Broadly speaking, there are two ways of thinking about the purpose of a business.
The first – and most common – is that businesses exist solely to make money. Profitability is the everything. Cash is king. ROI is required. Shareholder return is the rule. Operating from this mindset, anything that makes the cash register sing is a good thing.
Businesses that operate from this philosophy (if they survive) sometimes bring in billions, but there are tradeoffs. If the company’s employees have to sacrifice their health, sanity, and family to close a big deal or meet quarterly earnings, so be it. If what you’re selling is snake oil, caveat emptor. If ignoring inconvenient externalities like waste and pollution improves the bottom line, ignore away. If you can bribe a government official to give you preferential treatment or limit your competition, start writing checks.
It’s a sad way to live your life. In the immortal words of Ralph Waldo Emerson: “Money often costs too much.”
The second – and less common – way of looking at businesses is that they exist as a creative endeavor that’s financially rewarding. Money is still important, but it’s a means to an end: revenue is what allows you to keep doing what you’re doing. Other considerations are allowed to take priority: creative expression, craftsmanship, and personal satisfaction come first. As long as you bring in enough funds to keep going, you can choose to prioritize anything you want. The entire business becomes a reflection of the proprietor’s values.
Both ways of thinking about business rely on the same fundamentals: creating something people want, marketing and selling it, delivering the value, and bringing in more than is spent. Beyond that, it’s a night and day difference.
Do you exist to serve your business, or does your work exist to represent you and your values? It’s a question worth asking. The world would be a better place with a lot less of #1 and a lot more of #2.
(Photo credit: neadeau on sxc.hu)
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Thought provoking post. For me, it all comes down to whether you want to Maximize Shareholder Value (which is #1) or Maximize Stakeholder Worth (which is #2). Both are vastly different end games that can be mutually exclusive. Consider saving money by laying off workers. In one sense, you did good by shareholders while stakeholders (the workers) made out worst. It does have a lot to do with how you approach your businesses and what it stands for.
Business is here to support what I love. It supports me and I support it. In a perfect world this relationship would always be in balance. However, sometimes I lean more towards supporting business at my own expense…
Nothing new about this.
Most start with ideals stated in 2 but then when they grow big into corporations something takes over, something called capitalism – and everything changes to 1.
i have always run my company like thought 2. we have brought on employees, and even a business partner because of #2. they want to be a part of something that fosters fun, creativity, and our overall goal of helping others.
that said. slow economies make #2 much harder to pull off. but still worth it.
Businesses exist for two reasons and two reasons only…to solve problems and provide a platform for individuals to fulfill their life’s purpose. The better businesses are at doing these two things, the more money they will make.
Even though #2 is a good idea, it solely exists in theory. When it’s a question of money, everybody is of the same religion.
Adnan – you have a point. As a company grows, it faces a choice. If you partner with, take capital from, or get acquired by a company that operates from a #1 mindset, don’t expect to continue to be able to operate from #2. It’s a very clear tradeoff. One real-life example, among many: the acquisition of Ben & Jerry’s by Unilever, which changed the focus and personality of the company.
It is, however, possible to continue to operate in a #2 mindset while growing, so long as you accept you may grow more slowly. New Belgium Brewery in Colorado is a great example.
I think you’re missing a #3 – an enterprise that works to serve others. As connectivity and global awareness grows, more and more entrepreneurs are developing businesses that put helping others at the forefront of their venture. The financial rewards and personal success take a back seat.
The ROI for helping others can’t be measured.
A great discussion.
The first example to come to my mind, a #2 example, would be Craig’s List. Certainly not growing as fast as they could and happy to be as they are.
Reading Inside Steve’s Brain, and it seems that this is how Apple works — the second way, that is. When they hit their post-Jobs funk, they started making the business just about making money, instead of making excellent products. Jobs has helped bring them back to the center.
I have to disagree with Adnan — capitalism doesn’t “take over” at some point, capitalism is the economic structure in which we live. He seems to be equating capitalism with desctructive Greed, and this is as intellectually lazy as it is dangerous.
Capitalism is not the enemy, and I’m getting sick and tired of people giving it a bad name. Like Democracy, capitalism may well be “the worst type of economic system, except for all the others…” (apologies to Churchill) — but the benefits it has brought about are incalculable. /rant
You post is timely for me because I’m trying to wrap my head around Collin’s Hedgehog Concept and how to apply it to my present situation. Passion, “Strengths” (what you can be the best in the world at), and “Value” (Economic Engine) —
to Keno, I would argue that providing fulfillment of life-purpose is a side-effect of a business; if you can’t satisfy some Value threshold, the organization goes bust. If an individual can’t provide some threshold Value, they starve.
Man, I can’t believe I’m being so objectionable today, but “the world would be better with a lot less of #1 and more of #2″ — meh. That’s like saying the world would be better with twice as much sunshine and half as much rain — that’s great until drought kills everything off. What is preferrable: eliminating corporate greed, or having subsequent charitable organizations (Rockafeller, Gates, etc –too many to mention)?
Great post, Josh! Growth by method #2 is certainly slower, and shareholders need to be patient. I think that, more than anything, is why it’s not the more common choice in an “instant gratification” society.
Thanks Josh,
Jerry Kennedy
Sorry Josh — I just re-read your decription for #2; your options were not as black-and-white as I thought. You covered the need to provide some level of economic value… so you may be right. I still think there can be positive “trickle down” effects of extreme #1-type behavior, but I accept that I might be in the minority on that…
Chris – no worries; I think capitalism (vs. corporatism) is a wonderful thing. Businesses revolve around creating real value for people who need/want it, completing a mutually beneficial transaction, delivering the value, and reaching the point of financial sufficiency so the process continues indefinitely. Money is a wonderful tool – it’s the elevation of the dollar to an end-in-itself that causes the problems inherent in mindset #1.
Brian – Craigslist is a fantastic example. Here’s a recent article in Wired Magazine that describes why.
Jeff – great point about Apple. The decline of Apple after they shifted the focus from making great products to making more money is a great example of the Value Optimization Paradox.
I would argue that in the long run, you can’t have success in terms of #1 without following the philosophy of #2. Sure some can reap huge rewards in the short term living with a strong #1 perspective, but eventually there is something that brings those people back to reality. Just look at everything that happened about a year ago.
On the other hand, I would argue that living with a worldview based on #2 will create larger ROIs in the long run. I recommend looking at some of the work taking John Nash’s (that guy in the movie “A Beautiful Mind”) game theory as applied to economics – Groups in competition who strive to maximize their own individual profit can often cause lower profit to be earned for themselves than if they had been working from a more cooperative position. I would say that people who are in business because of #2 naturally tend to have the necessary cooperative attitudes more often than their #1 based counterparts.
Creativity (or passion, or whatever) is not sufficient — it has to be for something that you can be Excellent at (“the best in the world”, per Collins). Apple excels at design (and/or marketing), therefore they reap above average rewards (margins anyhow; is their lifetime ROI all that great?)
If you are only “good enough” at delivering, you’re never going to get excess rewards, no matter how passionate you are. Individually, we can’t pick the things we’re talented (gifted) at; perhaps organizationally we can, by hiring and investing in people that have the capacity to be the Best… hmmm.
Each have their own place in the world of business…neither one better than the other. Yet each one has the ability to morph into the other. Interesting discussion…
Shane — I hope that’s not your interpretation of my comment — it’s good (much much better) to be king! Ask the king and the pauper; I’m sure they’ll agree.
And my point was that each can NOT morph into the other; our talents are unique (and unfortunately, not all talents are equally valuable). Not only that, but an excess of talent is only maximally valuable in the right environment. Michael Phelps talents have little value outside of the pool… Steve Jobs talents didn’t take NeXT very far…
I’m afraid this will have to be brief, as I can’t stand this French keyboard I’m using.
I agree that chasing dollars can lead to a sale of the soul to the devil. Ultimately, that is a personal choice, and I would laugh in the face of any man who felt that he had no choice but to work in a business that demanded so much of him. If that man is as good at his job as the work requires, he would have no trouble finding other work that paid the bills without taking up his own life. The supply of good jobs is always greater than the number of brilliant people to fill them.
Where I find fault with this short post is that it simplifies something very complex too far. I love to reduce ideas to their constituent parts, but I believe in making things no simpler than they truly are.
Unfortunately all of business philosophy cannot be summarised in half a page of text. To do as you have done here is to mimic the practice of many unsavoury thinkers – to reduce an enormous problem to an “us and them” debate. Throw morality into the mix (the world would be a better place if we had more of this and less of that) and you have a perfect recipe for moral superiority that can be used to bring down the most successful businessmen.
Business is a process, with no truly definable boundaries, and it will stay as such.
Remember that if I demand a price for my product and others are willing to pay that price without being coerced, then it is a fair price.
-Jonathan Buchanan
Jonathan – “Remember that if I demand a price for my product and others are willing to pay that price without being coerced, then it is a fair price.” No disagreement there. Nor is making a lot of money a bad thing or in any way a moral issue. (There’s a strong argument to be made that making a lot of money by providing a lot of value to other people is a morally laudable, and should be respected.)
I’m advocating that people make conscious decisions about what they value most vs. automatically committing themselves and their businesses to profit-maximization, nothing more or less. The world would be a better place if more people thought this through for themselves and made their decisions accordingly.
Sounds a bit like this:
One should eat to live, not live to eat. ~Cicero, Rhetoricorum LV
Making money is about living, and not the primary purpose of a person, nor an organization.
Thanks Josh. The primary i created business is to have a meaning for living. This comes with so many things ranging from self satisfaction and people satsfaction. So the two reasons move hand in hand and you cannot do without the other.
Very interesting post. I work in sales for a Fortune 500 company. My company seems to exist for end of the quarter. Sometimes I find myself reading Dilbert because it seems that is where our fearless leaders get their marching orders for the week. As you can tell my company falls into the #1 category and I am getting close to burnout. For me there should be balance between 1 and 2 but I can’t seem to find it. Someone above stated there is always jobs available. Probably but then you have to weigh your personal values like am I willing to relocate or stay close to family. I believe that there will always be a personal battle between 1 and 2. I just have to keep reminding myself that I can only change me and my circle of influence.
I was just listening to Michael Gerber’s Emyth Enterprise and he brought up a similar line of thought.
It is stupid to say that people were created to serve business but that is how so many businesses are run.
Wow, I’ve just had an epiphany. #2 way of doing business is so much better. I bet #2 businesses constantly make Best Places to Work at list. Since, Josh also had me hooked on Teaching Company lectures and particularly, Game Theory. It all now makes sense. #2 business implements winning game strategy: tit for tat.
Everybody cooperates and everybody scores big.
“The world would be a better place if more people thought this through for themselves and made their decisions accordingly.”
I think I now see where you’re coming from. If I understand you correctly, ultimately what you’re saying is that people ought to be conscious of the process of business, including all the implications of the way they are carrying it out. If I have gotten the general grasp of your point, then I agree – considering how much time is spent in work earning money, it would be foolish for a man not to consider the motivations for him being at work.
However, I think it is limiting to say that business can either be carried out in x way or y way – though such simplifications are great for people who like to think they know a lot about business. It strikes me that such a simplification might only lead to people thinking that they have thought about how they conduct business simply by virtue of having considered which camp they sit in; x or y.
I think it fantastic that so many people are interested enough in this topic to write a comment in response, but I can’t help but feel that those who are writing comments here are searching not for the truth, but for tidbits of misinformation they can use as evidence that they understand what business is. I notice myself doing it from time to time. I sit and read the FT and mutter under my breath about the idiocy of businessmen, and eventually realise that all I really want in that moment is to feel superior to a man who I have never met and never will.
It is for this reason that I am slightly wary of such short and condensed posts.
Josh – great post. We’re working on #2.
The author has not provided any evidence to support his conclusion that most businesses operate in Option #1 and that option #2 is less common.
This is not credible. In a competitive market, option 2 is likely to be more sustainable than option 1, but in an oligopoly companies may find option 1 also sustainable and be tempted to resort to it in pursuit of larger financial rewards.
Looking at work or business philosophically, I believe work is a resource for humans, not humans a resource for work. We, as humans, have an innate need to work. No matter what work is being done, work is the essential resource for self confidence and self worth. Hard work, easy work, it doesn’t matter, the fact that we are working for something and putting our gifts and talents into something is an essential need of the human spirit.
Hi Josh,
I would extend this question to a career/personnal life: what do you want to achieve?
1) Are you ready to sell anything and forget friends/family/colleagues just to make money?
2) Or do you want to change something, and focus your career on this goal?
Living in an economic world, there is a mix of both choices. Money is one of the reward. If it’s the only one you’re looking after, I would say great! But for why? What the next step? What will you do with it?
As you said, we need a little more of #2. We need money to live, and achieve new goals: as long as we leverage it everything is fine. When money becomes the goal I do believe there is something wrong…
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