The Purpose and Objectives of a Business

What follows below is an excerpt from The Essential Drucker, a compilation of 60 years of Peter Drucker’s writings. It is taken from Chapter 3 that bears the same title as this post. Drucker’s discourse is direct and to the point: the purpose of a business is to create a customer. Read on.

Asked what a business is, the typical businessman is likely to answer, “An organization to make a profit.” The typical economist is likely to give the same answer. The answer is not only false, it is irrelevant.

[…] The concept of profit maximization is, in fact, meaningless. The danger in the concept of profit maximization is that it makes profitability appear a myth.

[…] 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 the right action. Whether there is such a thing as a profit motive at all is highly doubtful. The idea was invented by the classical economists to explain the economic reality that their theory of static equilibrium could not explain. There has never been any evidence of the existence of the profit motive, and 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. […]

In fact, the concept is worse than irrelevant: it does harm. It is a major cause of the misunderstanding of the nature of profit in our society and of the deep-seated hostility to profit, which are among the most dangerous diseases of an industrial society. […]

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.

[…] 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 customer buys and considers value is never just a product. It is always a utility, that is, what a product or service does for him.