Abductive reasoning as strategy to develop business growth

Abstract

The study presented in this work investigates the impact of forms of logical reasoning on company performance. Under changing market conditions and uncertainty, executives too often fail to foresee strategic options that lead to superior company performance. One reason for this is that executives tend to rely on deductive/inductive logic in order to reduce the risk associated with decision making under uncertainty. Deductive/inductive logic relies on general rules or prior observations. This means, rules or observations must be known prior to the decision. However, during early-stage innovation and strategic planning, future conditions are usually unknown. Therefore, it is unlikely that one will have made all observations necessary for such an explanation. As a consequence, executives often become risk averse and make predictable decision errors.
In order to successfully foresee strategic options—despite changing market conditions and uncertainty—executives need to change their approach and particularly the reasoning they apply. In the area of design and concept selection, scholars promote the use of abductive reasoning. This type of logic forms plausible hypotheses about future outcomes and events instead of deducing/inducing what is known from the past. When using abductive reasoning, thinking becomes more future orientated, and the potential of yet-not-existent concepts and outcomes can be better recognized despite the present uncertainty. This is important not only for design and concept selection, but also for other processes such as strategy development.
Building on prior studies and literature from the field of cognition, strategizing, opportunity recognition, design and abductive reasoning, I hypothesized that abductive reasoning should positively influence company performance. Under the umbrella of a larger research project funded by the Australian Research Council (ARC), I conducted a study investigating this link both qualitatively and quantitatively. The research was conducted at the University of Sydney in cooperation with Delft University of Technology under supervision of Dr. Massimo Garbuio, Dr. Boris Eisenbart and Prof. Andy Dong, and with Prof. Petra Badke-Schaub as chair of the graduation committee.
The study is based on secondary data of 30 US companies in the Software and Development Industry that went public on the US-stock market (NASDAQ) in the period between 2013 and 2014. The data was derived online via the US Securities and Exchange commission database. For the assessment of abductive reasoning, a framework was developed that expands existing frameworks used for the assessment of (abductive) reasoning during concept selection. Financial data were acquired via COMPUSTAT.
Results of the study confirm that abductive reasoning leads indeed to significantly greater company growth performance. Furthermore, abductive reasoning positively influences company profitability when used in conjunction with deductive/inductive logic, and was found to 1) introduce new business or revenue models 2) identify market segments 3) define a product or service offering, 4) invent technical solutions 5) revise and form beliefs/missions, and 6) explain observations such as (market) behavior.
Qualitative analysis suggests that specific observations made prior to or during early-stage venturing—referred to as observation sets—stimulate abductive reasoning. Three different categories of these observation sets were identified: analogy, anomaly and paradox. Observations about technological developments are suggested to enable innovation, i.e. the technical component of a new venture idea, while demographical and organizational observations are often the source of new strategic options.
Up to this point, the most commonly accepted view has been that strategic decisions are made rationally. Therefore scholars advise the use of tools which rely on deductive and inductive logic to assess and create strategic options. Results of the presented research, however, suggests that companies should instead make an effort to complement their strategy development with abductive reasoning approaches. In this paper, the results are discussed, managerial implications and contributions to literature are presented, and future research is suggested.