Peter Drucker: What Is A Business?

We have to start with its purpose, which lies outside the business. A business organization is an organ of society. There is only one valid definition of a business purpose: to create a customer. This leads to two and only two basic functions – marketing and innovation. All the rest are “costs.” Marketing is the distinguishing, unique function of the business. The uniqueness of the enterprise is that it markets a product or service. The economic revolution of the American economy since 1900 has been in large part a marketing revolution. He gives the examples of Sears (the book was published in 1973) and Japan after 1950. Marketing is so basic that it cannot be considered a separate function.

Despite the emphasis, marketing practices are more often rhetoric than disciplined. When managers speak of marketing, they often mean effective selling. They start with their products and look to their market. But selling and marketing are antithetical rather than synonymous or complementary. There will always be a need for selling, but the aim of marketing is to make selling superfluous, such that the product or service “sells itself” in the view of the customer.

The second function of a business is innovation – the provision of different economic satisfactions that are better and/or cheaper. Innovation may be finding new uses for old products. Innovation is not solely invention. Nontechnical innovations – social or economic – are at least as important as technical ones. (Management: Tasks, Responsibilities, Practices 61-66).

“However important the steam engine was as an invention, two nontechnical innovations had as much to do with the rise of modern economy: the mobilization of purchasing power through bank credit, and the application of probability mathematics to the physical risks of economic activity, that is, insurance. The innovation of limited liability and the subsequent development of the publicly owned limited-liability company were of equal importance” (66).

“Innovation can be defined as the task of endowing human and material resources with new and greater wealth-producing activity” (67).

There are three kinds of innovation: product or service, marketplace and consumer behavior or values, or of the various skills or activities used to bring the product or service to market. (107).