Article Summary

Idea in Brief

In his thirty-first article for HBR, Peter F. Drucker argues that what underlies the current malaise of so many large and successful organizations worldwide is that their theory of the business no longer works. The story is a familiar one: a company that was a superstar only yesterday finds itself stagnating and frustrated, in trouble and, often, in a seemingly unmanageable crisis. The root cause of nearly every one of these crises is not that things are being done poorly. It is not even that the wrong things are being done. Indeed, in most cases, the right things are being done—but fruitlessly.

What accounts for this apparent paradox? 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 an organization considers meaningful results. These assumptions are what Drucker calls a company’s theory of the business.

Every organization, whether a business or not, has a theory of the business. The theory of the business explains both the successes of companies like General Motors and IBM, which have dominated the U.S. economy for the latter half of the twentieth century, and the challenges they have faced.

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 today they rarely last for very long at all. Eventually, every theory of the business becomes obsolete and then invalid. When a theory shows the first signs of becoming obsolete, it is time to start rethinking the theory, with the clear premise that our historically transmitted assumptions no longer suffice.