Rose Stabler

What Is The Purpose Of Small Business?

According to a professor from Florida State University the purpose of business is to serve others who have a vested interest in its success, such as its employees and investors, because they are the ones who suffer the most if the business fails.

To fully understand my response, one must first read the Professor's Full Article as follows:

When I was in classes getting my Ph.D. in finance, my professors told me over and over, “The purpose of a business is to make money for its owners.” Unfortunately, I cannot tell you how many times I repeated this mantra to my students over the years. Now, however, I have a very different opinion on the subject.

A firm cannot stay in business just to make money for its owners at the exclusion of everything or everyone else. If an entrepreneur takes the attitude that he or she deserves to make all of the money, the business will suffer and will most likely crash and burn. Just consider who stands to lose the most when a business fails.

Some folks — my former professors included — would argue that the owners lose the most since they have the most at risk. There is no question in my mind that entrepreneurs lose a bunch as they generally have the most invested in terms of dollar amount. They are not; however, the ones hurt the most by a business failure. A business closing is devastating to the employees.

Employees are one of the many entities that have a vested interest in a business’ success. In addition to owners, stakeholders such as employees, vendors, banks and customers have so much tied up in a business. They are vitally concerned with the firm’s wellbeing and will put forth much effort to ensure its success. However, success is impossible unless all of the stakeholders are taken care of.

When a business fails all of the stakeholders suffer. Take for example a financial institution. A financial institution risks much of its depositors’ funds to support a business, and if the company fails, its own financial performance suffers.

If employees are not treated reasonably, the whole business will suffer as both the quality and quantity of work declines. So many entrepreneurs forget how important each and every employee is to the success of the business, and they often fail to treat employees well. If the business should fail, these employees are the ones that are going to pay a very high cost.

My colleague and I recently assisted an entrepreneur who had been operating a business with over 50 employees for a very long time. The business was losing hundreds of thousands of dollars each month, and we tried to give the entrepreneur the resources he needed to turn things around. When the situation failed to improve, we realized that there was only one alternative left: he had to close the business and file for bankruptcy.

Telling this entrepreneur that closing the business’ doors was the best course of action was, by far, one of the hardest things I ever had to do in this job. What made it so hard was not that we had to give the entrepreneur this bad news, but because we knew what a loss it would be for all of the stakeholders, particularly the employees. Through no fault of their own, the staff would lose their jobs.

In my opinion, the purpose of a business is to serve the stakeholders. Businesses must earn money to acquire additional funds and assets, but its staff and other stakeholders are vital contributors to this endeavor. The key is to balance and deliver on the needs of all the stakeholders.

My Response

I disagree with the premise that the purpose of business is to serve others. Yes, a business owner must be practical in her/his operational approach because others do hold "stakes" in the success or failure of the company. Everyone loses when an enterprises closes its doors.

Small businesses are the engines that power our economy. According to SBA statistics, they generated 60 to 80 percent of net new jobs annually over the last decade, employ 50.6 percent of the country’s private sector workforce, represent 97 percent of all the exporters of goods, account for almost 40 percent of our gross national product, represent 99.7 percent of all employer firms, and generate a majority of the innovations that come from the U.S.

When a firm closes its doors, business taxes and payroll taxes are lost, suppliers lose revenues from a lost customer, landlords lose rent, employees are out of a job, the taxes those employees pay are lost, those employees lose buying power and, consequently, sales taxes are lost as well. Everyone in the community loses. No one wins.

The two statements, first, that the purpose of business is to serve others, and second, that business owners are not the ones that lose the most from a business failure, are wrong. Both these attitudes fall into the liberal mantra that it takes a village to raise a child. No, it does not take a village, it takes the people who care the most to raise that child, the parents. Comparatively, the owner is the caretaker of his/her business.

No one cares the most for a business then its owner. No one will work harder for the business, sacrifice the most for that business, forgo vacations, time with family, reinvest every penny into that business, forgo sleep even.

Lenders, investors, and employees take calculated risks when they choose to invest or work for a firm. They have choices and their loyalties are calculated based on self-interest, not out of the goodness of their heart or for the best interest of the company. Nor will these stakeholders lose everything if the business fails. Lenders will invest in other ventures and employees will work for other companies.

On the other hand, the business owner will lose everything. They will suffer the most from the loss of their "child." The business owner is the most loyal to the company and is its biggest risk taker.

Successful business owners understand they must take care of those who have vested an interest, a self interest, in the firm. The market is competitive for employees and financing. Business owners know that. It is in their own best interest to provide for those who work for them and who invest in them. If they do not, those workers and investors would leave in a heart beat, a New York minute even.

Furthermore, these stakeholders would not wait around for the business to go to bankruptcy if they knew it was happening. The business owner, the captain, however, will go down with the ship.

So, to say that everyone has the same stakes, or the business owner loses less, is a falsehood, and undervalues business owners. An owner should enjoy the most benefit from the company should it be a success, just as they would suffer the greatest from its failure. The stakes are not equal nor is the interest.

If not for the ingenuity of business owners and entrepreneurs, there would be no investments to make by lending institutions, there would be no jobs for those employees, there would be no new technology and innovation for our future.

As Ayn Rand might have said, no one owns the "engine" but its inventor, no one slaves over it like its inventor, and no one has rights over it but its inventor.

The purpose of a business is to serve the ingenuity of its owner. The rest is opportunity for others.

Structural Changes in our Economy and our Businesses

Keynote speaker at the recent International Business Broker Association last week in Denver, Jerry Osteryoung, Executive Director of Global Entrepreneurship at FSU, was kind enough to allow this reprint of his report concerning the future economic changes that will be necessary in our society and the way we do business in order to cope with rising fuel prices and the diminishing oil supply.

"The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency." ~Bill Gates

With gasoline hitting $4 a gallon and no end to the increase in sight, it is time to start thinking about the structural changes that we are going to experience in our economy and in our businesses. With the exception of the internet revolution, this is one of the most dramatic changes that has come along in the last 50 years.

A recent report showed that if the current rate of oil consumption in China continues, they will need all of the world's fuel in the next ten years. Additionally, production and refinery capacity is going to further limit the availability of fuel, meaning higher prices as well.

Do I think that fuel prices will ever go down to two or even three dollars a gallon? No, because the demand for this commodity is increasing exponentially. I would not even be surprised to see fuel at five dollars a gallon by year end, especially if the dollar continues to do poorly against other currencies.

Not only is this a very big challenge for our country, but it is also an immense challenge for each and every business. One major change that I think we are going to see as a result of these conditions is more and more shopping on the internet. People are going to opt for this alternative as a way to avoid using gas. Of course, people will still have to shop for items like food; but they will use the internet much more in order to combat higher fuel prices and maintain their standard of living.

What this means is that your business is going to have to step up your web site. An okay web site is not going to cut it. To prosper in tomorrow's economy you must have a great web site that clearly demonstrates your products and services. It must also be easy to navigate and transact business. Users will simply fly by your site if it is not dynamic and relevant to their needs. In light of this, I think it would be very prudent to shift as many advertising dollars as possible to the internet.

A second trend we can expect to see is telecommuting becoming the norm rather than the exception. With high fuel prices and congested roads, businesses will simply not be able to recruit or afford workers that have to commute. Businesses will have to design the workplace so that more of their workers will not have to come into the office everyday. Of course, mass transportation will eventually fill this void, but this is going to take a long time to develop.

Another major change I see is development growing up instead of spreading out. In the past, new development moved away from the city core, but now it will have to come back to the center to provide housing for people that can no longer afford to live in the suburbs.

This will be especially troubling for the many workers who moved further out to get inexpensive land for their houses. The commute was acceptable when fuel costs were low; however, now that paradigm has changed, and these workers are getting caught in an economic squeeze. They are going to be stuck, both unable to live out of town due to fuel costs, and unable to take on the expense of moving.

Another business cost that will warrant examination is transportation for your materials or products. Now is the time to take a look at ways that you can reduce your shipping costs. Start by looking for vendors or resources that are closer to home, thereby reducing your cost of doing business.

Finally, each and every business will have to change the way it thinks about fuel. Businesses will have to limit travel, opting to conduct more meetings using video conferencing technology. Smaller vehicles will have to become the rule rather than the exception. Bottom line: each business will have to redesign itself assuming that fuel hits $7 a gallon. As Jim Moran, the philanthropist who funded JMI, said, "The future belongs to those that plan for it."

Now, there is a solution to this fuel price issue, and the answer is technology. Will this be a quick fix? No, but I believe it will come within the next seven to ten years.

Now is the time to start thinking about how you can offset the increasing fuel costs that will have a direct impact on your business. Do not be satisfied with minor tweaking here and there. The scope of this issue demands a major structural change - a reengineering of each and every business.

About the author:  Jerry Osteryoung is the Jim Moran Professor of Entrepreneurship in the College of Business at Florida State University. He is also the Director of the Entrepreneurship Program at FSU and Executive Director of the Jim Moran Institute of Global Entrepreneurship. He can be reached by e-mail at jerry.osteryoung@gmail.com or by phone at 850-644-3372. All of Dr. Osteryoung's articles can be found in a searchable form at www.cob.fsu.edu/jmi.