Your Theory of Business – Is Your Business Based on Reality?

Frameworks and Processes

Do you have a valid Theory of Business? A valid theory of business is extraordinarily powerful.

Purpose

A Theory of Business is a hypothesis of how your business or organization works. It is the assumptions your business makes of how your business should act and how your customers and the world will respond. It predicts how and why your business works.

It is not a slogan, mission statement, or elevator speech.

“Every organization, whether a business or not, has a theory of the business. Indeed, a valid theory that is clear, consistent, and focused is extraordinarily powerful”.
Peter Drucker

If your Theory of Business is wrong, you can do all the right things, but your business will fail.

The world is changing so rapidly that your assumptions have probably changed since your started your business or designed your department’s organization and workflow. Any organization older than two or three years must examine its Theory of Business.

This short article will help you create and test a one-sentence Theory of Business. That will help you and your people focus on reality.

Description

The father of management science, Peter Drucker, first wrote about the Theory of Business in the article, “The Theory of the Business”, in the September-October, 1994 issue of Harvard Business Review. Drucker wrote that you or your business can have great strategy and tactics, be in perfect alignment, and execute flawlessly, but if your Theory of Business is wrong, you will probably fail.

Some signs you probably need a new Theory of Business are,

  • Your assumptions have been the same for three years or more.
  • You have achieved your primary objectives.
  • You meet failure when you expected an easy success.
  • Other businesses in your market are growing significantly faster.

Professor Michael G. Goldsby, in his audio book, “The Entrepreneur’s Toolkit,” from The Great Courses, uses a single sentence to describe a Theory of Business. His sentence is,

If … then … because …

More completely the sentence is,

If… (we do this),

then … (our customers will respond like this),

because … (the customer’s reasons for responding)

How many of the people in your organization can describe your business like this in one sentence? Can you? (Some examples are below.)

The “If…then…because…” sentence has the form of a scientific hypothesis. If the hypothesis consistently proves true, then it becomes a theory, your Theory of Business. If your Theory of Business is based on false assumptions, the theory is invalid and your business will fail.

As the world changes and new data are discovered, the assumptions your hypothesis is based on may no longer be valid, and the theory has to be updated. In some cases, a new theory encloses and expands on an old theory. (For example, the Newtonian physics developed by Sir Isaac Newton’s wasn’t replaced by quantum and relativistic physics. They are all true at different micro and macro levels in the universe.)

If you want your business and people to keep up in this rapidly changing world, then you must evaluate your Theory of Business every two or three years and see if its assumptions are still true. It’s also a great idea to survey your people and see the diverse opinions of why your business exists.

Put It to Work

Writing your Theory of Business is an enlightening experience, but if you are crafting it with a group you will get into a lot of meaningful conversation. The entire process can really align and focus your team on what your business or organization does, how it does it, and why.

Basics

A basic process for writing your Theory of Business is,

1. Describe what the Theory of Business is and give a few examples. If you are working with a team, post examples on the wall where people can see them during the exercise.

2. Use a sheet containing a template similar to the following to guide writers.

3. Use a template containing the following prompts. These prompts are just to get you started.

If …

  • What product or service do we provide?
  • What context modifies the product or service?
  • What psychological and physical context surroundings the product or service?
  • How is the product or service unique from our competitors?

Leave area to write

Then …

  • How do you expect your customers to respond?
  • What is the external response you expect, such as, purchase, loyalty, advocacy, …?
  • What is the internal response you expect, such as, belonging, exclusivity, warmth, caring, …?
  • If you are department serving internal business needs, how will other managers, departments, and employees respond?

Leave area to write

Because …

  • What is the reason your customer responded?
  • Is there a physical or psychological need your product or service supplies?
  • How does your service differ from competitors and why was your business chosen?

Leave area to write

4. You can approach writing your Theory of Business two ways.

If you are customer-oriented, work from the inside out.
Start with the THEN description that describes the customer needs you are satisfying. Follow with the BECAUSE of why customers respond. Finally, write the product or service that satisfies the THEN and BECAUSE.

If you are product-oriented, as many startups and engineers tend to be, start with the IF and work forward.
Write an IF description that describes your product or service. Continue with the THEN and BECAUSE descriptions. This can be enlightening if you find it difficult to explain why someone would buy your cool new product or service.

5. Examine your Theory of Business or compare the different Theories that came from the group.

  • Are the assumptions in your Theory of Business valid?
  • Can you prove the assumptions?
  • Are the assumptions changing?
  • Are there trends that show your Theory of Business needs to change?

Check Your People

An enlightening exercise is to have people at different levels in your organization write what they think is your Theory of Business.

Compare the Theory of Business written by people at the same level, for example, your executive team. It can highlight a lack of alignment producing wasted energy and resources.

Compare the Theory of Business written by people across the vertical hierarchy, e.g., from the CMO to a copywriter. It can highlight a failure of communication and direction.

Of course, you want to do this without spotlighting or embarrassing individuals.

Test Your Theory of Business

A Theory of Business is only valid if it is a predictor of success. If your assumptions are wrong or the IF…THEN… consequence is wrong, you could face failure.

Few businesses can take the risk of completely changing the business to test a new Theory of Business. But, there are ways to safely test a new Theory of Business.

If you are in a large organization, you can test your Theory of Business with a Quick Win project. Quick Win projects are isolated projects you can test on a small scale. When proven, you can scale them up.

If you are a startup or are creating a new product or service, then you can use the Minimum Viable Product approach to test your Theory of Business before making massive commitment. A lot has been written about MVP including a few best-selling books.

Examples

A great business has a strong, clear Theory of Business. You can probably draft a Theory of Business for most well lead organizations.

The two examples below have been drafted by the author and not taken from the businesses. I wrote them from my impression of using their services. I have chosen these two businesses because they both have succeeded with their strategic theme of “Franchise Expansion” and are known worldwide.

McDonald’s

If McDonald’s consistently provides good-enough quality food across a large geographic network,

then, traveling families or people in a hurry will eat at McDonald’s

because people traveling with children value ease and consistency and people in a hurry don’t want to take the time or spend the energy deciding where to eat.

 

Starbucks

If Starbucks creates cafés with high-quality specialty coffee, the atmosphere and language of an Italian café, and accommodates the faster-paced US lifestyle,

then, young people who embrace a caffeinated lifestyle will become addicted to buying at these cafés

because they feel part of an exclusive worldwide club while getting a Pavlovian boost from a hot specialty-caffeinated drink

Do This Now

Write down the IF…THEN…BECAUSE structure and take ten minutes to see how clearly you can write a Theory of Business for your business or department.

Have your peers write the Theory of Business and compare them. Should you write, communicate, and test a new Theory of Business?

Related Topics

To learn more about building or starting a business designed for high-performance, check the article, Leadership Skills and Manager Tools for High-Performance Business.

Sources

Drucker, P. (1994, Sep-Oct). The Theory of the Business. Harvard Business Review. Retrieved from
https://hbr.org/1994/09/the-theory-of-the-business

Goldsby, M. (2014). The Entrepreneur’s Toolkit. The Great Courses. Retrieved from
http://www.thegreatcourses.com/courses/the-entrepreneur-s-toolkit.html

 

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