Peter Drucker makes these foundational statements:
“There is only one valid definition of a business: to create a customer.”
“To supply the wants and needs of a consumer, society entrusts wealth-producing resources to the business enterprise.”
“Because its purpose is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are ‘costs.’”
Use the three statements above, Drucker’s specific meaning of the terms marketing and innovation, and Goddard’s specific arguments related to the proper interpretation of the term costs to defend the economic rationale embedded in this statement by Drucker: “The business that fails to produce an adequate profit imperils both the integrity of the resources entrusted in its care and the economy’s capacity to grow. It is untrue to its trust.”
Guiding Questions:
-Based on what you’ve learned about the idea of economic profit, explain what Drucker means when he says: “a company can make a social contribution only if it is highly profitable.” Why is economic profit a measure of wealth creation? Why is wealth creation a measure of social contribution?
-What does Drucker mean by the term “marketing”?
-What does Drucker mean by the term “innovation”?
-Why is the idea of “creating a customer” through “marketing” and “innovation” central to the concept of creating wealth?
-For purposes of the essay, let us stipulate that when Goddard uses the term “cost” he means “expense” (a “bad” in Alchian’s formula for valuation); he does not mean opportunity cost. (Let’s also stipulate that Drucker intends the same interpretation of “cost” in the third bullet-point of the essay prompt.) Why is the distinction between expense and opportunity cost important in the context of Goddard’s argument about the relationship of “cost” (expense) to strategy?
-How do Goddard’s ideas about strategy relate to the meaning Drucker attaches to “marketing” and “innovation”?
-How does your response to the above bullet-point relate to what you have learned about the idea of economic profits in the context of Goddard’s statement that: “The benchmark of competitiveness should be value . . .”?
-As a summary statement, given your answer to the previous bullet-point, how would you explain to a person uninitiated with our course content that: “The business that fails to produce an adequate profit imperils both the integrity of the resources entrusted in its care and the economy’s capacity to grow”?
Resources:
Chapter 5 of Drucker, P. F. (1973). Management: Tasks, responsibilities, practices (pp. 50-57). New York, NY: Harper & Row.
Chapter 6 of Drucker, P. F. (1973). Management: Tasks, responsibilities, practices (pp. 58-73). New York, NY: Harper & Row.
Goddard, J. (2010). The reality of costs. (Link will open in new tab.) Business Strategy Review, 21(2), 40-45.
Anders, G. (2012, April 23). Inside Amazon’s idea machine: How Bezos decodes customers. (Links to an external site.) Forbes.
Levy, S. (2011, November 13). Jeff Bezos owns the web in more ways than you think. Download Jeff Bezos owns the web in more ways than you think. Wired.
Carr, A. (2015, January 6). The real story behind Jeff Bezos’s Fire Phone debacle and what it means for Amazon’s future. (Links to an external site.) Fast Company.
Lane, R. (2018, September 4). Bezos Unbound: Exclusive Interview With The Amazon Founder On What He Plans To Conquer Next. (Links to an external site.)Forbes Magazine.
