January 30, 2021

Thoughts on your replies to “What is the purpose of a business?”

Yesterday, I shared more than a hundred of your replies to my question:

What is the purpose of a business? (NOTE: Not YOUR business, but businesses in general.)

While all of your replies were unique, there were some recurring themes:

The purpose of a business is to...

make money (or income, or revenue, or wealth, or freedom, or agency) for the owner
fill a need (or solve a problem, or provide a product or service) for a customer
create value for (or provide value to) the buyer
maximize shareholder profit (or wealth)
serve clients (or customers, or buyers, or employees)
improve the world (or civilization, or culture, or society, or community)
continue to exist

OBSERVATIONS

A few observations that I found interesting:

Some folks made no mention (or even implication) of a buyer
Some folks provided an accurate definition of a business, but not what I would call the purpose of a business
Some folks gave an answer that focused on just the seller or just the buyer
Some folks focused on some version of “making the world a better place” but didn’t actually mention money or buyers at all
Some folks gave an answer that was not wrong but could also describe lots of non-business entities
Some folks see the business as distinct from the owner, and others see the business as an extension of the owner

THOUGHTS

Businesses need profit like people need air. Without it, you’re dead.

I agree that it is absolutely critical that a business makes a profit. In fact, I think profitability is only growth metric that matters.

However, I think saying “the purpose of a business is to make a profit” is like saying “the purpose of a human is to find oxygen” - i.e., a requirement of survival, but NOT a reason for being.

So what IS the purpose of a business?

Everyone is going to have a different answer to this question, but I think good answers must include a reference to delivering some kind of satisfaction (e.g., profit, ROI, value, etc) to some kind of buyer (e.g., customer, client, student, etc).

This is why I don’t find Milton Friedman’s famous quote particularly useful. If you’re not familiar with it, here’s a blurb I found online:

In a now-famous 1970 Times magazine article, the economist Milton Friedman argued that businesses’ sole purpose is to generate profit for shareholders.

I have two problems with this statement:

There is no mention of a customer, as if they are presumed or incidental
Generating profit is not a purpose, it is a requirement for survival

In fairness to Friedman, he was arguing against social responsibility for corporations and was probably not trying to articulate the canonical purpose of a business.

That said, lots of people share Friedman’s quote as if it were the canonical purpose of a business.

This is unfortunate because believing that the sole purpose of your business is to make a “profit for shareholders” (i.e., you, the owner) gives you no direction.

It’s like, “Okay, great... The purpose of my business is to make a profit. BUT HOW?!?!”

Tomorrow, I’ll share a quote about the purpose of a business that I think is much more useful.

Stay tuned!

Yours,

—J