The following is an early draft of what will be a sequence of posts. I am still struggling with how to bring business alive for individual contributors and managers who only have their one area of expertise in a company whether it be sales, engineering, manufacturing, distribution, human resources, legal etc.
I love getting these emails:
Do you have any good recommendations for a good (high tech) business 101 book? It is for one of my UXers. Something that talks a bit about business models, markets, etc? I learned through the school of hard knocks.
It is a different form of a question one of my senior managers asked me two weeks ago:
“Skip, I am able to execute on ideas and tasks that someone else prioritizes, but I don’t know how to pick which idea to pursue. I’ve watched you this last year and you always seem to know right away which idea to pick AND why. How do you do that? Your process is what I really want to learn from you.”
Both of these questions are of the form, reflect on your fifty years in business and share with me you knowledge and wisdom. And can you do it in 10 minutes? That is all the time I have.
On the flip side, I was sharing this challenge with a senior UX researcher who asked “what’s the big deal about business? I talked to a sales team the other day so I clearly understand business now.”
Alrighty now, clearly I am not communicating what I mean when I say “business.”
One of the exercises I run with my managers, my graduate students, and with entrepreneurs that I mentor is to ask where the money comes from to fund product development. The answers in a big company are of the form:
- From my boss
- Where does he/she get the money?
- From their boss
The questions continue until they get to the CEO. Then they are stumped. In my fifty years of asking this question, no one has tumbled to the right answer – the customer.
It is a much shorter chain in a startup where the answers stop with the investor. Then the entrepreneur is stumped.
A Business is Always about the Customer
“If we want to know what a business is we have to start with its purpose. And its purpose must lie outside of the business itself. In fact, it must lie in society since a business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer.
“Markets are not created by God, nature or economic forces but by businessmen. The want they satisfy may have been felt by the customer before he was offered the means of satisfying it. It may indeed, like the want for food in a famine, have dominated the customer’s life and filled all his waking moments. But it was a theoretical want before; only when the action of businessmen makes it effective demand is there a customer, a market. It may have been an unfelt want. There may have been no want at all until business action created it—by advertising, by salesmanship, or by inventing something new. In every case it is business action that creates the customer.
“It is the customer who determines what a business is. For it is the customer, and he alone, who through being willing to pay for a good or for a service, converts economic resources into wealth, things into goods. What the business thinks it produces is not of first importance—especially not to the future of the business and to its success. What the customer thinks he is buying, what he considers “value,” is decisive—it determines what a business is, what it produces and whether it will prosper.
“The customer is the foundation of a business and keeps it in existence. He alone gives employment. And it is to supply the consumer that society entrusts wealth-producing resources to the business enterprise.”
Drucker further explains that the practice of management has two basic functions:
Function #1: Marketing
“Because it is its purpose to create a customer, any business enterprise has two—and only these two—basic functions: marketing and innovation. They are the entrepreneurial functions. Marketing is the distinguishing, the unique function of the business. A business is set apart from all other human organizations by the fact that it markets a product or a service. Neither Church, nor Army, nor School, nor State does that. Any organization that fulfills itself through marketing a product or a service, is a business. Any organization in which marketing is either absent or incidental is not a business and should never be run as if it were one.”
Function #2: Innovation
“The second function of a business is therefore innovation, that is, the provision of better and more economic goods and services. It is not enough for the business to provide just any economic goods and services; it must provide better and more economic ones. It is not necessary for a business to grow bigger; but it is necessary that it constantly grow better.”
The challenge with using the word “customer” is that it doesn’t parse. I am always amazed at how words mean something, but rarely the same thing to different people. One of the hardest words to get agreement on is the word customer. It’s used in so many different ways by each function within a corporation that rarely is there the same image conjured up in each mind in any conversation where the word customer is used. The clearest insight into this problem came when I was reading a book by William Luther called How to Develop a Business Plan in 15 Days. At the very start of his book, Luther begins:
“In December 1984, I was hired by Clemson University to conduct a two-day marketing seminar for five state colleges in Florida. The first half-day was most difficult, because the people from the colleges kept stating that there was no way someone with no experience in education could help them develop a marketing plan. I tried to convey to them that the planning process was the same regardless of the type of product or service, but they just wouldn’t buy it. The use of a bad analogy made matters worse – the analogy being that the planning process was the same whether you were selling a college or a can of beer. The meeting did not go very well until just after lunch, when they were presented with a five-step procedure that helps you determine who your customer is and what the message should be. As I went through the sequence, I proved to them that they had been spending all of their marketing dollars for the last five years on the wrong target audience.
“Like so many other institutions of higher learning, these colleges realized that they must get a better understanding of marketing, now that federal and state funding assistance has diminished. The group was openly hostile until the purchase-process priority was discussed. When asked who should be number one in the purchase-process priority, the college officials, after several minutes of discussion, stated that it was the parent. Number two was the high-school guidance counselor. The student was listed as number three. At this point, I asked them how they had been allocating all their marketing dollars during the past five years. Almost in unison they said words to the effect of ‘son of a gun.’ They had been committing their complete marketing budget to the students.”
This book was my first introduction to the deconstruction of customer into influencers, purchasers and users. Most product development teams focus their energies on users. Most sales teams focus their energies on purchasers. The marketing team focuses on influencers. All are forms of customers. Each type of customer must be paid attention to in a business. Great businesses have high coherence on how a product/service fits each of the categories of customers – influencers, purchasers, and users.
Mack Hanan in Competing on Value takes the concept of customer further to include the customer as growth partner:
“How can you grow your business?
“You can only grow someone else’s business. His business growth will be the sour of your growth. By growing, he will force growth back upon you because he will want tyou to grow him again.
“The business you can grow have a name. they are called your major cusotmers. Their growth must be the objective of your business. The capabilities you require to grow them must be your asset base.
“Growth requires a customer. A growth partner is a special kind of customer. He is a customer whose costs you can significantly reduce or whose profitable sales volume you can significantly increase. In one or both of these ways, you can improve his profits. This is the basis for his growth. It is also the basis for his contribution to your own growth. As the two of you grow each other, you will become mutually indispensable.
“If you cannot grow a customer, you cannot partner him. You can continue to do business with him, buying and selling, but the maximized profits of growth will elude both of you. If all your customers are buyers instead of growers, you will be a slow growth or no-growth business. None of your customers will be growing you because you will not be growing them.”
The work of “business is about the customer” is nicely summarized in the following funnel diagram for getting customers, keeping customers, and growing customers:
Value is Co-Created
Service science stuff
Sequence of 4
Value as a service
The list of presuppositions
Seeing your Business – The Business Model Canvas
Thiel’s seven questions
Product Development Lifecycle
Note that key is adoption and monetization.
Seeing your Finances – Keeping Score