What IS a Business?
Businesses and Companies Are Distinctly Different
Companies making good use of those differences
grow faster and last longer than those who do not
Businesses and a companies are not the same, but the two terms are often used interchangeably. Companies are referred to as businesses; company executives are referred to as businessmen. Companies are well understood; businesses are not. Functional hierarchies are the default organizations for companies; cross-functional project teams are the default organizations for businesses.
The emergence of Behavioral Economics is motivating more and more companies to separate their customer-based businesses from their power-based functional hierarchies. The businesses provide marketing and innovation functions that serve specific sets of customers; the hierarchies provide administrative functions to serve their owners, investors, and businesses.
That may seem complex and risky, but providing one single set of administration functions for all of the company's businesses greatly simplifies those administrative functions, improves their effectiveness and lowers their costs. Cross-functional business teams run themselves, greatly reducing organizational complexities and internal competition among functional managers.
The payoff is in lower expenses, company growth, and longevity. There is no reason for a company to ever fail if it is continually creating and growing its businesses.
In the early 1970s, Peter Drucker published this definition of business in his book, Management: Tasks, Responsibilities, Practices.
Here is our view of Dr. Drucker's definition of business in graphical form. It is easy to see that the success of the system depends on the success of both the business and its customers. W. Edwards would certainly define this as simple system in which the performance of the system is determined by the performance of all of the system components. The customer and the business co-create system performance. Most important, the business cannot win unless the customer is winning.
A Graphical View of Dr. Drucker's Definition
We believe Dr. Drucker's definition is still fundamentally valid, and we are mystified that so many "business" people still ignore it, especially company managers, executives, and investors.
We will refer to elements of Dr. Drucker's definition of business to highlight some of those vital differences.
Businesses and companies serve completely conflicting classes of people to achieve different purposes by executing different functions. These basic characteristics of a business and a company are polar opposites.
But company executives go to great lengths to blur the distinctions between the company and its businesses. As Sruly Blotnick so aptly described in his book, The Corporate Steeplechase, company executives fear that detaching units such as businesses from the company hierarchies would threaten their status and power.
A company typically engages in multiple businesses. Companies that can detach their businesses from their company hierarchy, using cross-functional teams and applying rational processes such as Concurrent Engineering or Stage Gate. Companies doing that reap the rewards derived from the continual replacement of mature and declining businesses with fresh, new emerging and growing businesses.
Former industry leaders such as Digital Equipment Corporation, Montgomery Ward, Pan Am, and many others have failed because they would not do that one thing that would have preserved their successes—detach their businesses from their corporate hierarchies to 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 shareholder protection. It's a game, a game without winners.
People buy products and services they like from people they like in businesses 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 began the migration 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. So they closed them all.
Dr. Drucker's model above places your business within a system. This system works best when the businesses and their customers are each working well, and working collaboratively toward common interests. Therefore, in addition to building relationships with your customers to influence them to want to buy your products from your businesses, 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 than their competitors do. But even more important, winning businesses unite with their customers to strengthen all of the systems they are engaged in with those customers. Both the business and its customers achieve more success by enhancing the performance of those systems.
Winning in business is achieved by learning and uniting with their customers in a system like this one.