Peter F. Drucker's article, "The Theory of the Business," starts by describing what he means by that term(the assumptions that an organization is built on. He then recounts the surprising downturns of fortune in two of industry's most successful companies(GM and IBM(that occurred after their theory of the business "no longer fit reality" (Drucker, 1994, p. 95). IBM, for example, had long been highly successful in the mainframe business. When the PC came along, IBM quickly adapted and got into the PC business as well, but this created a paradigm shift that did not work, since it had depended on its mainframe business as its "cash cow" (Drucker, 1994, p. 98). Likewise, GM had had a 70-year history devoid of setbacks, but when the market changed in the 1970s, GM's traditional approach no longer fit the newly fragmented market. Both companies encountered serious difficulties as a result of the disconnect between their theory of the business and the reality of the business.
Drucker asserts that there are four requirements for ensuring that a company's theory of the business fits the reality. First, its assumptions about "environment, mission, and core competencies must fit reality" (Drucker, 1994, p. 100). Second, "the assumptions in all three areas must fit one another" (Drucker, 1994, p. 100). Third, the entire organization must know and understand the theory of the business. Fourth, the theory of the business must be constantly tested. The theory of the business is analogous to a patient. Drucker (1994, p. 102) points out that it needs "preventive care" in the form of abandoning what is not working and studying its noncustomers, as well as "early diagnosis" of problems through the monitoring of warning signs. He identifies "the cure" as being due to hard work, not miracle workers.
Drucker, P. (1994). The Theory of the Business. Harvard Business Review, (Sept-Oct), 95-104.
...