Theory of the Business

THE THEORY OF THE BUSINESS

Peter F. Drucker

Harvard Business Review, September-October 1994; 95-104

Guibone, July Anne C. July 13, 2013

MBA 2018 Business Management

2013-2014

There are new major management techniques: downsizing, outsourcing, total quality management, economic value analysis, benchmarking, reengineering. Most of them are designed what we call the “how to do” tools. Yet, “what to do” is increasingly becoming the central challenge among managers in companies that have enjoyed long-term success. A superstar company becomes stagnating and frustrated in an unmanageable crisis. This is what mostly happens when the right things are being done fruitlessly.

Every organization has a theory of business. What underlies the malaise of so many large and successful organizations worldwide is that their theory of business no longer works.

A theory of business has three parts. First, there are assumptions about the environment of the organization: the society and its structure, the market, the customer and the technology. This defines what an organization is paid for. Second, there are assumptions about the specific mission of the organization. This defines what an organization envisions itself in making a difference in the economy and in the society at large.

Third, there are assumptions about the core competencies needed to accomplish the organization’s mission, which define where an organization must excel in order to maintain leadership.

What are the specifications of a valid theory of business?

1. The assumptions about environment, mission, and core competencies must fit reality. The merchant, not the manufacturer, should design the products, develop them, and find producers to make the goods to his design, specification and costs.

2. The assumptions in all three areas have to fit one another.

3. The theory of the business must be known and understood throughout the organization.

4. The theory of the business has to be...