(Preamble -- Empirical work -- Building knowledge)

High quality theory in strategy is unambiguous and rigorously derived, is true to the essentials of reality, produces refutable, measurable claims, and is often interdisciplinary. To date, formal methods have been underutilized in the development of strategy theory.

A fundamental aim of strategy research is to increase understanding of the core drivers of organizational performance, broadly construed. This requires that we develop a body of theoretical claims that identify valid connections between performance and its precedents. Such claims should be unambiguous, rigorously derived, consistent with the core drivers of the phenomenon under investigation, and measurable.

A theoretical claim is unambiguous when interpretation of its terms, premises, and conclusions do not vary from individual to individual. Such precision is necessary for progress for several reasons. Theorists must understand one another unambiguously in order to build on each other’s work. Empiricists must understand and agree upon what is being claimed in order to test a theory’s external validity. From a normative standpoint, imprecise theory is clearly no basis for consistent business practice.

A theoretical claim is rigorously derived when its conclusions do, in fact, follow from its stated premises. Rigorous derivation helps us assess the internal validity of a claim by allowing others to verify the claim independently. Moreover, theoretical rigor lays the foundation for a stream of literature rich in extensions and refinements as the “technology” of theory-generation advances (e.g., when new methods permit the generalization of earlier work).

Even before independent verification, theories are invariably subject to an important face validity check to ensure that theoretical claims are consistent with the core drivers of the phenomenon under investigation. Significant discrepancies may lead a theory to be rejected upon inspection. Note, however, that “core drivers” need not – indeed, should not – encompass every aspect of reality. Simple theories that suppress many facets of the real world may well pass this test.1

High quality theory also connects to reality in a second sense: The constructs in a theoretical claim must be measurable if the claim is to be tested, and potentially refuted, empirically. This is especially relevant in a field such as strategy which is centered on a phenomenon. To validate the connections between performance and its precedents that a theory predicts, we must be able to measure performance and those precedents.

Finally, phenomena in strategy, by their nature, touch on the domains of multiple disciplines such as economics, sociology, and psychology. An organization’s pursuit of a strategy typically is animated by the pursuit of economic gain, requires the coordinated efforts of social groups, and requires decision making in the face of complexity beyond the psychological bounds of individual managers. Consequently, many of the best theory-building efforts in strategy are interdisciplinary. High quality interdisciplinary research brings disciplines together in ways that make the combination more than the sum of the parts. 2

Theoretical work in strategy has relied on two classes of methods: natural-language arguments and more formal methods (e.g., mathematical analysis, high-level logic, simulations). Traditionally, natural-language arguments have been far more common than formal methods. This parallels the norm in management scholarship more broadly. 3 It is useful to reflect on the ability of each class of methods to produce claims that display the characteristics described above.

A natural-language argument, in the hands of a skilled practitioner, is a powerful tool. The strengths of this method are its accessibility and its flexibility. Verbally derived claims are ideal for injecting major new ideas into theoretical discourse. Because its treatment of premises, definitions, and conclusions is very unconstrained, verbal theory can point scholars in broad new directions without resolving all the details. 4

The most obvious drawback of natural-language theory is its inherent ambiguity. Words have multiple meanings, and these meanings can change over time as language evolves. This ambiguity has led at times to persistent confusion over key ideas in strategy. 5 Rigorous derivation is also an issue for natural-language theory. Verbal argumentation has no built-in mechanism to force a theorist to characterize, clearly and completely, the premises required to support his or her conclusions. Moreover, strategy scholars study phenomena so complex that it is difficult to maintain logical consistency around them with verbal arguments. The danger then of reliance on natural-language theory is that unstated assumptions and hidden inconsistencies in logic are difficult to ferret out, resulting in the potential for false claims to diffuse widely and to endure. 6

In contrast, formal methods—mathematical analysis, high-level logic, and simulations—are designed to generate theory that is unambiguous and rigorously derived. Each of these approaches forces the theorist to (i) provide a complete and precise statement of terms, premises, and conclusions; and (ii) demonstrate the logical consistency among these items. These are compelling features and, on balance, the contributors to this volume feel that formal methods should play a significantly larger role in the development of theory in strategy.

Formal methods, however, have genuine limitations that may prevent them from making valid connections between firm performance and its precedents. Each formal method has specific requirements regarding the form and scope of the premises it allows. For example, certain game theoretic analyses require the theorist to specify a game tree, identify agent payoffs for various outcomes, and make assumptions about players’ beliefs regarding each other’s strategy choices. This specificity is good in that it enforces clarity and rigor. A problem arises, however, when the requisite form and scope of the premises is not well-aligned with what scholars believe to be core drivers of the phenomenon under examination. This can lead to theories that lack face validity. 7 A common challenge for all theorists is to craft theory that reflects the rich reality of strategy yet simplifies enough to be unambiguous and rigorous.

In sum, we urge scholars to ask the following questions when they pursue theoretical research in strategy:
  • Are their theoretical claims unambiguous?
  • Can their conclusions be derived rigorously from explicit premises?
  • Do their premises sufficiently capture the core drivers of the phenomena they study?
  • Have their theories produced propositions with measurable implications that can be refuted empirically?
  • Do their theories merge ideas from multiple disciplines in ways that produce something greater than the simple sum of the discipline-based ideas?

1 For example, Akerlof’s (1970) Nobel prize-winning paper, “The Market for Lemons,” contains a highly stylized (unrealistic) model of markets. Even so, most would agree that it successfully captures several key implications of asymmetric information between buyers and sellers.

2 A relevant example is Henderson and Clark’s (1990) classic paper on architectural innovation: there, notions from information economics, organizational theory, and product design combine to produce an explanation for the failure of established firms that no single discipline could produce. In contrast, weak theory efforts merge ideas from multiple disciplines by simply tacking them together—sometimes without reconciling the very different premises that motivate the underlying disciplines. Mongrel theory papers are rarely of high quality.

3 For example, Adner et al. (2009) find that the Academy of Management Review published only one article that actually used a formal approach in the period from 1998 to 2007.

4 Economics, for example, has a rich tradition of verbal claims that significantly changed the trajectory of its theoretical discourse. The work of Smith, Coase, and Williamson are but a few well known examples.

5 Postrel (2004), for example, devotes an entire paper to sorting through the many meanings of the term “competitive advantage.”

6 This process is often reinforced by poorly-crafted theory papers that rely on irrefutable tautology. For instance, a paper might define a capability as that which drives firm performance and then hypothesize that high-performing firms possess superior capabilities. Thus, it is not whether a theoretical claim is ultimatelyrefuted that determines its quality, but whether it is refutable. A piece of theory may be judged to be high-quality because it provides important clarification of previously murky concepts, even though it is later refuted by empirical analysis.

7 For example, many strategy scholars consider the “rational expectations” assumption required in some economic models to be grossly inconsistent with the knowledge of real-world managers and, more importantly, inconsistent in a way that misses the essence of strategic decision making. Using such a model would unambiguously identify the rational expectations assumption and rigorously demonstrate its implications but, having heard this assumption, many would reject the validity of its implications on its face.