Enterprise Is Not Just Intuition: The Science That Increases Profits

Can a theory influence the fortunes of a business more than market insights? The answer, according to new research, is yes. An experiment conducted in Tanzania revealed that entrepreneurs trained in a “theory of value” approach achieved significantly higher economic performance than those who relied on more traditional methods of empirical validation. This is not an academic detail: companies that adopted this model reported higher average revenues and profits and, more importantly, were able to implement more coordinated and strategic changes in their business models.

These are findings from the paper Does a Theory-of-Value Add Value? Evidence from a Randomized Control Trial with Tanzanian Entrepreneurs, authored by Rajshree Agarwal (University of Maryland), Francesca Bacco (Vrije Universiteit Amsterdam), Arnaldo Camuffo, Andrea Coali and Alfonso Gambardella (Bocconi University), Haji Msangi (Rwanda Institute for Conservation Agriculture), Steven Sonka (University of Illinois), Anna Temu and Betty Waized (Sokoine University of Agriculture), Audra Wormald (University of North Carolina-Chapel Hill) published in Organization Science. The study compares two approaches to entrepreneurship: one based on rapid, iterative experimentation (evidence-based approach) and one that integrates an ex ante theoretical framework to guide decision making (theory-and-evidence-based approach). Results show that the latter approach not only leads to higher revenue and profit growth, but also helps entrepreneurs implement more strategic and coordinated changes in their business models.

This article is part of the SAIM (A Scientific Approach to Innovation Management) , research projectcoordinated by Alfonso Gambardella, Full Professor of Corporate Management, and funded by the European Research Council (ERC) with an Advanced Grant of €1.9 million for the period 2021-2026. The SAIM project aims to test how and under what circumstances a “scientific” approach to decision-making can help entrepreneurs and managers make more effective decisions. This method involves properly defining the problem, developing models or theories that predict outcomes of actions through logical connections between antecedents and consequences, and testing the theory using existing data or collected through well-defined experimental designs.

The methodology: a field experiment to measure the effectiveness of entrepreneurship theories

To test the effectiveness of the two approaches, researchers conducted a randomized trial in Tanzania with agribusiness entrepreneurs. The control group received traditional evidence-based training, in which entrepreneurs formulate hypotheses and quickly test them in the marketplace through customer interactions and low-cost prototypes. The experimental group, on the other hand, received training that guided them to develop a “theory of value” before testing their hypotheses.

While the first method emphasizes rapid experimentation, the second approach invites entrepreneurs to develop a logical framework that explains how and why their business idea creates value. This theory guides subsequent experimentation, making it more focused and strategic. Results show that those who developed a theory of value achieved superior economic performance and demonstrated greater adaptability over time.

“This study demonstrates how theory is not just an academic exercise, but a key element in creating concrete value in businesses,” says Arnaldo Camuffo, Full Professor of Management at Bocconi. “Entrepreneurs who take a structured and theoretically informed approach make more informed and resilient decisions, achieving better results.”

Evidence-based vs. theory-and-evidence-based: two visions compared

The paper highlights two distinct approaches to entrepreneurship.

Evidence-based approach

• It is based on rapid and iterative experimentation using tools such as the Business Model Canvas.
• Privileges the collection of direct evidence through empirical market testing.
• Entrepreneurs make changes to their business models based on immediate feedback.
• It promotes speed of iteration, but can lead to fragmented and uncoordinated changes.

Theory-and-evidence-based approach

• It starts with building a theory of value, which guides experimentation in a more structured way.
• Entrepreneurs develop logical hypotheses about the relationships among the various elements of their business model.
• Experimentation is more targeted, focusing on aspects with greater uncertainty.
• It leads to more coordinated changes in the business model, increasing sustainability and long-term success.

According to Alfonso Gambardella, “The theory-and-evidence-based approach helps entrepreneurs build more robust and consistent business models. Rather than chasing random feedback, this methodology allows hypotheses to be tested more strategically, with better results in both economic performance and adaptability over time.”

The economic implications: more profits and greater sustainability

The economic benefits of the theory-and-evidence-based approach are clear. The study shows that entrepreneurs who followed this methodology posted:

• Higher revenues and profits. On average, their revenues were $1,548 higher than the evidence-based group, while their profits were $1,494 higher.
• Positive profits vs. negative profits. Entrepreneurs in the evidence-based group accumulated negative profits, while those in the theory-and-evidence-based group averaged positive profits.
• Robust results. Econometric analyses confirm that these results are not random, but result directly from the methodology used.
• Better results for high-potential firms. The positive effects were even more pronounced for better-performing firms, suggesting that this approach can maximize value especially in the most promising entities.

“The real difference lies in how entrepreneurs change their business model,” explains Andrea Coali, research fellow at the ION Management Science Lab at SDA Bocconi. “In the evidence-based group, many of the changes were fragmented: entrepreneurs changed only one aspect of the business, such as distribution channels or pricing, without an overall vision. In the theory-and-evidence-based group, on the other hand, changes were more coordinated and strategic, involving both fundamental and operational elements.”

Lessons for the entrepreneurial ecosystem and supporting policies.

The impact of this research goes beyond the specific case of Tanzania. If the theory-and-evidence-based approach has proven to work in an emerging context, where resources are limited and uncertainty is high, it is safe to assume that it can be even more effective in developed markets.

For entrepreneurs and startups, the message is clear: “Developing a theory of value before testing the market can improve the quality of decisions and increase the likelihood of success,” Gambardella summarizes. “This implies a greater emphasis on strategic planning and the use of rigorous methodologies in the early stage of business development,” Camuffo adds.

For institutions and programs supporting entrepreneurship, the study suggests the importance of integrating theory-based methods into training. “Instead of just teaching practical tools such as the Business Model Canvas, it would be useful to educate entrepreneurs to build solid theoretical models for their ideas,” Coali indicates.

For large companies, this research suggests that a return to the fundamentals of value creation can be an important lever for successful innovation. Rather than quickly testing new ideas without a clear conceptual framework, adopting a theory-based perspective could improve the quality of innovation and the sustainability of business strategies.

“We have seen that this approach works even in the most challenging contexts,” the researchers conclude. “If it is effective where resources are scarce, it can be even more powerful in advanced markets. It is time to bring this perspective into all levels of business education.”

A paradigm shift that could redefine the way we train entrepreneurs and innovate business models for the future.