The first, the theory of the business

The paper is all about reviewing Drucker’s “theory of management” and its application to various organization. How this “theory of management” affects the performance of the organization and stability of firm operations. The theory claims that it provides business a distinctive view of the business and provide a foundation wherein the business could start from. It also provides the business assumptions on the business itself, which can help the organization developed their existing brands into a more detailed and well planned label. Some organizations change their theories of the business in a timely manner, but most have to be jolted out of an existing theory into another one. Some adapt; many don’t. Every organization runs on the basis of assumptions. And when an organization puts together its key assumptions—about the environment in which it operates, its specific purpose in the world, and the core competencies it needs to accomplish its mission—it arrives at what Peter Drucker called its “Theory of the Business.” Therefore, the author of this article presents the idea in four major parts, and that is first, the theory of the business is introduced as a conceptual framework. Second, assumptions are explored as constructs in recent business and management literature. The third section considers the two business case studies that led to development of theory of business, while part four attempts to synthesize and conclude the chapter.

The article promotes that assumptions will be the basis for businesses to create their framework for creating their organization. As they start conceptualizing their business, they can use these assumptions as the basis of their principles to be implemented in the operations. This assumptions should not only be there upon the inception of the business, but they can also use this for evaluating their performance and revisit their existing policies in evaluate whether these are still applicable with the existing trends on the business or will be soon obsolete given the continuous developments of trends in the business.

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Upon evaluation of the existing policies and upon knowing that there are new trends in the business, the organization need to review the existing assumptions and if found to be obsolete, change it. By changing the same, the organization must make sure that the assumptions to be created must be in accordance with the current trends so that policies that are anchored with it may also be adaptable to the current situation of the business.

The paper also discusses what happen to IBM and General Motors. In the late 1970s and 1980s IBM “assumed” that computers in the form of mainframe systems and PCs could co-exist as a product offer. Drucker argued they were in fact competitor products, contradictory in design, application and market. They both were information products, but differed in application. It assumed it could do so. But, the PC market was out stripping the mainframe business, the traditional cash cow of IBM. IBM simply could not subordinate one to the other. As a result both businesses floundered and its assumption that a computer was a computer paralyzed it. The theory of business that propelled IBM in the 1950s and 1970s about both its mainframe and PC business almost destroyed it in the late 1970s and 1980s. General Motors provided another example of how the theory of the business acts as a positive and negative force. GM’s theory of their business assumed that the US automobile market was homogeneous in its values and segmented by relatively stable income groups. These market assumptions then formed symmetry with GM’s production process, which focused on semi-autonomous divisions, built around particular income segments, connected to one another by product overlaps. For over 70 years this theory held true and not until the late 1970s did it become invalid.

I relate this assumptions being pointed out by Drucker in his “theory of management” in the accounting assumptions being followed by the accountants in doing their work and in making accounting policies and standards. These accounting assumptions are also inherent from the business itself and these are the basis of accountants in making their report for the organization. The accounting reports provides the organization their evaluation of performance, stability as well as their ability to pay their currently due payables which on the same way as with business assumptions are the basis of the organization for their fundamental creation as well as their basis of development and growth.


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