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The Scientific Method applied to Business

© Herb Wexler

I am surprised at how many small businesses determine their targets. It seems to be based on round numbers rather than analysis. A 5% profit margin is good because it is a nice number-the same as the number of fingers on one hand. Can you run the business at 5% is 5 1/2% more realistic based on your costs and the level of service you plan on giving the clients?

Picking numbers out of the air is ok if you don't have any facts. For example when a business is just starting there is little information on costs or how much customers are willing to pay. As a company progresses and more facts are available, decisions should be made in a more systematic manner. This is why I want to review the scientific method and how it can be applied to business problems.

The Scientific Method:

1. Observation Look around constantly ask why things are the way they are. Should they or could they be different. Many people saw apples fall to the ground, but it was Isaac Newton who asked why.

2. Hypothesis or Theory (If you are uncomfortable with large words substitute guess). This step is an attempt to explain the observed events. A good hypothesis is one that makes testable predictions. "Newton proposed his law of gravitation in 1687 and stated that every particle in the universe attracts every other particle in the universe with a force that depends on the product of the two particles' masses divided by the square of the distance between them."*

3. Experimentation This is the step that separates the scientific method from other disciplines. Experiments can prove a hypothesis wrong or indicate that the hypothesis is at least partially correct. By applying the law of gravity to the motion of the planets it was found that Uranus did not follow the rules. This meant that something was either wrong with the theory or the observation was incomplete. By using Newton's theory of gravitation the planet Neptune was discovered.

The Scientific Method applied to Business:

1. Observation Entrepreneurs are always asking questions. Most small business are started because someone observed a need for a product/service that was not being met. Within a business, constantly look for problems/bottlenecks. Example: Sales are lower than they should be based on the business plan.

2. Hypothesis or Theory Make a guess why this is so. Example: People are unaware of the company's products. Therefore we need to do more marketing. The best marketing method is to hire a blimp.

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