What’s the main purpose of a business? To make money? Profit?
I disagree.
I think the purpose of a business is to be useful. To do or provide something valuable that people (or other businesses) want or need. If people will buy the product or service, then they want it, or need it1.
Investopedia tends to agree, in a kind of vague way:
“The purpose of a business is to organize some sort of economic production of goods or services.” – Investopedia
Profit is the result from running a business, not the purpose. A business’s profit shows that it’s adding value to society and operating well (as well as that the supply & demand curve of their particular market niche supports a profit at the time). Profit is the reward – for owners, investors, and executives, for the allocation of time, capital, skill and hard work. Profit is important. It’s often the reason people go into business. Without it, why bother?
But it’s not the purpose2.
A subtle difference
OK. Why does this matter?
Because what the leadership of a business focuses on determines what a business does, and how decisions get made. Because focusing on purpose – what you do – vs profit – how much you’ll make – makes a huge difference in how a company behaves, and how successful it is in the long term.
It’s a subtle difference, but a powerful one.
How do we make the best X? – vs – How do we make the most money from X?
How do we innovate in our products? – vs – How long can we get away without investing in R&D to increase short term profit?
How do we grow the business? – vs – How low can we cut costs?
How can we make our customer’s buying journey better? – vs – How can we make our customer’s buying journey cheaper?
What separates great businesses from others is that they focus on delivering a great product or service experience first and manage the profit as part of that; rather than focusing on delivering a profit first and managing the product or service as part of that.
If you have a great product / service experience, profit follows.
You don’t need to look hard to find stories
The business hall of fame has many examples of success stories & cautionary tales of how companies rose and fell as their focus shifted from product to profit. The ones with the greatest longevity shifted back to product again. Apple’s innovative Apple II and Mac, subsequent years of irrelevance, followed by the second Jobs era. Microsoft defining the PC market, stagnating on Office and Windows XP and missing mobile, then becoming a major force again under Satya Nadella’s cloud focus. Intel is currently in the throes of trying to become more relevant in chips again after focusing on profits for too long.
Examples from the industry powerhouses of our time are all well and good, but can be hard to relate. How does it affect smaller businesses?
If you don’t become the best you can – if you don’t build a moat, if your products don’t evolve and continue to be in demand, if you don’t retain customers, you leave yourself vulnerable to competitors or a new startup.
Potentially the only industries where it’s not as relevant are large regulated industries, monopolies and oligopolies – but even then, it seems that focusing on profit over a good product will eventually catch up with you, if Boeing is anything to go by. A story of profit over product, where eventually the profit disappears once the product isn’t good anymore.
Don’t get me wrong: profit is extremely important and should factor in most decisions. Cash and profitability matter in all businesses. But it’s a factor, not the primary focus. You should control your costs. You should be efficient. You should generate a profit. But the primary focus should be what you do, not how much you make.
What about your business?
Leaders should ask themselves: What are you spending more of your time on? What metrics are you reviewing? What’s of critical importance in your business? If you’re only viewing and discussing financial indicators – perhaps it’s indicative that you need to focus on your product or service as well as profit.
- Seems obvious, but there have been many companies that haven’t been able to create a business selling something that people want to buy. These startups eventually fail, but some get quite large before failing. ↩︎
- For most businesses. There are clearly some arbitrage businesses that directly target market inefficiencies where the purpose is profit (e.g. HFT). However, even those in some cases you could say their primary purpose is to make a market more efficient (e.g. HFTs act as market makers in the sharemarket), and that their profit comes from doing their core business activity well. ↩︎