What is the purpose of business? Discuss. INTRODUCTION

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At a dinner party a doctor, a lawyer and a businessman are sitting around the table chatting and talking about their life and work. At one point another man approaches the table and asks the three men what the purpose of their jobs is. The doctor immediately responds that he wants to help people and save life. The lawyer takes over and says he fights for justice and equality but when it comes to the businessman to answer the question - he remains silent. Would a normal businessman have been able to give readily a precise answer as to the purpose of business? Would he have said is it all about money and making profit? Or would he have answered like Peter Drucker that the customer should have the highest priority in business life and everything should be done to satisfy him1. Or would he have responded like Dave Packard once said: “I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being...” 2 These quotes describe very well the difficulty in answering the question what the purpose of business is and the need for detailed analysis. As everybody is affected and surrounded by business every day, and since one can hardly imagine a world without business, it is crucial to know its purpose. Therefore it is the objective of this paper to examine in greater detail the nature and purpose of business and to demonstrate its importance to the whole world. “A business is any enterprise which makes, distributes or provides any article or service which the other members of the community need and are able and willing to pay for. “ 3

This is one of an abundant number of definitions of business. The following study will consider reasons for many different descriptions and objectives of business. It will also examine why and how business has developed throughout the course of time as well as who are the stakeholders of a company and what different interests and objectives drives them to do business.

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Peter F. Drucker,(1954), The Essential Drucker, 7th ed.,Oxford: Elsevier Ltd.,p.15 Harvard Business School Press, (2003), Harvard Business Review on Corporate Responsibility, Harvard Business School Publishing Corporation, Boston, MA, p. 80/81 l. 26 ff. 3 th R.P Maheswari, ,(2006),Principles of Business, 6 ed., New Delhi: Pitambar Publishing Company, p.1

What is the purpose of business? Discuss. DISCUSSION

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When talking about business and especially about the purpose of business we first of all have to distinguish between two perspectives, under which business can be seen from. On one hand there is the perspective of the customer, we all know and experience every time we go shopping, get a coffee or take the bus. On the other hand there is the perspective of the producer or provider of goods and services performed by businessmen in companies.4 Before scrutinizing each aspect individually, it is important to know what drives us to give business and economic behaviour such an important role in our life. The root of economic behaviour and business activity is deeply entrenched in the human mankind. We are willing to act economically and join business because of our self-interest in obtaining the maximum of wealth and prosperity. Adam Smith was one of the first to introduce this idea by establishing the picture of the Homo Oeconomicus. It describes the nature of human beings as “animals seeking after individual advantages” 5 This sketch of a man who is trying to reach the highest level of satisfaction is strongly connected with the economic problem of the shortage and lack of goods. Each of us has an abundant number of wishes and needs, but the possibilities to fulfil these endless desires are limited. This compels us to act economically and to limit our demands to the most essential ones. The result of this process is summarized in maximum and minimum values, which implies that you try to reach a maximum with a minimum effort employing given means. 6 This is only possible and realisable if we form communities and subdivide the work among all people. This idea was already suggested by Plato, in his famous work Plato’s Republic, written around 380 BC. Step by step he visualized the requirements which are crucial for the existence of a city or a community. His treatise did not only deal with food, clothing, or shelter but also included the sketch of work division and a simple market structure to simplify and optimize the life and standard of living of the citizens. 7

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R. Lazaro,(2006), Philosophy of Business, Nicanor Reyes: Rex Book Store Inc. p.21 A. Smith, (1776),An inquiry into the Nature and Causes of the Wealth of Nations,New York: Hackett Publishing Company, p.210 6 Herbert Sperber,(2007),Wirtschaft verstehen (Understanding Business),Stuttgart: Schäfer-Poeschel,p.14 7 Nicholas D. Plato (c.427-347 BC), Plato’s Republic, Millis: Agora Publications Inc.,p.56ff

What is the purpose of business? Discuss.

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It was again Adam Smith who declared the division of work to one of the most important instruments in order to increase wealth and productivity among the nation. In his well-known book, “Inquiry into the Nature and the Causes of The Wealth of Nations” he describes, using an example of fixing pin production, how the division and specialising of work increases productivity extremely and in the end also prosperity among people.8 If all the mentioned aspects are taken into account the general purpose of business would arise out of the desire to continuously increase and improve the standard of living in society.9 But why do millions of people and business text books state that the purpose of business is to earn money and make profit? In order to find out which role profit and money play in the context of business purpose we will now examine business and its objectives as an economic institution. Today in a capitalistic society it is common to narrow the purpose of business down to the objective of earning money and making profit. Child labour and sweatshops are just two examples which underline this behaviour and show businessmen as unscrupulous people only trying to maximize their individual objectives of earning profits. But this performance distorts the picture of profits being a very important impact for economic behaviour and depicts even a very dangerous image of profit-fixed business activity in todays’ society.
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Nowadays one has to differentiate between profits which result out of

economic related transactions and profits produced out of egoism, greed and selfishness. 11

In order to realize who is actually affected by economic activity and who benefits from profits, the study will examine the eight stakeholder of a company shown in the following graphic.

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Eric D. Beinhocker ,(2007), Die Entstehung des Wohlstandes (The origin of wealth),Landsberg am Lech: MiFachverlag,p.51 9 R. Lazaro,(2006), Philosophy of Business, Nicanor Reyes: Rex Book Store Inc. p.54 10 R.P Maheswari, ,(2006),Principles of Business, 6th ed., New Delhi: Pitambar Publishing Company, p.10 11 David Henderson,(2002),The role of business in the modern world, University of Notre Dame, Fremantle, Australia, http://cei.org/studies-books/role-business-modern-world-progress-pressures-and-prospects-marketeconomy

What is the purpose of business? Discuss.

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Customers

Suppliers

Community

Employees

Organization

Creditors

Managers Owners

Government

[12]

Stakeholders are individuals or a group of people interested in an organisation or affected by the actions or projects of a company13. One can mainly distinguish between external stakeholders such as customers, suppliers, creditors, government and the general community and the internal stakeholders represented by the employees, managers and owners. Each group has individual objectives and strives for different interests.14 This understanding is very important while referring to the purpose of business because for each group the purpose of their performance and the being of the organisation can differ and even interfere quite a lot. Nevertheless, altogether they are playing a crucial role in order to maintain sustainability in society as well as to create shareholder prosperity.15

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Cf. Futrell,C. M.,(2003), ABC’s of Relationship Selling, 7th ed., New York: McGraw-Hill Companies, p. 36
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(2007),Stakeholders Engagement, Washington D.C.: International Finance Corparation,p.21, http://www.ifc.org/ifcext/enviro.nsf/attachmentsbytitle/p_stakeholderengagement_full/$file/ifc_stakeholdere ngagement.pdf 14 Claire Carpon,(2008),Understanding Strategic Management,Essex,UK: Pearson Education Limited, p. 138 15 Sanjay Sharma, Mark Starik,(2004),Stakeholder, the Environment and Society,,Massachussets,USA: Edward Elgar Publishing Inc.,p.1

What is the purpose of business? Discuss.

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While for an employee the first priority is to secure employment in order to afford a living and a higher living standard, managers are interested in yielding the greatest profits in order to get rewarded by e.g. fringe benefits and increase the efficiency of their company.16 Shareholders and creditors are known to be the most interested in profits - the higher the profit is the higher is the dividend they get paid out and the reward they obtain for taking the risk of investing their money and time into the organization as well as carrying all the responsibilities which are linked to it.17 So considering the purpose of business for the owners - the shareholders, we might assume their first priority concerns obtaining the highest profit as possible. Does this mean profit is their only purpose of business or is it just one objective which needs to be fulfilled in order to even run the company? – This will be considered more in detail later. Besides the internal stakeholders, the external stakeholders are just as important as the people who directly influence the companies’ actions. The external stakeholders are closely related to the organisations decisions and performance and it is of great importance to identify their impact on the objectives of a company. 18 The interest of the customer in business depicts the satisfaction of his demands and needs he is establishing while living life. He is concerned about quality and availability of goods and services and the company needs to fulfil his requirements in order to maintain his value and purchasing power.19 The purpose of business between owner, customer and supplier is slowly emerging: It is about taking and giving. Owner and supplier must both ensure quality of products and a good price performance ratio in order to ensure the satisfaction of their customers. In general, it is the community as well as the government that the company is observing laws and environmental regulations in order that living standards will be maintained or even enhanced.20

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Claire Carpon,(2008),Understanding Strategic Management, Essex, UK: Pearson Education Limited, p.138 Bienert, M. ,(2010), Chapter A: Basic Principles of Business and Economy, p. 7 18 (2007),Stakeholders Engagement, Washington D.C.: International Finance Corparation,p.21, http://www.ifc.org/ifcext/enviro.nsf/attachmentsbytitle/p_stakeholderengagement_full/$file/ifc_stakeholdere ngagement.pdf 19 Cf. Anton J., (1996), Customer Relationship Management, Upper Saddle River, NJ: Prentice Hall, Inc., A Simon & Schuster Company, p. 7 20 Cf. Futrell, C. M., (2003), ABC’s of Relationship Selling, 7th ed., New York: McGraw-Hill Companies, p. 36

What is the purpose of business? Discuss.

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It is of great significance that the internal stakeholders communicate and cooperate with the external groups so as to satisfy and combine in the purpose of business all requirements for the greater benefit of everyone. 21 This perspective is underlined by the idea of Peter Drucker, who claimed that the purpose of business must be searched not within business but outside of it. It was him who stated that the reason for business activity must lie, as mentioned before, within society within us, the people. We by going out and being willing to pay for a coffee create the foundation for business to exist. The customer creates demand and must consequently receive the highest value of business.22 Therefore Peter Drucker ruled that profit cannot be seen as the only purpose for business activity, he stated that profit is rather a very important instrument in order to compensate the risks which are involved while performing economic activity and the different stakeholders affected by the business. Profit is essential as an element of business activity, it is necessary to ensure the survival of a firm and to motivate its employees as well as shareholders and managers to contribute the best of their ability. For the reason that mankind is continuously striving towards greater aims, a company must permanently search for ways of improvement and development. Thus profits are needed as an important element to ensure growth and expansion. In the end all these arguments put forth in favour of earning profit must be combined in the most essential objective: 23 The final result must be that old customers are retained and new customers are attracted since they are the ones who decide to buy or reject the products. With the customer the cycle of the business process closes and starts again, because the customer is the one who in the end rewards the company with profits. Therefore, the customer has to be seen as the most important part of business, because he determines which products are necessary on the market and thus, which businesses will survive. Therefore the earning of profit is a necessary element and result- but not purpose- in doing business and acting economically in the pursuit of the objective to satisfy human needs. 24

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(2007),Stakeholders Engagement, Washington D.C.: International Finance Corparation,p.21, http://www.ifc.org/ifcext/enviro.nsf/attachmentsbytitle/p_stakeholderengagement_full/$file/ifc_stakeholdere ngagement 22 Drucker, P. F., (1955), The Practice of Management, Oxford, UK: Elsevier Linacre House, p. 32 ll. 3-4 23 R.P Maheswari, ,(2006),Principles of Business, 6th ed., New Delhi: Pitambar Publishing Company, p.12 24 Drucker, P. F., (1955), The Practice of Management, Oxford, UK: Elsevier Linacre House, p. 32 ll. 3-4

What is the purpose of business? Discuss. CONCLUSION

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Having discussed the source of business and consulted the position of some experts as well as having scrutinized the different interests and objectives of the internal and external stakeholders, what is the main purpose of business?

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Such as this graph is illustrating, business can be considered as a fundamental social progression “which proceeds from the very nature of man and of society”.26 Its main purpose can be pictured as a mosaic which is composed of many different pieces: The mosaic – the final purpose of business- is to serve the community by supplying them with goods and services while at the meantime - enhancing and spreading prosperity among all people.

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R. Lazaro,(2006), Philosophy of Business, Nicanor Reyes: Rex Book Store Inc. p.31 R. Lazaro,(2006), Philosophy of Business, Nicanor Reyes: Rex Book Store Inc. p.31

What is the purpose of business? Discuss.

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This results in the crucial aim of business - to show value and best quality products to the customer in order to satisfy him because he is the one who will decide which products to buy, hence where to spend his money. Profit and money are instruments which are needed to ensure this process and keep it running. All these factors- or pieces, which contribute to the formation of the final mosaic -the purpose of business- are connected with each other- connected with each of us, for the reason that we are all part of the business cycle and therefore must be seen in relation to each other. 27

After a few minutes the man stands up, looks at the others and says: “Well, with all due respect gentlemen, as far as I am concerned each of us is a businessman and even if you don’t notice, you do business every single day – but to come back to your question, I see the purpose in my work, as to contribute to the wealth and prosperity of our whole society which is you, me and basically everybody living on this earth.

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R. Lazaro,(2006), Philosophy of Business, Nicanor Reyes: Rex Book Store Inc. p.31/32