are they making empirically testable predictions, and
- What their framework for analysis is.
With respect to the first point, any advice given should be testable in practice. Advice is always a prediction – a hypothesis to be disproven. If it cannot be tested, it cannot be disproved. Good advice is always testable in the real world, and its effectiveness of can be borne out by observing real world experiences resulting from its use.
With respect to the second point, we always need to have a framework which allows us to develop insight into how a firm works. More precisely, how the economics of a firm works. A framework provides a way to think about a firm and to build insight about how the firm might be impacted due to changes in the many variables at play. In short, a framework allows us to predict what the firm’s future might look like.
Many people who dispense advice to firms, whether they be internal agents or consultants, lack useful frameworks for understanding and predicting the economic behaviour of a firm. Instead they tend to view the firm through the lens of whatever fad or label they are promoting as the program du jour, and rely on ideas and concepts that lack economic rigour and which may not be testable in practice.
Good advice can be reverse engineered – the person who gave the advice should be able to work backwards and explain how their advice obtained its results. In the absence of being able to do this, the result was more by chance than design, and more importantly there is no method for formulating good advice going forward.