The usual understanding is that the purpose of a company is to maximize shareholder value. That, so to speak, puts the cart before the horse. The purpose of a company, as Peter Drucker put it, is to create and keep a customer. And if you focus on the former without focusing on the latter first, you will end up doing neither.
That last part is the claim worth defending. Not that customer value is nobler than shareholder return, or that one should be traded for the other. The claim is that a company which pursues the return directly, without first securing the reason anyone buys, tends to get neither — and that the failure is structural rather than a matter of executive character.
Why It Fails Both
The trade looks reasonable in the moment it is made. Margin needs to improve this quarter. Something has to give. So the price goes up a little, or the service levels come down a little, or the team that makes the product better gets smaller, or the thing customers liked but did not strictly require gets removed.
Each decision is defensible in isolation. Margin does improve. The numbers confirm the judgment.
Then volume softens — not immediately, and not in a way that points back to the decision. So margin needs protecting again, and the same logic applies to a slightly thinner version of the business. Each round removes a bit more of the reason someone chose you, and each round is justified by the results of the previous one.
What makes this so durable is that the returns appear first and the damage appears later, usually after the people who made the trade have moved on. Nobody experiences cause and effect within the same tenure.
Boeing is the case everyone now reaches for — two fatal crashes, grounded fleets — and it needs no retelling. The interval is the part worth noting: important changes in the company's orientation began in the late nineties, while the consequences became visible two decades later. That gap is not a weakness in the argument. It is the mechanism that makes this kind of failure so hard to see. If harvesting the source produced visible damage within two quarters, no competent executive would do it.
And the shareholders did not win that trade either. They got grounded fleets, canceled orders, and a market position handed to a competitor. The profit-first orientation did not purchase superior returns at the cost of customer value. It destroyed both, in that order.
Young companies are mostly immune to this, not because founders are wiser but because they have nothing to harvest. You cannot protect a margin you do not have. Success is what makes the mistake possible.
The Two Things That Make Money
Drucker's follow-on claim is the uncomfortable one. Because the purpose is to create a customer, he wrote, a business has two basic functions: innovation and marketing. Marketing and innovation produce results. All the rest are costs.
One clarification, because the word has drifted. Drucker did not mean advertising. He meant understanding the customer so well that the product fits what they actually need — closer to what we would now call product and market strategy than to a promotional budget.
Read carelessly, "all the rest are costs" sounds like permission to cut. Read properly it is a warning. Everything that is not innovation or marketing is overhead by this definition — finance, legal, operations, administration, the executive team itself. Drucker is not saying those are unnecessary. He is saying they do not create customers, and that you had better understand the distinction before you start cutting, because the cost side contains the only two things that make money.
Most organizations do not know which is which, for a reason that is entirely mundane: the cost side is easier to measure. R&D is a line item. The customer you fail to create nine years from now is not.
I taught this to founders for years in a slightly different form, and my version works better as a test: sales, and things that drive future sales. Everything else is cost.
That catches what Drucker's taxonomy handles awkwardly. The manufacturing quality that produces repeat purchase is not innovation and not marketing, but it plainly drives future sales. So does the service experience that makes someone renew, and the engineer who answers a hard customer question in an hour instead of a week. None of those fit either category cleanly. All of them belong on the protected side of the line. The test does not tell you what to cut. It tells you which question to ask before you cut, which is the question that usually does not get asked.
What You Are Protecting
If the point is to create and keep a customer, the thing worth protecting is whatever causes someone to choose you — and to keep choosing you when something cheaper or newer shows up.
Stripped of its apparatus, that is what strategy is: the pursuit of valuable differentiation. Something a customer genuinely values, that distinguishes you from the alternatives, and that a competitor cannot easily replicate or neutralize.
All three conditions are load-bearing, and each fails differently.
Differentiation nobody values is the engineering-led failure. You have built something genuinely distinctive and genuinely hard to copy, and no one is willing to pay for it. The capability is real. The market for it is not.
Value that everyone offers is the commodity trap, and it is the one that arrives slowly. You are good at the thing. You have always been good at the thing. It stopped being a reason to choose you around the time your competitors got good at it too, and nobody inside the company noticed, because internally it is still a point of pride.
Differentiation that is easily replicated is the one that fools people most, because it looks exactly like success until it does not. You had a real advantage. It worked. Then someone copied it in eighteen months and you found out that what you had was a lead rather than a position.
That third condition is where Drucker's second verb does its work. Creating a customer requires only that you are better once. Keeping one requires that the reason persists — that it survives contact with competitors who have seen what you did and would like to do it too.
And it is the third condition that profit-first cutting erodes first, because the things that are hard to replicate are, almost by definition, the expensive ones. Depth of expertise. Accumulated process knowledge. A service standard that costs more than the industry norm. Those are the line items that look most attractive in a cost review and are hardest to rebuild once gone.
Where Porter Gets It Wrong
The standard framework here is Porter's, which treats cost leadership and differentiation as distinct generic strategies and warns against trying to pursue both. That taxonomy has governed strategy teaching for over four decades.
The division is a mistake, specifically in that it misclassifies low price.
Customers do not experience "cost leadership" and "differentiation" as different kinds of thing. They experience a reason to choose. Price is a reason. What makes a low price strategic is not that it is low — anyone can lower a price — but that it is low in a way a competitor cannot match without dismantling something. A cost structure. A logistics system. A membership model. A supply relationship built over thirty years.
Which is precisely the condition differentiation has always had to satisfy. Low price is not the alternative to differentiation. It is a form of it, and it fails for the same reason every other form fails: when it turns out to be replicable.
Treating them as opposites obscures the question that actually matters. Not which generic strategy are we running, but what do we offer that a customer would miss, and that someone else cannot easily provide.
Most companies have not asked that in a form that permits an uncomfortable answer.
The Test
A company's stated priorities are in the strategy deck. Its actual priorities are visible in what happens when results need to improve.
When margin has to come up this quarter, what moves first? If the answer is reliably price increases, headcount, or service levels, then whatever the deck says, profit is the objective and customer value is the adjustment variable. The order has been reversed in practice, and it will keep being reversed, because each individual instance is defensible and the cost does not show up for years.
The companies that hold the line are not more virtuous. They have usually just worked out which of their costs are actually the business.
I used to put this to students less diplomatically: chase the return without first securing the reason anyone buys, and you have the whole thing backwards. I have not found a reason to soften it since.
If you are not certain which of your costs are the business, that uncertainty is worth resolving before the next margin conversation rather than during it.
Better Thinking. Better Decisions. Better Outcomes.