In this episode I tackle one of the most fundamental questions in business; what is the purpose of business?
It’s not what most businesses think.
When I ask this question to businesspeople, most answer something along the lines of revenue or profit. But that’s not the purpose, that’s a byproduct.
Listen to this episode as I explore the true purpose of business and why it matters.
Hello, welcome to the Make Business Matter podcast, where we help you turn purpose into profit and customers and employees into passionate fans. I’m your host, Aaron Shields, partner and director of research for The Cult Branding Company.
On this episode, we’ll answer the question: What is the purpose of business?
What is the purpose of business? This is a fundamental question, but you can tell by the way businesses operate that so many people get this wrong. It’s why so many businesses fail.
When I ask companies this question, the most common answer I get is profit or revenue or money. But, when you chase profit, you end up chasing it into insanity. It makes anything that makes money seem like a good idea. And, it starts making you not think about the long-term health of the business. Chasing profit can maximize business in the short term, but destroy it in the long term. If you’re concerned about maximizing profit short term, do you really hate the business so much that you want to get out of it quickly?
So why are you in it in the first place? You can make a lot of money in almost any business. So why wouldn’t you want to make it in one that you find meaning in?
Every decision you make narrows what your business can be in the future. This can be a good thing, but also horrible if you’re chasing profit, because you end up doing things that take you out of the business you want to be in just for the dollars and destroy your original vision over the long term.
Also, nobody wants profit. Even executives aren’t concerned with profit. That’s not the end goal. Even if you’re hungry for money, they want something that the profit gives them.
So, what is the purpose of business? To create a customer. This isn’t some revolutionary idea, but it’s one almost everyone forgets or never considered. Peter Drucker management guru and arguably the greatest business writer of all time wrote about this really eloquently. He wrote: “There is only one valid definition of business purpose: to create a 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 a product. It is always utility, that is, what a product or service does for him.”1
If you haven’t read any Drucker, you definitely should check him out. Management and Essential Drucker are really good places to start.
When you accept that your purpose is to create a customer, to solve some tension in the customer’s life. The question is, what customer do you want to create? Then you have to ask a second question.
What business am I in? What business are you in? Another old question that a lot of people skip. Theodore Levitt made it famous in a 1960 Harvard Business Review article called “Marketing Myopia.” When you define your customer, you can define what business you’re in, what you compete for and what you compete against. It seems like an easy question to answer, but it’s a lot harder than you think.
Take for example, something like Cadillac. You could say they’re in the automobile business, but if you look at Cadillac during the great depression they were being crushed in the early years and GM was considering getting rid of it. And in the 1930s, Nicholas Dreystadt, who was the head of Cadillac service nationwide, just middle management position, crashed a meeting of the executive committee. Drystadt realized that Cadillac wasn’t competing with automobiles for transportation, that it was competing with diamonds as a status symbol.
Cadillac wasn’t in the automobile business; it was in a status business.
Once he understood that business, he looked at customers that could benefit from it. And so he saw that African-Americans, who couldn’t access many status symbols in America. at that time–like fancy nightclubs–were buying Cadillacs as a symbol of status. But, they had to get white people to act as frontmen. So, Dreystadt convinced Cadillac to go after that market sales soared. And, by 1937 more Cadillacs were being sold than in the roaring twenties.
Take films for example: films, don’t just compete with films. They compete against video games for the same budget.
So you have to figure out what type of business you’re in. So once you know the business you’re in, the sea you’re playing against, you have to think about what niche you want to occupy. You have to know what type of customer you want to create.
Typically, businesses will try to go after anyone who wants to buy what they have and they end up creating products, that try to serve everyone. This is what happened with Apple in Steve Jobs’ absence. They were selling multiple versions of the products to satisfy different retailers, the same exact products.
But, Jobs knew that they were in the business of enabling people’s creativity. So when he came back to Apple, he created a matrix of four products, consumer/pro, desktop/portable, and got them out of all other types of business, no multiple products, no printers, because they were in the business of enabling people’s creativity, not just creating these computer products to sell, to serve all these wholesaler needs.
They were in the business of creativity. And, by having a simple product line of four products, that consumer/pro desktop/portable matrix, made it easy for people to choose what they need and then enable their own creativity.
So, finding the customer starts with a need. You need to ask what tension you want to solve. Marketing is about finding not forcing. Many people think marketing is about forcing something on the customer. Marketing is about finding what the customer actually needs and then reflecting it back to them in your products and services.
You don’t have to ask, “How do we sell to the customer?” You ask, “What does the customer need?” This allows you to start projecting who your customers will become and who you want them to become. Tensions in customers’ lives are never fully satisfied. They just change.
For example, you look at digital photography: it serves the same purpose as photography. Seems obvious yet it wasn’t to Kodak. In fact, an engineer there invented the first digital camera in 1975. But, Kodak didn’t know what to do with it because they thought they were in the business of selling film.
That’s where they had made their money. And that’s what business they thought they were in. But, that’s not the customer need they were satisfying. In fact, taking this path was against the founder George Eastman’s vision, which was to make photography as convenient as a pencil. So digital photography should have fit within that original vision, but it got lost over time. They got so wrapped up in how the business was making money, functionally, that they forgot what the business was really about, what business they were actually in and what customer need they’re actually trying to satisfy. And, they lost their dominant place in the industry.
Same thing happened with Sears. It’s convenient to blame Amazon, pretending it has some preternatural power. But Amazon did one thing Sears didn’t: they considered what convenience would mean to customers, not just now, but in the future. Sears kept competing in the past, trying to make the past work better, whereas Amazon guided their customers to the future. They were going to get there anyway, but Amazon got them there first, first.
Knowing what business you’re really in and what need you’re solving, lets you solve them now and keep creating better products that serve your customers in the future. This isn’t just asking customers what they want. It’s knowing them deeper in your category than they know themselves and improving their lives in that area. You’re creating the type of customer you want and satisfying them better than anyone else.
How you can satisfy customers better than anyone else is something I’ll cover in future episodes and really gets to the heart of what you have to do to create businesses that matter. But, if you want to get a headstart, check out Who Do You Want Your Customers to Become? By Michael Schrage.
So back to profit: What’s the role of profitability? Profitability is the long-term outcome of solving the customers’ needs. As Drucker put it, it’s a test of the validity of the business. If you have a valid business and a valid customer, profitability becomes the byproduct of creating and selling those products to the customers who need them.
Businesses can do things that matter to their customers and be profitable as a result. It’s not an either or; it’s an and.
If you don’t satisfy your customers, someone else will. The need doesn’t disappear just because you suck at satisfying it. The time to answer these questions of what business you’re in and what type of customer you want to create and what customer needs you’re actually serving is now. Too many businesses wait until they’re already in a downward spiral. When you’re doing well, it’s often the best and hardest time to ask and answer these questions.
So the purpose of business is to create a customer. Then ask: what business am I in? Then ask: what customer do I want to create? Whose needs can I solve and do it better than anyone else? Starting with this wisdom will put you ahead of many other businesses, many of which seem successful, but are likely to fail over the long term because they chase trends instead of deep desires.
In the next episode, I’ll tackle another foundational question: what is branding? My take on it gets to the heart of what it means to create a brand with a loyal following.
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Thanks for listening until next time, I’m your host Aaron Shields and I hope you go out there and make business matter.
- Peter Drucker, Management: Tasks, Responsibilities, Practices, 1973. ↩