Business Purpose versus Strategy

Large companies might have strategies. Small companies can’t afford them.

I don’t know why I didn’t hear this until after I finished my MBA:

There is only one valid definition of a business purpose: to create a customer.

Peter Drucker, The Practice of Management (1954)

It certainly wouldn’t have hurt to have heard this in among the Organisational Behaviour and Strategy classes. I’ve had the painful experience of sitting down with a potential investor in a startup and being made to realise we hadn’t thought nearly enough about sales.

Companies have a duty to their shareholders to maximise profits. For a large company with a large amount of sales, one way to increase profits is to make internal processes more cost-effective. Others potentially include increasing prices, changing the way the company is financed, seeking favours from regulators, and so on. A 1% saving in costs might easily be enough to justify two or three high salaries of people who only look at internal functions.

These profit levers may be available to large companies. New ventures, though, must be about creating customers – selling stuff – enticing people to trade. As someone who had never had a customer-facing job, this was a slightly uncomfortable realisation.

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