The business case for purpose
“Purpose-driven companies witness higher market share gains and grow three times faster on average than their competitors, all while achieving higher workforce and customer satisfaction.”
When defined literally as the purpose of the business, not an add-on to the business, the business case is simple: it is the basis on which the company will remain valuable over the long term. Against the backdrop of finite industry lifecycles that sees companies plateau and lose profitability as they fight for market share, purpose reframes the role for the firm in a broader playing field of its own, based on an ecosystem of related needs and interests.
Inspiring the firm to think imaginatively in serving a broader set of needs and interests inherently leads to impact, with the reward of profitable growth. When Mars Petcare defined its purpose – a better world for pets – this propelled its expansion beyond the pet-food industry into the broader playing field of pet health, with a radical shift from products to services, to become the largest and fastest-growing division of parent Mars Inc.
Sustainable point of value creation
Leaders that do the homework to define and implement a company purpose in these terms, equip the firm with the clarity of a sustainable point of value creation. It is little surprise therefore that the business case for purpose is so widely documented and meets with such a high level of consensus, with evidence from executives, academics and leading management consultancies linking purpose to over-performance on a wide range of business outcomes and activities.
The effect of purpose on company performance is best seen through four key lenses: Growth, Customers, Culture and Transformation.
1. Growth
Figure 1. Revenue change over 3 years
Purpose-driven companies, meaning those that treat purpose as a core driver of strategy and decision-making, enjoy an advantage in terms of top-line growth. Results of a multi-sector survey of 474 executives conducted by Harvard Business Review show that purpose-driven firms are significantly more likely to see double-digit growth over a 3-year period. By contrast purposeless firms are almost 3 times as likely as purpose-driven firms to experience flat or declining revenue (Figure 1). Deloitte concurred with this conclusion, based on the findings of an independent 10-year study of the performance of 50 companies, reporting that “Purpose-driven companies witness higher market share gains and grow three times faster on average than their competitors, all while achieving higher workforce and customer satisfaction.”
We see three interrelated reasons for this growth advantage. Firstly, customers are statistically more likely to buy from a purposeful company, recommend it to others, and even forgive its mistakes, all else being equal (see below). Secondly, compounding the first point, purpose-driven firms have operationalised their purpose to the extent that customers experience superior value in the product or service, compared to that offered by competitors; thus making the purpose tangible. The third reason is consistency. Since purpose-driven firms have adopted a purpose grounded in a societal problem, which exists on a far longer timescale than market-based opportunities which have a lifecycle, they enjoy continuing strategic focus that allows them to progress effectively along the experience curve, accumulating both assets and reputation associated with serving the particular purpose.
2. Customers
Figure 2. Likelihood of consumer behaviour towards company
80% of executives agree that purpose helps increase customer loyalty (Harvard Business Review). This view is validated by Forbes magazine based on a survey of 8,000 consumers, which concluded that consumers are 4 times more likely to trust, purchase from, and recommend purpose-driven companies. In fact the survey found that consumers are even more likely (6x) to defend a purpose-driven company in a “challenging moment”, reinforcing the notion that purpose may also buy forgiveness for a company’s mistakes (Figure 2).
What about B2B companies? In fact it’s not only consumer businesses that derive a serious customer advantage from purpose. Although B2B buying has traditionally been viewed as a purely rational activity, it is increasingly understood that all human decisions result from a complex combination of logic, emotion, intuition and post-rationalisation. Nevertheless, it may come as an uncomfortable revelation that personal value not only plays a greater role in B2B buying than business value does, it has twice the level of influence on decisions. This was the finding of a quantitative survey of 3,000 buyers across 7 categories conducted by Google and the Corporate Executive Board (Figure 3).
Figure 3. Influence on B2B customer behaviour
Business value (the combination of functional benefits and business outcomes) drives consideration. However, since it is prerequisite to consideration (a table-stake), it does not differentiate the brands considered. For this reason, business value alone leads to the typical “top three” problem in which the buyer shortlists three best-known providers, resulting in inevitable price competition. On the other hand, personal value (emotional appeals in areas such as pride, happiness and a sense of purpose) is not a table-stake and is powerfully influential. The authors used Jonathan Haidt’s analogy with the Elephant and the Rider: the buyer’s rational side (the Rider, seeing the path ahead), and the buyer’s emotional side (the Elephant, powering the journey). This balance of influence in B2B buying is perhaps easier to understand in light of the personal risks involved for the buyer: risks of wasting time, losing credibility, and ultimately losing their job. These factors were found to make B2B purchasing even more personal than consumer purchasing (Google/Corporate Executive Board).
3. Culture
“The highest-performing employees are three times more likely to work for a company with a strong sense of purpose.”
The 2018 Global Talent Trends study by Mercer revealed that “the highest-performing employees are three times more likely to work for a company with a strong sense of purpose”. Were this not sufficiently compelling, purpose-driven culture is often seen as a win-win for employers: simultaneously strengthening the talent base and clarifying the strategic direction.
Harvard Business Review reported that 89% of executives say a strong sense of purpose drives employee satisfaction, while Gartner reported that “employees who believe that their company has a higher purpose are 27% more likely to stay at their current organization.” The challenge lies in the word believe: fewer than half of employees believe in the purpose of their firm. McKinsey found that only 44% of company purposes are both activated and aligned with motivations of their employees.
Figure 4. Productive output of employees
Justifying the firm’s special cause through hard evidence of its credentials, whilst not easy, tells employees that their organisation is worthy of commitment. Purpose-driven firms appear to harness not only the satisfaction of employees, nor merely their engagement, but their inspiration. If the difference between these three outcomes seems trivial, consider the findings of Bain & Company whose 2015 study showed that inspired employees – those classified as deriving inspiration and meaning from their company’s purpose – are more than twice as productive as satisfied ones. This may help explain the stronger rate of value creation associated with purpose-driven companies.
The process of developing an evidence-based purpose provides an opportunity for the board to define and codify the desired culture in communicable form. Values remain a vital way to relate culture to purpose, but in a purpose-driven company the beliefs and behaviours supporting each value can be recognised by employees. Values without a purpose, on the other hand, appear not worth the paper they’re written on. A large scale multi-industry quantitative study of US firms in 2020 by MIT Sloan revealed that there was “no correlation between official values and corporate culture”.
Since evidence-based purpose is grounded in the strategic opportunity for the firm, it represents more than a basis of camaraderie – it makes clear the direction for the organization. Researchers at Harvard Business School differentiated Purpose-Cameraderie firms from Purpose-Clarity firms, in which purpose provides a high degree of management clarity, finding that “Purpose-Clarity firms earns significant positive risk-adjusted stock returns” of up to 7.6% annually.
4. Transformation
Figure 5. Company success with innovation and transformation efforts
In today’s corporate environment transformation is often seen as a higher priority than purpose. Yet a multi-sector survey of 474 executives found that purpose-driven firms are significantly more successful in innovation and transformation efforts (figure 5). In major transformation efforts – e.g. changes in business model and/or operations – executives from purpose-driven firms were more than twice as likely to report success compared with all other firms (Harvard Business Review). The close association between successful purpose development and management clarity would be a logical explanation for this. Indeed it’s surely impossible to rationalise the business case for a transformation effort without knowing the destination. As EY says, purpose streamlines decisions. At one level, purpose provides the business case and direction for particular transformation efforts. At another level, purpose development is itself the over-arching transformation of the company – moving it into a broader, more strategic playing field that it can own, with a higher value core proposition.
“It’s an inside-out strategy rather than outside-in: you don’t just look at where the opportunities are and where you could make a lot of money as a way to decide where you ought to be. You decide where you want to be strategically, based on what you want to do.”
Purposecraft provides advice, consulting and training in strategic company purpose development.