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The Theory of the Business

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Peter Drucker is probably the greatest management thinker of the 20st Century. He has been Professor at New York University and at 83 years old still teaches at the Graduate Management School of Claremont University, California. This McKinsey Award winning article was published in the September-October 1994 issue of the Harvard Business Review.

In this article Drucker discusses the theory of the business, which is the assumptions on which the organization has been built. "These are the assumptions that shape any organization's behavior, dictate its decisions about what to do and what not to do, and define what the organization considers meaningful results." According to the author the theory of the business has three parts. First, there are assumptions about the environment of the organization. Second, there are assumptions about the specific mission of the organization. Third, there are assumptions about the core competencies needed to accomplish the organization's mission. Drucker identifies four specifications to a valid theory of the business. First, the assumptions about environment, mission, and core competencies must fit reality. Second, the assumptions in all three areas have to fit one another. Third, the theory of the business must be known and understood throughout the organization. Fourth, the theory of the business has to be tested constantly. Some theories of the business are so powerful that they last for a long time, but they do not last forever. There is a need for building into the organization systematic monitoring and testing of its theory of the business. The author also introduces preventive measures (abandonment and walk-around management), early diagnosis (unexpected success and unexpected failure), and a cure (hard work and being conscientious). Drucker uses his traditional examples (IBM and General Motors) to explain matters.

This article is truly great in its simplicity, as most articles by Peter Drucker. It describes in simple terms why many new management techniques are designed primarily "how to do tools" and not in line with 'the theory of the business'. It explains in simple terms the strategy of an organization, provides specifications, and methods to cure an ill organization. The author uses simple US-English.