Sunday, May 25, 2008

The Theory of the Business

Back to school, back to the classics.

I was cleaning out some stuff and came across some material from my MBA course work. Going through some of the articles and case studies I thought was worth keeping, I came across Peter Drucker's "The Theory of The Business". I remember how simple and insightful I had found it to be when I first read it. I love it when business models and theory's simplify the obvious and state it in such elegant and simple manner. A great piece of work on business strategy.

Here is how Drucker defines the Theory of the Business, it has three parts:

1. Assumptions about the environment of the organization; society, its structure, the market, the customer and technology

2. Assumptions about the specific mission of the organization.

3. Assumptions about the core competencies needed to accomplish the mission.

How valid the Theory is determines how successful the business strategy will be. Four parameters determine the success, (a) how close the assumptions fit reality, (b) the assumptions in all three areas fit one another, (c) everyone in the organization understands and works towards the fulfillment of the theory, (d) the theory of the business has to be tested constantly.

The Theory of the Business, is your basic understanding of your business.

"Unexpected failure is as much a warning as unexpected success and should be taken as seriously as a 60-year-old man's first minor heart attack" - Peter F. Drucker, 1994 Harvard Business Review

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