Redefining Business

Whereas Merriam-Webster defines business as, “the activity of making, buying, or selling goods or providing services in exchange for money” and the late great management thinker Peter Drucker — on page 31 of his 1954 classic, The Practice of Management — wrote, “There is only one valid definition of business purpose: to create a customer,” I must humbly disagree with both definitions in pursuit of a more fundamental understanding.

The problem with the Merriam-Webster definition is the focus on an exchange for money which oversimplifies the challenge of business given that money by itself does not honestly represent the metric by which a business can withstand the rigors of remaining in operation. In fact, the idea that money is an all-important aspect of what business is about represents a naive and dangerous notion to which a great many students and practitioners of business incorrectly subscribe.

Despite my being a fan of Peter Drucker’s numerous contributions to business thinking in general, I find his position on the purpose of business to be overly simplistic and unhelpful to those seeking a fundamental understanding of the role of business in commerce and society.

Over the years, having taught at business schools while contemplating the role of business and the challenges of managing business, I have arrived at the conclusion that the purpose of business as we know it must be redefined to:

Create value for profit.

The above definition, while not very complicated on its face, is loaded with two fundamental concepts:

Value

The notion of value is quite interesting and fundamental to business. There are grand theories related to value in the field of economics but for the purposes of the above basic definition, value is created for:

Consumers. Business must create value for consumers before consumers engage in any transaction with the business. Without products and/or services of value, there are no consumers.

Associates. Business must create value for the associates without whom business can not operate by way of rewarding associates with salaries and/or benefits [whether monetary or otherwise] commensurate with the value they bring to the business.

Shareholders. Business must create value for the shareholders and/or owners of the business whose investments provide liquidity for the business by way of compensation commensurate with the value they have brought to the business.

Society. Business must create value for society by behaving ethically and responsibly so that the symbolic value it creates serves as an example for other entrepreneurs and businesses to emulate.

Profit

Profit is critical in business because profit represents that which is left over after all the money is counted and any overhead accounted for. So yes, while money is necessary in order to achieve a profitable state, money by itself (without accounting for the costs of acquiring and managing the money) does not guarantee that a business can remain in operation nor is the acquisition of money possible without the creation of value that others are willing to exchange their hard-earned time, energy and money for.

The above definition sets forth a unique dynamic between value and profit. It is the responsibility of business — as a member of society — to balance value with profit in order to maintain sustainability for the long-term.

Enter Design

As a student of design and business, this is where I connect the two disciplines:

The purpose of business is to create value for profit.

The purpose of design is to create value.

Therefore, at the outset, given that all business must create value, all business must design.