Most managements, if they ask the question "What is our business" at all, ask it when the company is in trouble. Of course, then it must be asked. To wait until a company is in trouble is irresponsible management. The question should be asked at the inception of a business - and particularly for a company that has ambitions to grow. Such a business better start with a clear entrepreneurial concept.
The most important time to as "What is our business" is when the company has been successful. Success always obsoletes the very behavior that achieved it. It always creates new realities. It always creates, above all, its own and different problems.
Friday, May 4, 2007
Arriving at "What is our business?"
Any attempt at defining the business has to begin with the customer. The first question to ask is "Who is the customer?". A business may have several customers.
Next, it is important to ask "Where is the customer?"
The third is the most important question "What is value to the customer?" Yet, it is the question that is least often asked. One reason is because managers are quite sure they know the answer. Value is what they, in their business, define as quality. But this is almost always the wrong definition.
The teenage girl's value in a shoe lies in its 'high-fashion'. Durability is not value at all and price is at best a secondary consideration. Manufacturers tend to consider this as irrational behavior. But the first rule is that there are no irrational customers. Customers behave rationally in the context of their own realities.
The customer never buys a product. By definition, the customer buys the satisfaction of a want. He buys value. Yet, the manufacturer, by default, cannot produce a value. He can only make and sell a product. What the manufacturer considers as quality may, hence, be irrelevant and nothing but a wasteful and useless expense.
What the company's different customers consider value is so complicated that it can only be answered by the customers themselves. Management should not even try to guess at the answers - it should always go to the customers in a systematic quest for them.
So the attempt to ask "What is our business?" can be translated into first asking "Who is our customer", "Where is he", and "What does he consider as value"
Next, it is important to ask "Where is the customer?"
The third is the most important question "What is value to the customer?" Yet, it is the question that is least often asked. One reason is because managers are quite sure they know the answer. Value is what they, in their business, define as quality. But this is almost always the wrong definition.
The teenage girl's value in a shoe lies in its 'high-fashion'. Durability is not value at all and price is at best a secondary consideration. Manufacturers tend to consider this as irrational behavior. But the first rule is that there are no irrational customers. Customers behave rationally in the context of their own realities.
The customer never buys a product. By definition, the customer buys the satisfaction of a want. He buys value. Yet, the manufacturer, by default, cannot produce a value. He can only make and sell a product. What the manufacturer considers as quality may, hence, be irrelevant and nothing but a wasteful and useless expense.
What the company's different customers consider value is so complicated that it can only be answered by the customers themselves. Management should not even try to guess at the answers - it should always go to the customers in a systematic quest for them.
So the attempt to ask "What is our business?" can be translated into first asking "Who is our customer", "Where is he", and "What does he consider as value"
Thursday, May 3, 2007
The Functions of Profit
Profit is, first of all, a test of performance. It is the result of the performance of the company in marketing, innovation and productivity. It is an example of feedback, a self-regulation of a process by its own results.
Profit has a second function - equally important. It is the premium for the risk of uncertainty. Profit and profit alone, can supply the capital required for tomorrow's jobs - more jobs and better jobs.
Finally profit pays for the economic satisfactions and services of a society. From health care to defenses, from education to the opera.
Businessmen these days tend to be apologetic about profit. This is a measure of the dismal job they have done explaining profit - above all to themselves. For there is no justification and no rationale for profit so long as one talks the nonsense of profit motive and profit maximization.
Profit, to be sure, is not the whole of business responsibility. But it is the first responsibility. The business that fails to produce a profit imperils both the resources entrusted in its care and the economy's capacity to grow.
At the very least, business enterprise needs a minimum of profit, the profit required to cover its own future risks, the profit required to enable it to stay in business and maintain intact the wealth producing capacity of its resources. Management, in order to manage, needs a profit objective at least equal to the required minimum profit.
Profit has a second function - equally important. It is the premium for the risk of uncertainty. Profit and profit alone, can supply the capital required for tomorrow's jobs - more jobs and better jobs.
Finally profit pays for the economic satisfactions and services of a society. From health care to defenses, from education to the opera.
Businessmen these days tend to be apologetic about profit. This is a measure of the dismal job they have done explaining profit - above all to themselves. For there is no justification and no rationale for profit so long as one talks the nonsense of profit motive and profit maximization.
Profit, to be sure, is not the whole of business responsibility. But it is the first responsibility. The business that fails to produce a profit imperils both the resources entrusted in its care and the economy's capacity to grow.
At the very least, business enterprise needs a minimum of profit, the profit required to cover its own future risks, the profit required to enable it to stay in business and maintain intact the wealth producing capacity of its resources. Management, in order to manage, needs a profit objective at least equal to the required minimum profit.
Tasks of a manager
The tasks, in brief, of management are
- Economic performance
- Making work productive, and the worker achieving
- Managing social impact and social responsibilities and
- Doing all of this in balance between the demands of today and the demands of tomorrow.
Effectiveness vs. Efficiency
The administrative job of the manager involves increasing the yield from the organization's resources. This, we are told means 'efficiency' - doing better what is already being done. But, the optimizing approach, rather, should focus on effectiveness. It fo cuses on opportunities to produce revenue, to create markets and to change the economic character of existing products and markets.
Effectiveness does not ask "How can we do this better?". It asks "Which of our products are producing extra-ordinary economic results or are capable of producing them? Which of the end users/markets are capable of producing extra-ordinary results?" Following from this, then is the n
next logical question "To what results should existing resources and efforts of the business be put in order to achieve these extraordinary results instead of the ordinary results that efficiency is capable of producing?"
This does not deprecate efficiency. It deprecates being efficient in doing the wrong things. Effectiveness is the foundation of success. Efficiency is the minimum requirement for survival after success has been achieved. Effectiveness is about doing the right things. Efficiency is about doing things right.
Efficiency is concerned with doing everything optimally. Effectiveness is recognizing that in business, as elsewhere, 10-15% of the phenomena lead to 85-90% of the results. The other 85-90%, however efficiently taken care of produce nothing but the most ordinary results.
Effectiveness does not ask "How can we do this better?". It asks "Which of our products are producing extra-ordinary economic results or are capable of producing them? Which of the end users/markets are capable of producing extra-ordinary results?" Following from this, then is the n
next logical question "To what results should existing resources and efforts of the business be put in order to achieve these extraordinary results instead of the ordinary results that efficiency is capable of producing?"
This does not deprecate efficiency. It deprecates being efficient in doing the wrong things. Effectiveness is the foundation of success. Efficiency is the minimum requirement for survival after success has been achieved. Effectiveness is about doing the right things. Efficiency is about doing things right.
Efficiency is concerned with doing everything optimally. Effectiveness is recognizing that in business, as elsewhere, 10-15% of the phenomena lead to 85-90% of the results. The other 85-90%, however efficiently taken care of produce nothing but the most ordinary results.
Tuesday, May 1, 2007
The Two Entrepreneurial Functions
Because it is its purpose to create a customer, any business enterprise has two, and only these two, basic functions - marketing and innovation
Marketing
Any organization that fulfills itself through marketing a product or a service is a business. Any organization in which marketing is incidental or absent is not a business and should never be run as if it were one! Marketing is so basic it cannot be considered a separate function within the business on par with say, personnel or production. Marketing is the whole business seen from the point of view of its end-result - customer's view point. Concern and responsibility for marketing, must therefore. permeate all areas of the enterprise.
Innovation
It is not enough for a business to provide just any economic goods and services, it must provide better and more economic ones. Innovation, too, can no longer be considered a separate function in the organization.
Marketing
Any organization that fulfills itself through marketing a product or a service is a business. Any organization in which marketing is incidental or absent is not a business and should never be run as if it were one! Marketing is so basic it cannot be considered a separate function within the business on par with say, personnel or production. Marketing is the whole business seen from the point of view of its end-result - customer's view point. Concern and responsibility for marketing, must therefore. permeate all areas of the enterprise.
Innovation
It is not enough for a business to provide just any economic goods and services, it must provide better and more economic ones. Innovation, too, can no longer be considered a separate function in the organization.
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