LME022 – What is the purpose of a company?
What is the purpose of business? What is the purpose of a company? Most people don’t seem to have much trouble verbalizing the response to this question:
“That’s obvious: The purpose of a business is to make a profit!”
But that’s not true!
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The purpose of any business
When you ask a shareholder this response makes sense. To him, it’s important that the company, into which he invested, makes as much profit as possible. This increases the company value, or a dividend can be paid out.
In both cases, the capital invested by the shareholder increases, and this is what he cares about. This is easily understood, but that does not make generating a profit the purpose of a company.
Is the purpose of a company to create jobs?
But If you ask a union representative, or a socially oriented politician, he will probably tell you:
“The purpose of the company is to create jobs, and to retain these over the long-term.”
This also makes sense, but here as well: To create jobs is not the purpose of a company.
The sole purpose of any company is to satisfy the needs of customers. A company that does not provide a value to its customers will have no customers over the mid-term. Why should customers be expected to buy from this company?
Over the near-term, a company can survive without customers. Over the mid and long-term a company without customers has no reason for being, and no chance of survival.
Profits and employees?
This isn’t to say that profits and employees aren’t important. Both are needed to fulfill the purpose, i.e. to create value for the customer. They are a means to an end.
A company cannot survive without at least making a profit now and then, because it will not be able to invest into its future and the future value added for its customers. A company can therefore only be of benefit to its customers over the long-term if it is profitable.
This is similarly true for employees and their jobs. To provide value to the customer with services and products, practically every business needs employees. For this reason, it must create enough jobs to satisfy the needs of its customers. Not more, and no fewer.
Might I be splitting hairs?
You may think:
“That is splitting hairs. It makes no difference whether profits and employees are the means or the purpose of a company, right?“
By no means. This is critical to how you as the entrepreneur and manager think about it. Your attitude about this has a huge impact on the company success. The following example should highlight the point:
The self-employed programmer Thomas
Three years ago, Thomas became self-employed as a software developer. He wanted to be independent and make more money than he could in his previous employment.
As a recognized specialist for the programming language C++, he can now charge a comparatively high hourly rate for his work.His customers are happy to pay, because as a certifiable expert, he delivers outstanding programming work. He has therefore accomplished his goal to be independent, and to make good money.
Let’s assume that he defines “making lots of money” as the purpose of his one man enterprise. He therefore places the focus on money. This puts him in jeopardy of relying on his expertise and skill, and resting on his laurels.
But now, the requirements of his customers for his programming work are slowly beginning to change. He is reluctant and late to recognize and acknowledge this. After all, he’s focused on making as much money as possible, and not primarily on understanding the needs of his customers.
Over time, things are getting increasingly difficult for him, since C++ is no longer the predominant programming language called for. He has failed to adjust to the changing needs of his customers in a timely manner. His business is in decline, his revenues are dropping, and his customers no longer want to pay the high hourly rate. That’s too bad.
If he had regarded the purpose of his company as providing his customers with the highest possible value, he would have spent time early to study his customers and the solutions useful to them. He would continue to be a recognized partner for his customers, and his customers would continue to pay his high hourly rate.
Purpose and focus of your company
If your company is in a critical situation, it may be necessary over the short-term to focus on maximizing profits and quarterly results, instead on customer value. But over the long-term such an orientation is always disastrous.
The purpose of a company is always to provide value to its customers – and it is therefore clear that this must be the focus of your company. Your business vision statement as part of your business strategy should reflect the purpose of your company.
Purpose and Vision Statement
The inspiring quotes
“Every product and service is sold on the promise of a better future. The purpose of business is to deliver on the promise, and profit is the reward for doing so.”
“Winners are people with definite purpose in life.”