Friday, August 10, 2012

Personal Views and Asides from Bob ... The Purpose of Business Isn't to Create Jobs


There are lots of myths and totally false allegations about "the bad guys of business" flying back and forth this election season. And about jobs and who creates them as well.

One particularly absurd allegation, of which there are many, that really got my attention this week is the assertion that Bain Capital and Mitt Romney hired and then 'guaranteed' a lifetime job with health benefits to an employee named Joe Soptic. Years later Bain closed the struggling and unprofitable Kansas City factory where Soptic worked, and the new Democratic campaign ad claims that Romney  somehow was the cause of the death of Soptic's wife, Ilyona.

Although the story is total and complete crapola all the way, it does raise a most interesting question about how much We the People know about business, what it does and why it exists. Otherwise why would the Democrats deal in such absurdity during an important presidential election campaign year?

So why do businesses exist and what's their purpose? Are they good for anything? Or is capitalism just another one among the many evils perpetrated by the greedy fat cat crowd on unsuspecting and hard working innocents like the "middle class" Soptics?

Here's my take.

The Purpose of Any Business Isn't to Create Jobs; It's to Get and Keep Customers

Accordingly, Let's review why businesses exist and what it is they try to do, as well as what happens as a result of their successful or unsuccessful efforts.

The purpose of business isn't to create jobs.

The real purpose of business is to get and keep customers.

The profits of a business are the cost of staying in business.

Investors provide capital or funds to the business in an effort to protect and enhance their money's purchasing power through investment returns which exceed the cost of their invested capital.

Entrepreneurs or business leaders and managers run the business in an effort to maximize profitable  sales to customers while minimizing costs, thereby generating acceptable profits for their investors so they'll keep their money invested in the business and maybe even invest more for the further growth of the company.

Now here's the jobs kicker. If the business is successful, it will need to employ lots of people. The more customers the business gets and keeps, the more employees it requires to serve those customers.

In addition to hiring lots of people, successful businesses also buy lots of raw materials, parts, services, and other necessary things from their suppliers, who in turn hire more of their own employees. These successful businesses also pay taxes and provide countless other direct and indirect economic benefits to the local communities in which they operate as well.

In sum, the five constituencies of a successful business are customers, owners, employees, suppliers and communities. They all win when the individual business wins.

An unsuccessful business, however, either doesn't grow or maintain its customer base sufficiently, and this often impacts its per customer cost quite negatively and hence makes the business unprofitable. As a result, investors lose their money invested and employees lose their jobs, as do employees of their many suppliers. Of course, the community at large is harmed, too. This entire chain of events causes the business to cease to operate.

Productivity and Serving People

Continuous productivity improvements are essential to the financial well being of any successful business. When a company offers its customers better products and services at lower costs, its customers, employees, owners, suppliers and communities all benefit. Only its competitors suffer.

Finally, organizations exist to serve people. Thus, the way people best serve organizations is by serving other people. Of the people served by any business, customers are of the highest priority. If they are happy, everybody has a chance to be happy.

Bain Capital, GST Steel, and the Joe and Ilyona Soptic Story

Back to the ludicrous claim that Bain and Mitt Romney were responsible for the death of Ilyona Soptic in Kansas City. Bain invested in a sick and unprofitable Kansas City based steel business in 1993 with the hope of turning it around, making it profitable and growing its customer base and restoring profitability. After several years, it failed to make the business successful and closed its doors in 2003. Mrs. Soptic, who never worked at the plant and never was covered by the plant's health insurance, died in 2006.

When the plant closed and entered bankruptcy, Mr. Soptic and other employees lost their jobs and investors lost their money. Suppliers lost their business, Kansas City lost an employer and customers took their business elsewhere. That's what happens in free markets. Investors lose their investments and employees need to find other employment. Customers rule.

Now what's so hard to understand about that?

Summing up ... Is The Knowledge of We the People Lacking in Why Businesses Exist and What They Do?

But here's the biggest question I have about all this --- Do Americans not understand these simple facts of business life?  Evidently, the Obama campaign thinks not. For a whole host of reasons, I sure hope they're wrong about that.

If not from individuals and successful businesses, where does the money originate that government spends? Who guarantees the unemployment benefits and pays for the health care and other taxpayer, aka government, benefits that the Soptics of the world receive? Who pays for the schools, builds the roads, funds our national defense and hires our public servants?

And here's the answer, short and simple; employed individuals, successful private businesses, entrepreneurs and investors.

Finally ...

With respect to successful and unsuccessful businesses, there are fundamentally different consequences for a company's (1) customers, (2) owners, (3) employees, (4) suppliers and (5) communities.

One has lots of funds to invest and with which to operate. It continually acquires more money for expansion and thus is able to both maintain and expand its employee base as it serves an ever larger base of customers.

The other closes its doors.

Guess which is which.

Having said all that, now I feel better.

Thanks for listening. Bob.

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