Why are corporations in business?

Goal LineWhy do businesses exist? 

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]

2 Comment(s)

I had an interesting insight into this question while working on a small corporate archive. The company was owned by a larger entity that periodically had strategy meetings and the parent company had packets of data prepared for these.

One of these had a baldly typed statement that mirrored Friedman's sentiment, that a company's sole purpose is to make money. The CEO of this company I worked at had noted in the margin, "REALLY??!!" The sense of incredulity was very palpable, because I also had enough experience of the company to know that there was a commitment to quality and meeting the needs of its customers with a product of which they could be proud.

Prior to this experience I worked in another company that had that same ethos for the first part of its history. It made working there highly enriching until the goal became to make the company a money-maker so it could be sold.

When the focus shifts to pure money-making, the life of the company is sucked out and everything suffers. Can one get a product to market at all, least of all one that you can take pride in? Probably not. So I would love to see more top execs who, when confronted with the Friedman mantra, emphatically write "REALLY??!!" as a rejection of that sentiment and realize that you originally formed a company for a specific mission, declared when you file your corporation papers: to make X product or provide X service, and that you create a loyal customer following that allows you to sustain that mission.

Possibly the biggest constraint in TOC is being unable to question anyone or anything that tries to shake you from that declared mission.

I've written about this as well. And came across "The HP Way" ... I think Dave Packard was onto something when he said: "The purpose of a company is not to make money - it makes money in order to do what it is really all about and in our case, that is to make a contribution. We're here to create things that, if we didn't create them, the world would be worse off."

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