Our Core Beliefs About Business
Our working definition of business helps change agents create and develop new businesses
Our working definition of business guides us in everything we do. It is consistent with the emerging Behavioral Economic Model, a new economic paradigm based on scientific research and the experiences of early adopters of the new paradigm. The core elements are:
We believe the definition of a social group in the sidebar applies to businesses of two or more people. People in businesses interact with each other, united by their membership in their businesses. They seek new employees with characteristics similar to their own, and prospective employees seek to join businesses with characteristics similar to their own. People in businesses work together interdependently to achieve their common aspirations—to successfully create, build, and operate their businesses.
The simple realization that businesses are social groups opens the very large, but largely ignored, field of research on human behavior to people creating, building, and operating businesses. Major areas of the research include group dynamics, teams, team problem-solving, cognitive dissonance, authority and obedience, influence, and the functions of the brain.
On page 61 of his landmark book, Management: Tasks, Responsibilities, Practices, Peter Drucker makes this simple, clear assertion, "There is only one valid definition of business purpose: to create a customer".
That simple feature differentiates businesses from all other social groups. No other kind of social group must have customers.
A business and its customers are members of a larger social group, a two-component system in which products and services are exchanged for money—the basic business transaction. (Figure 1) So even a one-person business is a member of a social group, interacting with its customers; sharing similar characteristics and a sense of unity, pursuing their common interests interdependently.
The customers—not the business—control the purchase transactions. The business can offer products and services to potential customers, and influence their decisions to buy them. But the customers alone decide whether they will buy—or not!
The purchase decisions of the customers determine which of the offers presented by the business will succeed, and which will not. The same purchase decision-making by the customers determines which of the behaviors of the business will succeed, and which will not. The purchase decisions by the customers ultimately determine if the business will succeed, or if it will not.
Businesses in all stages of the business life cycle must create customers. It's most obvious in the pioneering and emerging stages of the life cycle. A startup will not become a business without creating customers.
But mature, established companies must create customers, too. The most successful mature companies have made creating, serving, and satisfying customers their highest priority. A good example is expressed in the Johnson & Johnson Credo, quoted in the sidebar.
Even businesses that dominate in their markets lose customers continuously. Customers' interests change, they grow older, they have a bad experience with a product or someone in the business, etc.
The financial performance of even the strongest companies will suffer if they do not strive to prevent the loss of customers who can be saved—and replace those who cannot be saved.
Because marketing and innovation are the only functions of a business that directly serve the only purpose of a business—to create customers—they are the only functions of the entire business. Everything else that the business does is a cost or expense, e.g. management, accounting, human resources, manufacturing, etc. Doing them poorly or illegally would damage or even kill the business, but doing them exceptionally well would not create customers.
Only marketing and innovation can create successes if done well, and create failures if done poorly.
Therefore, the highest ranking person in the business must be responsible for marketing and innovation, and everyone in the business has some role in executing the marketing and innovation functions—ranging from minor or indirect roles to major or direct roles.
Especially, we believe that assigning the marketing and innovation functions to the Marketing Department and the Engineering Department to free up time for everyone else in the business to focus on their "real" jobs has serious unintended consequences.
The marketing and innovation functions are strongly interdependent within a simple closed loop system. For example, understanding customers well, a part of marketing, can lead to innovations. Also, introducing something new that customers really want, a core element of innovation, strengthens the bonds with current customers and creates new ones—a marketing function.
A business is defined by its customers. A company is defined in legal terms. In the US, the most common kinds of companies are public corporations, private corporations, limited liability companies (LLC), partnerships, and sole proprietorships. Other industrialized nations have similar legal definitions of companies.
A business can only exist within one company, but a company can encompass more than one business. This may seem like a trivial distinction unless you realize that the primary responsibilities of a business and a company are polar opposites. For example, Peter Drucker's assertion, the only purpose of a business is to create customers, stands in stark contrast to the conventional belief that the only purpose of a company is to make money.
The most successful companies have detached their businesses from their company hierarchy, using cross-functional teams working skillfully with rational processes such as Quality Function Deployment, Concurrent Engineering, or Stage Gate. They have reaped the rewards delivered from the continual replacement of mature and declining businesses with fresh, new emerging and growing businesses. There is no reason a company should ever fail with a continual stream of new products and new businesses in the emerging and growth stages of the business life cycle.
There can be no doubt that the global economies are controlled by a closed loop system. Measures such as GDP, employment rates, the numbers of new companies created per year, the numbers that fail per year, etc. are statistically consistent. Over many decades, those outcomes have fallen well within the boundaries that W. Edwards Deming asserted as the indicator that a closed loop system is in control— plus or minus 3 standard deviations from their mean value.
The global economic system seems to be almost infinitely complex, so economic models have been created to help people to work within the system without fully understanding its intricacies. Two of those are the Rational Economic Model and the Behavioral Economic Model. They are summarized very briefly below.
Please keep in mind that these two models do not characterize two different economic systems. They are two different characterizations of the same system.
This is the default conventional economic model. It can be used without criticism by people creating and operating businesses .
The core features of the Rational Economic Model can be traced to Adam Smith (1723 - 1790), as published in his frequently cited book, An Inquiry Into The Nature and Causes of The Wealth of Nations, London, June 1776:
Adam Smith used the term "invisible hand" rather than "free market forces". The invisible hand triggered too many questions by people who deemed it too mysterious, questions that could not be answered by Adam Smith and his proponents. They changed the label to free market forces to reduce the number of questions, not to change the meaning.
We believe that a bare minimum of critical thinking reveals the built-in contradiction that leads to at least these three reasons to question the validity of Adam Smith's beliefs, some 236 years since their publication:
This simple observation may help to better understand the irrationality of the Rational Economic Model: If people actually performed rationally in businesses, companies, and economic systems, Dilbert would not be funny.
Over the past 60 years or so, learned experts on human behavior have been disproving the tenets of the Rational Economic Model, and consequently the conventional business definitions based on the Rational Model. They have done so by experimentally analyzing the behavior of people in economic situations, both individually and in groups—a practice not allowed by the core tenets of the Rational Economic Model.
A major milestone in the development of the Behavioral Model was achieved in 2002, when Daniel Kahneman, a Psychology Professor at Princeton University, accepted the Nobel Prize for Economics. The award was given in recognition of the pioneering work that he and Amos Tversky, also a Psychologist at Princeton, did to create the Behavioral Economic Model, debunking the Rational Economic Model.
The core features of the emerging Behavioral Economic Model are:
The emerging Behavioral Economic Model provides the framework and context for a new business paradigm. Our working definition of business was developed within that framework and context. It is an emerging business paradigm within an emerging economic paradigm, developed via real applications in real companies and real businesses.
Thomas Kuhn (1922–1996) is often credited with the launch of the concept of paradigms and paradigm shifts with his 1962 book The Structure of Scientific Revolutions. Ironically, many people leapt onto Kuhn's new paradigm about paradigms, and developed it into what is now an established paradigm—a household word. Core elements of the current perceptions are presented in the sidebar.
The application of scientific research to better understand the behavior of people in economic situations is a new paradigm, a new perception of the global economic systems. People who are adopting the new paradigm certainly see it as a revolutionary change from the aged Rational Economic Model.
The scientists and early adopters who are creating and developing the Behavioral Economic Model are fed up with the inanity of the Rational Model. They are eager to leave it behind and develop a new way to perceive the economic system and the roles of the people working in the system—a much more accurate perception that can actually be proven with experimentation.
Early adopters of the Behavioral Economic Model have achieved huge successes, but the tipping point is still in the future. As the number of those successes increases, more and more people in positions of power in established institutions will leap onto the new paradigm.
When that number reaches the metaphorical critical mass, the tipping point will occur. The new paradigm will become the norm almost instantly. The companies that continue to cling to the old paradigm will disappear relatively quickly as their customers migrate to suppliers who have leapt onto the new paradigm.
Our working definition of business is derived from the emerging Behavioral Economic Model. It can be used by startup companies and industry–leading corporations alike to guide the marketing and innovations functions of their businesses to create winning new products, new customers, and new businesses.
The Behavioral Economic Model is still an emerging paradigm, and business definitions based on the Behavioral Model are in the same stage of development. So using these emerging paradigms requires the keen attention and dedicated efforts of the "pioneers" or "change agents" in the businesses, companies, and economic systems.