How Purpose-driven Businesses can be Profitable tooVijay Kulkarni | August 11, 2019
There was a time when it was believed that the sole purpose of a business is to make money. That belief ensured that all actions that businesses take are constrained by the focus on short term profitability and delivering shareholder returns. Businesses that had additional purpose outside profitability were seen with a degree of scepticism and were commonly grouped with NGOs and social enterprises. However, that is changing now as profit with purpose is set to become the norm.
More than ever before, businesses are under pressure to have a meaningful purpose for the business and communicate it with their customers and the society in general. So, what is driving this change? According to 2018 Edelman Trust Barometer, 64 percent of people globally expect CEOs to lead on social change rather than waiting for government directions. Overall trust in business at 52% is higher than the trust in government at 43 percent. Even the younger generation which is set to redefine the consumption story are posing questions to CEOs about the purpose of their business. According to Deloitte’s Global Millennial Survey 2019, only 55 percent of millennials said that business has a positive impact on society, down from 61 percent in 2018.
Why purpose matters and it’s connection with profitability
Consumers are becoming more selective today about the companies that they buy products or services from. They are no longer just buying a product or service, but are buying into a company’s purpose. Accenture Strategy’s 2018 global survey of nearly 30,000 consumers found that 62 percent of customers want companies to take stand on current and broadly relevant issues like sustainability, transparency or fair employment practices. CEOs of large and small companies have started to pay attention now.
We have seen the rise of the B Corporation movement for businesses that balance purpose and profit. Certified B Corporations are legally required to consider the impact of their decisions on their workers, customers, suppliers, community and the environment. While it might seem aspirational to be a socially conscious business, one question that CEOs often have is whether it makes good business sense. According to the popular book “Built to Last”, a group of visionary companies between 1926 and 1990 – those guided by a purpose beyond money – returned six times more to shareholders than profit-driven competitors. There are several reasons why this is true.
Customers are likely to stick with companies and become ambassadors for companies that live by a purpose and communicate it clearly. Companies that are centred around a purpose are also employee friendly which makes it easier for them to attract and retain the best talent. Such companies also tend to give their employees a greater financial stake in the organization which leads to better financial outcomes. Purpose-driven companies are also conscious of their environmental footprint and are the preferred choice of consumers who prefer environmentally friendly products.
Lastly, in a dynamic market as a company grows, they enter new markets, acquire companies, and divests businesses. Purpose and values which are at the core of the company’s identity can serve as a glue for the sub-businesses and guide the organization while exploring new avenues.
What purpose should be and should not be
Most companies in spite of having good intentions get their purpose wrong. They wrongly approach it as a one-time CSR program or philanthropy event supported by a PR campaign with the intention of letting their customers know that they are doing their bit for the society. Like it or not, modern corporations command a lot of resources and the actions they take impact the lives of their customers, employees and their partners on whom they depend. For purpose-driven businesses, society and the people who are associated with the business are not an afterthought but are fundamental to their purpose.
While defining a purpose for the corporation, good corporate leaders seek to balance the broader societal interest with financial logic. The actions that they undertake are grounded in societal interests, irrespective of whether they are directly linked to the core functions of the business. So, instead of launching a pompous CSR program or throw in a few environmentally friendly policies, ask yourself some hard questions. What problem does my organization seeks to solve? How do we make people’s lives better? How can I get my customers and other stakeholders to be part of the purpose?
How is the sustainability of my Company related or contributing to the sustainability of the mankind itself?
Once you have a purpose that is shared by your customers and employees, you can take the relationship from merely transactional to a life-long one. It’s time for CEOs to take a lead on change rather than wait for government intervention – after all purpose means good business.
Hope this article provides an understand why a purpose-driven business is a necessity in today’s world. At Vardaan, we offer Business Responsibility Consultancy services through which you can seek guidance for crafting your organization’s purpose and aligning your organization to this purpose.