MAINSTREAM economics would have you believe that the purpose of business is to maximise profits.
If a business loses money it will soon go bust, this much is clear. Profit is necessary for any ongoing business operation, however the fact that a business makes a profit does not explain the purpose or raison d’être of the business. The Dalai Lama put it this way:
To state that the role of business is to make a profit makes as much sense as to say that the role of a person is to eat or to breathe. If a company loses money it dies, as does a person without food, but that does not mean that the purpose of life is eating.
Peter Drucker, father of the modern management profession, believed that:
Profitability is not the purpose of, but the limiting factor on, business enterprise. Profit is not the explanation, cause or rationale of business decisions, but a test of their validity.
Profitability allows a business to sustain itself, but it would be dangerous to make profit the most important objective of a business. A corporate culture that values profit above all else may lead to law breaking, excessive risk taking, unnecessary suffering for employees, or damage to society and the environment.
Instead of focusing on profit, a business should aim to satisfy customers while acting responsibly. By satisfying customers the business can occupy itself in a meaningful way. And by acting responsibly, the business can prosper without harming others. If the business can also make a profit then its activity will be self-sustaining.
5 replies on “What is the purpose of a business?”
On a related note, Michael Porter and Mark Kamer write about ‘Creating Shared Value’ in this month’s Harvard Business Review:
http://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/1
where they argue that companies should not focus purely on quarterly profits but more on contributing value to the greater society.
Wil, good comment, thanks for the link to the article!
My present perception is that businesses serve as an enabler between supply and demand. If there is a need, a business can add value to the chain by filling a void in the market and meeting the said need.
If there is enough demand by the market for said void to be filled, profit tends to follow.
I always thought this was the best answer to that question…
Source: http://www.noisefreeinvesting.com/blog/2010/03/the-objective-of-a-company/
Great quote, thanks F. Street!