Turning Desires Into Gold
What Does ‘To Do Business’ Mean?
‘Begin with the end in mind.’ This famous quote from Stephen Covey’s book The Seven Habits of Highly Effective People reminds us that we should think about the meaning of the work before we embark on any endeavor.
But, from my observation, few entrepreneurs and executives often look for the answer to the simple question: What does ‘to do business’ mean?
The world through the eyes of economists
In my youth, I played in the computer game Dune 2. The rules were simple. When I started an episode, I had only a tiny part of the game universe visible to me. The rest was covered by a black ‘mist’. Initially, I had a minimal set of resources that I could enhance by earning ‘money’ and developing my ‘military base.’ When I gained enough power, I extended the visible frontiers of the ‘world’ and attacked enemies (unless they struck me first). The goal of the game was to defeat opponents and win their resources. At my disposal, I had an army of perfect, dutiful soldiers and obedient employees who performed only the functions specified by the algorithm.
I don’t know if the authors of some classical works on strategic management played Dune 2. But sometimes, it feels like that’s the way they see the world.
From their point of view, a market is the battlefield. Players (companies) compete for resources, and the combat mission is to crush the enemies. In this universe, the losers die (go bankrupt), and strategy is a plan to outrun the competition.
The internet is rife with quotes by Sun Tzu and Carl for Clauzewits, two great military theorists, on strategy (many of them are fake, by the way). And they are believed to be applicable to business strategy.
Here are a couple of quotes from our contemporaries:
“Business is war. I go out there, I want to kill the competitors. I want to make their lives miserable. I want to steal their market share. I want them to fear me and I want everyone on my team thinking we’re going to win.” Kevin O’Leary.
“Number one, cash is king; number two, communicate; number three, buy or bury the competition.” Jack Welch.
What is wrong with that metaphor?
Firstly, I am convinced that the goal of a market player is not to outperform rivals. Instead, a company fights for the hearts of the consumers, which is not the same thing. Jeff Bezos, the Amazon founder, has the phrase:
«If you’re competitor focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering».
And this is what we should learn from Bezos.
Secondly, people play a secondary role in the concept. They are ‘market forces,’ faceless ‘consumers,’ and ‘human resources,’ resembling archers and carpenters from Dune 2, assets but not active actors.
The consumer is a passive market power in those publications. They don’t make decisions — they consume.
What Does ‘To Do Business’ Mean?
I have been asking this question for entrepreneurs and executives in my lectures for many years. And the question always bewilders attendees — people who do business every single day.
As a rule, I hear the following: «Business is an organized activity for profit.» And it would be wrong to say this definition is incorrect. But, at the same time, it does not include critical components of every organization’s work.
Imagine you and I combined our effort and capital and invested in stocks. It would be an organized activity, and if we were smart and lucky, we would get a positive ROI. Could we call our venture ’a business’?
Yes and no.
On the one hand, we worked together to earn more than we had invested. On the other hand, there is a fundamental difference between what we did and what Amazon, Google, Tesla, and most of the other 334 million companies all over the globe do every day.
If we invest in a stock, we are the only beneficiaries of our endeavor. They work for many other people.
Five stakeholder groups
Any organization is created and works to fulfill the interests of numerous people both outside and within it.
These are:
– Customers
– Employees
– Shareholders
– Business partners
– Society
Any system’s strength, resilience, and prosperity are directly tied to the quality of communication between its elements and other systems and within the system itself.
So, no organization can be successful long-term if it doesn’t satisfy the needs of one or more of those five stakeholder groups. The system becomes unbalanced, negatively affecting its performance sooner or later.
Many years ago, businesses didn’t consider employees as stakeholders. Workers were merely ‘human resources.’ But, gradually, this mindset has become a thing of the past. The situation is different when it comes to addressing the needs of society.
In strict accordance with the doctrine of the economist Milton Friedman from the 1970s, which asserts that the only social responsibility of business is to increase its profits, many companies have ignored social needs for decades. But the world is changing, and few enterprises can afford to ignore vox populi nowadays.
Your strategy is incomplete if it doesn’t clearly articulate how your business will meet these stakeholders’ expectations and requirements.
What’s wrong with net profit as a strategic goal?
After my lectures, some attendees pull me aside and ask: ‘Listen, we understand that the needs of consumers, employees, and society are very important. But, at the end of the day, everything is about net profit, right?’
And they are not greedy capitalists willing to go over the heads to personal prosperity. Following Friedman’s ideas, they believe that if a company earns profit, it contributes enough to the public good.
It develops new products, creates employment, and pays taxes. What else should it do? What’s wrong with the idea that shareholders aspire to wealth and, as a side effect, change the world for the better? It looks like a win-win situation.
But it isn’t.
If you want to buy an airline ticket, a car, a clothing item, a house, or anything else, you’ll have user-friendly websites and mobile apps, polite and attentive assistants, and convenient services at your disposal.
You can enjoy the purchasing process, but only until money moves from your wallet to the seller’s account. If you try to reverse the cash flow — to return the item or the ticket, to repair the item under warranty, or to get compensation — all politeness and user-friendliness usually evaporates.
And for a good reason.
According to the social exchange theory, Worth = Rewards — Costs.
When worth (a profit in the business world) appears to be insufficient, a company’s leaders have two options:
- To reduce costs
- To increase rewards, or the value it offers to the customers.
These options only seem equal. When a company opts for decreasing expenditures, it plays on familiar ground. All the costs are within the business, so it is relatively easy to calculate and foresee the outputs. Risks feel low and calculable. That’s why enterprises often choose this option and cut costs, primarily on things that don’t directly generate profits.
If a company’s executives proclaim net profit as its primary purpose, it only worsens the situation.
But if the business chooses another way, risks become higher, and benefits — unpredictable and incalculable.
This is the reason why few companies are capable of creating and enhancing customer value long-term. Many of them were able to do it when they were younger and smaller. But the longer they operated, and the bigger they became, the more they developed a profit-oriented mindset and, eventually, lost their ability to build value.
We also need to take two additional considerations into account:
- Cutting costs has its boundaries. Growing customer value is limitless.
- Profit is always related to a time span. We can talk about quarterly profits or annual profits. However, customer and company relationships aren’t tied to the calendar. By reducing costs today, we may boost this quarter’s profits, but if it destroys our reputation, we won’t be able to restore it by next quarter.
We will discuss profit as a strategic goal in the following chapters.
Okay, so how does it work?
I want to start this part of the chapter with two quotes:
“The true purpose of a business is to create and keep a customer, not to make you money.” Theodore Levitt
“The single most important thing to remember about any enterprise is that results exist only on the outside.The result of a business is a satisfied customer. The result of a hospital is a satisfied patient. The result of a school is a student who has learned something and puts it to work ten years later. Inside an enterprise there are only costs.” Peter Drucker
A company earns profits by satisfying customer needs. To do this, it creates value for them.
Customer value can be defined as everything the consumer wants to have and is willing to pay for. It may be the product itself, its particular elements (such as a logo on a car’s hood), or some supplementary services or features.
We will talk about customer value in more detail in the following chapters. But for now, suffice it to say that the ability to create a distinctive value (a value that other market players cannot duplicate or outdo) determines a company’s success.
Marketers would call it a «competitive advantage,» but I have some objections to this definition because it takes us away from consumers (see Jeff Bezos’s quote above).
The company creates customer value using the sources of value — assets. This broad concept includes tangible assets such as buildings, machinery, and cars; and intangible ones — a brand name, know-how, unique expertise, software, etc. We will also talk about them in the respective chapter.
If the company understands the consumers’ needs, it can create unique value for them by effectively using assets, making a long-term profit, or market capitalization.
I view profit as a symbolic ‘bonus’ to a company’s shareholders and employees earned from consumers when a company creates value to cover customer needs.
Business involves a series of processes focused on meeting consumer needs by creating value for the customer. This value is generated by utilizing assets. A business’s ultimate goal is to satisfy customers, employees, partners, and society while generating a net profit or increasing market capitalization for shareholders.
And if you think that all of the above goes without saying, that it is self-evident, it isn’t. I know from experience that many entrepreneurs, executives, and consultants often forget about it.
And I would like to use Henry Ford’s quote as a conclusion.
“Competition whose motive is merely to compete, to drive some other fellow out, never carries very far. The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time.”
This article is an excerpt from my upcoming book on strategic thinking. Subscribe to my free newsletter via the link and you’ll get a copy of the book for free.
Do you like the story? You can support my work by becoming a Medium member via my personal link. I will appreciate your support.