Apple's Rise, Microsoft's Fall... and Rise Again: Drucker's Theory of the Business Explains It All

Why your business needs a “Theory of the Business”

[This newsletter is available on SubStack here ]

In the 1990s, the battle was won – Microsoft reigned supreme while Apple faltered. Today, they're locked in a fierce race… what changed?

Microsoft, for a long time, was the quintessential technology success story. In some spaces, it was considered the ultimate winner through the 1990s, and in some cases it was feared due to it’s ability to crush competitors. Bill Gates was almost a household name due to this and his richest man in the world status.

Apple at the same time in the 1990s was the quintessential failure story in technology. It had a fanatic fan base, but at the same time it floundered.

In the 2000s, something interesting happened. Steve Job’s return in the previous decade started to change things. Apple started to change gears and was coming out with hit after hit. iPod, iPhone, iPad. Microsoft, on the other hand, struggled to succeed in the mobile centric world. Zune was a failure. Windows was doing ok, but was not the powerful player it was earlier. The Windows phone did not go anywhere. Most people wrote off Microsoft in terms of whether it mattered to the technology world.

In the 2010s, Apple continued it’s meteoric climb and became a cultural icon. Microsoft, on the other hand, struggled to see the next step until, Satya Nadella came back. Office on iPad was launched. Windows was relegated in a new restructure. Nadella talked about the importance of empathy. Something that we never heard from any previous CEO of Microsoft.

| Year | Apple (USD) | Microsoft (USD) |

|--------|-------------|------------------|

| 2004 | $26.05B | $290.71B |

| 2010 | $297.09B | $234.52B |

| 2015 | $583.61B | $439.67B |

| 2020 | $2.255T | $1.681T |

| 2023 | $2.994T | $2.794T |

| 2024 | $3.002T | $3.009T |

In the 2020s, post-covid and post-chatGPT, Apple and Microsoft are neck to neck in influence and market cap. Apple is doing well but struggling to find the next big hit. Nadella is riding the AI wave like non-other.

What explains this?

This is where we need what Drucker called “The Theory of the Business ” (HBR, 1994).

He provides a different class of examples and different context, but the logic remains the same. Assumptions.

The root cause of nearly every one of these crises is not that things are being done poorly. It is not even that the wrong things are being done. Indeed, in most cases, the right things are being done—but fruitlessly. What accounts for this apparent paradox? The assumptions on which the organization has been built and is being run no longer fit reality.

Drucker was a big fan of assumptions, and what he meant by that was the things an organisation took for granted or believed to the right things happening and the decisions it took.

These are the assumptions that shape any organization’s behavior, dictate its decisions about what to do and what not to do, and define what the organization considers meaningful results. These assumptions are about markets. They are about identifying customers and competitors, their values and behavior. They are about technology and its dynamics, about a company’s strengths and weaknesses. These assumptions are about what a company gets paid for. They are what I call a company’s theory of the business.

Drucker considered assumptions for any organisation in three key areas — the environment of the organisation; including the economy, megatrends, technology, markets, and customers. The “Specific Mission” of the organisation and how it wanted to create a difference in the world. And to achieve in this mission in a changing environment the kind of strengths that were needed. The assumptions around these three areas were key to the theory of the business.

Is theory practical? Immensely.

To explain the see-sawing of Apple and Microsoft, you can explore this from the angle of how assumptions of each organisation in the 1990s and their strengths made a huge difference. Richard Rumelt, the strategy guru, has a great anecdote in his book ‘Good Strategy/Bad Strategy’. He asked Jobs, in the late 1990s, what his next strategic move was. Jobs, in his special and honest way of responding to questions, suggested that Apple lost the PC wars. He was waiting for the next big thing for Apple. In the meantime; he cut product lines, cut costs, launched the iMac, partnered with Microsoft and waited.

He waited for the change in environment that enabled Apple to use its design strengths.

And that happened with the advent of digital music and the Napster. With the change in environment came new opportunities and the iPod came to life.

For Microsoft, the assumptions that drove the 1990s success of Windows continued in the 2000s, and it did not fit reality. Nadella considers empathy an integral part of leadership. Drucker would agree with him. Did empathy enable Nadella to see the environment changes better? Did it help him change the organisational dynamics?

We will come back to these stories in the future as I deep dive into the framework itself. But for now, I hope you can see the power of this kind of thinking.

Peter Drucker was considered the father of management, and he shaped me immensely. This substack is the to bring his ideas, his thinking and connect them to the latest management challenges and along the way, bring the various strategy, design, and innovation approaches to life.

In the coming weeks, I will deep dive into the theory of the business framework along with others and share a Drucker anecdote every Thursday.

I will share some of my learnings, the new frameworks and how some work for some contexts and for others they don’t.

Follow this journey with me, share your thinking, question my assumptions and let’s learn together.

Have you seen outdated assumptions hinder a business? Share your story in the comments.

[This newsletter is available on SubStack here ]