Monday, July 4, 2011

How Drucker's Theory of the Business is Inspiring Me!

Today, I sat down to do some reading for a little professional development.

In the back of my mind was the discomfort I have recently felt with business strategy.  I do not have a sufficient understanding for how a company ensures that it has a relevant, compelling and revenue-generating business strategy as well as a process for ensuring that the strategy remains as such.

Enter luck...While reading Fierce Conversations (which ebbs and flows between great, good, and just OK) I came across a reference to Drucker's Theory of the Business.  I am a massive Drucker fan and this theory was news to me.  So of course, I dropped the book and headed to HBR to find the article online.

This 1994 article "The Theory of the Business", discusses why businesses have crises, even though they are working very hard and very effectively on the right things.  Drucker explains that when this happens, it is evident that the assumptions upon which the organization has been built, no longer fit reality.

These assumptions can be grouped under three areas, as those relating to 1) the environment (markets, customers, etc.), 2) the mission or 3) the core competencies needed to execute the mission effectively in the environment.

How do you test to see if your organization's assumptions for the theory of the business are valid?   Drucker provides four types of testing that the theory of the business must pass.
  1. All three types of assumptions must fit reality.
  2. The assumptions within all three areas must fit with each other.
  3. The theory of the business must be known and understood throughout the organization.
  4. The theory of the business has to be tested constantly.

Why does Drucker think that many businesses fail to set, maintain and restore a valid theory of the business? He explains that often, when the theory is beginning to fail, the organization first becomes defensive and then attempts to patch. He points to examples at GM and IBM as well as others.

Drucker's suggested approach for establishing, maintaining and restoring a valid theory of the business is as follows:
  1. Put a Preventative Care Process in place.  Every 3 years, consider abandonment, by challenging every product, service, policy and distribution channel to ensure that if entering the market today, the organization would still choose to do so.  Question accepted policies and assumptions, test assumptions, and explore failures to get at the systemic causes.
  2. Re-explore the environment, and ensure that non-customers are included in analysis.
  3. Diagnose early and ensure that the theory of the business is re-examined when the organization achieves its mission, grows quickly, succeeds or fails unexpectedly or when a competitor succeeds or fails unexpectedly.
  4. Cure an ailing organization with hard work and conscientiousness on the part of the leader.  Understand the obsolescence of the theory of the business. Diagnose, analyze and take decisive action when needed.

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