Reading :: The Theory of the Business

The Theory of the Business

By Peter F. Drucker

This slim (47pp.) booklet was mentioned to me by someone who teaches entrepreneurship classes. Since I teach a course on entrepreneurship communication, I decided to check it out.

Drucker is, of course, well known for his thoughts on business. These particular thoughts were originally published in Harvard Business Review in 1994 before being reprinted here in 2017. Drucker makes these points:

• Each business has some underlying theory.
• The business gets into trouble when circumstances change and the theory does not (p.13).
• A theory of business has three parts:
• Assumptions about the organizations’ environment (pp.21-22)
• Assumptions about the organization’s mission (p.22)
• Assumptions about the core competencies needed to achieve that mission (p.23)
• In this theory of business,
• These assumptions must all match reality (p.25).
• These assumptions must fit each other (p.27).
• The theory of the business has to be known and understood across the organization (p.28).
• And it has to be tested constantly (p.29).
• Thus an organization must embrace preventative measures to address when these tests begin to fail. These may include:
• abandonment of what’s not working (p.33)
• study of noncustomers, to understand why they aren’t customers (p.34)
• Signs of crisis in one’s theory of business include:
• achieving one’s objectives (p.37)
• rapid growth (p.38)
• unexpected success (one’s own or a competitor’s) (p.39)
• unexpected failure (p.41)

To be honest, summarizing this booklet in bullets let me get a lot more out of the booklet, which does not signal its points as strongly as this review does. The points are more of an outline or sketch than a fully fleshed out argument — but the booklet itself is fleshed out mainly in that it offers examples rather than additional details. I think Drucker gives us much wisdom here, but the reader really does have to figure out the applications themselves. 

Still, if you are thinking in terms of maintaining a business or, more broadly, in terms of how to develop sustainability in any given organization, I think this booklet is worth reading.