theory

""A theory is a statement predicting which actions will lead to what results and why"" (Christensen, 2003b).

Theories may have the connotation as being impractical in the world of management. Just the opposite is true. All decisions made and actions taken by managers are based on some theory. These theories may be implicit more often than explicit, but if that is the case, the ability to improve decisions and learn from experience becomes limited and haphazard.

An adaptive learning organization must make theories explicit in order to assess their worthiness and detect when they need to be revised. In cases where a theory has not been developed, the hypotheses being tested must be defined.

Importance of theory to effective management --
Well managed and developed theories help in several ways.

• First, they help to explain cause and effect which gives some comfort that the next decision based on a well tested theory will be sound.
• Second, the understanding embodied in a theory is the basis for sorting out information from the noise of the environment enabling more rapid insights to develop as to what is happening.
• Third, the theory provides an established set of hypotheses against which action results should be continually tested to reveal when and where the theory may no longer be valid.

Theory development --
There are three stages to effective theory development.

• Phenomenon description -- This stage involves the development and acquisition of facts regarding a topic of interest, where a theory would be useful to the business. Care that correlation is not mistaken for cause and effect. The full breadth and complexity of the phenomenon needs to be examined.
• Sorting and categorization -- The second stage involves finding the affinity of the observations. Finding the similar characteristics provides clues as to potential relationships between the elements of observations or groups of observations. The objective of this stage is to find the meaningful differences within what starts as confusing and complex phenomena.
• Theory formulation -- Based on the understanding developed from the categorization of the phenomenon observations, a hypothesis is developed about what causes the phenomenon to happen and why it happens. The theory is now ready for testing.

Theory application --
Theories are behind all decisions, whether implicit or explicit. Decisions account for the soundness of the theory.

• In general, the newer a theory, the less that will be risked by those decisions that test the theory.
• Actions will be taken that result in a test being completed sooner than later.
• Well tested theories warrant decisions with greater resource commitment and risk, though the risk is reduced by the degree to which the theory is in fact valid.
• No theory should be assumed to be valid beyond the context in which it has been formulated and tested.
• Context includes time as well as place. No matter how well a theory is tested, it should never be blindly assumed to be valid. All decisions based on the theory should have an associated hypothesis test in order to detect when the validity of a theory begins to fade.

Relation to strategic management --

For a view of and relationship between theory, frameworks, and practice as it relates to strategy see framework.