​THE THEORY OF THE BUSINESS

THE BUSINESS ACUMEN OF THE GENIUS OF PETER F. DRUCKER
Not in a very long time—not, perhaps, since the late 1940s or early 1950s—have there been as many new major management techniques as there are today: downsizing, out-sourcing, total quality management, economic value analysis, benchmarking, reengineering. Each is a powerful tool. But, with the exceptions of outsourcing and reengineering, these tools are designed primarily to do differently what is already being done. They are “how to do” tools.

Yet “what to do” is increasingly becoming the central challenge facing managements, especially those of big companies that have enjoyed long-term success. The story is a familiar one: a company that was a superstar only yesterday finds itself stagnating and frustrated, in trouble and, often, in a seemingly unmanageable crisis. This phenomenon is by no means confined to the United States. It has become common in Japan and Germany, the Netherlands and France, Italy and Sweden. And it occurs just as often outside business—in labor unions, government agencies, hospitals, museums, and churches. In fact, it seems even less tractable in those areas.

The root cause of nearly every one of these crises is not that things are being done poorly. It is not even that the wrong things are being done. Indeed, in most cases, the right things are being done—but fruitlessly. What accounts for this apparent paradox? The assumptions on which the organization has been built and is being run no longer fit reality. 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. These assumptions are about markets. They are about identifying customers and competitors, their values and behavior. They are about technology and its dynamics, about a company’s strengths and weaknesses. These assumptions are about what a company gets paid for. They are what I call a company’s theory of the business.

Every organization, whether a business or not, has a theory of the business. Indeed, a valid theory that is clear, consistent, and focused is extraordinarily powerful. In 1809, for instance, German statesman and scholar Wilhelm von Humboldt founded the University of Berlin on a radically new theory of the university. And for more than 100 years, until the rise of Hitler, his theory defined the German university, especially in scholarship and scientific research. In 1870, Georg Siemens, the architect and first CEO of Deutsche Bank, the first universal bank, had an equally clear theory of the business: to use entrepreneurial finance to unify a still rural and splintered Germany through industrial development. Within 20 years of its founding, Deutsche Bank had become Europe’s premier financial institution, which it has remained to this day (save for its recent $10-billion scandal that arose from a scheme to help Russians secretly funnel money offshore) in spite of two world wars, inflation, and Hitler. And, in the 1870s, Mitsubishi was founded on a clear and completely new theory of the business, which within 10 years made it the leader in an emerging Japan and within another 20 years made it one of the first truly multinational businesses.

Similarly, the theory of the business explains both the success of companies like General Motors and IBM, which have dominated the U.S. economy for the latter half of the twentieth century, and the challenges they have faced. In fact, what underlies the current malaise of so many large and successful organizations worldwide is that their theory of the business no longer works.

What underlies the malaise of so many large and successful organizations worldwide is that their theory of the business no longer works. Whenever a big organization gets into trouble—and especially if it has been successful for many years—people blame sluggishness, complacency, arrogance, mammoth bureaucracies. A plausible explanation? Yes. But rarely the relevant or correct one.

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