What IS a Business?
What IS a Business?
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Our Working Definition of a Business
Your understanding of this working definition will help you to understand us
On a single page (# 61) in his 839 page book entitled simply Management, Peter Drucker made these simple, fundamental points defining a business - any business:
The diagram In Figure 1 depicts our understanding of Dr. Drucker's business definitions cited above.
Figure 1: Graphical Depiction of Dr. Drucker's Business Definition
We believe that most businesses can improve their results dramatically by simply shifting their attention away from their so-called core competencies and their carefully partitioned responsibilities toward the simple business fundamentals above.
A business and a company are not the same thing. A company is defined in legal terms. In the US, the most common kinds of companies are public corporations, private corporations, limited liability companies (LLC), partnerships, and sole proprietorships.
A business is defined by its products and its customers. A company can engage in multiple businesses. For example DeltaNet Consultants is a very small, two-person partnership. We offer Business Development Services to one class of customers and Mediation Services to a completely different class. Those are two different businesses in the same very small company.
This may seem like a trivial distinction until you realize that the primary responsibilities of a business and a company are polar opposites. For example, the primary responsibility of a corporation is to serve the shareholders. The CEO is selected by, and reports to, the Board of Directors. The Board is legally charged with the protection of shareholders' interests. In stark contrast, the ONLY purpose of a business is to create customers, according to Peter Drucker's definition above.
Companies that can detach their businesses from their company hierarchy, using a process such as Concurrent Enginering or Stage Gate, can reap the rewards derived from the continual replacement of mature and declining businesses with fresh, new emerging and growing businesses. There is no reason a company should ever fail with a continual stream of new businesses in development.
But company executives go to great lengths to blur the distinctions between the company and its businesses. As Sruly Blotnick so aptly described it in his book, The Corporate Steeplechase, managers do not like to have units like businesses detached from the hierarchy. It threatens their sense of status and power. So industry leaders such as General Motors, Douglas Aircraft, Montgomery Ward, and many others have failed because they would not do the one thing that would have preserved their successes—detach their businesses from the corporate hierarchy and continually create and nurture new businesses. They failed to protect their shareholders under the pretense of protecting their shareholders. They sold the notion that the power and control inherent in an orderly functional hierarchicy with shareholder protection. It's a game without winners.
People buy products and services they like from people 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. Marketing is 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 whole business. We believe neither of them can be assigned to functional units within the business.
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 kinds of products and services to buy, and from which businesses they want to buy them. Your business can influence those decisions to some extent, but they are the customers' decisions. In that way, the customers decide which businesses win, and which businesses lose.
Of course, a business must be profitable. That is a necessary, but not sufficient, condition for its survival.
No business can remain in business very long without generating profits. But the money that drops to the bottom line as a profit is a result of the exchange of products and services for money—the revenues. The revenues are in turn a result of the customers choosing to buy your products from your business at your prices.
Dr. Drucker's model (Fig. 1) places business within a system. Also, the business itself is a system. In Management he describes business as a social group, a certain kind of system. The system in Figure 1 works best when the business and the customers are both working well. Therefore, in addition to building relationships with your customers, your business must also help make your customers successful.
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. But even more important, winning businesses unite with their customers to strengthen all of the systems. Both the business and its customers achieve more success.
Winning rests on a foundation of learning and uniting, as shown in the diagram in Figure 2.
Figure 2. A Simple Process Used By Winning Businesses
Dr. Drucker also asserted that a business is a social group. Businesses differ from other social groups in one way: Business have customers.
Businesses are networked with other social groups, for example with their customers and sales communities. Using this network view of business facilitates the isolation of bottlenecks and the continual improvement of the overall system by relieving the bottlenecks, as W. Edwards Deming taught us beginning 6 decades ago.
Please download our presentation, Seeing Businesses as Complex, Networked, Adaptive Groups of People, to learn more about this valuable resource.
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