“To know what a business is we have to start with its purpose…There is only one valid definition of business purpose: to create a customer.“
This is a brilliant chapter on the essence of a business and what must be done for a business to succeed. An almost word-for-word treatment can be found in Drucker’s earlier book, The Practice of Management, What Is A Business? (pp. 34-48). Though this chapter includes a section on the origin of American and Japanese marketing.
While profit is nothing to be ashamed of, providing feedback, covering risk, and making society possible, profit is not the purpose of business. Creating customers is and must be the purpose of business.
To this end, Drucker summarizes the two main functions of business: marketing and innovation.
A business that is concerned about what it wants to do, about its products and services, cannot market well. A business that is concerned about its customers, what they value, and what they need and buy, understands marketing (64). Drucker believes that marketing was the key to IBM’s rise. IBM had stronger competitors in the commutation business, but IBM adopted the perspective of the customer, it saw things through the customer’s eyes (63). As a result, they offered what their customers loved.
About marketing, Drucker wrote: “There will always, one can assume, be need for some selling. But the aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself.” (65)
Innovation is not merely optimizing or inventing something new, it is making something better and more valuable. It can involve adapting something old for a new purpose and customer, or it can provide something new such as bank credit and insurance (66).
Toward the end of the chapter Drucker provides an overview of productive resources that often go unseen, such as product mix, process mix, management structure, and knowledge–all of which can be areas of innovation and measurement.
Profit makes serving the customer through marketing, innovation, and productivity continually possible and it enables society to afford goods. To this end, making a profit is the responsibility of business and management (73).
(Management, chapter 6)