Bartley Madden has spent decades working on a question central to business: why do firms succeed or fail at creating value over the long term? His answer, the Pragmatic Theory of the Firm (PTF), places PCT at its foundation. He shares his perspective below.
“My work has focused on a better understanding of how firms succeed or fail in creating value over the long term and has evolved into the Pragmatic Theory of the Firm, https://www.learningwhatworks.com.
The punchline is that the critical determinant of a firm’s long-term performance is the proficiency of its knowledge-building culture. This spotlights human behavior that nurtures and sustains such a culture.
Businesspeople need to better understand human behavior and discard the stimulus-response, carrots-and-sticks way of thinking and behaving. PCT is the path forward. My hunch is that a plain-spoken explanation of PCT with simple and insightful figures (as I have attempted in this paper) is the preferred way to communicate PCT benefits to businesspeople.
In my work, PCT is a way of thinking that I apply to better understand management’s behavior and the firm’s performance. Areas that seem ripe for explicit implementation of a PCT mindset by management include organizational structure, accounting controls, and employee satisfaction/culture.
Changes in the corporate world are currently being implemented by a few innovative managements—changes that substantially increase employee freedom to take actions to reduce discrepancies between controlled variables and perceptions. For example, there is a trend to transition away from pyramid, command-and-control hierarchies to much flatter organizations, e.g. Bayer (see Chapter 4 of my latest book, Value Creation Insights). Nucor’s (high-performing steel manufacturer) weekly bonuses based on team performance involve employees deciding what changes should be made without seeking the approval of higher levels of management (see Chapter 5 of Humanocracy by Gary Hamel and Michele Zanini). Radical change is happening within those firms that have eliminated budgets and associated accounting-based controls, enabling employees to take actions that they “control” in pursuit of significant value creation (see This is Beyond Budgeting: A Guide to More Adaptive and Human Organizations by Bjarte Bogsnes).
Finally, even though the management literature reflects increasing attention to systems thinking, a critical part of the “system” has been ignored—the PCT understanding of behavior.”
Bartley Madden is the author of the Pragmatic Theory of the Firm and Value Creation Insights. More at learningwhatworks.com.
