“It is, then, the first responsibility of top management to ask the question “what is our business?” and to make sure that it is carefully studied and correctly answered.”
In this valuable chapter, Drucker explains two foundational questions businesses should ask, especially large ones: first, what is our business? Second, what should it be?
To answer the first question, a business must understand its customer. This requires understanding why the customer buys a particular product or service. Does a customer buy a lawnmower because he enjoys yard work or as an affordable way to make his wife happy? Is a customer buying a pair of shoes or prestige?
Prestige, fear, safety, and making a difference are ultimate reasons why customers buy particular products. If a business knows the ultimate reason why its customers purchase its products and services, it will tend to focus on the right things.
By understanding what its customer wants, a business can define what its business is in terms of service, knowledge, and leadership.
The second question is about the future. Major events and innovations change future demand. Therefore, businesses should evaluate and define the effects of major events and decide how they will change to fulfill the demands of the future.
The transistor, a major innovation, enabled and led to digital photography which was a change in demand; film companies that did not act upon the transistor innovation, changing to satisfy future demand, faded away.
But it is not enough to accept and incorporate new technologies into a business. One must look for how events and innovations create new opportunities and markets.
Drucker gives a fascinating example of a large copper mining business. One would think that the demand for copper never changes. That selling copper is a stable, nearly static, enterprise. However, the copper business, no different from any other business, needed to evaluate opportunities for additional markets. The changing economy–events and innovations–spurred new opportunities and markets that it could not afford to ignore.
Evaluating events and asking what the business should be is not guess work or predicting the future. It is an exercise in analysis and executive judgment. It requires thinking through the consequences of occurrences that have happened before.
Executives can use the chapter’s questions and examples to think through these fundamental questions. Above all, asking what our business is and should be requires careful thinking and courage.
(The Practice of Management, Chapter 6)