The theory of Business

The Theory of Business

We shall go through the mind of a guru, Peter Drucker

The Theory of a Business

Drucker believes that the theory of a business or the assumptions on which a company has been built and is operating on depends on:

  • Assumptions about the environment of the organization
  • Assumptions about the specific mission of the organization

Assumptions about the core competencies needed to accomplish the organization’s mission As the organization becomes bureaucratic and sluggish, it becomes extremely difficult to change systems and mindsets when the assumptions are no longer valid. This was the situation that General Motors found itself during the 1980’s. In the following , Drucker teaches us how to maintain a valid theory of business.

Organizing for Success in Business

Decentralized Structure

In 1946, Drucker wrote “Concept of the Corporation,” which explores the evolution of the business corporation and its impact on society. The result of 18 months of interviews and observation, the book discusses the beliefs and management style of Alfred P. Sloan, GM’s creator.

He noted that GM gave its divisions great independence, which was uncommon by the standards of the day.

“In over 20 years of work…Mr. Alfred P. Sloan Jr. has developed the concept of decentralization into a philosophy of industrial management and into a system of local self-government.”

GM had 50 divisions, and Drucker estimated that all but 5 percent of decisions were within the control of the divisions.

Decisions that did require head office approval had to do with the financial function, pricing, labor costs and capital deployment. Drucker invented the term “profit center” to describe a division, and noted that these groups were held highly accountable for results.

Corporation as Human Effort

Drucker believes that decentralization is key to the corporation’s success. Decentralization creates a pattern of behavior and a basis for the successful solution of majority of problems. Furthermore, it provides an environment for grooming GM executives by placing them in positions where they could take responsibility without endangering the entire company. As they mature and their skills broaden, they are given new positions where they can apply themselves.

Drucker considers the corporation the means by which people could attain their dreams. He considered GM as a representative institution of the “large mass production plant,” which had become America’s social reality. However, GM was still far from achieving Drucker’s ideal that the corporation should be an engine with which to achieve the greater good. GM’s concept of employment was to churn out the highest volume of cars at the lowest possible cost. The role of the worker was to do as he was told and perform his assigned task on the assembly line with mindless monotony.

Next we shall look at Corporation as a pillar of society……..Watch out!!!!!!!!

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