What IS a Business?
1 October 2016
Our Working Definition of a Business
This working definition is the foundation
for building new products, new customers, new businesses
Our working definition of business is excerpted from Peter Drucker's book, Management: Tasks, Responsibilities, Practices:
Figure 1 summarizes our working definition of a business.
We believe that businesses can improve their results dramatically by simply shifting their attention away from their so-called core competencies and their carefully partitioned individual and functional organizational responsibilities toward the simple business fundamentals above.
A business and a company are not the same thing. 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.
A business is defined by its products and its customers. A company can engage in multiple businesses. For example DeltaNet Consultants is a very small, two-person partnership. We offer Business Development Services to one class of customers and Mediation Services to a completely different class. Those are two different businesses in the same very small company.
This may seem like a trivial distinction until you realize that the primary responsibilities of a business and a company are polar opposites. For example, the primary responsibility of a corporation is to serve the shareholders. The CEO is selected by, and reports to, the Board of Directors. The Board is legally charged with the protection of shareholders' interests.
Peter Drucker's assertion, the ONLY purpose of a business is to create customers, stands in stark contrast to the conventional wisdom that asserts that the purpose of a company is to comply with legal requirements, to protect owners and executives from the liabilities of the company, and to deliver a good return on the investments of its owners.
Companies that can detach their businesses from their company hierarchy, using processes such as Concurrent Engineering or Stage Gate, can reap the rewards derived from the continual replacement of mature and declining businesses with fresh, new emerging and growing businesses.
But company executives go to great lengths to blur the distinctions between the company and its businesses. As Sruly Blotnick so aptly described it in his book, The Corporate Steeplechase, managers fear that detaching units such as businesses from the hierarchy would threaten their status and power.
So former industry leaders such as Digital Equipment Corporation, Montgomery Ward, Pan Am, and many others have failed because they would not do the one thing that would have preserved their successes—detach their businesses from the corporate hierarchies and continually create and nurture new businesses. Ironically, they failed to protect their shareholders under the pretense of protecting their shareholders. They sold the notion that the power and control inherent in their orderly functional hierarchies provided the desired shareholder protection. It's a game, a game without winners.
People buy products and services they like from people they like. Creating customers depends on creating that liking, by building social relationships between people in your business and people in your customer communities. Customers will buy your products and services because of those relationships.
Therefore, the primary responsibility of a winning business is to achieve its primary purpose better than its best competitors can. A winning business must create stronger relationships with more of the customers than its best competitors can.
Dr. Drucker goes further to clarify his views on marketing and innovation. The marketing function encompasses everything that affects the exchange of products and services for money. Innovation is finding new ways to do that better. Marketing and innovation are the only basic functions of the entire business. We believe neither of them can be assigned to functional units within the business such as the Marketing Department or the Engineering Department.
Everyone in the business has a direct or indirect role in marketing and innovation. What have you done lately to find new ways to improve the exchange of products and services for money in your company?
Customers decide how to spend their money. They decide what products and services to buy, and from which businesses they want to buy them. Your business can influence those decisions to some extent, but ultimately they are the customers' decisions. In that way, the customers decide which businesses win their purchases, and which businesses do not.
Of course a business must be profitable to be sustainable. Earning a profit is a necessary, but not a sufficient, condition for a business to succeed.
No business can remain in business over the long term without generating profits. But the money that drops to the bottom line enters the business via the exchange of products and services for money—the revenues. A business can continue as a profitable entity with declining revenues by reducing expenses and costs to at least match the rate of decline of the revenues. But you do not need an MBA to realize that is not sustainable.
For example, Montgomery Ward was able to maintain profitability for a few years as their customers migrated to Walmart, Costco, and other new warehouse-style retailers. Wards closed their poorest performing stores in several waves to maintain profitability overall. But closing hundreds of stores did not increase the numbers of customers at the stores they did not close. Eventually, they closed them all.
Dr. Drucker's model (Fig. 1) places your business within a system. The system in Figure 1 works best when the business and the customers are both working well. Therefore, in addition to building relationships with your customers to influence them to want to buy your products from your business, you must also help your customers become more successful in order to increase the performance of the system.
Winning businesses learn more about their customers than their competitors do. They also unite their people around missions to build more and stronger relationships with their customers. But even more important, winning businesses unite with their customers to strengthen all of the systems. Both the business and its customers achieve more success.
Winning rests on a foundation of learning and uniting, as shown in the diagram in Figure 2.
Dr. Drucker asserted that a business is a social group that differ from other social groups in one way: Business must have customers.
Businesses are social groups networked with other social groups, for example with their customers and sales communities. Using this network view of business facilitates the isolation of bottlenecks and the continual improvement of the performance of the systems by relieving the bottlenecks, as W. Edwards Deming taught us beginning 6 decades ago.
Please download our presentation, Seeing Businesses as Complex, Networked, Adaptive Groups of People , to learn more about this valuable resource.