Brett Allred

be a student, not a follower

The Theory of Business

In September-October 1994, Peter Drucker published an article called The Theory of Business.  I read the article in the book Classic Drucker.  These are my notes and thoughts from the book.

Every business has a theory.  Sometimes this theory works and sometimes it doesn’t.

A theory of business can be organized into three sets of assumptions.

Set #1 – Environment
What are you paid for?  There are assumptions that are made about society and its structure, the market, the customer and the technology.

Set #2 – Mission
What do you consider meaningful results?  How does the business envision making a difference in the economy and in the society at large?

Set #3 – Core Competencies 
What must the business excel at in order to maintain leadership?

There are many examples in the article of companies and their theories in each of these areas.  My mind applied this more to the startup elevator pitch.  By answering three questions in a simple manner you have a pretty good elevator pitch.  What are you paid for?  How are you going to make a difference in the economy and society?  What must you excel at in order be a leader?

But this can’t just be a pitch. The theory of business must be known and understood throughout the organization.

It has helped me to realize the business is a theory.  We can test that theory in the market place.  If the theory proves to be false, adjust the theory and go at it again.

Other Notes & Quotes

Every three years, an organization should challenge every product, every service, every policy, every distribution channel with the question, If we were not in it already, would we be going into it now? By questioning, we are forced to think about its theory.

A theory of the business always becomes obsolete when an organization attains its original objectives.  Attaining ones’s objectives, then, is not cause for celebration; it is cause for new thinking.

Rapid growth is another sure sign of crisis in an organization’s theory.  Any organization that doubles or triples in size within a fairly short period of time has necessarily outgrown its theory.  Even Silicon Valley has leaned that beer bashes are no longer adequate for communication one a company has grown so big that people have to wear name tags.