Drucker then specifies what must be true for a theory of the business to be valid. It must be:
- True, as in accurately reflecting reality in the here and now.
- Congruent, meaning the parts have to fit together and complement one another.
- Grasped and understood throughout the firm, and vibrantly kept alive (pointedly, Drucker notes that this becomes more challenging as a firm grows and particularly as it seems to move from strength to strength (emphasis mine): “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.”
- And finally it must be subject to continual testing and validation against reality, because the theory is not “graven on tablets of stone, [i]t is a hypothesis.”
Drucker concludes with what’s as close to a call to arms as one is likely to find in management literature:
Some theories of the business are so powerful that they last for a long time. But eventually every theory of the business becomes obsolete.
And here’s a handy test for knowing when the theory becomes obsolete, since they aren’t packaged with sell-by dates: “A theory of the business always becomes obsolete when an organization attains its original objectives. Attaining one’s objectives, then, is not cause for celebration; it is cause for new thinking.”
Here we pause for a moment to celebrate the almost surreal originality and intellectual power of Peter Drucker: He was 85 years old when he wrote those words. (He would live another 11 years.) How many 25-year-old’s, or 45-year-old’s, truly believe that attaining one’s goals is the occasion to start thinking anew? I warned you at the beginning that this kind of profound reflection can be intellectually taxing.
Now let’s jump ahead nearly 20 years to the 2011 HBR article, “When Your Business Model Is in Trouble,” an interview with Columbia Business School Professor Rita Gunther McGrath. Early on, she’s asked what are the warning signs that a business model is running out of gas:
The first clear stage is when next-generation innovations offer smaller and smaller improvements. If your people have trouble thinking of new ways to enhance your offering, that’s a sign. Second, you hear customers saying that new alternatives are increasingly acceptable to them. And finally, the problem starts to show up in your financial numbers or other performance indicators.
Now, I’m not going to put words in your mouth, or thoughts in your head, but do you find that (a) your lawyers have trouble thinking of ways to improve what they do; (b) clients are directing some work to nontraditional providers; and (c) it’s getting harder and harder to move the financial performance needles? Sorry; we can just keep moving right along here.
What should firms worried about the durability of their model do about it? The Professor is not offering cheap solace (emphasis mine):
There’s always very early evidence that a business model is in trouble, but it usually gets ignored or dismissed. That’s because at most companies the people at the top got there because of their success with the current model—so they have very few incentives to question its durability. So you get a denial reaction initially, followed by desperate attempts to eke just a little more time out of the existing model.
As an example of a business model with staying power, she cites markets with “customer stickiness,” particularly subscription-based models, and barriers to switching; a close second is to provide a “platform”–think Microsoft Windows in its heyday. To be avoided are markets where the customer “buys something once and is done.” Ahem.
Drucker cites two “preventive” techniques for avoiding business model obsolescence: The first is what he calls “abandonment” but what is probably more familiarly thought of as “zero-based” activity management. Every three years or so, he recommends asking of every single service or product the firm offers whether it would be offered again today if not already in the portfolio. Seriously. In the vernacular, this is known as reinventing yourself before the other guy does it to you.
