Sunday, August 31, 2014

Satisfying the Needs of People by Allen Laudenslager & Bryan Neva (2005)

Satisfying the Needs of People
by Allen Laudenslager & Bryan Neva (circa 2005)

Around 1914, Henry Ford announced that he’d decided to pay his workers the unheard of sum of $5 for an eight-hour workday (which replaced the going wage of $2.34 for a nine-hour workday).  The business community in general thought that wage was unsupportable and that he would soon have to reduce wages or risk closing shop.

It is not the employer who pays the wages.  Employers only handle the money.  It is the customer who pays the wages. — Henry Ford

Ford knew that paying his workers well would have several benefits.  First, by reducing worker turnover, employees fought to stay in the best paying job in the area.  Ford saved money by not having to train new workers.  

Second, more experienced workers were more productive than less experienced workers.  Simple things like floor sweepers picking up tools and small parts that were dropped rather than just throwing them away created their own savings.  

Third, Ford believed that his own workers should be his best customers, and the higher wage meant that his workers purchased more goods and services in their communities and subsequently the community had more money to spend with Ford.

Ford essentially primed the economic pump; whereas, greed and shortsightedness by some, trying to satisfy their short term needs at the expense of others, stopped the money from circulating through the economy causing undue hardship and limiting overall economic growth.

In many direct and indirect ways all the stakeholders of a business enterprise—owners (entrepreneurs and investors), managers, employees, customers, creditors, suppliers, distributors, governments, communities, societies, and the environment—derive benefits from businesses.  Entrepreneurs like Ford conceive an idea for a business and investors provide the capital funding to start it.  Managers are hired to operate the business enterprise and employees are hired to create and add value to the products or services that meet the needs of a certain group of customers.  Suppliers and creditors provide the business with the raw materials and short-term loans to make the products or provide the services.  Distributors (wholesalers, retailers, or salespeople) actually sell the products or services to customers.  And it’s the customer who buys these products or services in order to meet their own specific needs.  The income generated from the sales of these products or services pays the overhead, taxes, and salaries of the managers and employees, and the net profits help repay the owners (entrepreneurs and investors) for the risks they took starting the business.  The managers and employees must pay income taxes on their salaries, which support their communities, and their earnings help them pay for their needs and wants.

Using their individual talents, many people work together to produce and distribute a product or service that ultimately adds value to everyone’s lives.  The business enterprise satisfies the needs of the owners (entrepreneurs and investors) through the products or services that were created and the profits returned to them to spend or to reinvest in their business.  It satisfies the needs of the managers and employees by providing them and their families with a livelihood.  It satisfies the needs of the suppliers, creditors, and distributors through interest income and sales of their products or services.  And most importantly, it satisfies the needs of the customers who purchased the products or services created by the business.  

Indirectly, the business satisfies the ancillary needs of governments through local, state, and federal taxes.  It satisfies the ancillary needs of communities and societies through employment for their citizens, taxes for the local infrastructure, and goods and services purchased by the business, managers, and employees.  And it satisfies the needs of the environment through the responsible use of our natural resources so that the business itself and future generations can enjoy and prosper from them.

The ultimate purpose of business then must be to satisfy the needs of people!  All the stakeholders who have a vested interest in the success of the business have different needs to meet and a good business enterprise must balance all these competing needs.  A business must also balance its own long-term survival against its responsibility to its stakeholders.  Only by satisfying the greatest number of needs for the greatest number of stakeholders can a business thrive and ultimately survive in the long-term.

A business has to balance all the competing demands of its stakeholders as its long-term goal, but the demand to survive the short-term is the first order of business.  This includes making a profit to ensure future survival.  The second order of business is to plan for long-term survival.  This includes employee development so that workers are trained in newer, more productive methods, and planning for future products and services it can sell to customers.  The third order of business is the development of the community where the business is located.  This includes being good corporate citizens so that its employees and their families have a good place to live and work and the business can continue to produce and sell its product.

At first glance, the idea that a business serves all these stakeholders may seem odd, but we assure you that any business that does not serve customers by filling a need will not survive.  We’ve all heard of businesses that failed miserably because they did not provide a good product or service, over-charged, defrauded, or mistreated their customers or employees.  On the other hand, we’ve also heard of businesses that failed because they were simply unprofitable despite having great products and working environments.  This dichotomy between satisfying people’s needs and profitability is perplexing.

While absolutely necessary, profit is really only one indicator of business success.  It’s a scorecard on how well a business has performed over a small period of time.  Satisfying the needs of stakeholders is also an indicator of business success, but it’s more difficult to measure and manage.  Rather than focusing only on profits, a business should instead focus on satisfying the needs of its stakeholders especially those who add the most value to its business.  Doing this will make the business more profitable in the long-term.

Fostering a business attitude of satisfying the needs of people is a legitimate profit strategy because it helps businesses focus on the stakeholders who add the most value to their companies—customers, employees, suppliers, creditors, and distributors.  If a business satisfies these important stakeholders, it will ultimately be more profitable and successful in the long-term.  And if the business is successful over the long-term, then it will satisfy the needs of its owners, investors, and managers, and society in general will benefit from a thriving business.

Customers, employees, suppliers, creditors and distributors really do add the most value to a business.  Without customers a business wouldn’t have any income; without employees a business couldn’t make products and provide services; without suppliers and creditors a business wouldn’t have the raw materials and money to produce its products and services; and without distributors (wholesalers, retailers, and salespeople), the business couldn’t sell its products and services to its customers.  And ultimately, it’s customers who pay for everything!

On the other hand, the owners, investors, and mangers add the least value to a business.  Without owners or investors a business wouldn’t exist in the first place.  But after the initial investments of time and money, a business no longer needs the owners or investors to function unless they perform management roles.  Managers, more importantly, provide the overall leadership an organization needs to accomplish its goals.  But managers are still overhead in an organization and don’t add as much value as the people doing the day-to-day work of the organization (i.e. employees).  This idea is supported by the fact that companies today are getting rid of many layers of management in favor of empowering their employees.

In summary, we’ve offered further evidence that the ultimate purpose of business is to satisfy the needs of people, and that profit is a natural byproduct of satisfying people’s needs.  And who are the people?  They’re the stakeholders of a business: the entrepreneurs, investors, managers, customers, employees, suppliers, creditors, distributors, governments, communities, societies, and the environment.  To be successful, businesses must balance all the competing needs of their stakeholders. However, a business should focus their energies on satisfying the needs of its principal stakeholders who add the most value to their business: the customers, employees, suppliers, creditors, and distributors. If the business succeeds in satisfying the needs of these principal stakeholders, then the needs of the other important stakeholders will also be satisfied. Understanding how the economic business cycle works and how money flows through our economy is the first step in making the leap to a better way of doing business.

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