Peter Drucker's Definition of a Business

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:

"There is only one valid definition of business purpose: to create a customer." (The italics are Dr. Drucker's)
"Because its purpose is to create a customer, the business enterprise has two, and only these two, basic functions: marketing and innovation. Marketing and innovation produce the results; the rest are 'costs'."
"It is the customer who determines what a business is...The customer is the foundation of a business and keeps it in existence. He alone gives employment."

A Graphical View of Dr. Drucker's Definition

The diagram In Figure 1 depicts our understanding of Dr. Drucker's business definitions cited above.

Peter Drucker's business definition in graphical form

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.

More About Creating Customers

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.

More About the Marketing and Innovation Functions

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?

How the Customers Define the Business

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.

Isn't Making Money the Purpose of a Business?

Cause and Effect

Let's keep cause and effect in the right order. If business management is able to win more customers than its best competitor, it should be able to make more money than its best competitor. Customers cause the opportunity to earn a profit.

Now consider the reverse order. Striving first to be more profitable, for example by cutting costs and expenses, does little or nothing to win more customers. Profits do not cause the opportunity to create customers.

Of course, a business must be profitable. That is a necessary, but not sufficient, condition for its survival.

Earning a Profit is a Business Necessity, but NOT the Business Purpose

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.

Customers cause profits. Profits do not cause customers.

Seeing Businesses as Systems

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 in Business is a Systematic Process

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.

Learn, Unite, Win: A Simple Winning Process

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

Seeing Businesses as Complex Networks of People

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.

DeltaNet can help you to create strong relationships with your customers,
and define your businesses in ways your customers want.

Contact us for more information on this vital principle.