Why do Enterprises Exist?
The question of purpose has become popular at last. A combination of younger people wanting to have a purpose and to work for a purpose driven organisation together with disillusion with corporate giants who only care about the bottom line is driving this welcome change.
In the corporate world of listed companies many say the purpose of an enterprise is to maximise the value of the business to shareholders, and this means maximising profits with no excuses. The results of this can be seen in the Banking Royal Commission in Australia and the Facebook data scandal.
Some say that this profit maximizing mantra fundamentally misses the point and that enterprises (and indeed most organisations) exist to gain and keep customers. Any other purpose is only a consequence of how well the organisation goes about achieving this fundamental.
No one will argue that an organisation’s financial performance is an essential focus for any business leader and it is the ultimate test of success or failure for many enterprises, however is it really the purpose of any enterprise?
The view first espoused by Peter Drucker is :
‘If you want to know what a business is, you have to start with its purpose, which must be found outside the business itself—in society, since a business enterprise is an organ of society. ‘There is only one valid definition of business purpose: to create a customer.’
To achieve long-term business success, an organisation must have a purpose that elicits the dedication of its people. This may be defined in a mission statement, vision or purpose that aligns the people with their organisation ‘
It is well over 50 years since Drucker presented these views and it amazes me that we are still having a discussion about this fundamental point and it is even more disturbing that many board members and business leaders still do not get it!!
Without happy customers there is no profit
Business leaders that focus solely on maximising profits are missing the bigger picture, as this limited focus ignores all of the elements of a sustainable business . By taking a step back and realising how each feature of a business – from its staff to its value proposition – is part of a common goal to make customers happy, businesses can subsequently become a profitable enterprise.
It’s a discussion that has got lost, particularly with publicly listed companies, that have to answer to shareholders and who live in the cauldron of the listed market. What doesn’t come through for these enterprises is that a customer focus is a profit focus – just an indirect one.
A customer-focused business strategy doesn’t mean ignoring your employees or the financial consequences of the enterprises activities.
The conversation that suggests maximising profits is an enterprise’s true purpose misses the entire point. Numbers are a product of how strategies and tactics are employed and are not a viable strategy on their own.
Directing a new business by focusing on customers
People generally start their own new businesses for similar reasons. In most cases, these ventures begin with a salesperson or a technologist spotting a gap in the market and realising there’s money to be made with a product or service that satisfies these needs.
For new businesses to survive, they need to be profitable, but that doesn’t mean their entire purpose is based around their bottom line and nothing else. It’s a difficult discussion to come to grips with early in the business lifecycle where a high failure rate results in significant financial pressure on the leaders of these companies.
What these new business owners need to realise is that by focusing on customers from the beginning, they’re better positioned to become profitable than if they simply treated it as a numbers game from the start.
This doesn’t mean that people can’t start a business to make money, but it’s wrong to confuse the desire to make money with the purpose of the enterprise.
The conversation starts at the top
For a business to start the discussion on what its true purpose is, the board needs to be confident in leading these discussions. As companies grow, they will hire the services of independent directors, professionals who often have a financial or leadership background and they are particularly susceptible to getting stuck in a mud on this issue.
I have found that, simply asking the question ‘what leads to profit’ can be enough to get people to start realising that it’s not all about numbers.
As we begin to backtrack through the elements of a business strategy that contribute to maximising profits, most soon get the idea that it’s engaged staff, effective products and retained customers that all contribute to this financial performance.
Put simply, decreeing that an enterprise’s purpose is to maximise profits misses all the steps it requires to actually make this a reality. Instead, by turning their attention simply and soley to Druckers original point ‘there is only one valid definition of business purpose: to create a customer’, the numbers game becomes an end, rather than a means.