0. Theory Overview

Our society has been studying the field of business for over a century now. Consequently, a myriad of theories has been developed during this time. And yet, the world of business is still missing the most important component--a fundamental theory.

Traditionally, business is taught as a collection of discrete disciplines. Practitioners are left to mix and choose, as they see fit, disparate concepts in order to get an understanding of the big picture. (Some MBA programs attempt to offer a vehicle for this aggregation process through the discipline of Corporate Strategy due to its big picture setting. However, this area has its own problems, as discussed in 10. The Pyramid of Success.) Under these circumstances, what is commonly dubbed as "business fundamentals" is nothing more than a simplification of the discrete disciplines, a small collection of disparate concepts.

Fortunately, change is under way. The theory introduced here provides not only a universal framework that explains what happens in business at the fundamental level, but also a common platform for all business disciplines and concepts. It is a theory of the big picture. Its impact on the field of business can be (humbly) compared with the impact of Newton's laws of motion on mechanics.

The theory is a breakthrough development expanding upon the elements introduced in Cristian Mitreanu's 2004 white paper "Strategy, Redefined." A new concept, the ofmos, provides the critical piece that helps with this radical improvement. In addition, to increase their relevancy, several concept labels have been renamed. More recently, the theory has been detailed in Cristian's article "A Business-Relevant View of Human Nature."

Comments

[Cristian]

Hello,

I thought that it might be a good idea to break the ice with some additional thoughts...

With no intention to minimize the value of the theoretical concepts taught in business schools, it is interesting to look at some of the diverse interpretations of "business fundamentals" and observe that there is no one course or theory to provide a fundamental platform for the existent disparate areas of knowledge.

HARVARD
BUSINESS FUNDAMENTALS SERIES SET
13 Collections of HBS background materials: Competitive Strategy, Finance for Managers, Financing Entrepreneurial Ventures, Information Technology for Managers, Leadership for New Managers (2nd Edition), Marketing Strategy, Negotiation, New Product Development, Reading Financial Reports, Sales Management, Understanding Consumer Behavior, Understanding Costs, and Managing Human Resources
http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml;jsessionid=VVFX5W3QYMYWKAKRGWCB5VQBKE0YOISW?id=6655BN

WHARTON
CORE BUSINESS FUNDAMENTALS
Component of the MBA program, encompassing 10 courses: Competitive Strategy, Global Strategic Management, Financial Analysis, Macroeconomic Analysis and Public Policy, Financial Accounting, Fundamentals of Managerial Accounting, Operations Management: Quality and Productivity, Operations Management: Supply Chain Management, Marketing Management: Program Design, and Marketing Management: Strategy
http://www.wharton.upenn.edu/mba/academics/curriculum/core.cfm#3

INSEAD
BUSINESS FUNDAMENTALS
Component of the Executive MBA program, encompassing 10 core courses (and 8 electives): Managerial Behavior, Decision Making, Management Accounting and Control, Economic Analysis, Finance, Organization Dynamics, Financial Accounting, Prices and Markets, Marketing, and Operations Management
http://www.insead.edu/emba/embaprog_curriculum_p1.cfm

Cristian | BizBigPic

[LW]

Hi,

I happen to surf around and read your theory. But I have to admit that I have no idea what and how your theory can help me, as a real life in the business world. I got to say that I just can't link your baby with what a CEO does everyday and not to mention how to understand your fundamental theory of business......anyway, I would be appreciated if you can explain more to the readers....
Thanks!

[Cristian]

Hi LW,

Obviously, as a CEO, your role is to lead the organization toward achieving and sustaining success. And by corporate success I mean organizational health - sustained positive cash flow and profit, which serves the primary role of a business - wealth accumulation for the owners. Therefore, you, the CEO, must 1) be able to see the big picture (the business, the landscape, and its evolution over time), and 2) have a framework (a logic) to guide the decisions and actions within the organization so that success is achieved and sustained.

The theory introduced here addresses both aspects related to the CEO job.

Essentially, the theory shows that relative to the customer problem solving behavior every business is in fact a portfolio of commoditizing ofmos. An ofmos is a business system (a system of transactions) defined by the organization, one of the organization's offerings, and a set of customers that have the same behavior relative to the offering. Due to the limitation of resources, organizations tend to become very good with a particular business approach, which translates into the emergence of a group of ofmos that generates most of the revenue. This is the Ofmos Portfolio Center, which reflects the fundamental business approach through which an organization is currently generating most of its revenue. Under the commoditization pressure exerted by the customers, the Center commoditizes as well. (Remember, the center is defined by ofmos, which are defined by individual transactions.)

At the same time, constrained by the natural limitation of resources, organizations are designed and managed top-down with a particular business approach in mind. Relative to the customer problem solving behavior, this is the Ofmos Portfolio Focus (Type I, II, or III - see comments under chapter 3). Aside from reflecting the intended business approach, the Focus also determines the organization's structure, and drives the communications with employees and customers. A mismatch between Focus and Center will generate conflicts and tensions that could lead to the demise of the organization.

As a result, the CEO's main job is to ensure that an alignment between the Focus and Center is achieved and sustained over time. (This is in fact the main component of the Pyramid of Success - the framework that addresses the second point mentioned at the beginning of this comment.) Every decision of the leadership team regarding offerings and markets directly affects the ofmos portfolio, and ultimately the Ofmos Portfolio Alignment. For clarification, I will use a few examples from the fast-evolving IT industry.

i. IBM---In the early 1990's, IBM went through tough times loosing billions of dollars annually. What happened? Their PC business grew to such proportions that it ended up defining the company's Center. But since the PC was a fast-commoditizing offering, the Center quickly moved out of alignment with the company's traditional Type II Focus leading to the problematic situation. Only after they brought in new leadership that adjusted the ofmos portfolio by adding high-value services (Type II offerings), did IBM start to recover and recapture its traditional Type II Alignment. And, later on, they ended up selling the PC business.

ii. IBM---Another interesting example is related to how IBM's current leadership has put the company in dangerous territory once again. (Interestingly enough, to my knowledge, nobody in the media has picked up this story.) For the past few years, IBM has been aggressively pushing the "On Demand" campaign. What they probably didn't realize is that "on demand" suggests utility computing, an offering that can only be successfully supported by a Type I organization. In other words, IBM's leadership was pushing a Type I Focus on a Type II organization, risking to disrupt their Type II alignment. I am not sure about the damage, but it seems that that campaign has recently ended.

iii. Dell---Dell Computer's growth over the past two decades has been remarkable. Many touted the "direct" approach. But when Dell recently began to experience a growing number of unsatisfied customers, that theory didn't hold up. So, what happened? Founded in the early 1980s, Dell was a Type I organization from its inception, even though for most customers the PC was a Type II offering. That is why Dell's initial customer base was constituted mostly of computer-savvy customers for which the PC was already a commodity, a Type I offering. But as the PC continued to commoditize and become a Type I offering for most customers, Dell started to successfully steal business from other PC companies, who started as Type II organizations and now were struggling to handle a Type I offering. In spite of this, in the past year, Dell failed to adjust their ofmos portfolio in time, allowing their Center to commoditize too much. This process has rendered some of their offerings inappropriate for the offering standards expected by the customers. More recently, they moved toward fixing this problem by relocating some call centers and acquiring Alienware (gaming computers), which will allow Dell to adjust the ofmos portfolio by adding higher-value offerings.

(Other examples from the readers are highly appreciated.)

As you can see this theory can be extremely valuable for a CEO. Every decision about launching new offerings, terminating particular offerings, entering and/or exiting markets, mergers & acquisitions, the structure of your organization, etc. will influence the organization's alignment, which in turn will affect the organization's health.

I know that I didn't cover everything (see additional stuff under the chapters 9 and 10), but getting a grasp on the concept of alignment first is very important.

Please don't hesitate to ask more questions. After all, this is meant to be a discussion... Thanks. Cristian | BizBigPic

[Michael Aschenbach]

Recently I heard, via Forbes-Wolfe Nanotech Report, that IBM was investing heavily in nanotech, which would seem to be a Type III activity in your model.
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You state, "relative to the customer problem solving behavior every business is in fact a portfolio of commoditizing ofmos." I am wondering if customer problem solving behavior always leads to commoditization of an offering. What if we consider the enhancing effect of more people joining a club. In this case, it would seem that commoditization is counter-balanced by a value increasing process over time as the club becomes more valuable to join. This clearly applies to technology "clubs."

Also consider the appreciation factors in offerings as varied as houses and art works, say Picassos. How should we represent these capital gains factors in your model?

There are many things that appeal to me about this model, notably its use of graphical models to achieve complexity management. I'm just suggesting that you might want to consider a wider range of "customer" behaviors and types of organizations that might not normally fit into the concept of "business" but are nevertheless in the business of solving problems, for example religions.

I discuss some of these ideas in my new book, VISION 3000: The Transformation of Humanity in the New Millennium, which is entirely previewable for free at: www.emergingvisionmedia.com

These are interesting ideas you have offered, Cristian. I will contemplate them for awhile and await your responses. Thank you for the novel approach. ---Michael

[Cristian]

Hi Michael,

A nanotech solution, in general, seems to have the makings of a high-level offering, but it's impossible to say what level (II or III) without knowing the context--"what solution for which customers?" The same offering can be a Type II offering for some customers, and a Type III offering for others...

Note >> Discussing an offering without a context is a major flaw of traditional business thinking. Proof of this lies in the fact that the concept "industry" (defined solely by an offering) remains one of the most dominant business concepts today. The concept "ofmos" (see chapter 4) overcomes this problem. Defined by (1) an offering and (2) a set of customers that have the same problem solving behavior relative to the offering, it provides the context for an offering. << End Note

Now, it's possible that IBM will launch these nanotech offerings as Type III offerings for a small set of customers in order to get validation. But shortly after, I believe that they will accelerate the process of commoditization, by (1) standardizing the related processes (production, sales, etc.) and (2) educating the market, in order to bring the offerings into the Type II space, where they excel and the number of customers is higher. Then, using the associated patents, they will slow down further commoditization, preventing the offerings from becoming Type I, generic offerings... This seems to be a classic pattern for Type II organizations, like IBM and GE.

Back to your main comment... As I explained in the answer to your other comment under "General Discussions & Updates," commoditization is the result of learning and knowledge accumulation, which is a fundamental characteristic of human nature. Therefore the process of commoditization is a continuous process. The only "counter-balance" is innovation (incremental improvements of the offerings). Also in that comment, I explained the fact that commoditization and value growth are intertwined--more commoditization, more value for the customer (value as in "making the most out of an offering;" not value as in "price value").

About Picassos... Again, it is essential to understand the context of an offering. For most people a painting, in general, is just a decorative object, a Type I offering that impacts them at the "Activity" level. In other words, for most people a painting is a commodity, which brings value by "enhancing the atmosphere in the living room." At the same time, for others some paintings are more than decorative objects. They are objects of status. These paintings are Type I offerings that impact at the "Operational Entity" level. (Their uniqueness and importance for the customers lead to bidding wars that generate huge price values.)

Religions can be explained too. Like the theory presented here, religions are ideologies. They impact individuals at the "Ideology" level. In other words, they generate value by offering individuals "a platform to support their lives." Of course, the levels of commoditization depend on who the customer is...

Please let me know if I missed something. Again, great points! Cristian | BizBigPic