Science économique
Propositions premières

Chapitre 3 - L'entreprise

What Is a Business

Peter F. Drucker

Management: Tasks, Responsibilities, Practices [1], beginning of the chapter 6, What Is a Business?

1. Business Created and Managed by People, Not by Forces

The Sears story shows that a business enterprise is created and managed by people and not by forces. Economic forces set limits to what management can do. They create opportunities for management’s action. But they do not by themselves determine what a business is or what it does. Nothing could be sillier than the oft-repeated assertion that “management only adapts the business to the forces of the market.” Management not only has to find these forces, it has to create them. It took a Julius Rosenwald seventy-five years ago to make Sears into a business enterprise, and a General Wood twenty-five years later to change its basic nature and thus insure its growth and success during the Depression and World War II. Now another management generation will have to make new decisions that will determine whether Sears is going to continue to prosper or to decline, to survive or eventually to perish. And that is true of every business.

2. The Fallacy of Profit Maximization

Another conclusion is that a business cannot be defined or explained in terms of profit. Asked what a business is, the typical businessman is likely answer, “An organization to make a profit.” The typical economist is likely to give the same answer. This answer is not only false, it is irrelevant.

The prevailing economic theory of business enterprise and behavior, the maximization of profit—which is simply a complicated way of phrasing the old saw of buying cheap and selling dearmay adequately explain how Richard Sears operated. But it cannot explain how Sears Roebuck or any other business enterprise operates, nor how it should operate. The concept of profit maximization is, in fact, meaningless.

Contemporary economists realize this; but they try to salvage the theorem. Joel Dean, one of the most brilliant and fruitful of contemporary business economists, still maintains the theorem as such. But this is how he defines it:

“Economic theory makes a fundamental assumption that maximizing profits is the basic objective of every firm. But in recent years, profit maximization has been extensively qualified by theorists to refer to the long run; to refer to management’s rather than to owners’ income; to include non-financial income such as increased V leisure for high-strung executives and more congenial relations between executive levels within the firm; and to make allowance for special considerations such as restraining competition, maintaining management control, warding off wage demands, and forestalling anti-trust suits. The concept has become so general and hazy that it seems to encompass most of men’s aims in life.

“This trend reflects a growing realization by theorists that many firms, and particularly the big ones, do not operate on the principle of profit maximizing in terms of marginal costs and revenues.” [2]

A concept that has “become so general and hazy that it seems to encompass most of men’s aims in life” is not a concept. It is another way of saying, “I don’t know and I don’t understand.” A theorem that can be maintained only when qualified out of existence has surely ceased to have meaning or usefulness.

The danger in the concept of profit maximization is that it makes profitability appear a myth. Anyone observing the discrepancy between the theory of profit maximization and the reality, as portrayed by Joël Dean, would be justified in concluding that profitability does not matter-the conclusion actually reached by John Kenneth Galbraith in The New Industrial State[3]

3. Profit: An Objective Condition of Economic Activity, Not Its Rationale

Profit and profitability are, however, crucial-for society even more than for the individual business. Yet profitability is not the purpose of but a limiting factor on business enterprise and business activity. Profit is not the explanation, cause, or rationale of business behavior and business decisions, but the test of their validity. If archangels instead of businessmen sat in directors’ chairs, they would still have to be concerned with profitability, despite their total lack of personal Interest in making profits. This applies with equal force to those far from angelic individuals, the commissars who run Soviet Russia’s business enterprises, and who have to run their businesses on a higher profit margin than the wicked capitalists of the West.

The first test of any business is not the maximization of profit but the achievement of sufficient profit to cover the risks of economic loss.

4. Invented by the [Neo] Classical Economists, the Profit Motive and its Offspring Maximization of Profits Are Irrelevant to the Purpose of a Business and the Job of Managing a Business

The root of the confusion is the mistaken belief that the motive of a person-the so-called profit motive of the businessman-is an explanation of his behavior or his guide to right action. Whether there is such a thing as a profit motive at all is highly doubtful. It was invented by the classical economists to explain the economic reality which their theory of static equilibrium could not explain. There has never been any evidence for the existence of the profit motive. We have long since found the true explanation of the phenomena of economic change and growth which the profit motive was first put forth to explain.

It is irrelevant for an understanding of business behavior, profit, and profitability whether there is a profit motive or not. That Jim Smith is in business to make a profit concerns only him and the Recording Angel. It does not tell us what Jim Smith does and how he performs. We do not learn anything about the work of a prospector hunting for uranium in the Nevada desert by being told that he is trying to make his fortune. We do not learn anything about the work of a heart specialist by being told that he is trying to make a livelihood, or even that he is trying to benefit humanity. The profit motive and its offspring maximization of profits are just as irrelevant to the function of a business, the purpose of a business and the job of managing a business

5. Largely Responsible for the Worse Mistakes of Public Policy

In fact, the concept is worse than irrelevant: it does harm. It is a major cause for the misunderstanding of the nature of profit in our society and for the deep-seated hostility to profit which are among the most dangerous diseases of an industrial society. It is largely responsible for the worst mistakes of public policy—in this country as well as in Western Europe- which are squarely based on the failure to understand the nature, function, and purpose of business enterprise. And it is in large part responsible for the prevailing belief that there is an inherent contradiction between profit and a company’s ability to make a social contribution. Actually, a company can make a social contribution only if it is highly profitable. To put it crudely, a bankrupt company is not likely to be a good company to work for, or likely to be a good neighbor and a desirable member of the community—no matter what some sociologists of today seem to believe to the contrary.

6. The Purpose of a Business Enterprise

To know what a business is we have to start with its purpose. Its purpose must lie outside of the business itself. In fact, it must lie in society since business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer.

Markets are not created by God, nature, or economic forces but by businessmen. The want a business satisfies may have been felt by the customer before he was offered the means of satisfying it. Like food in a famine, it may have dominated the customer’s life and filled all his until the action of businessmen converted it into effective demand. Only then is there a customer and a market. The want may have been unfelt by the potential customer; no one knew that he wanted a Xerox machine or a computer until these became available. There may have been no want at all until business action created it-by innovation, by credit, by advertising, or by salesmanship. In every case, it is business action that creates the customer.

It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. What the business thinks it produces is not of first importance-especially not to the future of the business and to its success. The typical engineering definition of quality is something that is hard to do, is complicated, and costs a lot of money! But that isn’t quality; it’s incompetence. What the customer thinks he is buying, what he considers value, is decisive-it determines what a business is, what it produces, and whether it will prosper. And what the customer buys and considers value is never a product. It is always Utility, that is, what a product or service does for him. And what is value for the customer is, as we shall see (in Chapter 7), anything but obvious.

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.

[1] First edition in 1974 by William Heinemann Ltd. This book is now available in digital format.
[2] Managerial Economics (Prentice-Hall, 1951), p. 28).
[3] Houghton Mifflin, 1967.