Theory of the Business Assignment

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Peter Drucker in 1994, wrote about the “Theory of the Business”, that represents the key assumptions underlying a firm’s strategy. These assumptions are in three categories:

  1. a) the external environment that includes the market, society, technology and customer
  2. b) the mission of the organization
  3. c) the core competencies needed to accomplish the mission.

He continued that a valid theory of the business has four specifications – assumptions about the mission, environment and core competencies must really fit reality, the assumptions in all the three areas have to fit one another, the theory of the business needs to be tested constantly.

He also wrote that organizations get into trouble when the assumptions representing the theory of the business no longer fit reality. He also used an example of retail department stores, where their theory of business assumed that people who could afford to shop in department stores would do so. Though, many shoppers abandoned department stores in favour of speciality retailers, when time became the primary factor in the shopping destination rather than income. He described the theory of the business as a “discipline” and a “hypothesis”.

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