196. Bart Vanderhaegen: How Criticism Fuels Knowledge Creation in Adaptive Entrepreneurial Firms

Success in business — serving customers well, and achieving growth in revenues and assets with a return on capital greater than its cost over the long term — is tied to knowledge-building, whereby everyone in the company learns more and more about specialized and advantaged methods of generating value for customers. Customer value fueled by knowledge-building flows back to the company as cash flow as a result of customers’ willingness to pay (which, itself, is a piece of knowledge to be discovered through testing and experimentation).

The uncertainty of the future means that a lot of knowledge-building must be achieved through experimentation — testing ideas to find out if they work or not. The earliest stage of this testing is bound up in the concept of criticism. Bart Vanderhaegen, a philosopher, epistemologist, and business consultant, explains the role of criticism to Economics For Business.

Knowledge Capsule

There is broad agreement on the need for adaptiveness in business.

It is becoming more and more accepted to view firms as operating within a complex adaptive system in which the interactions of millions of agents, and the resultant emergence of new outcomes and new system properties, require an acute sensibility regarding change — and speed of change — in the business environment and an ability to make adjustments in response or, if possible, in anticipation.

This adjustment process often goes by the name of adaptiveness.

What, exactly, is being adapted?

Bart Vanderhaegen’s analysis is that it is ideas that are being adapted and adjusted. He defines idea in this business context as a goal and a plan to achieve that goal — a desired end and the associated means. It is ideas that ultimately result in changing people’s behavior, changing product and service offerings, and changing markets.

If the idea is wrong, it will fail in achieving any desired change. To establish why or how an idea is wrong requires criticism.

Criticism is an artifact of the science of knowledge.

Critical rationalism views knowledge as useful information we use to solve problems we face. It can never be viewed as final — it’s conjecture about possible solutions that we are continuously challenging and criticizing to expose any error that we can subsequently correct to improve upon the solution, and to get closer to economic reality. That’s adaptation.

Firms actively seek the criticism of the market.

Once ideas have been activated as products and services, firms are comfortable with the criticism of the market. As Mises observed, the customer, by buying or not buying, returns a verdict on every business’s offering. And business welcomes the criticism, in the form of sales report, or market share analysis, or market research. The market is full of feedback, and in the case of non-buying, the feedback is criticism and triggers improvements or an adaptation of the plan.

In business, there tends to be less comfort with criticism in the pre-market stage, but it’s a necessary tool for refining options and making decisions.

In Bart’s way of saying it, the word criticism, when used in business, has “kind of a weird smell around it”. There’s a culture of what he calls justificationism. We are taught to project confidence bout business plans. Executives claim expertise in the domains for which they were hired. The boss is correct.

This is all misplaced. What we should be confident about is capacity to solve problems, and not be scared of making mistakes, but rather to be eager to adapt our knowledge to observed reality when it changes.

By utilizing criticism methodically, businesses can unleash its power.

The proper use of criticism is to criticize ideas and not persons. We always want to celebrate the owner of an idea, and grant them autonomy to accept or reject criticism. Bart’s three step method for business criticism is:

1. Start with the presentation of the idea by the idea owner. There should be the opportunity for a full and reasoned presentation. Questions of clarification can be asked, but no criticism at this step.
2. Then follows the offering of criticism. It should be high quality, constructive and specific as to what elements are in doubt and why, and what can be improved. General opposition such as “That will never be accepted here” (which could be said of any idea) is not acceptable.
3. The criticism session is completed with a consent stage, in which the idea owner indicates which criticisms he or she finds relevant and will act on to improve the idea, whether in ends or means or both. Consent is in the discretion of the idea owner and should not be the result of any pressure by critics, whatever their rank or status. There is no “softness” in this: there is a shared and passionate commitment to improve.

Successful adaptive businesses develop a positive culture of criticism.

It’s important to analyze and classify the prevailing firm culture. Some cultures will discourage or reject criticism as a method for improvement, especially those that are hierarchically organized and have a tradition of authoritarianism.

The appropriate culture values truth and values adaptiveness, and celebrates the identification of error as a successful step towards improvement. Bart called this culture a “tradition of criticism”, which sounds contradictory since the word tradition is usually associated with preserving the status quo; but a tradition of criticism implies a kind of stability around the practice of criticizing. People become comfortable with it, and try to become better at it, and are proud to be part of the path to betterment through criticism.

The Amazon 6-page memo system is a good example of the tradition of criticism. Idea owners are required to prepare a detailed memo describing the idea and the business case and this is submitted to a committee of reviewers in a dedicated meeting, escalating in rank towards the most senior management as the idea is vetted, improved, and increasingly strengthened. It’s a tradition and a part of the Amazon culture.

Such a culture is not initiated with an announcement or a campaign, but emerges organically as a universal tool for everyone in the firm to utilize.

Additional Resources

Pactify Management: PactifyManagement.com

Bart on Twitter: @B_Vanderhaegen

Bart’s podcast: Fallible Management (Anchor.fm/FallibleManagement)

Bart’s email: bart.vanderhaegen@pactifysoftware.com