This topic has really caused more harm than good amongst various people who argue about it from their own perspective and point of view. I learnt this many years back but decided to share a little of what I know or have learnt for those who will believe and will find this educative enough to share.
Let me reiterate that "The Purpose of Business Is Not To Make A Profit". Business is primarily about purpose and creating value for stakeholders — money and profits follow.
Each entrepreneur dreams of becoming a millionaire some day, which directly implies that he is doing business to earn money. Why is it often said that "Don't start a company if you just want to earn money" ? After all the definition of doing business is earning money.
There's a reason for that saying. Because to earn money, you can start a company either to defraud other people or help them solve their problems. Single-minded focus on earning money might result into defrauding people. The purpose of business should be to give a compelling value proposition to its customers, to solve their problems, to help and please them. Then, and only then, you can charge for the value you are delivering and earn money.
It also helps in the long-term, and basically is in the interests of business. Business managers that only think about earning money frequently make bad decisions - think of the recent case of Martin Shkreli who indulged into price gouging of important life saving drugs.
I remember one of my favorite quotes from Warren Buffett who is also our Spot Light for this Month:
It takes 20 years to build a reputation and just 5 minutes to ruin it. If you think about that, you'll do things differently.
You may think that business is all about profit, business people are unethical and business in general is a black art of guile and greed. Over the years I have found this to be mostly untrue.
Business can solve the world’s problems. And more people are coming to believe that. Having observed business for some time now, I can tell things are changing. Thousands of new businesses are working to make the world a better place and, most importantly, add real value to our daily lives.
We need to recast the very way we think about business, especially in the aftermath of the global financial crisis, in which the old model of business — profit maximization — contributed to the meltdown.
Stakeholder Theory argues that stakeholders come first — whether they’re suppliers, investors, employees, customers or the community.
The old way of thinking about business presupposes the point of business is to make profits. This is akin to believing that breathing is the purpose of life. Yes, you have to breathe to live, just as businesses must make profits. But the purpose of business is usually determined by a passionate Entrepreneur chasing a dream to change the world.
Putting Purpose Back Into Capitalism
Capitalism has always had its share of critics, who claim it leaves scandal, pollution and poverty in its wake. Capitalism may not be perfect, but it is the greatest system of social cooperation created thus far. Capitalism works because entrepreneurs and managers figure out how customers, employees, suppliers, communities and people with the money all can cooperate to mutual benefit. Competition is important, but it is a second-order property that gives people more choice in a free society.
Business is a deeply human institution, but its purpose is not to make as much money as possible. The purpose is something else. We need to put purpose back into capitalism because business is primarily about purpose and creating value for stakeholders — money and profits follow.
What Then Should The Purpose of a Business Be?
According to Drucker, there is only one valid purpose for a business, and that is To Create a Customer. This is because as Drucker wrote,
"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."
What has this to do with you or me? Regardless of our organization and whether it is profit or non-profit, Drucker’s truth holds. If we want our organization to be successful we have to remember that while "profit" is essential to support innovation and marketing actions, profit maximization is not only not the purpose, it is bad for society and hazardous to our organization’s health.
Let Me Share The Six Good Reasons To Start A Business
Here are the six most common reasons to start a business:
1. Making A Difference
By setting up and running a business, you will have the opportunity to make a difference. There are more and more people who want to start businesses for this reason and in recent years we have seen the development of ‘social businesses’ aimed at doing good things for society, while at the same time making a profit.
There’s no shame in this. In fact it’s essential there is profit for the business to continue. Typically, social business owners don’t earn as much as those seeking to make a return for shareholders, although they may still need to work as hard to be successful
2. Making a Lifestyle Change
Many people start their own businesses in order to change not just their job but also their way of life. Do you just want to create a better lifestyle for yourself with greater independence and flexibility in your working life? Most small businesses are most definitely in what is known as the ‘lifestyle’ category. These are businesses that have been created by the owners to provide a livelihood and income for themselves, as opposed to being aimed at being sold at some stage in the future.
There are many examples of people who have done this. They construct the business so it fits around their lives. This may mean working evenings and weekends to get time during the day to spend with others, which could in turn affect the opportunity to earn more money.
3. Creating a Legacy
Creating a successful business that can be passed onto a family member can be a powerful motivator for many would-be business owners. Not so many businesses nowadays pass on through the family as the younger generation seems more inclined to do their own thing. Many businesses fail within the first five years so the chances of creating something that will last long enough to pass on may be limited.
4. Gaining Self-Fulfilment
The simple desire to gain some sort of personal, non-financial reward through your own business may also be a motivator. The phrase ‘work-life balance’ has come to be widely used and this is a factor behind many start-ups.
Seeing a business grow or getting a kick out of pleasing customers or simply watching the bank balance grow can be very fulfilling for some!
5. Making Money
Many people want to run their own business because it offers them the opportunity to make money. Some want to make a fortune, while others want to earn a decent living for them and their families.
Some people say that if you set out in business with the sole aim of making money, then you will fail. It’s a good point. It’s more important to focus on providing customers with good products and services that they want or need, which will in turn build a fundamentally valuable business and the money will flow anyway.
6. Making Myself BOSS
For many, running their own business offers them a chance to be in control of what they do at work every day without the constraints of having to do what their manager tells them. Having your own business is one way of gaining independence, freedom and control in your working life.
Being your own boss can be liberating. There is no-one to tell you what to do, what actions to take, what hours to work and how hard to work. By the same token, the onus will be on you to get the work done to achieve the deadlines and fulfil the orders.
IN SUMMARY
In other words, deserve the money you want to earn - that should be the aim - the money will eventually come. Be fair. Because sooner or later, if you sell what you wouldn't buy yourself, you'll have to wrap up your business. That's almost certain.
With the focus of just earning money, greed will come up and more importantly the only reason to make money does not motivate you to constantly work on your business no matter what. You have to find reasons that are deeper than just money. Money is simply a by product of providing a product or service to people that helps them, and changes their life's.
Thanks
I remain
Entrepreneur | Consultant | CEO Colossus Gists
Article Credits
a. R. EDWARD FREEMAN from University of Virginia
b. Boundless
c. Quora
d. William Cohen, Ph.D. from Human Resources
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