theory of business

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A phrase used by Peter F. Drucker to describe the assumptions used to build an organization. These are the assumptions that shape an organization's behavior, dictate its decisions about what to and what not to do, and define what the organization considers meaningful results. These assumptions are about what a company gets paid for.

Assumptions which define a business --

  1. The assumptions about environment, which defines what the organization gets paid for,
  2. assumptions about the specific mission of the organization, and
  3. assumptions about the core competencies needed to accomplish the organization's mission.

Specifications for a valid theory of business --

  1. The assumptions about environment (which define what the organization gets paid for), mission, and core competencies must fit reality.
  2. The assumptions in all three areas have to fit one another.
  3. The theory of business must be known and understood throughout the organization.
  4. The theory of the business has to be tested constantly.
-- Peter F. Drucker, The Theory of Business, HBR Sep-Oct, 1994

Similar concepts and constructs --

  • Jim Collin's Hedgehog Concept
  • Gary Hamel and C.K. Prahalad's Strategic Intent
  • Michael Porter's Fit and Position
  • Jamshid Gharajedaghi's Organizational Purpose