Friday, May 3, 2024

ABCs against Business Illiteracy


There's nothing better for those seeking security in their businesses than being street smart and/or book smart. Experience comes with practice, and to compensate for the lack of hands-on experience, the idea is to have solid business literacy, understanding the most important management theories. However, it's often challenging to contextualize so many books and theories. The purpose of this article is to help you reorganize these ideas to make it much easier to reconcile with practical life.

On the other hand, even with vast practical experience, many individuals find themselves in a state of business illiteracy, which can limit their scope for success in their business lives.

Business administration is based on case studies, whether they're your own cases, cases that happened to your friends, or cases that happened to others, so reading is essential.

However, extensive reading of theories can overwhelm and confuse students and professionals in the field.

Faced with this scenario, there's a need to organize the different schools of thought in business administration in a more accessible and understandable manner. While some theories are widely recognized and contrasting, like Adam Smith's liberalism versus Karl Marx's communism (even if not so antagonistic, there's a comparison of opposites that can be relevant), other nuances of thought can blend and become less distinct for students and professionals.

In this approach, we propose an approach that aims to facilitate understanding of business administration theories by organizing them into theses and antitheses. By presenting different schools of thought in opposition to each other, we hope to create a clear and accessible reading map for those who wish to delve into the study of business administration. Through this approach, we aim to make the vast field of administration more comprehensible and accessible to all interested parties.

1 Liberalism (Adam Smith) vs. Communism (Karl Marx & Friedrich Engels):

The main antagonism in the ideas and philosophies of how to conduct an economy is the antagonism between Adam Smith's liberalism, which advocates economic freedom, free markets, and non-governmental intervention in the economy; and Marx and Engels' communism, which advocates collective ownership of the means of production, the abolition of social classes, and equitable distribution of resources. While liberalism emphasizes wealth generation and suffers from unequal distribution and the pursuit of individual profit, communism prioritizes equality and collective cooperation without as much concern for wealth generation.

2 Scientific Management Theory (Frederick Taylor) vs. Human Relations Theory (Elton Mayo):

The second most important counterpoint is Taylorism, which emphasizes efficiency and maximization of production through scientific analysis of work processes and division of labor into simple and repetitive tasks.
On the other hand, Mayo's Human Relations Theory highlights the importance of social relationships and the work environment in the productivity and satisfaction of workers, proposing a more humanized and participative approach.

3 Organizational Development Theory (Kurt Lewin) vs. Contingency Theory (James Burns, Lawrence Stalker):

Organizational Development emphasizes the internal management of changes, the continuous improvement of organizations through participation and continuous development of people and processes.
On the other hand, Contingency Theory focuses on the external environment; changes must be driven by what happens in the market.

While Contingency Theory emphasizes adapting the organizational structure to the external environment, Organizational Development focuses on planned change and internal organization development through human intervention.


While Kurt Lewin emphasized the importance of organizational change as a process that involves deconstructing existing norms (unfreezing), introducing new practices or processes (shifting), and stabilizing new norms (refreezing), Burns and Stalker's Contingency Theory emphasizes the idea that effective organizational structure is contingent on specific characteristics of the external environment.

Lewin viewed change as a process involving all levels of the organization and the need for a participatory approach to involve organizational members in the change process. On the other hand, Burns and Stalker argued that different environments require different forms of organizational structure and that organizational effectiveness depends on the organization's ability to adapt to the demands of the external environment.

4 Stakeholder Theory (Edward Freeman) vs. Profit Maximization Theory (Milton Friedman):

Stakeholder Theory recognizes that companies have responsibilities to a wide range of stakeholders, including employees, customers, suppliers, community, and the environment, in addition to shareholders.

On the other hand, Friedman's Profit Maximization Theory argues that the only social responsibility of companies is to increase their profits, as long as it is done ethically and within the law.

5 Competitiveness Theory (Michael Porter) vs. Cooperation Theory (C.K. Prahalad, Gary Hamel):

Porter's Competitiveness Theory emphasizes the importance of competition and the pursuit of competitive advantage in a market. 

In contrast, Prahalad and Hamel's Cooperation Theory highlights the importance of collaboration and the creation of shared value through strategic partnerships and cooperation among companies.

C.K. Prahalad's theory on value co-creation differs from Michael Porter's approach to competitiveness in several aspects:

Strategic Guidance:

Prahalad emphasizes the importance of collaboration and joint value creation between companies and customers. It highlights the need for companies to focus on meeting customer needs in a personalized and innovative way.
Porter, on the other hand, focuses on analyzing competition and searching for sustainable competitive advantages, often highlighting the importance of product and service differentiation and cost leadership.

Customer Focus:

Prahalad places emphasis on customers' active participation in the value creation process, emphasizing personalization and customer experience as key elements.
Porter, although he recognizes the importance of customers, often focuses more on analyzing the external competitive environment and strategies to overcome the competition.

Value Approach:

Prahalad champions the idea that value is co-created in collaboration with customers, recognizing that innovation and personalization are key to uniquely meeting customer needs.

Porter tends to focus more on maximizing value for the company, often through gaining competitive advantages over competitors and maximizing profits.

Long Term Vision:

Prahalad emphasizes the importance of continuous innovation and adapting to changing customer needs and preferences over time.

Porter also values strategic adaptation, but often with a focus on maintaining competitive advantages over the long term.

In summary, while Prahalad's theory emphasizes value co-creation with customers and a more customer- and innovation-oriented approach, Porter's approach tends to be more focused on competition and the search for sustainable competitive advantages. Both frameworks have their own applications and are complementary in many aspects, but they differ in their emphasis and strategic orientation.

6 Disruptive Innovation Theory (Clayton Christensen) vs. Incrementalism Theory (Henry Mintzberg):

Disruptive Innovation Theory, proposed by Clayton Christensen, suggests that innovation often occurs through the introduction of disruptive technologies or business models that challenge existing norms and create new markets.

On the other hand, Incrementalism Theory, advocated by Henry Mintzberg, argues that change and innovation happen gradually through small incremental adjustments to existing processes and structures.

While disruptive innovation aims for revolutionary change, incrementalism focuses on evolutionary progress.

7 Chaos Theory (James Gleick) vs. Order Theory (Henri Fayol):

Chaos Theory, popularized by James Gleick, suggests that complex systems, including organizations, are inherently unpredictable and non-linear, and small changes can lead to significant and unexpected outcomes.

In contrast, Order Theory, proposed by Henri Fayol, emphasizes the importance of organizational structure, hierarchy, and control to maintain order and stability within an organization. While chaos theory acknowledges the inherent unpredictability of systems, order theory seeks to impose structure and control to mitigate chaos.

8 Network Effect Theory (Robert Metcalfe) vs. Natural Monopoly Theory (Michael Waterson):

The Network Effect Theory, formulated by Robert Metcalfe, postulates that the value of a network increases as the number of users or nodes connected to it grows, like Facebook and Google, leading to exponential growth and reinforcing network domination established.

Do not confuse Network Effect with Multi Level Market (MMN) by Carl Rehnborg, creator of Nutrilite in 1934, in which products are sold directly by distributors, who recruit more sellers whose main opponents are regulatory bodies who fear the threat of Ponzi effects.

Carl Rehnborg criou a Nutrilite em 1934

On the other hand, Natural Monopoly Theory, proposed by Michael Waterson, suggests that in certain industries, such as utilities or infrastructure, economies of scale and high barriers to entry result in natural monopolies, like AT&T, where one company dominates the market. 

While network effect theory emphasizes the power of network growth, natural monopoly theory highlights the inevitability of monopolistic control in certain industries.

9 Long Tail Theory (Chris Anderson) vs. Market Concentration Theory (Michael Porter):

Chris Anderson's Long Tail Theory suggests that, in a graph with the number of products (x) and their popularity (y), in markets where distribution is virtually free and infinite, niche products in the "long tail" (highly niche technical books) can generate as much or more profit than popular products in the "short head" (successful films and books like Harry Potter and Star Wars). Niche products and services can be economically viable due to reduced distribution costs and expanded access to diversified markets, leading to a shift away from traditional market concentration.

In contrast, Market Concentration Theory, proposed by Michael Porter, suggests that a small number of companies dominating the market should compete.

While the long tail theory emphasizes the importance of diversity, market concentration theory focuses on the dynamics of a few good companies.

Chris Anderson's "long tail" theory is aptly illustrated by the graph of audience popularity versus number of films available, popular blockbusters like “Jurassic World” occupy the top of the distribution curve with a large number of viewers and high revenue , while successful but slightly more niche films, such as “Blade Runner 2049” still appear at the head of the curve, however, closer to the tail with fewer viewers and lower revenue. 

This is followed by a plethora of documentaries, cerebral films and films aimed at specific niches populating the long tail, forming a diverse range of content that attracts smaller but still significant audiences.

This demonstrates how platforms like Netflix can leverage the long tail to cater to diverse viewer preferences and expand their subscriber base.

10 Product Life Cycle Theory (Theodore Levitt) vs. Market Saturation Theory (David Aaker):

Product Life Cycle Theory, as articulated by Theodore Levitt, describes the stages through which a product passes, from introduction to decline (4 stages - introduction, growth, maturity, and decline), with different marketing strategies required at each stage to maximize profitability.

On the other hand, Market Saturation Theory, proposed by David Aaker, suggests that markets eventually reach a point of saturation where demand stabilizes, leading to a stagnation.

Levitt became famous in 1960 for his article on "Marketing Myopia", in which he argued that companies were too focused on the product and forgot to see the market. Levitt highlighted the importance of looking beyond the product and focusing on the market, arguing that companies often got stuck in the production mindset and failed to understand consumers' needs and preferences over time.

On the other hand, Aaker, who also emphasizes the importance of understanding the market, has a slightly different approach.

It recognizes that products do not necessarily come to an end, as Levitt's product life cycle model suggests, but can reach a point of saturation in the market. At this point, demand stabilizes, leading to intense competition and decreasing profits. Aaker calls this "market saturation" and highlights the need for adaptation and innovation to address this condition.

11 - Theory X and Y (Douglas McGregor) + Theory Z (William Ouchi)

In all of the situations above, some thinkers tended to think in one way, while others practically thought in the opposite way, even if this disagreement was not so sharp in some cases.

However, there are interesting cases in which a single author explores both sides of the coin.

This is the case of Douglas McGregor, who describes in Theory X, a more pessimistic view of employees, suggesting that they have a natural aversion to work and need to be controlled and directed in an authoritarian way. On the other hand, in Theory Y, the same McGregor presents a more optimistic view, arguing that employees can find satisfaction and motivation at work and are capable of self-direction and responsibility.

These two theories represent opposite ends of the spectrum of beliefs about human nature in the context of work. McGregor recognized that both perspectives could be applicable in different situations and organizational environments, and his work helped promote important discussions about people management and leadership.

In addition to McGregor's theories, another important author who discusses additional perspectives on management and leadership is William Ouchi. He introduced Theory Z, which is an extension of McGregor's Theory Y, but with influences from Japanese culture. Theory Z emphasizes values such as loyalty, cooperation and employee participation, as well as a strong sense of belonging to the organization.

Ouchi argues that by incorporating these elements, organizations can achieve greater productivity and job satisfaction.

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