The first post in what turned out to be a series of three on the topic of the purpose of business:
- What, exactly, is the purpose of business? An answer post-Drucker
- Debating the purpose of business
- Talking garbage and the purpose of business
Peter Drucker asserted that the purpose of business is to create and keep a customer. He was right at the time in offering previously inward-looking firms a more appropriate beacon. His dictum is, however, wrong for our time.
The assertion is insufficient in sustainability terms; ie, being concerned with the health and resilience of living systems such as organizations, society and the environment. A customer-centric outlook is too simplistic, simply failing to recognise complexity, and therefore at threat from business that has progressed beyond Drucker's heuristic.
Complexity is a system in which there are multiple interactions between many different components. It bridges the gap between the individual and the collective, and exhibits emergent behaviour characterised by a complicated mix of order and chaos.
Understanding of complexity remains nascent – too few recognise the complexity of nature let alone the nature of complexity. Understanding advanced with cybernetics research in the 1950s and Ashby’s law best summarises the organizational transformation required today, variety absorbs variety, paraphrased by Malik in the 1980s as only complexity can absorb complexity.
As I've asserted previously in a post differentiating complexity and complication:
Organisations may gain advantage by reducing the complication over which they have domain – and perhaps there's a happy medium to be found – but they cannot simplify complexity beyond this, for that is the product of nature. We can only seek ways to navigate it more simply and more nimbly.
In their 2014 book sub-titled How to Manage Complexity without Getting Complicated, Morieux and Tollman conclude:
Some observers think increasing business complexity is the problem. We disagree. We believe that while complexity brings immense challenges, it also offers a tremendous opportunity for companies. Increasingly, the winners in today's business environment are those companies that know how to leverage complexity and exploit it to creative advantage.
I agree obviously, but agreement matters not. Business has no choice. Complexity is unavoidable. The winners will compete with the appropriate blend of human organization and technology, sensing and sense-making in real-time and responding with agility, elevating responsiveness in the scheme of things above the dedication to efficiency.
What then is the purpose of business?
Business exists to establish and drive mutual value creation.
Mutual, sustainable value is generated within this network, within this system, and no one individual or category of individuals can do it without others playing their part – the right mix of others at the right time. It’s a natural law. It’s all in the mix. Ignore this, or indeed attempt to act otherwise, and you wither – particularly when facing off competition that does get it.
[Attenzi – a social business story.]
Note that value is not restricted to the narrow monetary sense. One must 'see' value from business however one perceives it, irrespective of one's role and contribution.
All business is organization. Not all organization is business. As we continue to erode the frictions identified by Coase in explaining the very existence of the firm, it's conceivable that the firm as we know it may become a minority form of organization.
Giddens and Sutton adopt the working definition of organization as "a social group or collective that is internally structured to meet a social need or to pursue specific aims." Might we also say then that organization exists to establish and drive mutual value creation, at least if it's intent on sustainability. Perhaps sociologists already do ... it's still early days in my learning sociology.
Nevertheless, it is perhaps self-evident. After all, how long do you tend to participate in organization personally when the value you see is less than that you perceive elsewhere? And the rate of this self-organization can be expected to increase as those frictions decrease.
Image source: Paternoster Square, by gren, public domain
David Phillips says:
Drucker's great advantage is that his assertion is simple and disguises the complexity of his assertion. In that sense you both have merit. The unspoken asset is expressed as intangible (goodwill included) and the conversion of intangible value into exchangeable value is not easy. It is even more difficult when the exercise of converting intangibles is designed to enhance both intangible and tangible assets at same time. It is this process that I think you support for complexity theory has its place.
A lifetime of working with Public Relations, one of the great intangible asset creating professions (if not the only one) makes your assertion all the more important to understand.
It also shows PR as a much more complex discipline than most would believe.
17 April 2015 — 9:47 am
Re. your meriting Drucker's definition for its simplicity David, HL Mencken springs to mind: “For every complex problem there is an answer that is clear, simple, and wrong.”
Of course I have the highest regard for Drucker. He changed the world. And his point was articulated beautifully for its time, but competitive advantage may now be secured by moving beyond it.
Your reference to intangible and tangible value echoes my brief point about value not just being in the monetary sense, and it is a point neatly expressed. And you know I whole heartedly embrace your insights into the future of public relations, and your frustrations no doubt in knowing that PR's current practice and reputation obfuscates your point here to the vast majority. Nevertheless, being an innate optimist, I do see the potential for "future PR" / "PR redefined" to emerge in line with the definition I present here for business. Indeed, it depends on it.
17 April 2015 — 10:43 am
John R. Bell (@JohnRichardBell) says:
Such an insightful post, Philip, but I must declare my bias as the author of a new book citing complexity as the factor that stifles, stagnates, and brings companies to their knees - Do Less Better. The Power of Strategic Sacrifice in a Complex World. Love the way you redefined "value."
17 April 2015 — 7:41 pm
Thanks for taking the time to read and comment on this post John. I might just be a sucker for definitions, but I think your complexity might be my complication. I'll be sure to check out your book to find out for sure. As for the definition of value, I think that is in fact its definition! :-)
17 April 2015 — 11:02 pm
Jon Husband says:
""After all, how long do you tend to participate in organization personally when the value you see is less than that you perceive elsewhere? And the rate of this self-organization can be expected to increase as those frictions decrease.""
The crux of the matter.
21 April 2015 — 2:48 am
David Phillips says:
Who, then is the customer? The recipient of value observed in the created product or service exchanged for products or service of lesser perceived value. The vendor has to find a way of presenting this value gap which can be of tangible of intangible assets or, as is often the case, both. The vendor also has to be content with the lesser value product or service (e.g. money) to be able to continue as a vendor.
21 April 2015 — 9:53 am
Drucker's Post -Capitalistic Society was one of the influences on the creation of a business which asked, isn't the real purpose of business to benefit people? https://www.linkedin.com/pulse/20141112065203-3207079-what-is-the-purpose-of-business
31 May 2016 — 10:06 am