I heard Peter say a lot of strange things when I was his student, but this has got to be one of the most unusual that I’d heard up to that time. I think most of my Drucker classmates agreed. Indeed, until Drucker came along most everyone believed the basic “fact” that the purpose of a business was to make money. That is, to make a profit. This belief leads to a corollary, another myth, believed by all—that is, that the goal of any business is profit maximization. Another words, whatever your business, your goal should be to make as much profit as possible. If you accept making a profit as a business’s purpose, the second part just follows naturally. This might even seem worthy to many. To quote Michael Douglas’s famous (or infamous) statement in his role as Gordon Gekko in the 1987 movieWall Street: “Greed is good.” Even today many “know” greed, or profit maximization to be the correct prescription for business success, even if it is amoral or shouldn’t be “good” from a moral perspective. Not so fast, Gordon. As Drucker so often said, whatever everyone knows is usually wrong, Hollywood films not excepted. Drucker told us first that profit is not the purpose of business and that the concept of profit maximization is not only meaningless, but dangerous.Lessons from Peter F. Drucker
The Purpose of Business Is Not To Make A Profit
William Cohen, Ph.D. | Peter Drucker’s first executive Ph.D. graduate at what is now the Peter F. Drucker and Masatoshi Ito Graduate School of Management. His latest books are Drucker on Leadership (Jossey-Bass, 2010) and Heroic Leadership: Leading with Integrity and Honor (Jossey-Bass, 2010). Cohen is the president of The Institute of Leader Arts and a vice president of the 26 Peter F. Drucker Academies of China and Hong Kong. He is also a retired Air Force general.
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory. — Wikipedia
Neoclassical economics is at odds with the foremost figure in business management has to say, and which most business people know from experience. "The business of business is business." that is, attracting and retaining customers in a marketplace that is ever-changing. Profit is a by-product of business success, which is the result of efficient and effective management. "Efficiency is doing things right, and effectiveness is doing the right things," is the message of Peter F. Drucker's The Effective Executive.
14 comments:
Ridiculous argument by Drucker. He argues, especially in his 3rd paragraph, that because some businesses fail to avoid a loss by raising their prices, that somehow destroys the whole argument for the profit motive.
If a car manufacturer makes cr*p cars which no one wants, it won’t make a profit, and raising the price of it’s cr*p cars won’t save it. It will make a loss and close down, and quite right. The fact of making a loss is a good indication that the relevant inputs (labour, capital, etc) can be put to better use.
If Drucker cannot understand that simple point, you wonder whether his management speak made any more sense. Glad I never spent any time studying it.
In the Bible, profit is good but profit taking is bad, at least from one's own countrymen.
Did you get through the whole piece, Ralph?
"According to Drucker, there is only one valid purpose for a business, and that is to create a customer. This is because as Drucker wrote, “The customer is the foundation of a business and keeps it in existence. He alone gives employment. To supply the wants and needs of a consumer, society entrusts wealth-producing resources to the business enterprise.”
I thought this was good... rsp
There are two approaches to business. The first is the old-fashioned way that I was taught, i.e., serving customers better than competitors, which Drucker articulates. The second is the corporate managerial way that manages to the bottom line on the next quarterly report in terms of exceeding or at least meeting analysts expectations. This is called managerialism.
The first is owner-oriented because it is about managing a business over time in the interest of the owners.
The second is manager-oriented, because managers manage the business not for the owners but rather for what they can take out during their time in office. Top management captures the board and isolates it from stakeholders and then runs the company for the benefit of top management, i.e., rent extraction through salaries, bonuses, perks and whatever else can be extracted.
The long term good of the company is not a consideration so this style of management is called short-termism and managerialism. Minsky called attention to the adverse effects of managerialism in finance.
This is not management in the interest of the owners, especially when profits are distributed more generously to management than equity holders. The ideas of managing to the bottom line and profit maximization are antithetical to good business practice. This is the provence of the CFO, with whom the CEO closely consults in making management decisions.
Poor CEOs let the CFO manage the firm for what can be squeezed out of it. I mean this literally. There is often a lot of ruthlessness and shadiness involved, and the lawyers are employed to help maximize gains while reducing potential exposure. This is a business strategy that culminates in control fraud.
Good CEOs know that the input of the CFO is just one factor in management and not the most important one either if the CFO is not taking the long term into consideration as well wrt to corporate long term strategy.
I remember reading some of Drucker's books back in the 60's. It was fairly humanistic stuff, talked about adapting the job to fit the employee rather than forcing the employee to fit the job. At the time, Drucker was considered mainstream in the business world.
Totally different than today's predatory capitalism.
I don't think it makes much sense to talk about "the purpose of business", as though a business were an autonomous entelechy with its own self-subsistent telos. Businesses are run by people. Businesses don't have purposes, people do. The purpose toward which any given business is directed depends on the purposes of the people who happen to run it. Clearly some of those people are motivated by profit about all else.
Makes sense, Dan, but according to SCOTUS, corporations are person with substantially the same rights as natural persons.
But I think the real issue does concern this. Corporations are immortal and equity in them is also immortal, so owners have very long terms interests, since the corporation only legally immortal and not immune to failure.
Short-termism and managerialism are based on managers being able to extract short term gains that are self-serving and often harm the health and longevity of corporations in the intest of the managers and at the expense of the equity holders.
Profit taking and exponential growth are necessary for a business because the government backed credit cartel requires usury for the money supply it lends. Then don't borrow from the cartel, you say? But renting stolen purchasing power is a lot cheaper than honest finance so the ethical are at a competitive disadvantage so long as the government backed credit cartel exists.
Corporations are not really the problem, at least not in principle, since their purpose is to allow many small capital owners to consolidate their capital for economies of scale. But the government backed usury for stolen purchasing power cartel, the banks, forces business and everyone else into a rat race just so they can get their usury.
There is a better way. Without the credit cartel, corporations might find that their cheapest finance would be to issue and accept their own common stock as money, thus bypassing the banks and in the process "sharing" wealth and power with the rest of us.
Managers spend far too much time managing accounting numbers when they should be running their businesses.
Managers should focus on running their businesses instead of wasting effort on manipulating accounting numbers.
Managers should focus on running their businesses instead of wasting effort on manipulating accounting numbers.
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