The Purpose of a Firm
It’s odd that with all the businesses out there, no one agrees on why the firm exist. If you ask folks, you’ll get a variety of answers to the purpose of a company.
The classical definition, which never made much sense to me, was that a company existed to ‘create shareholder value’. It seemed hollow, lacking any deep meaning, but hey, what do I know. The good news is that even the longtime GE CEO Jack Welch didn’t get it. In his words,
“shareholder value is “the dumbest idea in the world. Shareholder value is a result, not a strategy... your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal.”
Ok, now we are getting somewhere, but if it’s not shareholder value, what is it? Enter management guru Peter Drucker who places a stake in the ground via his 1954 book The Practice of Management.
“There is only one valid definition of business purpose, to create a customer.”
Now we are getting somewhere. At least customers are involved in this definition, but what are we as employees to do? How do we act on this? I wasn’t sure, until this week…
Horace Dediu is an analyst who covers Apple Computer via his popular blog. He also hosts a podcast called the Critical Path. In a recent episode, he was discussing why Apple decided to stop providing unit sales data for its products.
At first glance, this seems odd until you realize Apple wants analysts to begin thinking like they do - about customer satisfaction. After all, is the goal really selling more and more iPhones?
“The purpose of the firm is to create and preserve the customer….The ultimate achievement of the firm is to create the satisfied customer.”
Now this is a definition I can sink my teeth into. To create a satisfied customer. It gets at the heart of the matter. Buying once, in most industries isn’t the high water mark for success. In fact, ‘buying’ isn’t even the goal. You need sustained behavior over time, and you do that by satisfying customers.
And of course, this brings us to W. Edwards Deming, the genius of manufacturing innovation who helped Japan emerge stronger after defeat in WWII. In his words,
“Profit in business comes from repeat customers, customers that boast about your product and service, and that bring friends with them.”
Maybe delighting the customer is not such a fluffy concept after all?