Peter Drucker used to argue that the purpose of a business is to create a customer. He encouraged executives not to try to explain their businesses to their customers, but to let their customers – and potential customers – explain their businesses to them. The business should then organize itself around the results.
Capitalism is the ideal vehicle for facilitating this process. It is often criticized for being selfish, inasmuch as it is built on the presumption that people act out of individual self-interest. But the truth is that this motivation compels providers to be outwardly focused – to orient on the interests of customers. That is, even if the fundamental drive that animates capitalism is self-interest, its operation causes its participants, as Gannon Beck argues, to seek out opportunities for mutual-interest.
Successful businesses in capitalist economies are built from information about customer needs discovered in markets, and the penetration of that information backwards into the organization. They do not arise from the meticulous interventions of central planners emanating out to the markets – or even from singular leaders pronouncing their visions from the summits of their businesses, which then cascade down through the organizations and out to the customers.
One of the great things about free markets is that they will let businesses do it the wrong way round all they want – and they seem to want to do that a lot. Inevitably, some will hit on an idea that is well received by customers, and they will thrive on that for a while. What’s more, they will take the rare good luck as evidence of their rare insight and skill. The markets know how to deal with that. Do central planners?
The really effective companies, though, don’t just market their products or services – they help customers market their needs, and then fill them. Procter & Gamble is perhaps the best-known current practitioner of this type of approach. For such companies, the markets are places to learn not just how they are doing, but about what they are perceived as, and what they need to be.
Is there a parallel, here, between the businesses learning from and organizing their efforts around their customers, and managers and their staffs? What can management learn about its own business (or certainly, about its customers) from its staff? Should the design of a business organization incorporate the needs of its employees – as described by those employees? Around what defining principles should the range of those needs be built, and by what circumscribed?
How can managers and employees use the labor market to discover and enhance their mutual interests?
—
This post is a part of a series. You can learn about and link to the other articles here: Conceptualizing capitalism
—
Today’s tip: Did you know that there is a relationship between a person’s belief in free will or predetermination, and his or her collaborative spirit or aggression? Please see this fascinating explanation of the research, at PsyBlog.
—
Did you know that as a subscriber to this blog (by either RSS reader or email), you are entitled to a FREE download (.pdf format, 344KB) of the first chapter from Jim’s critically-acclaimed book, Managing Leadership? Download your free chapter now! (Even if you haven’t subscribed, yet – download it anyway! – (and then subscribe!))
—
Technorati Tags: purpose, business, customer, executive, self-interest, capitalism, information, market, organization, central planner, leader, vision, insight, skill, product, service, Procter & Gamble, manager, staff, management, employee, free will, predetermination, aggression, PsyBlog, Peter Drucker, Gannon Beck
Sphere: Related Content
5 Comments
Wonderful post, Jim. One thing we’ve left out of the discussion is that many of people say that under capitalism companies should seek to maximize shareholder value. That’s true as far as it goes, but it’s also important for companies to consider other stakeholders such as employees, communities and customers.
Hello Wally,
Thanks for pointing this out – I had been expecting to wrap this series up on Friday, but it looks like it will go in to next week. The question of maximizing shareholder value – how, and at the cost of what other factors – is at the bottom of much of the problems with and criticisms of capitalism. That definitely does need discussion – thanks!
I should say that I had wanted, in this post, to refer to your item about a store-opening a century ago, and your views on how managers can learn to relate to their employees the way that store did to its customers. I couldn’t find it, even though I thought I had tipped to it previously. I’m disappointed at this – do you recall the piece I’m referring to – could you remind us where it is?
Thanks again!
“Should the design of a business organization incorporate the needs of its employees – as described by those employees?”
I’ve been thinking about this component a lot. Just because an employee wants something, doesn’t mean it’s possible. On the other hand, I doubt anyone would state that a system structured to take advantage of employees is ideal.
There are two ways to make sure employees are treated fairly: unions and competition. Unions are directly opposed the concept of competition. Instead of making companies compete for employees, unions force companies into monopolistic practices across an industry through collective bargaining. The individual company cannot create a better system if it wants to for its employees without the other companies in the industry agreeing to it. Employees as a social class get pitted against management as a social class across the industry. The business practices, good or bad, are spread industry wide in this scenario. Any bad practices using this method will be systemic across the industry.
Competition on the other hand, ensures that companies have to compete not only for customers but also for employees. The best employees will be drawn to the best places to work. In this way, the best business systems will thrive. Companies that can’t collectively attract customers and great employees will not survive.
My hero, Benjamin Franklin, shows how a competition approach can work. When Franklin came back from his first trip to England he was rehired by the printer he worked for before he left for England. Samuel Keimer was the owner of the establishment. He and Franklin did not have a good relationship. Keimer, as Franklin tells it, only hired Franklin back to train the “cheap hands.” Once these low-paid employees were whipped into shape, Keimer was going to fire Franklin, as Keimer went along in his business with highly trained, lowly paid employees. This is exactly the kind of scenario of employee abuse that unions claim they need to be around for. They might suggest getting all the employees together and to collectively refuse to work unless treated better. They would hold the company hostage. This, however, is not what Benjamin Franklin did.
Franklin left the company with one of the other employees, found an investor, and set up his own printing shop to compete with Keimer’s. Eventually, he put Keimer out of business. Then, as Franklin’s business became more successful and growth was inevitable, he set up his employees in partnership shops all along the American Colonies. His employees, once partners, had an ownership stake in the prosperity of the businesses, and worked hard to ensure its success.
I think Franklin’s way is the best way. Rather than propping up a bad system that pitted employees against management, he created a new system that aligned management and employee interests. Capitalism is the backdrop that made this possible. Competition made it possible for those trained in the printing arts to find a better deal. Franklin still had to compete with other printers, and therefore employees, so he ensured that his system would attract and reward hard working, skilled printers. By rewarding them with ownership he also ensured that everyone would either benefit or struggle together while making sure that the system was the most sustainable one that could be devised.
Unions, through collective bargaining, make industries act like monopolies at least with regard to employees. Perhaps there is noble intent, but the results are likely to be counterproductive in the long run. Furthermore, as Benjamin Franklin demonstrated, there is a better way. The government, by supporting unions, is backing monopolistic practices and propping up systems that should be replaced by better ones. One of the government’s key roles in the U.S. economy should be to ensure competition. Under such a system employees may not get all that they want, but they will get as much as the system can give while remaining a stable, sustainable system.
I think what you’re getting at is that unions ARE the monopolies in their respective companies, if not industries. Once a union has been allowed in, it is the ONLY one allowed in. Employees wishing to be governed by a different set of rules, in most cases, are forbidden from negotiating contracts on their own or seeking other representation.
Allowing unions to compete with one another would diminish their power (which is why they’d never agree to it willingly), but it would also force them to adopt capitalistic principles that demand they seek mutual self-interest.
Hello Gannon and Cam,
Gannon, I agree that it is neither possible nor necessarily desirable to organize a business around its employees’ desires, in the same fashion that one might want to do so around the customers’ desires. I think, though, that managers need to listen both to customers for what they want, and to employees for how to best give it to them, and then organize accordingly. This is not a passive activity, but involves active dialogue and assessment, but these are much stronger by being conducted honestly and robustly with those parties.
But what you point out is a real problem. The US auto industry is the classic example of the sort of monopolistic collusion you allude to. As Cam points out, unions essentially represent a monopoly on labor in an industry. When it comes time to renegotiate contracts, a single car company is typically targeted as the proxy for the industry – as you point out, the rest of the companies in the industry have to fall in line with what is negotiated with the proxy, effectively creating a reactionary monompoly with regard to this issue. Then another company takes its turn the next time around. Something similar even happens on those rare occasions when the tables are turned. Everyone knows the rules, and abides by them rather than risk being targeted out of turn.
This is also a good example of how the issue is complicated by the mixture of politics and business. We haven’t heard much from this angle in the past 8 years, but that is changing.
This is a large topic. But it is relevant both to the general topic of how capitalism works in the US and elsewhere, and to how managers should frame the problems of organizing and managing their businesses.
Will have to look at this. Why did unions develop along with the spread of capitalism – in particular, of industrialism? Why do we still have them? Are they as firmly entrenched as many think? Why and how do some foreign automakers, and other industries, avoid them? What forces – social or political – tend to support them today? Should managers avoid them, or is it possible to work to mutual benefit with them?
I don’t know if this is the venue for this, but it may be worth taking a look at – thanks!
One Trackback/Pingback
[...] relationships between labor unions and many corporations in the United States. Gannon Beck, in a comment to “Creating businesses,” points out that this can have the effect of forcing firms within an [...]
Post a Comment