What is the purpose of business? Well that’s an easy one! Generally speaking, every business school on the planet Earth will teach you that the purpose of business is to maximize shareholders value. In other words – make a profit. So the purpose of business is to make money. And here pretty much the argument ends. But there is more to it than meets the eye and the purpose of business conveys much more complexity than this. For this reason, we would like to dig a little bit deeper. Let us do so.
The word business from old English “bisignis” (which means “anxiety”) transferred to modern days as an activity someone is engaged in, concerned with and/or regularly occupied with. In simple words, “business” suggests work that needs to be done. On the other hand, the concept of a business firm or a business organization is: a person, or usually a group of people, that has a system of activities organized towards achieving a collective goal. So here comes the question: Why would one bother with an `anxiety` to achieve a goal? What is the purpose of that?
In order to examine this question further, we should define the meaning of purpose in this particular context in a more encompassing way. Purpose, considered as the most profound goal, blended with sense of meaning. Purpose endorsed by the feeling that doing what you do has a meaning for you, your collaborators and society. Now, having somewhat deeper or at least common, understanding of what business and purpose mean, we could take on to the question.
To start with, let’s turn to late Petter Drucker and base our argument on the significances pointed out in his book The Daily Drucker. In it he argues that:
If we want to know what a business is, we have to start with its purpose. And the purpose must lie outside the business itself. In fact, it must lie in society, since a business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer.
The customer is a foundation of a business and keeps it in existence. The customer alone gives employment. And it is to supply the customer that society entrusts wealth-producing resources to the business enterprise.
Because it is the purpose to create a customer, any business enterprise has two – and only two – basic functions: marketing and innovation. These are the entrepreneurial functions. Marketing is the distinguishing, the unique function of the business.
Peter F. Drucker was a writer, professor, management consultant and self-described “social ecologist,” who explored the way human beings organize themselves and interact much the way an ecologist would observe and analyze the biological world.
Hailed by BusinessWeek as “the man who invented management,” Drucker directly influenced a huge number of leaders from a wide range of organizations across all sectors of society. Among the many: General Electric, IBM, Intel, Procter & Gamble, Girl Scouts of the USA, The Salvation Army, Red Cross, United Farm Workers and several presidential administrations.
Mr Drucker, doubtlessly one of the greatest minds in management and marketing, has a point. The purpose of business is to create a customer, and its basic functions are marketing and innovation. In this sense, if we are to take these statements further, the basic function of marketing is: to attract and retain customers at a profit. Profit does not necessarily mean money, although for most commercial organisations it is exactly it – cash. However, think of profit as the value you seek to obtain from your customers. It could be their time and attention. For non-profit organisations and philanthropists it would be their “customers”social wellness or educational development. Or it could be money as well. Still though, the foundation of every business lies in the idea of exchange. Exchange of something for something else – goods or service at a cost for the recipient, which cost has less value to him compared to the value of the product or service he receives in return. Money just makes that process whole lot easier and lets people do what they do. Consequently, this is based on the very concept of the transaction cost theory. To spare you the raw definition of it, allow us to give you an explanation that is applicable to the practical outside world. Thus, at the simplest interpretation the concept says that if you want to drive a fast car, you would be better off minding your own business, earning some decent money and then you can probably buy a Ferrari rather than focusing on making one on your own. Why? Because it is more cost-effective, time-efficient and simply makes more sense.
Now the point is, does a Ferrari has a greater value than a bunch of money that we are willing to part with? Or does it not? What is the value of the money? What is value in this particular instance? There are many definitions, from accountant, mathematical, economic point of view. We will use the marketing perspective of course. In this case, then, value would be: the extent to which a good or a service is perceived by its customers to meet their needs or wants, measured by customer willingness to pay for it. So a good or a service will have its intrinsic value. For a product, for instance a car, it is in all physical qualities – its power if you seek speed, fuel economy if you seek efficiency, boot size if you seek practically. These are all rational, hard numbers one could compare related to the quality and quantity. Then it comes the irrational dimension of value – conscious or subconscious. We would refer to it as the perceived value. Probably the best examples for perceived value are all luxury brands. The value their customer seeks and gets is status, accomplishment, recognition together of course with all the qualities. In fact the overall value is the sum of all small fragments that matter to us when looking for goods – lower price, less effort to obtain, wider variety to choose from; or a service – trust, expertise, convenience. The point is, everything has value. That value is different for everyone. It is characterized as intrinsic and perceived. It is defined by one’s needs and wants and it is shaped by the social preferences. Further Reading: The Concept of Value
Finally, what is the purpose of business?
Now let’s make few steps back and see what we have on the table so far. We defined business as a person or a group led by collective goal. This collective goal, according to Drucker, should be focused on creating and retaining customers through the functions of marketing and innovation. We further observed that in the core of the relationship between customers and businesses is the notion of exchange. Usually a customer will pay money to receive goods or services. The latter, he perceives, have greater value compared to the money he pays. If you as a person or a business want to participate in that exchange, your product or service should serve others value.
Hence, the whole purpose of business is to create something valuable on an individual scale and for the society as a whole. So next time you may consider questions such as – What should I do as a businessman? Make money, or make even more money? What is more, you should also ask yourself – Do I understand the value my business creates for my customers? How satisfied does it make them? What value do my customers seek? How can I add more value to my product or service compared to my competitors? How can I communicate that added value with my costumers and make them more satisfied?
Drucker P., (2004), The Daily Drucker, New York: Harper Business
Franz, A. (2014), What is the purpose of business, [on-line] Available from: www.cx-journey.com/2014/06/what-is-purpose-of-business.html [accessed 08/07/2015]
Friedman, M. (1970), “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, September 13.
Jobber, D. (2010), Principles and Practice of Marketing, 6th edition, New York: McGraw-Hill Higher education
Oxford dictionaries (2015), [on-line] Available from: www.oxforddictionaries.com [accessed 08/07/2015]
Peter Drucker’s Life and Legacy, [on-line] Available from: http://www.druckerinstitute.com/peter-druckers-life-and-legacy [accessed 08/07/2015]
Rory Sutherland. (2004), Life lessons from an ad man, [on-line video] Available from: http://www.ted.com/talks/rory_sutherland_life_lessons_from_an_ad_man. [Accessed: 08/07/2015]
Slater, S.F., (1997), Developing a Customer Value-Based Theory of the Firm, Journal of the Academy of Marketing Science 25(2): 162–7