In response to pressure from employees, customers, and communities, hundreds of companies have announced a purpose. But upon closer examination, the vast majority of these “purposes” have little to do with the companies’ business strategies. It’s not clear how the purpose manifests in their products or services, in the way that they conduct their operations, or in their strategies for talent acquisition. These companies are missing out. They may have developed a catchy purpose statement that can be featured in their next ad campaign, but they’ve failed to understand that a purpose-led strategy can substantially increase company profitability.
Purpose-led companies can capture value from six sources: customers, employees, investors, communities, governments, and partners.
When companies, as part of their purpose, develop products or services that directly resolve a social or environmental need, they can create new markets and generate additional revenue. For example, BD (Becton Dickinson) developed the disposable syringe to help address needle stick injuries and Intel’s designed its Learning Series family of products to improve the learning experience and classroom outcomes. Companies can also capture indirect value from customers that want to support brands that are trying to achieve a purpose that they believe in. The 2018 Porter Novelli/Cone Purpose Premium Index found that consumers are 33% more likely to try a product or service from a purpose-led company and 50% more likely to switch brands from one they typically buy. Patagonia’s commitment to its purpose and environmental change has consistently led to a direct increase in revenue, even when encouraging customers to consume less. The company’s famous 2011 “Don’t Buy This Jacket” campaign led to a 30% increase in sales; its 2016 pledge to donate Black Friday proceeds to environmental NGOs garnered a record $10 million in sales, more than five times expected sales.
Today’s workforce is looking to find purpose in their work. 70% of millennials say that a company’s commitment to the community and social impact initiatives will influence their decision on where to work. An authentic, societal purpose can increase employee engagement, support talent acquisition and retention, and boost productivity. When Unilever shifted course in 2009 behind a new purpose “to make sustainable living commonplace” and announced its ambitious Sustainable Living Plan, employee engagement rose by over 60%. Employees at purpose-led businesses are up to 3x more productive than the average workforce.
It is important that companies understand that employees can become cynical very quickly if they decide that the company is not living by its purpose (e.g., Volkswagen’s loss of employee trust and declining morale after the company was discovered to have cheated on emissions tests). Companies need to be consistent about pursuing their purpose and must be able to demonstrate that the company is having meaningful impact on people’s lives. Companies that claim to have a purpose but cannot demonstrate meaningful impact will rapidly undermine employee engagement.
The notion that having a societal purpose distracts companies from maximizing shareholder return is changing. In 2018, BlackRock Chairman and CEO Larry Fink’s annual letter to CEOs called on companies to have a purpose that not just delivers profits but makes a “positive contribution to society” or risk losing the support of the world’s largest asset manager. Companies with a carefully developed purpose-led strategy will capture the interest of two kinds of investors: 1) those who can recognize the financial returns that will accrue to the companies that develop solutions to societal problems that affect long-term cash flow and 2) investors who have a special interest in the social or environmental challenge the purpose addresses.
In 2018, twelve leading global banks, including BNP Paribas, defined a new credit facility aligned with Danone’s purpose and commitment to nourish lives and sustain a healthier world through food. This new instrument directly links the interest rates Danone pays to the company’s performance on sustainability and social impact metrics, flipping the traditional investment narrative. Even a small percentage of savings on the loan rate—through verified positive impact—could lead to several million dollars of annual savings for Danone.
Many companies have serious tensions with the communities where they operate. Community members grow frustrated with their protracted struggles with poverty or environmental challenges while they watch the company prosper. These tensions can be costly to the company. On the other hand, when a company partners deeply with a community on delivering its purpose, it can create a different sort of relationship that contributes to a favorable local operating environment and a pipeline of local employees, customers, or partners. Bendigo Bank is a prime example of this. In the late 1990s, Bendigo developed a new business model in rural Australia. As part of its "Profit with Purpose Strategy," the bank lowers its operating costs by having select communities run their own branches as franchisees, leveraging the bank’s infrastructure and expertise. The branches not only provide community members with financial services, but they also reinvest a portion of their revenue into communities to drive long-term growth.
We often talk about the need to align a company’s purpose with the social objectives and goals of its consumers, employees, and local communities. Governments serve these same constituencies. By focusing on shared societal objectives, purpose can help a corporation develop strategic government relationships that reduce costs through favorable regulatory and policy environments. Fibria, a large Brazilian forestry company that recently merged with Suzano, embraced local community development as a part of its company purpose. In 2015, Fibria launched the Public Management Support Program (PAGP), along with the IDB, the BNDES, and the Arapyau Institute to improve living conditions in Tres Lagoas, a municipality of about 100,000 people near Fibria’s newest wood pulp factory. The municipal government was so convinced of the authenticity of Fibria’s commitment to helping develop the city that they regularly consulted with the forestry company on its plans for infrastructure investment. Fibria’s deep relationship with city officials resulted in increased government investment in improving the road system, therein helping to fulfill the company’s economic development purpose and lowering costs for Fibria, which had been paying millions of dollars in extra logistics costs.
In our experience, this is one source of value that companies often overlook. In an increasingly interconnected and complex business environment, companies have more partners than before – ranging from suppliers to NGOs that support a company’s efforts to help solve social problems. As more companies are re-thinking how to engage on societal issues, purpose can help a company reduce costs by increasing supplier engagement and attracting partners with shared interest in common social or environmental challenges. Humana has embedded purpose in its health insurance strategy with its Bold Goals. Humana recognizes that non-profits, whether local or national, are critical partners for its effort to improve health by 20% by the year 2020. Without the efforts of Feeding America, Humana cannot address food insecurity; without March of Dimes, it cannot address pre-term birth rates.
The vast majority of companies that claim to be purpose-led do not go far enough. Many company leaders are not ambitious about company purpose because they believe they will sacrifice profit by pursuing purpose. They let their purpose statements live in the marketing and branding worlds and do not integrate purpose into their business operations, their product development process, or their approaches to talent acquisition and retention.
For those companies out there that claim to be purpose-led, we would like to challenge you: is your company going far enough? Are you capturing value from all six of these sources? If not, then we would suggest that you can go further and be more ambitious, more consistent, and more strategic about integrating your purpose into your strategy and your company operations.
To learn more about how FSG can help you capture more value from your purpose, contact Dane Smith at email@example.com