Additional Readings Unit 1 Essay

Additional Readings
Contents
Reading 1.1: The Purpose of the Firm, A. Campbell.
Reading 1.2: Why do Companies Over-Diversify? A. Campbell.
Reading 1.3: Manufacturing Strategy Part 1 - Setting the Strategy, Tangram
Technology

Manufacturing Strategy: Unit 1 - The Nature and Role of Manufacturing Strategy
November 2000

1-1

Additional Reading 1

The Purpose of the Firm, A. Campbell.

UNSW, Copied under Part VB of the Copyright Act 1968, as amended, on December 1993.

Manufacturing Strategy: Unit 1 - The Nature and Role of Manufacturing Strategy
November 2000

1-2

Brief Case:
The Purpose of the Firm
Andrew Campbell

In recent weeks I have been involved in a number of discussions about the purpose of business. These nearly always lead to a disagreement between people who argue that the purpose of the firm is to create value for shareholders (i.e. to make money) and people who argue something else. The second group of people consist of a broad church. Some have no clear view about what the purpose of the firm should be, but they are convinced that making money should not be the ultimate purpose.
Some have strong views in favour of a variety of other purposes—serving customers, longterm survival, to be the best in the industry etc.
Some believe that the focus on shareholders is appropriate so long as it includes a recognition that the company must behave responsibly towards other groups and Stakeholders. These discussions normally generate more heat than light and most managers feel the discussions have very little to do with the running of a successful commercial organization. So why is it worth devoting a Brief Case article to the topic? First, I believe that a clear understanding of the purpose of the firm in our society will help to improve management thinking on a number of issues ranging from corporate governance to corporate objectives.
Second, the current emphasis on creating value for shareholders is causing managers in many companies to run their businesses in a way that makes them unwitting hypocrites. Managers proclaim shareholder wealth as their objective, and then take some decisions that can clearly be shown to have a negative impact on shareholder wealth. Third, there is a deep suspicion of big business both among employees and in society at large.
This saps employee commitment, undermines management self-confidence and leads many school leavers and graduates to look for careers outside the commercial sector.

If we could develop a better understanding of the role of business in society and of what is a legitimate purpose for the firm, I believe we could help eliminate a cause for discord and confusion in industry and commerce.
I find it useful to start an analysis of purpose by thinking about small business, if we ask the purpose question of a three person consulting business, can we get an unequivocal answer?
Let us assume that this consulting business consists of two principals and an administrative assistant, and the focus of their work is giving companies advice on business strategy. What is a legitimate purpose for this business? Is it to create value for shareholders? Is it long term survival? Is it to maximize the value received by clients? Is it to provide interesting and well paid work for the two principals? Is it to be the best business strategy consulting team in
Britain? The answer is that the purpose of the three person consulting business depends on the desires and aspirations of the two principals, influenced no doubt by the administrative assistant. It is likely to be a complex purpose that reflects the complex needs of the people.
The principals may have a requirement that the business generates a certain amount of wealth for them. They will also want to have stimulating work to do. They may want the business to survive for at least a certain period, but they may have no desire for it to exist beyond their retirement.
The important point from this example is that the choice of the business's

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