But, if used consistently, they should keep an organization alert and capable of rapidly changing itself and its theory. The first measure is what I call abandonment. Every three years, an organization should challenge every product, every service, every policy, every distribution channel with the question, If we were not in it already, would we be going into it now? By questioning accepted policies and routines, the organization forces itself to think about its theory.
It forces itself to test assumptions. Is it because we made a mistake? Is it because we did the wrong things? Without systematic and purposeful abandonment, an organization will be overtaken by events.
It will squander its best resources on things it should never have been doing or should no longer do. As a result, it will lack the resources, especially capable people, needed to exploit the opportunities that arise when markets, technologies, and core competencies change. In other words, it will be unable to respond constructively to the opportunities that are created when its theory of the business becomes obsolete.
The second preventive measure is to study what goes on outside the business, and especially to study noncustomers. Walk-around management became fashionable a few years back. It is important. Noncustomers always outnumber customers. In fact, the best recent example of the importance of the noncustomer is U.
They questioned their customers constantly, studied them, surveyed them. They saw no reason why they should. Their theory of the business assumed that most people who could afford to shop in department stores did. Fifty years ago, that assumption fit reality. But when the baby boomers came of age, it ceased to be valid. For the dominant group among baby boomers—women in educated two-income families—it was not money that determined where to shop.
Because department stores looked only at their own customers, they did not recognize this change until a few years ago. By then, business was already drying up.
And it was too late to get the baby boomers back. The department stores learned the hard way that although being customer driven is vital, it is not enough. An organization must be market driven too. Early Diagnosis. To diagnose problems early, managers must pay attention to the warning signs. A theory of the business always becomes obsolete when an organization attains its original objectives.
Some executives then said it was time to reassess the theory of the business and, for instance, separate local service—where the objectives had been reached—from growing and future businesses, beginning with long-distance service and extending into global telecommunications. Any organization that doubles or triples in size within a fairly short period of time has necessarily outgrown its theory. Even Silicon Valley has learned that beer bashes are no longer adequate for communication once a company has grown so big that people have to wear name tags.
But such growth challenges much deeper assumptions, policies, and habits. To continue in health, let alone grow, the organization has to ask itself again the questions about its environment, mission, and core competencies. But sales of its Jeep and its new minivans—an almost accidental development—skyrocketed. At the time, GM was the leader of the U. After all, minivans and light trucks had always been classified as commercial rather than passenger vehicles in traditional statistics, even though most of them are now being bought as passenger vehicles.
However, had it paid attention to the success of its weaker competitor, Chrysler, GM might have realized much earlier that its assumptions about both its market and its core competencies were no longer valid. From the beginning, the minivan and light-truck market was not an income-class market and was little influenced by trade-in prices.
And, paradoxically, light trucks were the one area in which GM, 15 years ago, had already moved quite far toward what we now call lean manufacturing.
Everyone thought Sears was crazy. It was only logical for Sears to decide in that investment products had become consumer goods for the American family. It bought Dean Witter and moved its offices into Sears stores. The move was a total disaster. The U. In , Sears sold it at a tidy profit. For Sears might then have seen, as several of its competitors like J.
Penney immediately did, that the Dean Witter failure threw into doubt the entire concept of market homogeneity—the very concept on which Sears and other mass retailers had based their strategy for years. Traditionally, we have searched for the miracle worker with a magic wand to turn an ailing organization around. To establish, maintain, and restore a theory, however, does not require a Genghis Khan or a Leonardo da Vinci in the executive suite.
It is not genius; it is hard work. It is not being clever; it is being conscientious. It is what CEOs are paid for. To establish, maintain, and restore a theory does not require a Genghis Khan in the executive suite. It requires hard work. There are indeed quite a few CEOs who have successfully changed their theory of the business. But for every one of these apparent miracle workers, there are scores of equally capable CEOs whose organizations stumble.
And when one talks to these supposed miracle workers, they deny vehemently that they act by charisma, vision, or, for that matter, the laying on of hands.
They start out with diagnosis and analysis. They accept that attaining objectives and rapid growth demand a serious rethinking of the theory of the business. It requires decisive action. You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Managing people. The Theory of the Business. But, with the exceptions of outsourcing and reengineering, these tools are designed primarily to […] by Peter F.
The Peter F. Drucker Read more on Managing people or related topics Organizational restructuring , Competitive strategy and Strategy. Peter F. Drucker November 19, — November 11, was an Austrian-born American management consultant, educator, and author whose writings contributed to the philosophical and practical foundations of the modern business corporation.
You could consider setting up a team of employees to monitor and report on changes in the business world. Professional associations and trade bodies - their publications, academic publications, government publications, reports from research bodies, trade and technical magazines. Trade exhibitions and conferences - these can provide an easy way of finding out what your competitors are doing and to see the latest innovations in your sector.
Product research and development - scientific and technical research and development can be a vital source of knowledge that can help you create innovative new products - retaining your competitive edge. Organisational memory - be careful not to lose the skills or experience your business has built up.
You need to find formal ways of sharing your employees' knowledge about the best ways of doing things. For example, you might create procedural guidance based on your employees' best practice. Non-executive directors - these can be a good way for you to bring on board specialised industry experience and benefit from ready-made contracts. An improvement in the goods or services you offer and the processes that you use to sell them. For example, identifying market trends before they happen might enable you to offer products and services to customers before your competitors.
Increased customer satisfaction because you have a greater understanding of their requirements through feedback from customer communications. An increase in the quality of your suppliers , resulting from better awareness of what customers want and what your staff require.
Improved staff productivity , because employees are able to benefit from colleagues' knowledge and expertise to find out the best way to get things done.
They'll also feel more appreciated in a business where their ideas are listened to. Increased business efficiency , by making better use of in-house expertise. Better recruitment and staffing policies. For instance, if you've increased knowledge of what your customers are looking for, you're better able to find the right staff to serve them. The ability to sell or license your knowledge to others. You may be able to use your knowledge and expertise in an advisory or consultancy capacity.
In order to do so, though, make sure that you protect your intellectual property. Databases organise information so it can be easily accessed, managed and updated. For instance, you might have a database of customers containing their contact information, their orders and preferences. A data warehouse is a central storage area you might use if you have a variety of business systems, or a range of information in different digital formats.
Many businesses now use digital asset management to store, manage and retrieve information, and this can be particularly helpful if you sell online. It is, however, a complex area technically and in task management, and you may wish to seek specialist advice from an IT consultant.
Data mining is a process in which all the data you collect is sorted to determine patterns. For instance, it can tell you which products are most popular and whether one type of customer is likely to buy a particular item. Reporting and querying tools let you create reports interpreting data in a particular way. How many of your sales have been handled by one particular employee, for instance?
Business intelligence portals are websites that bring together all sorts of potentially useful information, such as legal issues or details of new research. The Internet and search engines - these can be a powerful source of knowledge, although be certain to check the credibility of your information source. Internet newsgroups can be specific sources of business information, but check the authors' other postings before deciding how to view their opinions and claimed facts.
An intranet is a secure internal network for the sole use of your business. An extranet is similar to an intranet but can be extended to customers and suppliers. Customer relationship management software helps you build up a profile of your customer database and enables you to target them through e-mail, telephone or postal marketing campaigns. Call-centre systems enable you to serve large numbers of customers if you sell by telephone.
Website log-file analysis helps you to analyse how customers use your website so you can improve its effectiveness. Systems to analyse and file customer letters, suggestions, emails, and call centre responses, which will enable you to spot trends, improve customer service and develop new products, services and systems. Share on:. Need help? Our qualified agents can help you. Contact us! Recent reforms in Russia, China, and most of the eastern European nations have moved these economies toward more capitalistic, market-oriented systems.
North Korea and Cuba are the best remaining examples of communist economic systems. Time will tell whether Cuba takes small steps toward a market economy now that the United States reestablished diplomatic relations with the island country a few years ago.
Socialism is an economic system in which the basic industries are owned by the government or by the private sector under strong government control. A socialist state controls critical, large-scale industries such as transportation, communications, and utilities. Smaller businesses and those considered less critical, such as retail, may be privately owned. To varying degrees, the state also determines the goals of businesses, the prices and selection of goods, and the rights of workers.
Socialist countries typically provide their citizens with a higher level of services, such as health care and unemployment benefits, than do most capitalist countries. As a result, taxes and unemployment may also be higher in socialist countries. For example, in , the top individual tax rate in France was 45 percent, compared to With both countries electing new presidents in , tax cuts may be a campaign promise that both President Macron and President Trump take on as part of their overall economic agendas in the coming years.
Many countries, including the United Kingdom, Denmark, India, and Israel, have socialist systems, but the systems vary from country to country.
In Denmark, for example, most businesses are privately owned and operated, but two-thirds of the population is sustained by the state through government welfare programs.
Pure capitalism and communism are extremes; real-world economies fall somewhere between the two. The U. Also, through policies and laws, the government transfers money to the poor, the unemployed, and the elderly or disabled. American capitalism has produced some very powerful organizations in the form of large corporations, such as General Motors and Microsoft. To protect smaller firms and entrepreneurs, the government has passed legislation that requires that the giants compete fairly against weaker competitors.
Canada, Sweden, and the UK, among others, are also called mixed economies ; that is, they use more than one economic system. Sometimes, the government is basically socialist and owns basic industries. In Canada, for example, the government owns the communications, transportation, and utilities industries, as well as some of the natural-resource industries. It also provides health care to its citizens.
But most other activity is carried on by private enterprise, as in a capitalist system. In , UK citizens voted for Britain to leave the European Union, a move that will take two or more years to finalize. It is too early to tell what impact the Brexit decision will have on the UK economy and other economies around the world. The few factors of production owned by the government in a mixed economy include some public lands, the postal service, and some water resources.
But the government is extensively involved in the economic system through taxing, spending, and welfare activities. The economy is also mixed in the sense that the country tries to achieve many social goals—income redistribution and retirement pensions, for example—that may not be attempted in purely capitalist systems. The state of the economy affects both people and businesses. How you spend your money or save it is a personal economic decision. Whether you continue in school and whether you work part-time are also economic decisions.
Every business also operates within the economy. Based on their economic expectations, businesses decide what products to produce, how to price them, how many people to employ, how much to pay these employees, how much to expand the business, and so on. Economics has two main subareas. Macroeconomics is the study of the economy as a whole. It looks at aggregate data for large groups of people, companies, or products considered as a whole. In contrast, microeconomics focuses on individual parts of the economy, such as households or firms.
Both macroeconomics and microeconomics offer a valuable outlook on the economy. For example, Ford might use both to decide whether to introduce a new line of vehicles. The company would consider such macroeconomic factors as the national level of personal income, the unemployment rate, interest rates, fuel costs, and the national level of sales of new vehicles. From a microeconomic viewpoint, Ford would judge consumer demand for new vehicles versus the existing supply, competing models, labor and material costs and availability, and current prices and sales incentives.
Another way to see how the sectors of the economy interact is to examine the circular flow of inputs and outputs among households, businesses, and governments as shown in Figure. Households provide inputs natural resources, labor, capital, entrepreneurship, knowledge to businesses, which convert these inputs into outputs goods and services for consumers.
In return, households receive income from rent, wages, interest, and ownership profits blue circle. Businesses receive revenue from consumer purchases of goods and services. The other important exchange in Figure takes place between governments federal, state, and local and both households and businesses.
Governments supply many types of publicly provided goods and services highways, schools, police, courts, health services, unemployment insurance, social security that benefit consumers and businesses.
Government purchases from businesses also contribute to business revenues. When a construction firm repairs a local stretch of state highway, for example, government pays for the work. As the diagram shows, government receives taxes from households and businesses to complete the flow.
Changes in one flow affect the others. If government raises taxes, households have less to spend on goods and services.
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