Author: Carvalho Capital

What’s the purpose of purpose?

In HBR’s 2015 report, “The Business Case for Purpose,” 80 percent of CEOs declared that purpose is important for their organizations but fewer than 50 percent of those organizations leverage purpose in an impactful way. The problem is that few leaders know how to think about purpose in a clear and focused way or how to help their companies act on it effectively. Some see purpose as an individual concern and talk about in terms of directing people toward a meaningful life or meaningful work. Others view it as an organizational challenge, and link it to  an altruistic or philanthropic agenda (the new Corporate Social Responsibility) or as a way to connect to employees and customers.

A select few organizations, however, are using purpose in a very distinct but deliberate way.

First, they define purpose as their company’s unique ability to have an impact on meaningful challenges faced by customers in their market or within society or even globally. Second, they are using that purpose as a core driver of their business rather than as a merely altruistic exercise.

The articulation of purpose shifts their orientation from current internal concerns and problems to urgent, emerging or future challenges and needs of customers, society, or the world. The pursuit of that purpose helps them drive innovations that improve or disrupt products, services and strategies and either change the game in existing markets or create entirely new markets. As a result, these companies engage more directly and meaningfully with customers, achieve growth that is directed toward filling more significant or meaningful needs, and distinguish themselves from competitors in a way that is difficult to emulate.

A Different Approach to Doing Business

A number of contemporary high-growth tech companies have been very clear and upfront about their organizational purpose. Some, such as Google, Groupon, and Facebook, famously included founder’s letters in their IPO prospectuses to declare their focus on long-term purpose over short-term profit.

Paris-based Danone is at the forefront of this change. It has linked itself to health and nutrition from its founding in 1919 with its mission to achieve “health through food” by encouraging healthier eating habits and sourcing practices. Since 1972, Danone has been deliberately applying that ideal to shape its approach to doing business. Specifically, Danone develops, markets and sells products in collaboration with local stakeholders and in consideration of local needs, cultures, and economic circumstances. This helps Danone advance its purpose to reduce world hunger and improve nutrition and sourcing while also achieving growth and market share.

The approach still plays out decades later. In 2006, Grameen Bank founder, Muhammed Yunus, partnered with Danone to develop a Bangladesh-based enterprise, Grameen Danone, launched to develop nutritious yogurt that local populations could afford. The company leveraged local saleswomen to sell an inexpensive product on commission and build interest before developing local production facilities to meet demand. That strategy aligned purpose (reduce malnutrition and poverty) with practice (a workable business model that helped Danone enter and establish growth in a new market). As a result, Grameen Danone has developed new products and approaches that are hard for other companies to compete with or copy. The pursuit of purpose, in other words, has helped the company develop and scale an appealing product that not only meets the market need for taste and affordability and improves health and nutrition but also boxes out competitors.

Danone isn’t alone on this. Unilever, a company that shuns short-term profitability over long-term growth objectives especially in emerging markets, tries to develop brands linked to distinct social causes. It’s found that those brands grow at twice the speed of brands without a clear purpose. Nestle has organized its business around 39 commitments with social value, in areas such as nutrition (e.g., reduce salt and sugar in products), rural development (e.g., implement responsible sourcing), water (e.g., increase efficient use and sustainability), the environment (e.g., improve packaging), and human rights (e.g., eliminate child labor). Rather than limit themselves to one purpose, this approach aligns them to many different purposes that impact the world. PepsiCo has shaped its growth strategy around its “Performance with Purpose” outlook, and is investing in sustainable agriculture and environmental practices that serve their purpose and profitability goals. Mondelez, reliant on innovation and talent to win market share in a highly competitive environment, has essentially outsourced its innovation function to a network of startups and retailers to develop new consumer offerings, linking those products more closely to customer needs.

Corporations in the Food & Beverage industry may be predisposed to “purpose” because they are vulnerable to consumer and environmental criticism, and closely linked to health, nutrition, and sourcing issues. Yet, their purpose-led innovations and strategies are not being implemented merely to tick the box on a public-relations oriented CSR effort. They are about achieving growth, profitability, and competitive advantage in pursuit of purpose.

To start, they must define the role purpose currently plays in their organization’s strategy and approach to doing business.

Aligning Purpose to Your Strategic Compass

As the examples from the Food & Beverage industry also show, the level of idealism and impact inherent in a particular purpose varies. Some are more global and altruistic (make the world a better place) while others are more concerned with immediate customers and market pressures (delight customers with better products). This does not indicate a defect or flaw in one premise and a virtue or strength in another. Rather, the difference is an indication of where that company is strategically focused.

When my team began researching and reflecting on the relationship between purpose, strategy and innovation as a way of clarifying the purpose of our own unit, we decided to look at a wide range of companies over the past 15 years and how they have operationalized or directed themselves according to their declared or understood purpose.

First, we looked at 8 robust sectors ranging from Food & Beverage to Motor Vehicles and Telecoms, and selected the top three to five representatives of those sectors according to the Fortune Global 500. We analyzed their mission statements and their focus on problems or needs that were linked with their purpose, and we assessed how clearly their business model was aligned with having a sector, societal or global impact.

Then, for comparison, we also looked at a number of small or emergent startups with particularly clear or compelling purpose-orientation.

We quickly discovered a number of nuances.

1. Some purpose-driven companies are operationally focused (better products, diverse talent) while others are focused on broader needs that are more societal (economic inequality or injustice) or global (world hunger or environmental sustainability). We called this span our x-axis.

2. Some purpose–driven companies are focused on current sectors and markets (existing spaces) and others are focused on new or emerging sectors and markets (white spaces). We called this orientation our y-axis.

3. Incumbents and startups are equally capable of capitalizing on purpose, though they may be playing in different quadrants.

Next, we ranked each company’s “purpose-business model” on a scale from 1 to 10, depending on whether a particular company has a purpose that is largely operationally focused (1) or largely globally focused (10). We similarly scored these companies against their innovation focus to compare their level of attention to existing spaces over white spaces.

Finally, we plotted the results onto a matrix.

While this analysis was largely subjective and interpretative, it did allow us to see these companies in interesting and insightful ways with some surprises.

1. Compete = Operational Focus + Existing Space

These companies are in intense traditional competition in crowded markets. Most of the organizations we found in this quadrant were large and established with high market capitalization. A sense of purpose gave them some but not a lot of clarity and distinction between competitors and in the eyes of customers, but mostly led to innovations tied to internal performance levels and incremental improvements in products. For example, PepsiCo focuses on procuring talent that is diverse and ethical and using sourcing practices that are sustainable and efficient, and it leverages that to improve its competitiveness.

2. Hyper-Growth = Operational Focus + White Space

These companies are trying to outpace competitors by expanding the narrow definition of a traditional market to satisfy unmet needs or pain points often through new technology. They grow explosively by bringing those innovations to scale for an established market of consumers. Netflix famously came to dominate the home video market by introducing DVD delivery by mail and later through streaming services in line with its purpose to provide entertainment anytime and anywhere. We found that most but not all these companies were startups or recent ventures.

3. Redefine = Global Focus + Existing Space

These companies broaden their purpose beyond traditional operational concerns to more global concerns, yet they compete in traditional markets. They try to make a difference in that area of global concern by leveraging their business model. So, for example, Tom’s Shoes tries to alleviate the problem of shoelessness in the developing world through a business model in which each pair of shoes that is purchased means another pair of shoes is gifted. In a crowded market, this gives Tom’s Shoes distinct appeal for consumers who want to do more to help the world with their money. In a sense, those customers engage with Tom’s Shoes to help solve a global problem. The success of Tom’s Shoes as a traditional company fuels that capability, redefines market expectations, and distinguishes them from competitors. This group included a mix of new and established businesses.

4. Disrupt = Global Focus + White Space

These companies are focused on global needs in areas that are not being served by businesses or with technologies and approaches that are not being applied to those problems. They are disruptive in the sense that they are driving innovations that haven’t been seen before while also bringing benefits beyond the boundaries of their sectors or markets. We found a mix of startups and established companies, though the established companies had internal startup engines driving innovations. Success for these companies means disruptive growth that also creates improvements in global problems.

Older or newer companies, irrespective of size or sector, can be found in any quadrant, though there are some tendencies and clusters. Traditional established companies, for example tend to innovate on operationally focused purposes within their existing markets to beat competitors; while it’s easier for startups to be idealistic while trying to win in new markets.

Our initial conclusion was that it is easier and better for a company in one quadrant to define and align its business model with a purpose that suits that quadrant. So, for example, GM or AT&T are beholden to shareholders and customers with established expectations, and it would create misalignment and confusion to suddenly adopt a purpose that was focused on alleviating global problems either in existing or new markets. Similarly, a startup with an operationally-focused purpose would face strong headwinds in an established market but have more potential for competitive advantage in a new market or by aligning itself with a more societally or globally appealing purpose.

However, as we reflected on the potential for purpose-driven innovations to either drive growth or improve competitiveness, we quickly saw an advantage for established companies to move up and to the right on the matrix.

We also soon saw examples of companies that were innovating in exactly this way. IBM distinguishes itself as a technological solutions provider by leveraging a focus on global problems – smarter planet, smarter cities, smarter healthcare. Nestle and Unilever have done the same.

In the past year, the big auto manufacturers, Toyota, Volkswagen, and General Motors have partnered with Uber, Gett and Lyft respectively, as a way of moving into white space markets while also improving their capacity to develop self-driving technology that reduces accidents and improves efficiency.

Where does your company currently exist, and how can you move further up or right by focusing on purpose-driven innovation?

Reverse-Engineering Purpose

Purpose can seem so intangible or idealistic in nature that many may find it difficult to imagine how they can leverage purpose to actually innovate and solve business challenges. However, we’ve seen models for doing so that provide a clear path to follow.

(business, technological, market) that stand in the way, while leveraging innovative solutions and business approaches to overcome them. In this way, purpose and innovation becomes tightly woven with strategy and business model.

Muhammed Yunus, mentioned in the Grameen Danone example, was a banker who wanted to alleviate poverty in Bangladesh (a purpose with global need). Yunus observed the impact that small loans could have on helping launch and support small businesses. By offering micro-loans to female entrepreneurs specifically, Yunus’ Grameen Bank hit multiple objectives: it funded new business growth, alleviated family poverty, and saw a return on its investment.

Elon Musk is widely seen as a visionary, but he’s also a great example of an innovator who is purpose-driven. Consider how deliberately he focused both Tesla and SpaceX on a clear purpose and how systematically he has worked backward to overcome barriers and challenges with business solutions and innovations. Tesla, for example, is the outcome not the initiator for solving an overwhelming global problem – climate change. Musk recognized that climate change was driven primarily by CO2 levels in the atmosphere. The dominant culprit was fossil fuels. The answer is to switch to solar power. But how do you affect that sort of massive change in global power consumption?

The most significant user of fossil fuels is petroleum-powered vehicles. Musk’s approach was to apply business thinking and solutions to break the problem down into manageable challenges and solve each one in turn.

• Purpose (global) – to reduce CO2 emission levels and help save the planet
• How – by (replacing) transitioning energy use from fossil fuels to solar power
• Through – increasing use of electric vehicles and making it easier to use solar power in homes

• Obstacle – widespread reliance on fossil-fuel powered automobiles
• Solution – build high-performance electric vehicle

• Obstacle – current battery performance levels poor
• Solution – bring in the best engineers to substantially build a better battery

• Obstacle – customers don’t see electric vehicles as appealing
• Solution – focus on speed, style, and brand to increase high-end demand

• Obstacle – to scale and achieve mass consumption, lower cost models are required
• Solution – build successively cheaper versions and cut out middle man (dealers) to reduce costs

• Obstacle – need competition to spur demand for electric vehicles and associated services. Need open platform to scale
• Solution – release all patents for electric-vehicle technology

• Obstacle – need to stimulate broad demand for solar power
• Solution – build battery pack for home use to allow solar power customers to store and efficiently use that energy

Musk pressed on through many obstacles and maintained focus on the fundamental problem because of the importance of the purpose in his sights. If he succeeds, he will have changed the world and achieved a level of significance comparable to Thomas Edison, Henry Ford and John D. Rockefeller combined.

Purpose is the New Leadership

Deciding on a purpose and striving through barriers and business challenges to achieve it is not enough. It takes a special kind of leader and an aligned organization to develop that vision, organize effectively, create innovative solutions, and attract the necessary backing and talent. It requires a new leadership.

Throughout the past 100 years, leadership has evolved to meet the business needs of the time. In the early manufacturing period, there was a need for massive efficiencies (think Kaizen or Lean). In the Mad Men era, there was a war for differentiation through mass marketing (remember Coca Cola or Campbell’s Soup). From the ‘70s through ‘80s the frequency of crisis and confusion led to the paradigm of the competent and confident persona (Jack Welch). This ideal changed again in the mid-1990s with the emergence of flattened hierarchies, entrepreneurial innovation, and the focus on scale over profit. Our very ideals of leadership, in other words, have evolved considerably over time.

Today, when trust in big corporations, the establishment, and institutions is limited, employees and customers are looking for meaning and purpose from leaders. In the Internet century, as Eric Schmidt calls it, we no longer require leaders to have more competence or experience than anyone else

 Young or inexperienced leaders with passion and vision can gain followers (as well as talent and capital) even more easily than those who come from the constrained status quo.

 

Since skills and knowledge can be outsourced cheaply, what’s left for leaders to provide? Excitement and enthusiasm, the spark of the new and the impactful, and a sense of meaning and direction… i.e., purpose.

 

Leaders today must be driven by their own purpose and the purpose of their organizations to truly motivate and align their people and customers around the needs of the world.

Since skills and knowledge can be outsourced cheaply, what’s left for leaders to provide? Excitement and enthusiasm, the spark of the new and the impactful, and a sense of meaning and direction… i.e., purpose.

 

Leaders today must be driven by their own purpose and the purpose of their organizations to truly motivate and align their people and customers around the needs of the world.

They are in business for a bigger reason than business

, and this excites and motivates others. In an economic climate under constant siege from competitors, new technology and changing customer expectations, there is no better way to steer straight to a destination and arrive first.

 

This trend is not going away. Millennial employees are more motivated by work within organizations that are purpose-driven and innovative, rather than hierarchical, status-quo and purely profit driven. Similarly, millennial customers are more interested in buying products and services from companies that have values aligned to their own, or do some good in the world.

 

Finally, some may argue that there are not that many purposes of magnitude to pursue for all companies to adopt one. Not true. As the companies discussed in this article indicate, there are a wide range and limitless number of purposes that can be leveraged.

 

Fortunately (or unfortunately) there are countless societal or world-saving problems out there for companies to drive their innovation and growth to solve.