Why Are We in Business?

To know what a business is we have to start with its purpose. There is only one valid definition of business purpose: to create a customer. Because its purpose is to create a customer, the business enterprise has two—and only these two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rests are costs.

––Peter Drucker, People and Performance, 2007

When participants in our seminars are asked why they are in business, more than 75 percent answer: “To make a profit.”

Yet is the answer really that simple?

Any business needs to earn a profit to survive; indeed, profit is the measurement of how much value an organization adds to the lives of others—an index of altruism, as George Gilder says. It is also a premium earned for risk and uncertainty.

That said, to think that a business exists solely to make a profit is to confuse cause and effect—we must distinguish between the purpose of a business with its goal.

As Peter Drucker indefatigably pointed out, not only is the notion that businesses exist to make a profit false, it is irrelevant. Profit is a result of customer behavior. More accurately, profit is a lagging indicator of customer behavior. The real results of any organization take place in the hearts and minds of its customers.

Economists use a different definition of profit from that of the typical financial statement. They consider both parties to a transaction, because both parties must receive more value than each is giving up; otherwise no transaction would be consummated in the first place.

A most articulate expression of the above definition came from Stanley Marcus [1905–2002), chairman emeritus of Neiman-Marcus, one of the ultimate authorities on customer service:

"You’re really not in business to make a profit, but you’re in business to render a service that is so good people are willing to pay a profit in recognition of what you’re doing for them."

In reality, there is no way for a seller to capture all of the economic value created—the buyer must also earn a profit.

Peter Drucker explained the same idea by what he termed the marketing concept, in the early 1960s. The purpose of any organization—from a governmental agency or nonprofit foundation, to a church or a corporation—exists to create results outside of itself.

The result of a school is an educated student, a saved soul for a church, as is a cured patient for a hospital, or a saved soul for a church. A business exists to create wealth for its customers.

The only thing that exists inside of a business are costs, activities, efforts, problems, mediocrity, friction, politics, crises, and a grapevine. In fact, Peter Drucker wrote, “One of the biggest mistakes I have made during my career was coining the term profit center, around 1945. I am thoroughly ashamed of it now, because inside a business there are no profit centers, just cost centers.”

The only profit center is a customer’s check that does not bounce. Customers are indifferent to the internal workings of your firm in terms of costs, desired profit levels, and efforts. Nobody wants to hear about the labor pains—they want to see the baby.

What makes the marketing concept so breathtakingly brilliant is that the focus is always on the outside of the organization. It does not look inside and ask, “What do we want and need?” but rather it looks outside to the customer and asks, “What do you desire and value?”

Perhaps another reason we lose sight of the truth that businesses exist to create wealth is the language of business is drawn largely from war and sports analogies. In sports, a competition is usually zero-sum; meaning one competitor wins, and the other loses. This is not at all relevant in a business setting.

Just because your competitors flourish does not mean you lose. There is room for both FedEx and UPS, Airbus and Boeing, Pepsi and Coke, Ford and Toyota, and while their sparring might be mistaken as some war, as economist John Kay points out “not in Pepsi’s wildest fantasies does it imagine that the conflict will end in the second burning of Atlanta [Coca-Cola’s head office].”

When Coca-Cola changed their recipe to New Coke, company spokesman Carlton Curtis stated, “You’re talking about having some guts—and doing something that few managements would have the guts to do.” If you find it amusing that grown men talk about guts and recipes in the same sentence, then it should be obvious business has nothing to do with war.

Business is not about annihilating your competition; it is about adding more value to your customers. War destroys, commerce builds. It is as far removed from war as capitalism is from communism, and perhaps these war analogies, too, need to be tossed onto the ash heap of history.

In the final analysis, a business does not exist to be efficient, control costs, perform cost accounting, or give people fancy titles and power over the lives of others. It exists to create results and value outside of itself.