CHAPTER TEN
What Is a Business?
A BUSINESS ENTERPRISE IS created and managed by people, not by forces. Economic forces set limits to what management can do. They create opportunities for management’s action. But they do not by themselves determine what a business is or what it does. Nothing could be sillier than the oft-repeated assertion that “management only adapts the business to the forces of the market.” Management not only has to find these forces, it has to create them.
Another conclusion is that a business cannot be defined or explained in terms of profit. Asked what a business is, the typical business man or business woman is likely to answer, “An organization to make a profit.” The typical economist is likely to give the same answer. This answer is not only false, it is irrelevant.
The prevailing economic theory of business enterprise and behavior, the maximization of profit—which is simply a complicated way of phrasing the old saw of buying cheap and selling dear—may adequately explain how a particular entrepreneur operates. But it cannot explain how any business enterprise operates, nor how it should operate. The concept of profit maximization is, in fact, meaningless.
Contemporary economists realize this, but they try to salvage the theorem. Joel Dean, one of the most brilliant and fruitful of contemporary business economists, still maintains the theorem as such. But this is how he defines it.
Economic theory makes a fundamental assumption that maximizing profits is the basic objective of every firm. But in recent years, profit maximization has been extensively qualified by theorists to refer to the long run; to refer to management’s rather than to owner’s income; to include non-financial income such as increased leisure for high-strung executives and more congenial relations between executive levels within the firm; and to make allowance for special-considerations such as restraining competition, maintaining management control, warding off wage demands and forestalling anti-trust suits. The concept has become so general and hazy that it seems to encompass most of men’s aims in life.
This trend reflects a growing realization by theorists that many firms, and particularly the big ones, do not operate on the principle of profit maximizing in terms of marginal cost and revenues.1
A concept that has “become so general and hazy that it seems to encompass most of men’s aims in life” is not a concept. It is another way of saying, “I don’t know and I don’t understand.” A theorem that can be maintained only by declaring almost everything to be an exception has surely ceased to have meaning or usefulness.
The danger in the concept of profit maximization is that it makes profitability appear a myth. Anyone observing the discrepancy between the theory of profit maximization and the reality, as portrayed by Joel Dean, would be justified in concluding that profitability does not matter—the conclusion actually reached by John Kenneth Galbraith in The New Industrial State.2
Profit and profitability are, however, crucial—for society even more than for the individual business. Yet profitability is not the purpose of, but a limiting factor on, business enterprise and business activity. Profit is not the explanation, cause, or rationale of business behavior and business decisions, but the test of their validity. If archangels instead of business people sat in directors’ chairs, they would still have to be concerned with profitability, despite their total lack of personal interest in making profits. This applies with equal force to those far from angelic individuals, the commissars who run Soviet Russia’s business enterprises, and who have to run their businesses on a higher profit margin than the wicked capitalists of the West.
The first test of any business is not the maximization of profit but the achievement of sufficient profit to cover the risks of economic activity and thus avoid loss.
The root of the confusion is the mistaken belief that the motive of people in business—the so-called profit motive—is an explanation of their behavior or their guide to right action. Whether there is such a thing as a profit motive at all is highly doubtful. It was invented by the classical economists to explain the economic reality which their theory of static equilibrium could not explain. There has never been any evidence for the existence of the profit motive. We have long since found the true explanation of the phenomena of economic change and growth which the profit motive was first put forth to explain.
It is irrelevant for an understanding of business behavior, profit, and profitability whether there is a profit motive or not. That Jim Smith is in business to make a profit concerns only him and the Recording Angel. It does not tell us what Jim Smith does and how he performs. We do not learn anything about the work of prospectors hunting for uranium in the Nevada desert by being told that they are trying to make a fortune. We do not learn anything about the work of heart specialists by being told that they are trying to make a livelihood, or even that they are trying to benefit humanity. The profit motive and its offspring, maximization of profits, are just as irrelevant to the function of a business, the purpose of a business, and the job of managing a business.
In fact, the concept is worse than irrelevant: it does harm. It is a major cause for the misunderstanding of the nature of profit in our society and for the deep-seated hostility to profit which are among the most dangerous diseases of an industrial society. It is largely responsible for the worst mistakes of public policy which are squarely based on the failure to understand the nature, function, and purpose of business enterprise. And it is in large part responsible for the prevailing belief that there is an inherent contradiction between profit and a company’s ability to make a social contribution. Actually, a company can make a social contribution only if it is highly profitable. To put it crudely, a bankrupt company is not likely to be a good company to work for, or likely to be a good neighbor and a desirable member of the community—no matter what some sociologists of today seem to believe to the contrary.
The Purpose of a Business
To know what a business is we have to start with its purpose. Its purpose must lie outside of the business itself. In fact, it must lie in society since business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer.
Markets are not created by God, nature, or economic forces but by the people who manage a business. The want a business satisfies may have been felt by customers before they were offered the means of satisfying it. Like food in a famine, it may have dominated the customers’ lives and filled all their waking moments, but it remained a potential want until the action of business people converted it into effective demand. Only then are there customers and a market. The want may have been unfelt by potential customers; people—the potential customers—did not know that they wanted Xerox machines or computers until these became available. There may have been no want at all until business action created it—by innovation, by credit, by advertising, or by the ability to sell. In every case, it is business action that creates the customer.
It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. What the business thinks it produces is not of first importance—especially not to the future of the business and to its success. What customers think they are buying, what they consider value, is decisive—it determines what a business is, what it produces, and whether it will prosper. And what customers buy and consider value is never a product. It is always utility, that is, what a product or service does for them. And what is value for customers is, as we shall see, anything but obvious.
Customers are the foundation of a business and keep it in existence. They alone give employment. To supply the wants and needs of consumers, society entrusts wealth-producing resources to the business enterprise.
The Two Entrepreneurial Functions
Because its purpose is to create a customer, the business enterprise has two— and only these two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are “costs.”
Marketing is the distinguishing, unique function of the business, A business is set apart from all other human organizations by the fact that it markets a product or a service. Neither church, nor army, nor school, nor state does that. Any organization that fulfills itself through marketing a product or a service is a business. Any organization in which marketing is either absent or incidental is not a business and should never be managed as if it were one.
The first man in the West to see marketing clearly as the unique and central function of the business enterprise, and the creation of a customer as the specific job of management, was Cyrus H. McCormick (1809–1884). The history books mention only that he invented a mechanical harvester. But he also invented the basic tools of modern marketing: market research and market analysis, the concept of market standing, pricing policies, the service salesman, parts and service supply to the customer, and installment credit. He had done all this by 1850, but not till fifty years later was he first widely imitated even in his own country.
The revolution of the American economy since 1900 has in large part been a marketing revolution. However, creative, aggressive, pioneering marketing is still far too rare in American business. Fifty years ago the typical attitude of American business toward marketing was “the sales department will sell whatever the plant produces.” Today it is increasingly, “It is our job to produce what the market needs.” However deficient in execution, the attitude has by itself changed our economy as much as any of the technical innovations of this century.
Marketing is so basic that it cannot be considered a separate function (i.e., a separate skill or work) within the business, on a par with others such as manufacturing or personnel. Marketing requires separate work, and a distinct group of activities. But it is, first, a central dimension of the entire business. It is the whole business seen from the point of view of its final result, that is, from the customer’s point of view. Concern and responsibility for marketing must, therefore, permeate all areas of the enterprise.
Among American manufacturing companies the outstanding practitioner of the marketing approach may well be IBM; and IBM is also the best example of the power of marketing. IBM does not owe its meteoric rise to technological innovation or product leadership. It was a Johnny-come-lately when it entered the computer field, without technological expertise or scientific knowledge. But while the technological leaders in the early computer days, Univac, GE, and RCA, were product-focused and technology-focused, the punch-card sales people who ran IBM asked: “Who are the customers? What is value for them? How do they buy? Arid, what do they need?” As a result, IBM took over the market.
From Selling to Marketing
Despite the emphasis on marketing and the marketing approach, marketing is still rhetoric rather than reality in far too many businesses. “Consumerism” proves this. For what consumerism demands of business is that it actually market. It demands that business start out with the needs, the realities, the values of the customer. It demands that business define its goal as the satisfaction of customer needs. It demands that business base its reward on its contribution to the customer. That after twenty years of marketing rhetoric consumerism could become a powerful popular movement proves that not much marketing has been practiced. Consumerism is the “shame of marketing.”
But consumerism is also the opportunity of marketing. It will force businesses to become market-focused in their actions as well as in their pronouncements.
Above all, consumerism should dispel the confusion which largely explains why there has been so little real marketing. When managers speak of marketing, they usually mean the organized performance of all selling functions. This is still selling. It still starts out with “our products.” It still looks for “our market.” True marketing starts out with the customers’ demographics, their realities, their needs, their values. It does not ask, “What do we want to sell?” It asks, “What do customers want to buy?” It does not say, “This is what our product or service does.” It says, “These are the satisfactions, values, and needs the customers look for.”
Indeed, selling and marketing are antithetical rather than synonymous or even complementary.
There will always, one can assume, be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand customers so well that the product or service fits them and sells itself.
Ideally, marketing should result in customers who are ready to buy. All that should be needed then is to make the product or service available, i.e., logistics rather than selling, and statistical distribution rather than promotion. We may be a long way from this ideal. But consumerism, is a clear indication that the right motto for business management should increasingly be, “from selling to marketing.”
The Enterprise as the Organ of Economic Growth and Development
Marketing alone does not make a business enterprise. In a static economy there are no business enterprises. There are not even businessmen. The middleman of a static society is a broker whose compensation is a fee, or a speculator who creates no value.
A business enterprise can exist only in an expanding economy, or at least in one which considers change both natural and acceptable. And business is the specific organ of growth, expansion, and change.
The second function of a business is, therefore, innovation—the provision of different economic satisfactions. It is not enough for the business to provide just any economic goods and services; it must provide better and more economic ones. It is not necessary for a business to grow bigger; but it is necessary that it constantly grow better.
Innovation may result in a lower price—the datum with which the economist has been most concerned, for the simple reason that it is the only one that can be handled by quantitative tools. But the result may also be a new and better product, a new convenience, or the definition of a new want.
The most productive innovation is a different product or service creating a new potential of satisfaction, rather than an improvement. Typically this new and different product costs more—yet its overall effect is to make the economy more productive.
The antibiotic drug costs far more than the cold compress which is all yesterday’s physician had to fight pneumonia. The computer costs far more than an adding machine or a punch-card sorter, the typewriter far more than a quill pen, the Xerox duplicator far more than a copy press or even a mimeograph copier. And, if and when we get a cancer cure, it will cost more than even a first-class funeral.
The price of the product is thus only one measurement of the value of an innovation, or of the economic process altogether. We may relate price to unit output, i.e., price of a drug to the saving it produces in days of hospital stay and in added years of working life. But even that is hardly adequate. We really need a value measurement. What economic value does innovation give the customer? The customer is the only one to judge; and the customer alone knows his or her economic reality.
Innovation may be finding new uses for old products. A sales person who succeeds in selling refrigerators to Eskimos to prevent food from freezing would be as much of an innovator as someone who had developed brand-new processes or invented a new product. To sell Eskimos a refrigerator to keep food from getting too cold is actually creating a new product. Technologically there is, of course, only the same old product; but economically there is innovation.
Above all, innovation is not invention. It is a term of economics rather than of technology. Nontechnological innovations—social or economic innovations—are at least as important as technological ones.
However important the steam engine was as an invention, two nontechnological innovations have had as much to do with the rise of modern economy: the mobilization of purchasing power through bank credit, and the application of probability mathematics to the physical risks of economic activity, that is, insurance. The innovation of limited liability and the subsequent development of the publicly owned limited-liability company were of equal importance. And installment credit (or as the British call it more accurately, hire purchase) has equal impact. It makes it possible to pay for the means to increase production out of the future fruits of the investment. It thus enabled the American farmer in the nineteenth century to buy the implements that made him productive and to pay for them after he had obtained the larger crop at lower cost. And this also makes installment credit a powerful dynamo of economic development in today’s poor, underdeveloped countries.
In the organization of the business enterprise innovation can no more be considered a separate function than marketing. It is not confined to engineering or research but extends across all parts of the business, all functions, all activities. It cannot be confined to manufacturing business. Innovation in distribution has been as important as innovation in manufacturing; and so has been innovation in an insurance company or in a bank.
The leadership in innovation with respect to product and service has traditionally been focused in one functional activity which is responsible for nothing else. This has been particularly true for businesses with heavy engineering or chemical technology. In an insurance company, too, a special department charged with leadership responsibility for the development of new kinds of coverage may be in order; and there might well be other such departments charged with innovation in the organization of sales, the administration of policies, and the settling of claims. Yet another group might work on innovation in investing the company’s funds. All these are the insurance company’s business.
But the best way to organize for systematic, purposeful innovation is as a business activity rather than as functional work. At the same time, every managerial unit of a business should have responsibility for innovation and definite innovation goals. It should be responsible for contributing to innovation in the company’s product or service; in addition, it should strive consciously to advance the art in the particular area in which it is engaged: selling or accounting, quality control or personnel management.
Innovation can be defined as the task of endowing human and material resources with new and greater wealth-producing capacity. Innovation is particularly important for developing countries. These countries have the resources. They are poor because they lack the capacity to make these resources wealth-producing. They can import technology. But they have to produce their own social innovations to make imported technology work.
To have realized this was the great strength of the founders of modern Japan a century ago. They deliberately kept their country dependent on the West’s technology—a dependence that remained until very recently. But they channeled their energies and those of their people into social innovations that would enable their country to become a strong modern society and economy and yet retain its distinct Japanese character and culture.
Innovation is thus crucial to economic development. Indeed, economic development is, above all, an entrepreneurial task.
Managers must convert society’s needs into opportunities for profitable business. That, too, is a definition of innovation. It needs to be stressed today, when we are so conscious of the needs of society, schools, health-care systems, cities, and environment. These needs are not too different in kind from those which the nineteenth-century entrepreneur converted into growth industries—the urban newspaper and the streetcar; the steel-frame skyscraper and the school textbook; the telephone and pharmaceuticals. The new needs similarly demand the innovating business.
The Productive Utilization of Wealth-Producing Resources
The enterprise must utilize wealth-producing resources to discharge its purpose of creating a customer. It is, therefore, charged with productive utilization of these resources. This is the administrative function of business. In its economic aspect it is called productivity.
Everybody these last few years has been talking productivity. That greater productivity—better utilization of resources—is both the key to a high standard of living and the result of business activity is not news. And we should realize by now that the scourge of modern economics, uncontrolled inflation, is a deficiency disease caused by inadequate productivity. But we actually know very little about productivity; we are, indeed, not yet able to measure it.
Productivity means that balance between all factors of production that will give the greatest output for the smallest effort. This is quite different from productivity per worker or per hour of work; it is at best distantly and vaguely reflected in such traditional standards.
These standards are still based on the eighteenth-century tenet that manual labor is, in the last resort, the only productive resource; manual work the only real effort. The standards still express the mechanistic fallacy—of which Marx, to the permanent disability of Marxian economics, was the last important dupe—that all human achievement could eventually be measured in units of muscle effort. Increased productivity in a modern economy is never achieved by muscle effort. It is always the result of doing away with muscle effort, of substituting something else for the laborer. One of these substitutes is, of course, capital equipment, that is, mechanical energy.
At least as important, though unnoticed until very recently, is the increase in productivity achieved by replacing manual labor, whether skilled or unskilled, by knowledge, resulting in a shift from laborers to knowledge workers, such as managers, technicians, and professionals.
A little reflection will show that the rate of capital formation, to which economists give so much attention, is a secondary factor. Someone must plan and design the equipment—a conceptual, theoretical, and analytical task—before it can be installed and used. The basic factor in an economy’s development must be the rate of “brain formation,” the rate at which a country produces people with imagination and vision, education, and theoretical and analytical skills.
However, the planning, design, and installation of capital equipment is only a part of the increase in productivity through the substitution of brain for brawn. At least as important is the contribution made through the direct change of the character of work from one requiring the manual labor, skilled and unskilled, of many people, to one requiring theoretical analysis and conceptual planning without any investment in capital equipment.
This contribution first became evident in the 1950s in the analysis of the productivity gap between American and European industry. Studies—e.g., by the Stanford Research Institute and by the Organization for Economic Cooperation (OEC)—showed clearly that the productivity differential between Western Europe and the United States was not a matter of capital investment. In many European industries productivity was as much as two-thirds below that of the corresponding American industry, even though capital investment and equipment were equal. The only explanation was the lower proportion of managers and technicians and the poor organization structure of European industry with its reliance on manual skill.
In 1900 the typical manufacturing company in the United States spent probably no more than $5 or $8 on managerial technical and professional personnel for every $100 in direct-labor wages. Today there are many manufacturing industries where the two items of expenditure are equal—even though direct-labor wage rates have risen proportionately much faster. Outside of manufacturing, transportation, and mining, e.g., in distribution, finance, insurance, and the service industries (that is, in two-thirds of the American economy), the increase in productivity has been caused primarily by the replacement of labor by planning, brawn by brain, sweat by knowledge.
The greatest opportunities for increasing productivity are surely to be found in knowledge work itself, and especially in management. The vocabulary of business—especially of accounting—in relation to productivity has become so obsolete as to be misleading. What the accountant calls productive labor is manual workers tending machines, who are actually the least productive labor. What the accountant calls nonproductive labor—all the people who contribute to production without tending a machine—is a hodgepodge. It includes pre-industrial, low-productivity brawn labor like sweepers; some traditional high-skill, high-productivity labor like toolmakers; new industrial high-skill labor like maintenance electricians; and industrial high-knowledge personnel like supervisors, industrial engineers, and quality control personnel. Finally, what the accountant lumps together as overhead—the very term reeks of moral disapproval—contains what should be the most productive resource, the managers, researchers, planners, designers, innovators. It may also, however, contain purely parasitical, if not destructive, elements in the form of high-priced personnel needed only because of malorganization, poor spirit, or confused objectives, that is, because of mismanagement.
We need a concept of productivity that considers together all the efforts that go into output and expresses them in relation to their result, rather than one that assumes that labor is the only productive effort. But even such a concept— though a big step forward—would still be inadequate if its definition of effort were confined to the activities measurable as visible and direct costs, that is, according to the accountant’s definition of, and symbol for, effort. There are factors of substantial, if not decisive, impact on productivity that never become visible cost figures.
First there is knowledge—our most productive resource if properly applied, but also the most expensive one, and totally unproductive, if misapplied. Knowledge workers are, of necessity, high-cost workers. Having spent many years in school, they also represent a very high social investment.
Then there is time—our most perishable resource. Whether people and machines are utilized steadily or only half the time will make a difference in their productivity. There is nothing less productive than idle time of expensive capital equipment or wasted time of highly paid and able people. Equally unproductive may be cramming more productive effort into time than it will comfortably hold—for instance, the attempt to run three shifts in a congested plant or on old or delicate equipment.
The most productive—or least productive—time is that of the managers themselves. Yet it is usually the least known, least analyzed, least managed of all factors of productivity.
Productivity is also a function of the product mix, the balance between various combinations of the same resources. As every manager should know, differentials in the market values of various combinations are rarely proportional to the efforts that go into making up the combinations. Often there is barely any discernible relationship between the two. A company turning out a constant volume of goods with unchanging materials and skills requirements and a constant amount of direct and indirect labor may reap fortunes or go bankrupt, depending on the product mix. Obviously this represents a considerable difference in the productivity of the same resources—but not one that shows in costs or can be detected by cost analysis.
There is also an important factor which I would call “process mix.” Is it more productive for a company to buy or to make it, to assemble its product or to contract out the assembly process, to market under its own brand name through its own distributive organization or to sell to independent wholesalers using their own brands? What is the company good at? What is the most productive utilization of its specific knowledge, ability, experience, reputation?
Not every management can do everything, nor should any business necessarily go into those activities which seem objectively to be most profitable. Every management has specific abilities and limitations. Whenever it attempts to go beyond these, it is likely to fail, no matter how inherently profitable the venture.
People who are good at running a highly stable business will not be able to adjust to a mercurial or a rapidly growing business. People who have grown up in a rapidly expanding company will, as everyday experience shows, be in danger of destroying the business should it enter upon a period of consolidation. People good at running a business with a foundation in long-range research are not likely to do well in high-pressure selling of novelties or fashion goods. Utilization of the specific abilities of the company and its management and observance of these specific limitations is an important productivity factor. Conglomerates may optimize the productivity of capital, but they will have rather low productivity—and inherently poor results—in other equally important areas.
Finally, productivity is vitally affected by organization structure and by the balance among the various activities within the business. If a lack of clear organization causes managers to waste their time trying to find out what they are supposed to do rather than doing it, the company’s scarcest resource is being wasted. If top management is interested only in engineering (perhaps because that’s where all the top managers came from) while the company needs major attention to marketing, it lacks productivity; the resulting damage will be greater than could be caused by a drop in output per worker hour.
These factors are additional to the factors accountants and economists usually consider, namely, productivity of labor, capital, and materials. They are, however, fully as important.
We therefore not only need to define productivity so as to embrace all these factors affecting it, but also need to set objectives that take all these factors into account. We must develop yardsticks to measure the impact on productivity of the substitution of capital for labor, and of knowledge for both—and means to distinguish between creative and parasitical overhead, and to assess the impact on productivity of time utilization, product mix, process mix, organization structure, and the balance of activities.
Not only does individual management need adequate concepts and measurements for productivity, the economy needs them. Their lack is the biggest gap in our economic statistics and seriously weakens all economic policy. It frustrates our attempts to fight depression and inflation alike.
The Functions of Profit
Profit is not a cause but a result—the result of the performance of the business in marketing, innovation, and productivity. It is a needed result, serving essential economic functions. Profit is, first, the test of performance—the only effective test, as the communists in Russia soon found out when they tried to abolish it in the early twenties (though they coyly called it the capital fund and avoided the “bad” word profit until well into the 1950s).
Profit has a second function which is equally important. It is the premium for the risk of uncertainty. Economic activity, because it is activity, focuses on the future; and the one thing that is certain about the future is its uncertainty, its risks. The word “risk” itself is said to mean “earning one’s daily bread” in the original Arabic. It is through risk-taking that business people earn their daily bread. Because business activity is economic it always attempts to bring about change. It always saws off the limb on which it sits; it makes existing risks riskier or creates new ones.
The future of economic activity is a long one; it can take fifteen or twenty years for basic decisions to become fully effective, and for major investment to pay off. “Lengthening the economic detour” has been known for a hundred years to be a prerequisite for economic advance. Yet while we know nothing about the future, we know that its risks increase in geometric progression the farther ahead we commit ourselves to it.
Profit and profit alone can supply the capital for tomorrow’s jobs, both for more jobs and for better jobs.
Again it is a definition of economic progress that the investment needed to create new and additional jobs increases.
Today’s accountants or engineers do not make a better living than grandfather on the farm because they work harder. They work far less hard. Nor do they deserve a better living because they are better people than grandfather. They are the same kind of human being as grandfather was, and grandfather’s grandfather before him. Today’s accountants or engineers can be paid so much more and yet work so much less hard because the capital investment in them and their jobs is infinitely greater than that which financed grandfather’s job. In 1900, when grandfather started, capital investment per American farmer was at most $5000. To create the accountant’s or the engineer’s job, society first invests at least $50,000 in capital and expenses for school and education. And then the employer invests another $25,000 to $50,000 per job. All of this investment that makes possible both additional and better jobs has to come out of the surplus of economic activity, that is, out of profits.
And finally profit pays for the economic satisfactions and services of a society, from health care to defense, and from education to the opera. They all have to be paid for out of the surplus of economic production, that is, out of the difference between the value produced by economic activity and its cost.
People in business 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 as long as one talks the nonsense of profit motive and profit maximization.
No apology is needed for profit as a necessity of economy and society. On the contrary, what business people should feel guilty about, what they should feel the need to apologize for, is failure to produce a profit appropriate to the economic and social functions which profit, and only profit, can develop.
Walther Rathenau (1867–1922), the German executive, statesman, and social philosopher, who thought more deeply than any other Westerner of his time about the social responsibility of business, proposed replacing the word profit with responsibility. Profit, to be sure, is not the whole of business responsibility; but it is the first responsibility. The business that fails to produce an adequate profit imperils both the integrity of the resources entrusted in its care and the economy’s capacity to grow. It is untrue to its trust.
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 to maintain intact the wealth-producing capacity of its resources. This required minimum profit affects business behavior and business decision—both by setting limits and by testing their validity. Management, in order to manage, needs a profit objective at least equal to the required minimum profit, and yardsticks to measure its profit performance against this requirement.
What, then, is managing a business? It follows from the analysis of business activity as the creation of a customer through marketing and innovation that managing a business must always be entrepreneurial in character. There is need for administrative performance. But it follows the entrepreneurial objectives. Structure follows strategy.
It also follows that managing a business must be a creative rather than an adaptive task. The more a management creates economic conditions or changes them rather than passively adapts to them, the more it manages the business.
But an analysis of the nature of a business also shows that management, while ultimately tested by performance alone, is a rational activity. Concretely this means that a business must set objectives that express what is desirable of attainment rather than (as the maximization-of-profit theorem implies) aim at accommodation to the possible. Once objectives have been set by fixing one’s sights on the desirable, the question can be raised what concessions to the possible have to be made. This requires management to decide what business the enterprise is engaged in, and what business it should be engaged in.