THE
THEORY OF THE BUSINESS
The assumptions on which the organization has been
built and is being run no longer fit reality. These are the assumptions that
shape any organization’s behavior, dictate its decisions about what to do and
what not to do, and define what the organization considers meaningful results.
These assumptions are about markets. They are about identifying customers and
competitors, their values and behavior. They are about technology and its
dynamics, about a company’s strengths and weaknesses. These assumptions are
about what a company gets paid for. They are what I call a company’s theory
of the business.
The
assumptions about environment, mission, and core competencies must fit reality.
When four penniless young men from Manchester,
England, Simon Marks and his three brothers-in-law, decided in the early 1920s
that a humdrum penny bazaar should become an agent of social change, World War
I had profoundly shaken their country’s class structure. It had also created
masses of new buyers for good-quality, stylish, but cheap merchandise like
lingerie, blouses, and stockings—Marks and Spencer’s first successful product
categories. Marks and Spencer then systematically set to work developing brand-new
and unheard-of core competencies. Until then, the core competence of a merchant
was the ability to buy well. Marks and Spencer decided that it was the
merchant, rather than the manufacturer, who knew the customer. Therefore, the
merchant, not the manufacturer, should design the products, develop them, and
find producers to make the goods to his design, specifications, and costs. This
new definition of the merchant took five to eight years to develop and make
acceptable to traditional suppliers, who had always seen themselves as
“manufacturers,” not “subcontractors.”
The
assumptions in all three areas have to fit one another.
This was perhaps GM’s greatest strength in the long
decades of its ascendancy. Its assumptions about the market and about the optimum
manufacturing process were a perfect fit. GM decided in the mid-1920s that it
also required new and as-yet-unheard-of core competencies: financial control of
the manufacturing process and a theory of capital allocations. As a result, GM
invented modern cost accounting and the first rational capital-allocation
process.
The
theory of the business must be known and understood throughout the organization.
That is easy in an organization’s early days. But as
it becomes successful, an organization tends increasingly to take its theory
for granted, becoming less and less conscious of it. Then the organization
becomes sloppy. It begins to cut corners. It begins to pursue what is expedient
rather than what is right. It stops thinking. It stops questioning. It
remembers the answers but has forgotten the questions. The theory of the
business becomes “culture.” But culture is no substitute for discipline, and
the theory of the business is a discipline.
The
theory of the business has to be tested constantly.
It is not graven on tablets of stone. It is a
hypothesis. And it is a hypothesis about things that are in constant
flux—society, markets, customers, technology. And so, built into the theory of
the business must be the ability to change itself.
Some theories of the business are so powerful that
they last for a long time. But being human artifacts, they don’t last forever,
and, indeed, today they rarely last for very long at all. Eventually every
theory of the business becomes obsolete and then invalid. The first
reaction of an organization whose theory is becoming obsolete is almost always
a defensive one. The tendency is to put one’s head in the sand and pretend that
nothing is happening. But patching never works.
Instead, when a theory
shows the first signs of becoming obsolete, it is time to start thinking again,
to ask again which assumptions about the environment, mission, and core
competencies reflect reality most accurately—with the clear premise that our
historically transmitted assumptions, those with which all of us grew up, no
longer suffice.
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