By Peter F. Drucker
Excerpts from HBR / September-October 1994
Other than outsourcing and reenginnering, most management tools are designed primarily to do the same things differently.
They focus on the “how to do” tools …
(whereas) “what to do” is increasingly becoming the central challenge facing managements.
Indeed in many cases, the right things are done fruitlessly. (This is because), the assumptions on which the organisation has been built and is being run no longer fit reality.
Every organisation, whether a business or not, has a theory of the business. [This is captured in the business model … and profits ensure that the business model is still valid – Form “What management is”]
Indeed, a valid theory is clear, consistent, focussed and is extraordinarily powerful.
e.g. 1870, George Siemens founded the Deutsche Bank to use entrepreneurial finance to unify a still rural and splintered Germany.
The theory of the business can explain both the success and the failure of the business.
What underlies the malaise of so many large and successful organizations worldwide is that their theory of business no longer works.
One of GM’s core competencies has been to “overpay” for well-performing but mature businesses and then turn them into world-class champions.
e.g. In the early 1980’s – the very years in which GM’s main business, passenger automobiles, seemed almost paralysed – the company acquired two large businesses: Hughes Electronics and Ross Perot’s Electronic Data Systems.
GM also overpaid of Buick, AC Sparkplug and Fisher Body … and then turned them into world-class champions.
Yet what worked so beautifully in those businesses that GM knew nothing about failed miserably in GM itself.
The reason why policies, practices and behaviours that work for decades, top showing results is that the realities that each organisation actually faces have changes quite dramatically from those that each still assumes it lives with.
e.g. IBM did not create the personal computer (Kodak did). But in 1950, its flexibility, speed and humility created the computer industry.
It is possible to have a bouquet of companies that complement each other and equally impossible to have a group of companies that contradict each other (as their basic definition of information is contradictory)
e.g. It is easier for GM to own generating stations and toaster manufacturing units that for IBM to own the Mainframe and PC business (the mistake committed by IBM leading to the rise of Microsoft). Both business (Mainframes and PCs) are primarily competitive and hence cannot be complementary. The resultant entity will not be able to achieve efficiencies in either one of those fields. Thus, the assumption that a computer is a computer – or more prosaically, that the industry is hardware driven – paralysed IBM.
Since the early 1920s, GM assumed that the US automobile market was homogeneous in these values and segmented by extremely stable income groups. But in the late 1970s, its assumption about the market and about production became invalid. The market was fragmenting into highly volatile “lifestyle” segments. Income became one factor among many in the buying decision, not the only one.
A theory of business has three parts
- Assumptions about the environment
- Society and its structure
- Markets
- Customers
- Technology and trends
- Assumptions about the specific mission of the organisation
- E.g. Sears, Roebuck and Company – informed buyer for America
- E.g. Marks and Spencer – change agent in UK
- E.g AT&T – ensure that every US family has access to a telephone
- Assumptions about the core competencies needed to accomplish the organisation’s mission
- E.g. Westpoint – Turn out leaders who deserve trust
- E.g. Marks and Spencer – Ability to identify, design and develop the merchandise it sold
- E.g. AT&T – Technical leadership that would enable the company to improve service continuously while steadily lowering rates
- The assumptions about environment, mission and core competencies must fit reality
- The assumptions in all three areas must fit one another
- The theory of the business must be known and understood throughout the organisation
- The theory of business must be tested continuously
Once you achieve your original objectives, it means that the assumptions have become obsolete.
A company needs to systematically monitor and test its theory.
There are two preventive measures –
- Abandonment – Every three years, the company should challenge every product, every service, every policy, every distribution channel. By challenging its theory, an organisation forces itself to think about its theory.
- Study Non-customers – Talking to people who are not your customers will give you better insight about the product that talking to people who are your customers. e.g Walmart caters to 18% of the US retail market, i.e. 72% of the market does not shop at Walmart. This is where the best insights can be picked up.
There are two early indicators of problems with the theory of business –
- Unexpected success – Whether one’s own or competitors
- Unexpected failure – Whether one’s own or competitors
- Hardwork – To establish, maintain and restore the theory does not require a Genghis Khan in the executive suite. It requires hard work.
- Decisive action – Using the surgeon’s time tested principle for effective decision making: A degenerative disease will not be cured by procrastination. It requires decisive action.
