Twisted news about ventilators

Two days ago ProPublica published a story about ventilators, which have been in high demand to treat patients with COVID-19. Taxpayers Paid Millions to Design a Low-Cost Ventilator for a Pandemic. Instead, the Company Is Selling Versions of It Overseas. The story is rather long, more than 3,000 words.

A short version is this. The U.S. Department of Health and Human Services (HHS) in 2015 signed a $13.8 million contract with a Pennsylvania manufacturer -- Philips, a subsidiary of a Dutch firm -- to create a low-cost, portable, easy-to-use ventilator that could be stockpiled for emergencies. The contract was very open-ended regarding delivery of the ventilators with a deadline in 2022. In September 2019, the contract was modified. Still, it gave Philips almost a year before delivering any ventilators and until 2022 to fulfill the order. Meanwhile, Philips has raised production and been selling other, higher-priced models responding to the high demand.

Showing their political leaning, the ProPublica authors believe the HHS should have forced Philips to accelerate delivery. I wonder if they also believe any direction given to Philips by its Dutch parent should be disregarded. I wonder how well the low-cost, portable, easy-to-use ventilator the HHS contracted for would perform in the more severe COVID-19 cases.

Yesterday The Hill rode the coattail of the ProPublica story. Its headline is Stockpile of US-manufactured ventilators sold overseas. In other words, The Hill twists 'an empty stockpile because it hadn't been stocked yet' into 'an empty stockpile because Philips sold from the stockpile to overseas customers.'  Also, The Hill story omits the part about the delivery terms of the contract between Philips and HHS.

Trump’s Health Insurance Changes #2

https://ijr.com/5-things-to-know-about-trumps-plan-to-utilize-hras-in-us-health-care/ 

What does Speaker Nancy Pelosi think about the proposal?

She hates it.

Speaker Pelosi (D-Calif.) wrote in a press release that President Trump was trying to “dismantle American’s health care” by bolstering HRAs. She claimed that allowing workers to shop for their own insurance will result in more people receiving “junk” coverage.

“And since Day One, the Trump Administration has worked relentlessly to push families into disastrous junk plans, increase their health care costs and gut their health care protections,” Pelosi wrote.



My comments

1. Does Pelosi really believe most people are stupid and gullible enough that they will buy disastrous “junk” coverage?
2. Health insurance policies sold in the USA are regulated by state insurance departments. Before a policy is legally sold in any state, the policy provisions must pass the scrutiny of the state insurance department. Said department has a host of requirements including (a) ones that policy provisions must pass, many about what benefits the policy must cover and (b) about claims practices.

So despite #2, does Pelosi still believe that disastrous "junk” coverage is typical and most people are stupid and gullible enough that they will find it and buy it? I'd like to see her attend a meeting of the National Association of Insurance Commissioners and tell all the regulators there that most of what they approve is disastrous "junk."

Trump’s Health Insurance Changes

Last month the Trump administration promulgated some new rules that take effect 1 January 2020 and further allow employers, especially small businesses, to make tax-advantaged employer-paid health insurance available to their employees. With his usual fondness for hyperbole, President Trump lauded it as “a monumental victory for small businesses” (link). I won’t argue with that. However, I would not call it a “monumental victory for health insurance more broadly.” In my opinion it is a small step in the right direction. The devil is in the details.

First, some explanation of terms should help.

HRA – Health Reimbursement Account – HRAs have existed for years, but a minority of people know what they are. They have mainly existed for retirees and public sector employees. The new rules will make them available for more people who work in the private sector without employer-paid insurance. Of course, a high percentage of them work in small businesses. The new rules will  allow money in them to also be used to pay for health insurance premiums.

HSA – Health Savings Account – HSAs have existed for years. They allow employers and employees to contribute money to an account that can be used to pay medical expenses – such as doctor and hospital bills – but not health insurance premiums. External to the HSA the employee must buy (pay premiums for) individual or family coverage catastrophic (high deductible) health insurance. Such premiums are not tax-deductible.

Group health insurance pertains mainly to coverage provided by larger employers. The employer pays for coverage for its employees, and often dependents. Typically, employers pay most of the cost – 80% is common – and it isn’t taxable income to the employee. The employees pay the other 20% or so, which reduces their take-home pay, and they do not get a tax deduction. Employers usually pay a lower share of the cost of coverage for dependents.

The Kaiser Foundation estimates that about 156 million people in the USA have employer-paid health insurance. That number includes spouses and children, so the number of employees so covered is somewhat less. Media coverage of ‘Medicare for All’ says that around 180 million people have private insurance, but that includes supplemental policies owned by people enrolled in Medicare and people in Medicare Advantage plans. The Trump administration changes are expected to result in, at best, about 11 million more people having employer-paid insurance. Obviously 11 million is a pretty small increase percentage-wise, less than 10%.

The new rules specify two kinds of HRAs:

1. Individual Coverage HRA, which cannot be offered to employees who are eligible for group health plan coverage.

2. Excepted Benefit HRA, which can be offered only to employees who are also eligible for an employer sponsored group health plan (link).

Not permitting employees who are eligible for group health insurance to have an Individual Coverage HRA is a “devil in the details.” First, it restricts their freedom of choice. Second, it blocks a huge number of people from switching from group insurance to individual insurance (without changing employers). Consequently, it prevents radically enlarging the individual insurance risk pool, which is what is needed to put downward pressure on premiums in the individual health insurance marketplace for people under age 65.

The other demerit of the new rules in my opinion is that the employer outlay for health insurance remains non-taxed compensation. Like I wrote here, Employer-paid Health Insurance, and here, Trump's "Across State Lines" Baloney, a radical move is needed to make the medical insurance market for individuals under age 65 as vibrant and competitive as the medical insurance market already is for individuals over age 65.

Amazon HQ2 #4

Cleveland did not make the list of Amazon's top 20 cities contending for its HQ2 announced several months ago. This article, also in yesterday's Cleveland Plain-Dealer print addition, reports that Cleveland, Cuyahoga County, and Ohio offered Amazon about $3.5 billion in incentives to put HQ2 in Cleveland. This wasn't as much offered to locate HQ2 in Alexandria, VA or Queens, NY.

What was offered to locate in Cleveland? There were the typical reduced real estate taxes for many years. In addition, the county subsidy included the creation of a power micro-grid,  which would allow Amazon to power its facilities independent of the main power grid. The micro-grid would cost $200 million, and be paid for by the sale of bonds. Cleveland is believed to have been the only city to offer Amazon an independent and redundant power supply.

Of course, there were other reasons for Amazon not choosing Cleveland -- airport capacity and being an area with a smaller tech workforce than other cities.

Amazon HQ2 & HQ3 #3

Yesterday at a Thanksgiving celebration I asked a guy who works in information technology about Amazon HQ2 and HQ3, assuming there has been office buzz about it where he works. Part of his reply was that Amazon employees have bought residential real estate near the future new location(s). He didn't say how long ago this started.

So this morning I did a Google search {"Amazon employees" bought "real estate"}. There were lots of hits. Examples:  BoingBoing    Wall Street Journal (pay-walled)

The stories are mostly about Long Island City (HQ3).

Amazon HQ2 & HQ3 #2

This post will be about the reported tax breaks that Virginia and New York will give to Amazon. On Wikipedia there is heavy criticism of the tax breaks. One professor calls the tax breaks overly generous. Another professor says that Amazon's search for other locations was a ruse and a con. It was done to solicit bids from places that they never intended to move to solely to gain tax breaks. However, none of the critics quantify the overly generous tax breaks that they allege.

To take a "stab" at it I did some rough calculations comparing (a) the extra income taxes that Virginia and New York will collect assuming 25,000 employees at both HQ2 and HQ3 to (b) the reported tax breaks.  My calculations say that it will take nearly 4 years for Virginia and nearly 6 years for New York to recoup the tax breaks via income taxes. Call these "number of years to recoup" (Y). Such simple assumptions likely under-estimate Y.

Complications

The above assumed all the new Amazon employees will come from out-of-state, and they will all be added immediately. Both are obviously false. So let's assume that only half of the employees will come from out-of-state and the average number of employees over the first several years will be about half of the numbers shown above. Adjusting for both of these factors implies that Y will be nearly 16 years for Virginia and nearly 24 years for New York!

Arguably Y could be reduced some for favorable side effects like income to local businesses and rents. On the other hand, there will be unfavorable side effects. The presence of HQ2 and HQ3 will increase other costs to local people for things such as paying more for teachers, food, rent, infrastructure, and so forth. These are, of course, very difficult to quantify. But if the net effects were to reduce Y 1/8th, the result is still nearly 14 years for Virginia and nearly 21 years for New York! I'm inclined to agree with the professors.

I am confident that not many people in the general public do the above kind of analysis. Therefore, politicians can hand out tax breaks to Amazon or whoever, and most people in the affected community will swallow whole whatever the politicians say about it being a great deal for the local economy. Even if some of the people are skeptical about how good a deal it is for the community, there is little or nothing they can do once the tax breaks have been finalized.

Amazon HQ2 & HQ3 #1

According to several news stories Amazon is near announcing its new headquarters. That's two of them, not one as first announced. They are being called HQ2 and HQ3. HQ1, as I'll here call it, will remain in Seattle. HQ2 will be in Crystal City, VA very near Washington, D.C. and Reagan Airport. HQ3 will be in Queens, NY, near LaGuardia Airport but not far from JFK Airport. Some stories say HQ3 will be in Long Island City, which is not on Long Island but adjacent to Queens.

The following story compares real estate prices and more in the two new locations and Seattle.
How Amazon’s HQ2 and HQ3 locations compare with Seattle and the U.S. overall

I don't know how close HQ2 will be to the Crystal City Metro station, but I bet it will allow many to do a brief walk between them. Also, the Crystal City Metro station is only one stop away from the Reagan Airport Metro station (link).

Expected tax breaks for Amazon -- $573 million from Virginia and $1.525 billion from New York (link).

Accountable Capitalism Act

Presidential hopeful Senator Elizabeth Warren has offered the Accountable Capitalism Act. She will likely continue using it as a campaign plank as long as she feels that a majority of voters view it as touchy-feely good. The Act’s major features are shown in Wikipedia and the WSJ.

Firstly, note the misleading, presumptuous headline in Warren’s WSJ op-ed. A corporation -- according to her – is not at all accountable to customers, employees, suppliers, bondholders, communities where the business is located, or governments. While true in a very narrow sense – they don’t vote on the corporate board or major changes like shareholders do – it is mostly blatantly false. The corporation is very much accountable to the others in other ways.

Others have commented on it, mostly unfavorable. The Tracinski Letter compares what the Act would create to neo-feudalism. Replace the feudal king and his lords with a bunch of politicians and bureaucrats, and the resulting structure is similar.

At CNBC the Act is described as more crony capitalism, channeling Karl Marx, and a “slippery slope” towards more government intervention. It’s also pointed out that contra Warren’s title state incorporation laws in many states already contain propositions to recognize all stakeholders, not just shareholders.

NationalReview portrays the Act as Warren’s plan to nationalize everything. That is hyperbole, but Warren’s greed and lust for power is not.

The most naive article I have seen so far is at Vox. The author defends the Act, attacking the National Review article as unhinged and seizes on the National Review correspondent’s charge of nationalization. The author’s assertion that Warren isn’t proposing nationalizing any business is narrowly true but mostly blatantly false. Nationalization means government taking ownership and control. Warren doesn’t propose government ownership, but she does propose far more political control, which the author “sweeps under the rug” by ignoring it.

Moving on to my own comments, what more exactly does Warren propose? Who exactly is she proposing to represent consumers, e.g. the millions of people who shop at Walmart, or buy from Amazon and Apple, or use Google and Facebook? Who exactly is she proposing to represent them, the community, and the environment, if not a horde of politicians, bureaucrats or political appointees?

She desires to reduce the political power and influence of corporations, but shows no such desire regarding unions. If requiring 75% of shareholders and directors approve any political spending by a corporation, then why not require 75% of union members approve any political spending by a union?

Of course, rarely are politicians like Warren frank about how much power they want. It’s a trial balloon, and her proposal is only a first step. Later, when what’s put in place will have failed to produce the desired result, they will advocate even more power-grabbing.

Varieties of Capitalism #3

Business Law

Liberal market economies (LME) and coordinated market economies (CME), meanings here, differ in business law. 

In essence there are two solutions to problems that arise from incomplete contracting. 

The first, the classical or common law approach, attempts to protect each party's freedom to contract. It assumes all market participants are sophisticated. Courts enforce a written contract as written, even when there appear to be bargaining imbalances or unanticipated contingencies. Practices in the LME of the USA and England fit here.

The second, the regulatory approach, focuses more on power imbalances within contracts. It attempts to police the distribution of risks within contracts, often to order to implement broad societal norms calling for fair of just fulfillment of contracts. Courts do this by prohibiting powerful market actors from delegating unspecified risks caused by contractual incompleteness to weaker market players. Courts will also attempt to "repair" contracts disrupted by unforeseen contingencies.  Practice in the CME of Germany fits here.

The author doesn't specifically address unilateral contracts. Such a contract is written by one party to it, and the other party accepts it as written. So imbalances are inherent. An insurance policy is a good example. When there are ambiguities in a unilateral contract -- in the USA and absent legal precedent -- the ambiguity is generally interpreted against the interest of the party who wrote the contract (contra proferentem). This is an exception to the general rule in the second paragraph.

Peter Drucker on Innovation

More from Peter Drucker's Management: Tasks, Responsibilities, Practices follows.

There were good reasons in the past for the administrative function to the neglect of innovation. When management first became a concern in the early 20th century, the greater need was learning how to organize and direct large scale work, recently new at the time. Innovation was seen as something separate done by inventors. That view changed in the coming decades.

Innovation now needs to be built into organizations. First, they have much more access to manpower and capital. The ratio between invention and research and the efforts needed to convert the results of invention and research into new businesses or products has changed significantly. As a rule of thumb, every $1 spent on generating an idea, $10 have to be spent on “research” to convert it to a new discovery or invention. For every $10 spent on “research”, at least $100 need to be spent on development, and a $1,000-$10,000 are needed to introduce and establish a new product or business on the market. Only then is there “innovation.”

Innovation is not a technical term, but an economic and social one. Its criterion is not science or technology, but a change in the economic or social environment, a change in the behavior of people as consumers or producers, and so on.

Innovation strategy requires different measurements and a different use of budgets from those of an ongoing business. Nothing is inimical to successful innovation as a demand to produce the sort of steady and often growing profits of a more mature business. Innovations may take years to produce a profit, but if and when they do, profit growth will be higher than from a mature business. On the other hand, it is important to decide when to abandon an innovative effort (MTRP 783-96). 

Peter Drucker on Growth

More from Peter Drucker's Management: Tasks, Responsibilities, Practices follows.

The idea that growth is by itself a goal is a delusion. There is no virtue in in a company getting bigger. The right goal is to become better. Sound growth should be the result of doing the right things. By itself, growth is vanity and little else.

Growth crazes in the business world are a recurrent disease. In public service institutions, and especially government, the growth craze is endemic and permanent. Bigger is not necessarily better in a service institution, whether a hospital, a government agency, a university – or in the personnel staff in business, or in a research laboratory. But growth is just as demanding and difficult in the public service institution as it is in business.

Yet growth will continue to be desirable and a necessary business objective. Even when there isn’t overall growth, there is a need for management to understand how to manage it. A period of zero growth is not one of stability but of turbulence. When a business operates in a dynamic environment, and there isn’t growth in some respect, the business will not survive.

There is plenty of room in a growing economy. There is even room for those who do not know how to grow well and grow more by accident than by management.

Even fairly moderate growth calls for financial planning to meet the new demand to expand and replace the existing capital structure.

The controlling factor in managing growth is always top management (MTRP 772-7).

Peter Drucker: Top-management

More from Peter Drucker's Management: Tasks, Responsibilities, Practices follows.

Top-management is not a single task; it is multidimensional. The following is only a sketch; he says lots more about each one. It is also a partial list.

1. The task of thinking through the mission of the business.

2. Setting standards.

3. Building and maintaining the organization, its structure and design.

4. The major relations which only the people at the top can establish and maintain. They may be relations with customers or major suppliers. They may be relations with the industry, bankers, the financial community, government, or other outside institutions.

5. There are countless “ceremonial” functions.

6. There is a need for a “stand-by” organ for major crises. (MTRP 611-12).

“[A] peculiar characteristic of top-management tasks is that they require a diversity of capabilities, and, above all, of temperaments. They require the capacity to analyze, to think, to weigh alternatives, and to harmonize dissent. But they also require the capacity for quick and decisive action, for boldness, and for intuitive courage. They require being at home with abstract ideas, concepts, calculations, and figures. They also require perception of people, a human awareness, and empathy and altogether a lively interest in people and respect for them. Some tasks demand that a man work by himself, and alone. Others are tasks of representation and ceremonial, outside tasks, that require the politician’s enjoyment of crowds and protocol; the ability to represent and to make a good impression by saying nothing.

“The top-management tasks require at least four different kinds of human being: the “thought man,” the “people man,” the “action man,” and the “front man.” Yet these four temperaments are almost never found in one person” (MTRP 616).

Peter Drucker: Contribution Analysis

More from Peter Drucker's Management: Tasks, Responsibilities, Practices follows.

“There are four major groups of activities distinguished by their contribution to a businesses.

“There are, first result-producing activities – that is activities which produce measurable results which can be related, directly or indirectly, to the results and performance of an entire enterprise. Some of these activities are directly revenue-producing. Others contribute measurable results.

“There are, second, support activities which, while needed, and even essential, do not by themselves produce results but have results only through the use made of their “output” by other components within the business.

“There are, third, activities which have no direct or indirect relationship to the results of a business, activities which are truly ancillary. They are hygiene and housekeeping activities.

Finally, and different in character from any of these, is the top-management activity” (MTRP, 532).

Results producing activities directly bring in revenues. “Here belong innovating activities, selling and all the work needed to do a systematic and organized selling job, such as sales forecasting, market research, sales training, and sales management. Here also bring the treasury function, that is, the supply and management of money in the business.” Also included are information activities.

Support activities can also be called resulting-contributing. Manufacturing is typical of these activities. Also included are training, human resources, purchasing and physical distribution, engineering, and operations such as the handing of data and paper, and in an insurance company, claims settlement.

Hygiene and housekeeping activities include such things as janitorial service, cafeterias, administration of benefit programs, and record keeping requirements.

This is a rough, nonrigid classification, and far from scientific. (MTRP, 533-4).

Top-management activities will be addressed in my next post.

Peter Drucker: Markets and Socialism

More from Peter Drucker's Management: Tasks, Responsibilities, Practices follows.

“The market approach is commonly called “capitalist.” But this is a misunderstanding. The market approach can equally be called “socialist.” * Whether ownership is in capitalist hands or not is no longer primary. What matters is managerial autonomy and accountability. What matters is whether resources are being allocated to produce results and on the basis of results.

“The prevailing idea that the U.S. economy is capitalistic because ownership is private is a misunderstanding. Decisive ownership of American big business is in the hands of the people – that is, the hands of the mutual funds and pension funds who are the fiduciaries for the middle class and workers. Big business in the U.S. has not been nationalized, but it has largely been socialized. In terms of the classical definition, the U.S. is, at best, a mixed and may steadily be approaching a socialist economy in which the public owns the means of production. But the U.S. manages largely on the basis of local autonomy of the enterprise and allocated resources on the basis of results. It is still a market economy” (MTRP 154).

Socialist and capitalist and their conjugates have two different meanings. In one socialism means a political theory advocating state ownership of industry, or an economic system based on state ownership of capital. In another social means relating to human society, the interaction of the individual and the group, or the welfare of human beings as members of society. Clearly Drucker means the latter here. Also, by capitalist he doesn’t mean an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state. He rather means capital is a component of production, regardless of who owns it.

Increasingly the mid-sized and large firms in American industry are being owned for the benefit of employees via retirement funds and mutual funds. By 1990 – the book was published in 1973 – such funds will own 2/3rds to 3/4ths of mid-sized and large firms. The managers of these funds are the only true “capitalists” around (MTRP 293).

* Market socialism at Wikipedia. Market socialists are generally against a free market in capital. Some believe it is fine and even advocate for workers at a company to own capital of that company, but are against other private sector people, who don't work at that company, owning its capital. They believe such others owning it would exploit the workers.

Peter Drucker: Service Institutions

More from Peter Drucker's Management: Tasks, Responsibilities, Practices follows.

The basic difference between a service institution and a business is the way the institution is paid. Businesses are paid by satisfying customers. Service institutions are paid from a budget allocation. They aren’t paid for what the taxpayer or customer mean by results and performance. Their revenues are allocated from a revenue stream obtained by tax, levy, or tribute.

Service institutions include governments, public schools, nonprofit hospitals, and some utilities. There can also be quasi service institutions within a business, a division which is paid from an allocation for overhead. These divisions tend to exhibit the same characteristics as the more typical service institutions. (MTRP 141).

Efficiency and cost controls aren’t considered virtues, however much they are preached. The importance of a budget-based institution is measured by the size of its budget and staff. The urge to spend near the end of an accounting period in order to get a larger budget or not get a smaller one for the next accounting period results in a lot of waste (142). Being budget-based makes it more difficult to abandon what’s wrong or obsolete (145).

There are exceptions to the general behavior of service institutions, such as Bell Telephone (before its breakup) and some American universities, but I will say no more about them.

Peter Drucker: Administration and Entrepreneurship

More from Peter Drucker's Management: Tasks, Responsibilities, Practices follows.

The manager need to administer – manage and improve what already exists and is known. He also has to to be an entrepreneur – redirect resources from area of low or diminishing results to areas of higher or increasing results. Optimizing should focus on effectiveness – to produce revenues, to create markets, to do things better, to achieve extraordinary results. Economists often speak of efficiency, which shouldn’t be neglected, but effectiveness is primary. Efficiency is concerned with doing things right. Effectiveness is doing the right things. The most efficient business cannot survive, let alone succeed, if it is efficient at doing the wrong things.

Effectiveness starts with the realization that in business, or any other social organism, 10- 15% of the phenomena – such as products, orders, customers, markets, or people – produce 80-90% of the results. The other 85-90% of the phenomena, now matter how efficiently handled, produce only costs, or busy-ness.

The first administrative job of the manager is to make effective the small core of worthwhile activities which is capable of being effective. At the same time, he neutralizes the large penumbra of other things that don’t yield extraordinary results.

The second administrative job of the manager is to bring the business all the time a little bit closer to the full realization of its potential.

“The perpetuation of a business is a central entrepreneurial task – and ability to do so may well be the most trenchant and definitive test of management” (MTRP 45-47).

The individual entrepreneur does not need to explain his business to others. One person is thinker, analyst and executor. Unlike the single entrepreneur, business enterprise requires continuity beyond the life span of one man. It commits resources to a longer future and typically to multiple products or services. Insofar has the literature of management and economics has given a theory, it has dealt mostly with the man at the top. He alone knows what the business is about and makes entrepreneurial decisions. This may have been adequate for the 19th century, but no longer. Today’s businesses (also, hospitals and governments) brings together a great many men of high knowledge and skill. Business decisions affecting the entire business are made at all levels. Middle managers have become largely decision-makers rather than just executors of higher-level decisions (MTRP 74-76).

Peter Drucker on Profit

Profit is not the purpose of but a limiting factor on business. It is not the explanation, cause, or rationale of business behavior or decisions, but the test of their validity. It is the result of performance of the business in marketing, innovation, and productivity. So profit's first function is a test of performance. It is an example of feedback, self-regulation of a process by its own results.

Whether there is such a thing as a profit motive is highly doubtful. There has never been any evidence for it. Indeed, the idea of it does harm, based on the mistaken prevailing belief that there is an inherent contradiction between profit and making a social contribution. Actually, a company can make a social contribution only if it is highly profitable. (Management: Tasks, Responsibilities, Practices 59-60).

When business people talk to the public about profits, they usually still define the goal of their business as profit maximization and appeal to the profit motive. They fail to explain and justify the functions of profit. (MTRP 374).

An equally important function of profit is the premium for the risk of uncertainty. Much economic activity focuses on the future, which is inherently risky. Only profit can supply the capital for tomorrow’s jobs, both more jobs and better jobs.

At the very least, business needs a minimum of profit – the profit required to cover its own future risks, to enable it to stay in business, to maintain the wealth-producing capacity of its resources.

Finally, profit pays for the economic satisfactions and services of a society, from health care to defense, and from education to the opera. They all have to be paid out of the difference between value produced by economic activity and its cost. (MTRP 71-73).

To the best of my knowledge, Drucker never says that wages are profits, like I did here. But analogous to the above, profits in the forms of wages are what pay for the satisfactions and services of individuals and their families – for food, clothing, a place called home, health care, education, transportation, entertainment and so forth. Also, regarding wages as profits might have made Drucker less cavalier about the profit motive.

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).