Understanding a business’s purpose just became more important. Here’s why.
In a recent Ipsos poll of over 21000 people across 28 countries, 86% of respondents said they want to see the world change to become a fairer and more sustainable place.
Talking about the new normal has become fashionable. Yet, how many businesses can genuinely claim they want a new normal. Why would companies desire a new normal any way – when the old one was suiting them fine. After all nobody was talking about changing the norms in December 2019.
We know life changing events – loss of job, death of a loved one, partner separation – often lead to soul searching. The economic wreck, heaped by the pandemic, has led many businesses to pause and reflect on this life altering event.
This is an opportunity for businesses, of all sizes, to reflect on the reasons they were in business in the first place.
Why do you do what you do (or did before the pandemic).
What is your purpose for existing? Did you have one? If not – how can you create one and adopt a purpose-driven strategy?
We offer a basic structure to think about and incorporate purpose into your own organisation:
Purpose = Strategy = North Star
Purpose, however, defines the reason for your existence and how you decide what to do.
Purpose is distinct from a firm’s mission or vision statement. A mission statement describes how a company does what it does, while its vision statement is an attempt to define where it wants to go.
In defining your company purpose questions such as ‘Is our purpose to become the most profitable technology services company?’ or ‘Is our purpose to become the world’s largest food delivery company?’ are misplaced. The better question instead is to ask yourself ‘Why are we in business?’
Once you are clear about why you are in business it becomes a whole lot easier to define what you will do to achieve that purpose and through what means you intend on getting there.
Virgin Group aspires to change businesses for good. The group attempts to use this statement in running their operating companies and subsidiaries and the way they build their brands.
Unilever’s stated purpose is to make sustainable living common place. There is a clear emphasis on the environment and the potential for creating a negative impact on the climate if it doesn’t recognize the extractive nature of its industry on the climate.
To be clear, a company cannot be a sustainable business if it does not generate margins or positive cash flows. Producing profits is necessary for viability and doesn’t make a company evil. Yet, it’s purpose cannot be generating margins.
Let your business purpose dictate how you allocate capital
Strategy is nothing more than a set of conscious choices you make as an organisation. You decide the customers whom you want to pursue, you design products that could meet the unmet needs of these customers and then you invest in making and selling those products.
Thus, where you allocate capital i.e. invest cash or resources, is a critical decision.
Purpose-driven companies use their stated purpose to decide which project investments to pursue and which to reject if they are divergent to their purpose, even if this means that they will earn lower returns on their invested capital by not pursuing those opportunities.
Unilever would want to avoid investing in sectors or ideas that could negatively impact the environment or source raw materials that could erode sustainability even if it is less expensive to do so.
This makes having your employees, shareholders, partners and suppliers buy into your purpose a vital determinant of success.
Recruit and reward to reinforce purpose
As we said above, a purpose is a shared belief. It does not help if the purpose is only in the head of the CEO or only a handful of senior managers understand it.
It is critical that the entire organization and its stakeholders subscribe to it. Recruiting new employees who are able to imbibe the purpose is arguably the most critical. Recruit employees who would actively engage with your purpose. Basic introduction to the company’s purpose, as part of onboarding the employee, can create an immediate impression of the importance the firm places on its purpose. Many companies go a step further by requiring employees to demonstrate their commitment to purpose as part of the performance evaluation process as well as tying elements of compensation (say a % of bonus payments) to living the company’s purpose.
A purpose is not just for global firms with large balance sheets, or only for public listed firms to put on their annual reports. Firms of all sizes and ownership structures can and should define their purpose and then adopt it wholeheartedly.
Stick to your purpose and your employees and customers will appreciate it.