What is the purpose of your business?

February 26th, 2009 by Patrick Stähler

Beginning of the week, I had a long discussion with Dr. oec. Susan Müller and  Prof. Dr. Thierry Volery, two researchers at the University of St. Gallen. They want to figure out how high the excess return is earned by business model innovators. They want to know which kind of business innovation like value innovation or architectural innovation leads to what kind of über return or excess return.

Very interesting question in particular since most researchers including myself are still using case studies to make our point.

What made the discussion even more interesting was that we discussed what a business model is. There are several technical definitions like mine but for us more interesting was why the term became so prominent in the last years. With the term business model the word business returned to prominence in the conversation on strategy.

In strategic management the classical unit of research is the business unit, the industry in which a business unit is competing and the corporation which is the legal entity of most business units (Bettis 1998: 357). On the basis of these units of analysis researchers try to evaluate why certain companies have higher profits than other, comparable companies.

While researchers all try to find new units of analysis like clusters of firms, value nets, value webs [update: link not longer vaild] or inter organizational systems, the real world was very pragmatic and uses more and more the term business (model). For managers and entrepreneurs the business became the locus of competition and of strategy.

Business model as the answer?

One of the reasons why the term business model has became popular is that people want to answer the question about the purpose of their business. This question was raised by Peter Drucker, a management philosopher and thinker.  He made the point that making profit – very often mentioned as the purpose of a firm – “is not only false, it is irrelevant.” and may even be harmful

Profit-making is not the purpose, but the test if the purpose of the business works. For Drucker “there is only valid definition of business purpose: to create a customer.” And you get your customers only if you do a job they need, you fulfill a want they have.

Business model describes the meaning of your endeavor

When you define your business via the value proposition you offer to your customers that is exactly the bridge between your company’s purpose and the need and wants of your customers. In a philosophical way the business model is a vehicle for the meaning of your endeavor.  And that meaning drives the employees, the management and the customers of the firm.

References

Bettis , R.A. (1998). “Commentary on “Redefining Industry Structure for the Information Age” by J.L. Sampler”, Strategic Management Journal, Vol. 19, p. 357-361.

4 Responses to “What is the purpose of your business?”

  1. Sivakumar Narayanan Says:

    Hello Mr.Stahler
    I live in Uster near Zurich and current working on my MBA project on BM innovation. I have been quite interested in your research and would like to discuss this topic further in detail with you..would this be possible ? Thanks for your answer.

    regards/ Sivakumar

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