What really sets a company apart from the pack?
Writing in the latest issue of MIT Sloan Management Review, Jules Goddard, Julian Birkinshaw and Tony Eccles assert that “visionary leadership, a unique corporate culture and a distinctive set of core competencies” are all well and good, but “a company’s beliefs—or what we refer to as its ‘uncommon sense’—are often the most critical source of differentiation.”
What we especially appreciate about this article is that the authors credit Peter Drucker with this insight, noting his writings on what he called the Theory of the Business. Nevertheless, they note, “while many recognize that beliefs form the platform for actions and capabilities,” it us up to managers to “generate a distinctive belief system—their uncommon sense—and translate it into action.”
Drucker indeed believed in the importance of a Theory of the Business, which he defined as a “set of assumptions as to what [the] business is, what its objectives are, how it defines results, who its customers are, what the customers value and pay for.” In Drucker’s view, what linked a theory of business to concrete results was strategy.
“Strategy converts this Theory of the Business into performance,” Drucker wrote in Management Challenges for the 21st Century. “Its purpose is to enable an organization to achieve its desired results in an unpredictable environment. For strategy allows an organization to be purposefully opportunistic.”
What Drucker also stressed was that a Theory of the Business had to extend beyond the ranks of top management. “The Theory of the Business must be known and understood throughout the organization,” Drucker counseled in Managing in a Time of Great Change. “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.”
If managers don’t ensure that everyone in the organization understands the Theory of the Business, then subordinates tend to devise their own Theories. And that invariably leads to trouble. “Every one of these men bases his decisions on some, if only vague, Theory of the Business,” Drucker wrote in Management: Tasks, Responsibilities, Practices. “Every one assumes that certain kinds of results are wanted and that other kinds are not particularly desirable.” Absent coordination, Drucker added, “these subordinates “will pull in different directions without even being aware of their divergences.”
What companies do you feel have an especially clear and effective Theory of the Business?