What is “a business?” What is it really? What’s it actually doing? Tucked away in the appendix of Tyler Cowen’s book, Big Business: A Love Letter To An American Anti-Hero is an enlightening reflection on how he defines the word, which we can apply towards how we think about our own businesses.
The standard concept of business stems from Ronald Coase, who defined businesses (extreme paraphrasing warning) as reducers of transaction costs. Say you want a nice glass of wine with dinner. Consider the cost of plowing the field, planting the grapes, harvesting, fermenting, bottling, etc. as it compares to stopping off at the local liquor store for a bottle. Businesses consolidate all of that time, effort, and expertise to make our lives better.
Cowen thinks Coase’s definition is limiting. Not because it doesn’t hold (most of the time it’s fine), but because sometimes businesses don’t reduce transaction costs in the way we expect them to. Just because a firm may do something better/faster/smarter than you, doesn’t mean another firm can’t do it better/faster/smarter than them. Bureaucracy is real, and to all of the old policies in corporate America that inflict more pain than they reduce (ex. faxes, extended hold times, etc.) if we only considered the costs they save, we’d ignore their impact on consumers and preferences.
Cowen says a better definition of business is “a carrier of reputation.” Reputation is social. Reputation has to be earned and then kept up. Reputation requires more than just reducing transaction costs behind the scenes, it requires building and maintaining a story. When we see business in terms of reputation, we think about how the highest level brand/executive connects all the way down to the lowest level product/employee with their customers. Customers don’t always pick the cheapest option, because of reputation. Customers don’t always switch to the new-new thing because of reputation. Transaction costs are lower, but they don’t have to be lowest when there’s a good story explaining why.
In order to build a successful business, we also need to be thinking in terms of reputation. Yes – we will still need to reduce the costs and hassles of what a person would have to do on their own without us, but we also need to pay at least as much attention to the reputation our brand, products, and interactions are creating within our client’s minds and hearts. It is not enough to just make things simpler, we also have to make things resonate.