The Purpose of A Business

The purpose of a business is to offer value (through products and/or services) to customers, who pay for the value with cash or equivalents. Minimally, the money received should fund the costs of operating the business as well as provide for the life needs of the proprietor.

Any money in excess of these needs of funding and salary—”margin” or “profit”—may be used to reinvest in the business; to be invested for future needs and security; and/or to be used for philanthropy and the environment.

There are direct actions required in this process: the acquisition, perpetuation, and expansion of customer business. These actions may also include R&D (creating new value); marketing (creating need); and finance (pursuing receivable to create better cash flow).

There are indirect actions often engaged in, which may include upgrading equipment; improvement or realignment of physical property and work space; legal protections; and so on. In large, complex, and diverse companies, e.g., IBM, these indirect actions are often departmentalized and run by distinct managers. I call all such indirect actions “overhead,” and although a large company can sustain a great deal of overhead, I’ve found in my organization development work that I could remove 20 percent of all such managers and never have the customer realize or be affected by it.

In solo practices and boutique firms, such overhead directly detracts from the resources available for the direct actions. Indirect actions are often pursued because they provide immediate gratification and are easier than direct actions. But they will not acquire, perpetuate, or expand business.

Proprietors undertake the risks inherent in creating and operating a business, employees do not. Hence, employees are paid according to the proprietor’s evaluation of the value they provide, but the purpose of the business is to offer value to customers, not to offer employment. As a rule, employees involved in direct action are far more valuable than those involved in indirect action. People who solely “deliver” and do not acquire business are less valuable than those who create business. They are also far more common and easy to find.

As the proprietor gains success and increases margins, he or she is able to raise fees while decreasing personal labor, with or without employees. Raising fees generates money. Decreasing labor intensity generates discretionary time. Money provides power, but discretionary time provides wealth. The blind pursuit of power can easily erode wealth.

Value is always that which is perceived by the customer. Ideally, it should evolve, change, and multiply over time. Ultimately, a brand is the ideal representation of uniform value which by itself can serve in business acquisition. Thought leadership is the human representation of a brand, irrespective of whether other brands are also employed. Therefore, the ultimate brand is your name when recognized as the leader in your field.

When you possess such a brand, virtually no overhead is required, and direct actions are greatly facilitated. Margins and discretionary time are exponentially increased.

© Alan Weiss 2013

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10 Responses to The Purpose of A Business

  1. James Wilks says:

    F’ing excellent post. The most perfect summary! That is all. Alan Weis=legend.

  2. Jared Lazaro says:

    Amazing as always, Alan… This post generates a lot of professional reflection, and for me personally, a small bit of nostalgia.

    My former partners always thought Sam Walton’s definition of a business was overly simplistic (“… to create customers.”) Without adding too much unnecessary overhead and fluff, we got to:

    – “The purpose of a business is to profitably acquire, service, and duplicate clientele who appreciate the value of your offering.”

    I’ve been curious: Which of those three do you feel is the most common stumbling block for startups and new businesses..? Or is it something else (besides the constant concern about confidence?)

  3. Alan Weiss says:

    Most businesses operate for their own convenience and protect their own insecurities, rather than focus on outstanding customer experience, just as airports are build for planes and not for travelers. Banks today are absolutely paranoid. They have no time, in the midst of that mental illness, to think about customer retention.

  4. arun says:

    This is one of the best and most cogent explanation I have ever read of — what a business is and what one should focus on — so as to have a great business /practice.

    I am going to refer to it every few days , so that it gets implanted in my head .

    Thanks a lot

  5. Alan Weiss says:

    Not rocket science, is it?

  6. Fareena Johari says:

    “The purpose of businees to me is to create sustainable value for all stakeholder.”

  7. Alan Weiss says:

    I’m starting to hate the word “sustainable” which is overused and now means practically nothing. The purpose of a business—its driving force or mission—is never to merely enrich the stakeholders. That may be a reason to invest, but it’s not why the business exists.

    • Peter McLean says:

      Just pointed out the meaninglessness of the ‘sustainable’ part of an engineering firm’s vision statement the other day. It’s thinking and language taken from the back of a cereal box or, worse yet, a political brief.

  8. Alan Weiss says:

    “Sustainable” has become an “empty” word, like “meaningful” or phrases like “war on terror” or “war on women.” They are meant to convey emotion without meaning, intent without clarity.

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