What, in its most basic form, is business?
The precise answer to this question depends on issues of scale, purpose and interpretation, all of which suggest wide disparities in the way enterprises are conducted. Ultimately however, the definition is reducible to the pursuit of a single formula: the creation of profit, where profit equals revenue minus costs. Assuming it achieves this, the business must then strive for sustainable competitive advantage, which relies on three preconditions: having a unique product or service, one which competitors cannot easily imitate, and which creates unique value for customers. As Hooley et al indicate,
‘Uniqueness may stem from employing superior, proprietary technology, utilizing superior raw materials, or from differentiating the tangible and augmented elements of the product.’
(Hooley et.al, 2004: p.386).
It is the highly differentiated journey which each enterprise takes to reach this position, which we will explore briefly here. There are several competing and parallel theoretical literatures which have been generated around the concept of business, all of which have a different function, purpose, and audience.
Economists use classical economics and its successor theories to interpret the behaviour of companies and predict their likely success – or otherwise. Strictly speaking though, business is not the primary focus of economics, which has a wider societal remit. Classic and neo-classical economics assume that firms, in their most highly developed state, will pursue the maximization of capital, or return on investment, to the exclusion of all other considerations. This is a fair assumption: but the larger and more complex an organization becomes, the more difficult it is to assume that whole business is sufficiently and consistently focused on that outcome, or whether, as Kelly points out, the corporation has:
‘…too many divergent corporate strategies generating confusion and dissonance…’
(Kelly 2006: p.219)
As soon as a business starts to lose its customer orientation, its competitive advantage will also ebb away. (Richter and Vettel, 1995: p.43).
The generic enterprise is in effect called into existence by the market, or more specifically, the needs of customers within that market. In other words, businesses are not created by entrepreneurs themselves, but by opportunities, although it can be conceded that perception of such opportunity, in terms of its scale and possibilities, is an intrinsic business skill. Attempts to distill the elements of entrepreneurialism into a formulaic or repeatable pattern of behaviour, which may be emulated by aspirants to that status, usually fail, because they overlook some key variables. The entrepreneur is frequently a figure who enjoys success in seizing particular or unique opportunities: however their status as entrepreneurial is mediated though the scale of such success, and such skills are seldom transferable. As the careers of classic exemplars such as Sir Richard Branson and the late Dame Anita Rodick demonstrate, such expertise also has variable success. Mintzberg’s idea of entrepreneurship as ‘…strategy formation…all wrapped up in the behaviour of a single individual…’, never really able to ‘…say much about what the process is…’ expresses this all too clearly. (Mintzberg et al.p.144)
The objective of any enterprise is to meet those collective customer needs which called it into existence, and to generate profit: its endurance as an enterprise hinges on both the latter, and the maintenance of its market position. No matter how large, highly developed or skilled, enterprises can – and regularly do – go out of business due to flawed interpretation of their own established market position. Simply put, being successful is insufficient, if they fail to understand why they are successful. As Hooley et al. put it,
‘…customers do not buy products, they buy what the product can do for them…gardeners don’t really want a lawnmower. What they want is grass that is 1 inch high. Hence a new strain of grass seed, which is hard-wearing and only grows to 1 inch in height, could provide very substantial competition to lawnmower manufacturers…’
(Hooley et al 2004: p.24)
This prosaic and mildly comic example illustrates a basic business truism which permeates not only consumer behaviour, but sophisticated business-to-business products and services. For example, IT multinational IBM almost collapsed because it failed to recognize that its market dominance was based on the artificial intelligence its mainframe computers delivered, not on its brand, or the mainframes themselves. When the same facilities became available from rivals via PC’s and consumer-friendly software like MS Windows, – and at a fraction of the cost – the real nature and extent of IBM’s market share was revealed. The customers had been buying what the product could do for them, not the product itself: when that became available for a tenth of the cost, the decision path was straightforward, and IBM’s decades-old corporate market collapsed in just months.
This expresses more fully the concept of market positioning, and what businesses must do to achieve it. Not even the most phenomenally successful product demonstrates that the enterprise has truly achieved durable market positioning: a series of successful products which successfully meet altered customer needs represents far better evidence. Being first to the market can represent an enduring basis for competitive positioning, but only if the enterprise is first to the market with the right product each time. This is one of the biggest challenges faced by any company: how to maintain its knowledge management systems and ensure they are sufficiently focused on the core purpose of the enterprise. Organizations achieve scale through success: ironically however, this may confer as many problems as benefits: burgeoning company structure incorporate more and more people who have no awareness of direct customer needs, and little customer orientation. ‘Customer’ is being used in its broadest sense here, incorporating individual consumers in one extreme, and complex business-to-business client relationhips in the other.
This links to another unavoidable constant in the definition of business. Every service or product, no matter how localized or small, has cumulative characteristics, features and tendencies which have come to be collectivized under the term ‘brand’. Large, formally constituted businesses carefully substitute expensively cultivated brand images for first hand customer knowledge, until an association has been made. Neither scenario can alter the true provenance of brand identity, which resides firmly in customer perceptions. As one authority puts it, ‘You do not own your brand. Your brand is owned by your customers and anyone else who has an impression of your company.’ (Calloway, 2003: p.97). This in effect directs the analysis right back to issue of consumer value and market position as a driver of business. As another authority observes, ‘A product can be copied by a competitor; a brand is unique.’ (Ind, 1997: p.3).
In other words, although the company must remained focused on product or service integrity, it must also be prepared to move swiftly on if the external environment or consumer orientation change. This in effect is the downside of the Category Management revolution: the availability of data raises shareholder and consumer expectations of management. As Kelly points out, ‘Real-time culture is also driven by the relentless short term surveillance of the financial markets that has eliminated any planning activity where expected benefit does not occur within one or two quarters.’ (Kelly 2006: p.134). In other words, although the resources available to it have never been greater, the corollary is equally high expectations of business performance. Even the boardrooms of very large and profitable businesses can find themselves embattled, despite apparently healthy business figures, if forecasts predict a downturn in growth. The data revolution means that stakeholders, whether customers or shareholders, expect management to be more prescient than ever before.
This is a very tangible factor in contemporary business management, and it means that the latter now has less latitude than ever before about the time-frame and life-cycle of strategies: only a short term strategic approach can keep the activist investor at bay. In a sense, the appearance of the latter – now frequently backed by private equity funding – is redolent of the classical economists’ view discussed earlier. Maximization of capital is again assumed to be an immediate imperative in the governance of the enterprise. What this overlooks of course is that value to shareholders, which represents the principle leverage of the activist agenda, may not always be in the best interests of the customer, or, in the longer term, the business itself.