Measuring business success

Forbes Global 2000 is a list of the world’s biggest public companies. The way Forbes ranks each business is by adding up the scores for four equally weighted metrics—sales, profits, assets and market value—and compiling a composite score for each company.

This is an overkill and can be completely misleading.

The only metric that matters is sales. More specifically, the share of market and the share of wallet. How many people spend their money with you and how much they spend—that’s the true indicator of business success.

By the way, Fortune—the biggest competitor of Forbes in business rankings—gets it right. Their Fortune 500 list is ranked purely on the volume of sales.

At the same time, Fortune’s or Forbes’s, none of the lists matter. Not even a tiny little bit. It’s because any “pissing contest” among companies can be meaningful only if they are in the same market. There is no point comparing non-competing businesses, because the amount of money spent by customers varies widely between individual markets.

What is the purpose of business?

The purpose of business is to make the world a better place. Miroslav Chodak

In my last post, I defined the term “business” and identified the single most important component of any successful business. Now, let’s examine more closely the question of what is the purpose of a business.

One might assume that, just like with the definition of business, there would be a consensus. However, the reality cannot be more different.

Three schools of thought

Overall, there are three different schools of thought on this subject. The starting point is the historically most accepted view that the purpose of business is to make maximum profits for its owners.

Each school of thought has a different take on this definition:

1. Yup!

The first school completely subscribes to the “maximum profits for its owners” view but also attempts to answer the how question. The resulting definitions include things like: provide goods and/or services, offer value, fill a need, solve a problem or (most famously, perhaps) create a customer.

2. Yes, but…

The second school also accepts the “maximum profits for its owners” view, but adds a second(ary) dimension. For example: create sustainable value for all stakeholders.

3. No way!

The third school takes a completely different view. They reject the profit maximization objective out of hand and instead propose an alternative purpose. For example, the purpose of a social business is to maximize improvements in human and environmental well-being.

What’s my definition?

I don’t dispute the fact that a business must be able to make money. But, I don’t consider it its purpose (a function, yes, but not a purpose). In fact, the sole focus on profit maximization is extremely harmful to the society, because it leads to inequality, unemployment and eventual collapse of the economy. Not to mention the environmental pollution, the collapse of natural ecosystems and the depletion of natural resources.

Businesses are the major driving force in our society today. More so than individual members of the public—who are employed by the businesses, and more so than governments or political parties—which are financed by the businesses.

Make the world a better place

If anybody can institute lasting change in this world, it’s the businesses. Therefore, it is my belief that the purpose of every business should be to make the world a better place.

What is business?

Define: business

The definition of the word “business” is pretty straightforward. While there are numerous versions available and their exact wording varies somewhat from case to case, their essence is basically the same.

Wikipedia’s definition is just as good as any, so let’s go with that:

A business, also known as an enterprise or a firm, is an organization involved in the trade of goods, services, or both to consumers. — Wikipedia

In short, business is an entity involved in trading.

Before you die from boredom as I beat this subject to death, let me point out one very important element that this definition contains. It is so important, in fact, that, if not taken seriously, it will spell certain demise to any business-building efforts.

What makes it a business?

By definition, for a business to even exist, a trade of goods or services must take place.

Trade is [the transfer of] the ownership of goods from one person or entity to another by getting a product or service in exchange from the buyer. — Wikipedia

If you want to trade, you must be able to sell. If you cannot sell, you don’t have a business. Simple as that.

This is why every entrepreneur’s first priority, when building a new business, must be selling. Simplified, selling is what makes or brakes a business. As soon as selling stops, the business is doomed. Period.