Tuesday, June 17, 2014

What Is the Purpose of a Business?

Image courtesy of Google Books
What is the purpose of a business? Not sure? Consider this.

In Peter Drucker's The Daily Drucker, which contains 366 daily insights (excerpts from his books; see original text I'll refer to from The Practice of Management in the image to the left), each one ending with an action item to put that day's concept to use, he writes:

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.

ACTION POINT: Find out what needs your customers want fulfilled today. Determine how well your products are meeting the needs of your customers. That is the purpose of business.

I've written previously that your purpose is your why; it's the reason for being, the reason for doing what you're doing. It is your guiding light. Everything you do, from hiring to designing your customer experience, will be aligned with this purpose. It's your north star; it guides you when you're lost and points you in the right direction when competing ideas are spreading you too thin.

We need to forget about that 1970s mindset, that the purpose of a business is to maximize shareholder value. That's not a purpose; that's an outcome of creating customers. Being customer-focused and customer-centric translates to shareholder value. Focus on the customer, on creating customers, and the profits will come.

But you can't create - and then, especially, keep - customers without knowing who they are, which most certainly is required in order to facilitate delivering a great customer experience. Retention is key here, or you'll keep spinning your wheels. Drucker's "Action Point" is spot on. Find out the needs of your customers and what jobs they are trying to do, figure out how well you're meeting their needs or how easy/difficult it is for them to achieve some task, and correct/celebrate accordingly.

In order to better understand who the customer is, do the research to develop personas. You'll thank me for it. Personas...
  • Shift the organization's focus outside-in (on the customer), as it should be, rather than inside-out
  • Really put the experience in the customer’s perspective and make you think about the customer as a “real human”
  • Help everyone understand who the customer is and obsess about the customer’s needs
    • And keep people from forming their own opinions about who the customer really is - everyone is on the same page
  • Develop empathy for the customer
  • Bring the customer to life
  • Drive engagement and ongoing understanding of the customer, especially since they need to be reviewed and updated on a regular basis
I think Jeff Bezos took a page right out of Drucker's book when he created Amazon. He has said: We see our customers as invited guests to a party, and we are the hosts. It's our job every day to make every important aspect of the customer experience a little bit better.

Is this thinking and behavior that your organization can adopt? It's never too late. Obsess about the customer, and the business will thrive.

Whenever you see a successful business, someone once made a courageous decision. -Peter F. Drucker


  1. Thank you Annette, for this excellent refresher. First, we forgot that maximizing shareholders value is an outcome, not a purpose of business. Then, we forgot that people who trade on quarterly P/E data are not the shareholders, but share traders. Yes, business leaders prefer cater to the needs of the short term interests at the expense of their stakeholders - customers, employees and shareholders.

    1. Thanks, Gregory. You're right... it seems they do prefer to cater to short-term interests. Sadly.

  2. Annette, I haven’t come across this book, I will give it a go.

    As for purpose, I find that lots of organisations (and people) have a very self centred purpose, — to be the worlds best bank. Oddly their customers don’t give two hoots, which is why they never succeed

    1. Agree... what does that mean, to be the best bank? It's most likely self-serving.

      It was my first look at the book, too. I will be taking a look at his others, as well.

  3. Annette,
    Can you believe that this book was first published in 1954? Thanks for the reminder.

    Also, what do you think about Amazon's recent and ongoing spat with Hachette? In the customers interests?


  4. Annate, Drucker's Post Capitalist Society was one of the influences on the concept of the profit-for-purpose business model which began with this question.

    "At first glance, it might seem redundant to emphasize people as the central focus of economics. After all, isn't the purpose of economics, as well as business, people? Aren't people automatically the central focus of business and economic activities? Yes and no.

    People certainly gain and benefit, but the rub is: which people? More than a billion children, women, and men on this planet suffer from hunger. It is a travesty that this is the case, a blight upon us all as a global social group. Perhaps an even greater travesty is that it does not have to be this way; the problems of human suffering on such a massive scale are not unsolvable. If a few businesses were conducted only slightly differently, much of the misery and suffering as we now know it could be eliminated. This is where the concept of a "people-centered" economics system comes in."

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