(2023-04-04) Chin There Is No Truth In Business Only Knowledge

Cedric Chin: There Is No Truth in Business, Only Knowledge. If you want to get good at running businesses, you need to pursue knowledge — that is, theories or models that allow you to better predict the business outcomes of your actions. Such a pursuit more often than not leads you towards the use of data. (thinking in bets)

While practical implications are all well and good, I think our focus on the practical belies the true impact of the idea. W Edwards Deming’s assertion was a huge revelation to me — the very idea that it is knowledge that you want to pursue in business, not truth. In this essay, I want to take a step back to discuss the philosophical implications of taking this idea seriously.

A Philosophy for Business Judgment

Why talk about the philosophical implications of a business idea?”

this is useful because it is the sort of philosophy that has to do with truth

how do you know that the things you believe about your business is true?

And yet one of the most difficult things in business is knowing when to discard old beliefs you have, especially when there is a fundamental change to your world

The most famous set of stories come from business professor Clayton Christensen, who introduced a theory of disruption with his 1997 book The Innovator’s Dilemma... In the 90s, Christensen started asking himself why business success was so difficult to sustain.

What made Christensen’s theory so arresting was that he did not blame the incumbent executives in all of his examples. No, Christensen argued, executives were doing the rational thing in each case — they were pursuing products with higher margins, ceding ground on less attractive opportunities at each step of the way, up to the point where the lousier, disruptor technology became good enough for their highest value customers, at which point the incumbent businesses failed. The main culprit, Christensen reasoned, was the way managers had been taught to measure success.

Christensen’s story is sobering because it is difficult to imagine overcoming your orthodoxy if you are an executive in one of those incumbent companies. But the New Yorker profile also includes an appearance by legendary Intel CEO Andy Grove, the protagonist of our next story. Grove is perhaps proof positive that it is possible to update one’s beliefs, especially if one is an exceedingly paranoid businessperson

In Only the Paranoid Survive, that same Intel CEO, Andy Grove, talks about a period of crisis in the company’s history. This period wasn’t about low-end disruption, but it might as well have been, so similar were the root causes. In 1994 Intel was caught off guard by a firestorm of consumer anger, in response to a flaw in Intel’s Pentium 4 processor.

Grove knew this was the story he’d been looking for. He had Christensen tell the same story to his staff, and “rebar” became a company mantra. Intel brought out the Celeron chip, a cheap product that was ideal for the new low-end PCs, and within a year it had captured thirty-five per cent of the market.

it regarded itself as a component supplier to such manufacturers

It took a year for Grove to realise that Intel had become a consumer-facing company — in retrospect, a totally predictable outcome thanks to their remarkably successful ‘Intel Inside’ ad campaign

paralysed by the consumer backlash; to end the crisis, Intel had to do a recall of Pentium 4 chips, along with junking all of existing Pentium inventory. They lost half a billion dollars — four years of Pentium’s ad budget — in a mere six weeks.

some business misjudgments come from totally incomprehensible developments. In Good Synthesis is the Start of Good Sensemaking I told the story of incumbent laminate manufacturer Formica, who was challenged by Ralph Wilson Plastics (RWP) in the 70s. ((2020-05-26) Chin Good Synthesis Is The Start Of Good Sensemaking)

Widespread understanding of Process Power only emerged in the 80s. (We now know the phenomenon with terms like ‘lean manufacturing’ and ’continuous improvement’). I told this story from the perspective of Formica’s CEO because I wanted to capture the sheer confusion they must’ve felt as RWP took market share away from the company; I chose to present this specific case because RWP was wielding a competitive advantage that Formica simply did not — and could not — understand.

so I’ve long wondered about the sort of thinking you’d need to do to escape this sort of trap.

Another, commonly cited answer is to say that you’ll need to have ‘strong opinions, weakly held’ — which, as I’ve noted elsewhere, mostly doesn’t work that well. ((2020-07-20) Chin Strong Opinions Weakly Held Doesn't Work That Well)

One trite response is to quote Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so” ... as if watching out for ‘things you know that just ain’t so’ is that simple to do.

Deming’s formulation of ‘knowledge’ over truth gives us a third path.

Deming’s criterion of knowledge is whether it helps us to predict and not whether we discover truth, because there is no such thing in the domain of empirical knowledge.

In the empirical world, statements are only probable rather than true and absolute. (thinking in bets)

A theory is evaluated by future experience, whether in science, in management, or in everyday living.

With the Christensen example, this is slightly trickier: could the managers of these disrupted companies predicted the downfall of their businesses, so fixated were they on business ratios and not absolute numbers?

yet we know that business is a domain where the principles aren’t fixed.

business beliefs that are not predictive are discardable.

I find this rather freeing.

This frame of ‘knowledge vs truth’ also sheds light on Amazon founder Jeff Bezos’s exhortation to focus on ‘things that don’t change’. If knowledge in business consists of beliefs that are most predictive of business outcomes, then the most valuable set of predictive beliefs are surely those that change the slowest

Deming’s framing is interesting to me because it is in opposition to the default worldview that most of us possess.

I’ve long argued that “scientists are interested in what is true; practitioners are interested in what is useful”; my approach to theory and synthesis is biased towards what is practically shown, not academically proven. But I do think that Deming’s ‘knowledge vs truth’ is profound and useful and good. Because in thinking it in business, perhaps you’ll find yourself holding onto your beliefs more loosely. And perhaps in internalizing it, you’re more likely to learn something new.