The Theory of Your Business

In class this week on Entrepreneurial Management, we discussed what I believe is an important question for any startup and small business.  Using Peter Drucker’s article in the Harvard Business Review as the foundation, we discussed how to get a small business to identify “The Theory of their Business”.

Drucker notes that most businesses, especially when performance is suffering, focus on new management techniques or what he calls ‘how to-do’ tools.  In many cases, Drucker observes that the problem doesn’t lie in what the company is doing but more in what is happening outside the firm.  Example after example can be provided where at one time a company is doing well leading their industry then in a short time, becomes an industry laggard.  Nothing the firm is doing has changed but something in the outside environment has altered the conditions of the industry.

Drucker blames this on the business’ theory or the assumptions that the firm’s foundation was built on no longer fit reality.  These assumptions may include markets, customers, competitors ( both their values and behavior),  technology and the company’s strengths and weaknesses.   In other words, the Business Model is not as relevant.

The way to deal with identifying if your business theory is relevant is for the leadership of the organization to re-look at its  assumptions about the environment of the organization(society and its structure, the market, the customer, and technology), assumptions about the specific mission of the organization, and assumptions about the core competencies needed to accomplish the organization’s mission.  This should be done on a continual basis to assure that reality is not drifting from the business.  Additionally, the theory must be constantly tested and communicated throughout the organization.

While Drucker passed away several years ago, his writings still hold true.  Constantly evaluate the theory of which your business is based upon and it will assist your firm in making sure its still relevant.



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