Drucker on The Purpose and Objectives of a Business

Peter Drucker on The Purpose and Objectives of a Business, from The Essential Drucker.

Asked what a business is, the typical businessman is likely to answer, “An organization to make a profit.” The typical economist is likely to give the same answer. This answer is not only false, it is irrelevant.

The danger in the concept of profit maximization is that it makes profitability appear a myth. Profit and profitability are, however, crucial—for society even more than for the individual business.

Yet profitability is not the purpose of, but a limiting factor on, business enterprise and business activity.

There has never been any evidence for the existence of the profit motive, and we have long since found the true explanation of the phenomena of economic change and growth which the profit motive was first put forth to explain.

It is irrelevant for an understanding of business behavior, profit, and profitability, whether there is a profit motive or not

We do not learn anything about the work of a heart specialist by being told that he is trying to make a livelihood, or even that he is trying to benefit humanity

The profit motive and its offspring maximization of profits are just as irrelevant to the function of a business, the purpose of a business, and the job of managing a business

In fact, the concept is worse than irrelevant: it does harm

To know what a business is, we have to start with its purpose. Its purpose must lie outside of the business itself. In fact, it must lie in society since business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer.

it is business action that creates the customer

It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. What the customer buys and considers value is never just a product. It is always a utility, that is, what a product or service does for him.

Because its purpose is to create a customer, the business enterprise has two—and only these two—basic functions: marketing and innovation.

Marketing is still rhetoric rather than reality in far too many businesses

It demands that business start out with the needs, the realities, the values, of the customers

When managers speak of marketing, they usually mean the organized performance of all selling functions. This is still selling. It still starts out with “our products.” It still looks for “our market.”

It does not ask, What do we want to sell? It asks, What does the customer want to buy?

Indeed, selling and marketing are antithetical rather than synonymous or even complementary

There will always, one can assume, be the need for some selling. But the aim of marketing is to make selling superfluous.

A business enterprise can exist only in an expanding economy, or at least in one that considers change both natural and acceptable

The second function of a business is, therefore, innovation—the provision of different economic satisfactions.

It is not necessary for a business to grow bigger; but it is necessary that it constantly grow better.

The most productive innovation is a different product or service creating a new potential of satisfaction

Above all, innovation is not invention. It is a term of economics rather than of technology. Nontechnological innovations—social or economic innovations—are at least as important as technological ones.

In the organization of the business enterprise, innovation can no more be considered a separate function than marketing

Innovation can be defined as the task of endowing human and material resources with new and greater wealth-producing capacity

Managers must convert society’s needs into opportunities for profitable business

decisions affecting the entire business and its capacity to perform are made at all levels of the organization, even fairly low ones

Every one of these men and women bases their decisions on some, if only vague, theory of the business. Every one, in other words, has an answer to the question, What is our business and what should it be?

Unless, therefore, the business itself—and that means its top management—has thought through the question and formulated the answer—or answers—to it, the decision-makers in the business, will decide and act on the basis of different, incompatible, and conflicting theories

Nothing may seem simpler or more obvious than to know what a company’s business is

Actually, What is our business? is almost always a difficult question and the right answer is usually anything but obvious

That business purpose and business mission are so rarely given adequate thought is perhaps the single most important cause of business frustration and business failure

With respect to the definition of business purpose and business mission, there is only one such focus, one starting point. It is the customer

any serious attempt to state “what our business is” must start with the customer’s realities, his situation, his behavior, his expectations, and his values

Who is the customer? is thus the first and most crucial question to be asked in defining business purpose and business mission. It is not an easy, let alone an obvious, question

It is also important to ask, Where is the customer? One of the secrets of Sears’s success in the 1920s was the discovery that its old customer was now in a different place: the farmer had become mobile and was beginning to buy in town

The next question is, What does the customer buy?

does the man who buys a new Cadillac buy transportation, or does he buy primarily prestige?

Most managements, if they ask the question at all, ask, What is our business? when the company is in trouble

The question should be asked at the inception of a business—and particularly for a business that has ambitions to grow.

The most important time to ask seriously, What is our business? is when a company has been successful

Success always makes obsolete the very behavior that achieved it. It always creates new realities

In asking, What is our business? management therefore also needs to add, And what will it be?

Again the market, its potential and its trends, is the starting point

The most important of these trends is one to which few businesses pay much attention: changes in population structure and population dynamics

Management needs to anticipate changes in market structure resulting from changes in the economy, from changes in fashion or taste, and from moves by competition. And competition must always be defined according to the customer’s concept of what product or service he buys and thus must include indirect as well as direct competition

What Should Our Business Be?

What will our business be? aims at adaptation to anticipated changes.

But there is need also to ask, What should our business be? What opportunities are opening up or can be created to fulfill the purpose and mission of the business by making it into a different business?

Just as important as the decision on what new and different things to do is planned, systematic abandonment of the old that no longer fits the purpose and mission of the business, no longer conveys satisfaction to the customer or customers

The basic definitions of the business, and of its purpose and mission, have to be translated into objectives. Otherwise, they remain insights, good intentions, and brilliant epigrams that never become achievement.

1. Objectives must be derived from “what our business is, what it will be, and what it should be.”

2. Objectives must be operational. They must be capable of being converted into specific targets and specific assignments

3. Objectives must make possible concentration of resources and efforts. They must winnow out the fundamentals

4. There must be multiple objectives rather than a single objective.

To manage a business is to balance a variety of needs and goals. And this requires multiple objectives

5. Objectives are needed in all areas on which the survival of the business depends

A business must first be able to create a customer. There is, therefore, need for a marketing objective

There is need for an innovation objective

All businesses depend on the three factors of production of the economist, that is, on human resources, capital resources, and physical resources. There must be objectives for their supply, their employment, and their development

Finally, there is need for profit—otherwise none of the objectives can be attained

Objectives are always needed in all eight key areas. The area without specific objectives will be neglected.

The measurements available for the key areas of a business enterprise are still haphazard by and large

However, enough is known about each area to give a progress report at least. Enough is known for each business to go to work on objectives.

We know one more thing about objectives: how to use them.

They must be transformed into work

But objectives that become a straitjacket do harm. Objectives are always based on expectations. And expectations are, at best, informed guesses

no flight is ever operated without schedule and flight plan. Any change is immediately fed back to produce a new schedule and flight plan

Marketing Objectives

It is somewhat misleading to speak of a marketing objective. Marketing performance requires a number of objectives

Many books have been written about every one of these areas. But it is almost never stressed that objectives in these areas can be set only after two key decisions have been made: the decision on concentration, and the decision on market standing.

Archimedes, one of the great scientists of antiquity, is reported to have said; “Give me a place to stand on, and I can lift the universe off its hinges.” The place to stand on is the area of concentration

The concentration decision is, therefore, crucial; it converts, in large measure, the definition of “what our business is” into meaningful operational commitment

Obviously, not everybody can be the leader. One has to decide in which segment of the market, with what product, what services, what values, one should be the leader

A company with a small share of the market will eventually become marginal in the marketplace, and thereby exceedingly vulnerable

There is also a maximum market standing above which it may be unwise to go—even if there were no antitrust laws

a new market, especially a new major market, tends to expand much more rapidly when there are several suppliers rather than only one

Du Pont seems to have grasped this. In its most successful innovations, Du Pont retains a sole-supplier position only until the new product has paid for the original investment. Then Du Pont licenses the innovation and launches competitors deliberately

Innovation Objective

There are essentially three kinds of innovation in every business: innovation in product or service; innovation in the marketplace and consumer behavior and values; and innovation in the various skills and activities needed to make the products and services and to bring them to market. They might be called respectively product innovation, social innovation, and managerial innovation

Resources Objectives

resources a business needs in order to be able to perform, with their supply, their utilization, and their productivity

three kinds of resources: land, that is, products of nature; labor, that is, human resources; and capital, that is, the means to invest in tomorrow. The business must be able to attract all three and to put them to productive use. A business that cannot attract the people and the capital it needs will not last long.

Productivity Objectives

productivity objectives with respect to each of the three major resources, land, labor, and capital; and with respect to overall productivity itself

The continual improvement of productivity is one of management’s most important jobs. It is also one of the most difficult; for productivity is a balance among a diversity of factors, few of which are easily definable or clearly measurable.

Labor is only one of the three factors of production. And if productivity of labor is accomplished by making the other resources less productive, there is actually loss of productivity

The Social Responsibilities Objectives

Lessons we have learned from the rise of consumerism, or from the attacks on industry for the destruction of the environment, are expensive ways for us to realize that business needs to think through its impacts and its responsibilities and to set objectives for both

the business enterprise is a creature of a society and an economy, and society or economy can put any business out of existence overnight. The enterprise exists on sufferance and exists only as long as the society and the economy believe that it does a necessary, useful, and productive job.

Profit as a Need and a Limitation

Only after the objectives in the above key areas have been thought through and established can a business tackle the question, How much profitability do we need? To attain any of the objectives entails high risks. It requires effort, and that means cost. Profit is, therefore, needed to pay for attainment of the objectives of the business. Profit is a condition of survival.