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The purpose of companies: giving businesses a sense of direction

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It is often said that most new businesses don’t end up doing what they first started out to do, making flexibility a core survival behaviour. For me, this means the ability to change your mind, adjust your direction and rethink your plans. Whatever I come up with for a purpose, it has to fit into this schema somehow. It has to be something to give direction and focus whilst still being flexible.

One of our group had asked his mother what purpose her business, formed with her husband many years ago, had. Simple and elegant, her answer was to ensure their family was secure, protected from the vagaries of external influences, and had a steadily improving quality of life. I was bowled over – beats the hell out of “achieving a £10m EBITDA by 2020”, which was my first offering.

I realised I had a ‘heads down’ approach to this question, which meant I had limited horizons, context and analysis – just staring at my feet really. What I needed was to see the bigger picture. I had to start with the question, what is the purpose of ANY company?

Digging further into the concept of purpose I came across stakeholder statements, which explicitly recognise there is more to a company than shareholders, and that there are other investments people make in a company that are not financial, but they still don’t explain anything. The concept is unbounded, which makes it useless.

My next step is to get clarity on the obvious stakeholders and ask the question: “Who or what allowed them to get into that position?”.

If we want to know why companies exist, we need to first ask the people who formed them. We need to look at the context of society that allowed them to be created and become dominant.

History suggests that companies are the extension of a long term trend for people to specialise in what they do. In fact, it goes back to the reason for a capitalist economy of any sort – we need an economy because we need money, and we need money because it allows people to be rewarded in a single unified manner for the whole host of human endeavor, allowing them to specialize, exchange their service for money, then buy another service they need. Otherwise we would all live off the land, eating and wearing what we could grow and make ourselves.

Companies, therefore, in social terms, are a means of organizing ourselves into specialist units to provide goods or services that someone else values enough to pay for. Society allows this to happen because we all become better at what we do. That is why the standard of living of people today is so much better than prior to the industrial revolution.  

So, we have the founder’s purpose coupled with a contextual reason from society. However, despite being multidimensional and specific enough to have true meaning and learning from it, certain questions are left unaddressed – such as why society allows the risks of companies – in other words, avarice. It also fails to explain how it works. We now have an explanation of why companies are allowed to exist and what their purpose is, but it is untested. A way of testing it is to ask: “If this is the purpose, how does it translate into the day to day activities of companies?” How did we get the TV, the car, the mobile phone? They came from an open exploration of what people might value. 

Who in Henry Ford’s time would have predicted the sales of Grand Theft Auto on a play station? They couldn’t, so you need to give encouragement and space to innovation in the company purpose. Society demands it, which implies some coherent thought by an entity called society – which of course does not exist – (score one for Margaret Thatcher), and companies are a major source of such innovation, so it needs to be part of their role, their purpose. Hence the need for a value proposition in a purpose – people in society need to want the products or services on offer – if they don’t then the company fails.

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