Showing posts with label for-profit. Show all posts
Showing posts with label for-profit. Show all posts

2011-10-29

Business 101b

Turning one's thinking around isn't really as difficult as most would make it out to be. You simply need to take a step back, move slightly to the side, and then take a new look at the old idea. Failing that, sometimes a gentle nudge from without can help. Let's see:

Peter Drucker, the grandfather of American business theory, maintained that the purpose of a business (organization) is to satisfy needs in markets. I know that last word is a red flag for some, but let's keep it simple: by market I mean any "place" (real or virtual) where value is exchanged. This can be a swap meet, a flea market, an online bartering site or a commercial or industrial trade sector, or more.

In a world as complex as ours is today, this definition of purpose easily accommodates both for-profit and not-for-profit organizations. If there is a need for, say, computers and you have a business than makes them, then you are satisfying that need. If there is a need for charitable assistance for homeless people, then if you organize to do that, you are satisfying that need. If there is a need for government oversight in some area of the economy, then that agency, by performing its function, satisfies a need. Now that everyone is accounted for, we can move on to more meaningful topics like strategy, operational efficiency, environmental effectiveness or anything else that might help us get more out of what we do ... and by "more", I certainly don't mean just money.

Profit is money, so if the primary purpose of business is profit maximization, then you are trying to maximize your money. It follows, however, that if this is your first purpose, any other purpose you have can be, at best, second or lower. And it is here that too many businesses become disingenuous and start losing credibility in many people's eyes ... and rightfully so. You can claim that "product quality" or "customer satisfaction" or "the health of the patient" is paramount, but if you believe the mantra, you are not telling the truth. Profit maximization means nothing less than money first, and everything else comes after that. The order in which they come is really not all that important, for what's important is money. Naturally this does not and cannot work for not-for-profit organizations, but over the long-term it's not good for for-profit businesses either. At some point the customer starts asking him or herself what their getting for their money. Theirs is less; the businesses is more.

I would be the last person to maintain that money isn't important. Just because it isn't the absolute top priority doesn't mean it has no priority at all or that we shouldn't care about it. Quite the contrary. It is essential for businesses to strive for sustainability, to ensure their long-term existence, not just for their owners, but for the employees, their families, the community and any other stakeholder in the business. In order to do this, it is absolutely necessary to take in more than you spend. This is just commonsense housekeeping. Making profit the measure of success, though, defeats this purpose because the needs that should be satsified by organizations become relegated to second-class status, then ignored, then forgotten.

We need a new measure of success, but we won't be able to find one till we are ready to give up on ideas that have proved themselves wrong. Profit-maximization is one of them. It's time to give another idea a chance.

2011-10-28

Business 101a

The more things change, the more they stay the same. I earned my MBA a quarter of a century ago, and I spent the last twelve years tutoring on an internationally recognized MBA program, and I can assure you, not much has changed. In my day, the MBA mantra was simple: the purpose of business is the maximization of profit. But is that really the purpose of business?

To some it is. I'd be the last person to say it wasn't so. But just because we think something is a certain way, it doesn't mean that's the best way to look at it. Truth be told, that mantra is actually a formula for failure, and that is precisely what the lastest financial crisis has shown us. We don't have to learn from our mistakes, I suppose (though I'd prefer we would), but it would be worthwhile thinking about just why it failed.

I don't like talking about businesses as if they were all one and the same thing (and regardless of what the Supreme Court thinks, they are not "people" ... an incorporated organization is technically a juridical person, meaning that in terms of the law it is in some limited ways like a person, but that does not make it a person any more than if I act like the boss that this means I actually am the boss). It is much easier, and cleaner, to think of businesses as "organizations", that is, a collection of individuals who have associated themselves with one another to do something that none of them could do on his or her own. In financial terms, though, it is possible to distinguish between two primary types of organizations: those that generate a profit (for-profit organizations) and those that don't (non- or not-for-profit organizations). These latter types of organizations can take on different forms from government departments and agencies to charities and more.

It is quite obvious that the MBA mantra doesn't -- and cannot -- apply to not-for-profit organizations. Though the MBA mantra is still being preached (with unwavering fervor), but the number of students from not-for-profit organizations seeking a graduate business degree has been increasing dramatically and steadily for the last 10 years. One has to do a lot of mental gymnastics to contort oneself enough to bring all of this together in such a way that it makes sense. Besides, it all can be so much simpler. We humans have a knack for simply getting things backwards, so perhaps it is time to simply turn our thinking around. It might take a bit of effort, but it really shouldn't hurt.