Why are corporations in business?
Steve Denning had a piece in Forbes last week, The Origin Of 'The World's Dumbest Idea': Milton Friedman, which talks about Milton Friedman's statement that the sole purpose of corporations is to make money for its shareholders. The short form is that Friedman based his article on flawed logic. The long form is Denning's book on Radical Management.
From the article:
No popular idea ever has a single origin. But the idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman in the New York Times on September 13, 1970.
... Any business executives who pursued a goal other than making money were, he said, “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor.”
I highlight the article (and the comments!) because this concept is heavily used in the Theory of Constraints community, as in
The primary purpose of a company is to make money now and in the future.
As I work more and more within organizations, I see that this statement doesn't ring perfectly true. Sure, the money is needed to run the business, but that isn't the over-arching goal for people. In particular, I usually hear about employees (ensuring security and satisfaction) or about a strong connection to customers. There are people within the TOC community who acknowledge this and talk about multiple goals (all with "now and in the future" in the wording), and depending on your viewpoint, one of them takes primacy while the others are necessary conditions.
Denning quotes Drucker in saying that the primary reason for a business is to "create a customer," as it is the customers who pay for the goods and services the business develops. If those goods and services don't meet the needs, then the customers don't come. And if the customers don't come there is no security for employees and there is no money.
So, why do businesses exist? What is their purpose? Can we identify just one thing?
[Photo: "Goal Line" by Charlie Bird]
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