5 Steps towards a Purpose-led Strategy
21/02/2022
What is the purpose of your corporate strategy and how can it be used to transform the company and grow the business? Having a purpose-led strategy can be a true business driver and can combine doing well in financial performance terms with doing good and creating social value. Edward Huizenga, Endowed Professor at UMIO | Maastricht, shares some insights with UMIO Prime on how to create and implement a purpose-led strategy that can be transformative for a company using a 5-step framework.
Today, many companies embrace the idea of having a purpose statement as part of their mission and vision. Kate Raworth’s work on Doughnut Economics in 2017 and more recent research on purpose-led strategy by Edward Huizenga in 2020 and Thomas W. Malnight in 2019, inspires the strategy practice field to think and act upon the 21st-century economic and societal challenges. It certainly appears to be the case that having a purpose statement is trending among organisations. However, the depth and impact of those purpose statements vary significantly, ranging from shallow statements to the ones that become value-based drivers for a company’s growth and transform the business.
Purpose is unfolding
Kate Raworth’s compelling argument for why we need to act with purpose is twofold. Organisations need to be aware of their ecological overshoot on issues such as climate change, freshwater withdrawal, biodiversity loss and many more ecological challenges. They also need to have an understanding of the shortfall of the societal foundations around issues such as diversity, food availability and malnutrition, health, access to education and inequality. If we bring this point of view back to the strategy field, the strategy task begins unfolding to incorporate a dialogue around purpose in the strategy cycle of organisations. This dialogue can drive the annual strategy planning cycles and influence the way we make decisions, allocate budgets, and imagine the company’s future direction. Within the business and corporate strategy field, we need to ask ourselves how we can contribute to creating a world that supports human need while safeguarding the planet from ecological overshoot.
Societal and business gains
Academic research shows that it’s time the beliefs and theories about strategy catch up with the way leading companies transform their business to meet today’s societal challenges. Rosabeth Moss Kanter (2011) argues that investing in the future of people and society drives new beliefs and leading companies must use a different logic and have a well-defined purpose as part of their core strategy. It has to be more than just an add-on, it’s a ‘hot button’ topic.
Scholars have identified ways of creating social value, improving people’s morale and heightening their commitment to an organisation. There is clear benefit of doing good for the community and environment and increasing evidence suggests that companies with a purpose-led strategy become the thought leaders of their industry and show a performance surplus. Malnight et al.’s global study in 2019 on high growth in companies investigated three strategies for growth. These strategies involved creating new markets, serving broader stakeholder needs and changing the rules of the game. Alongside the three strategies to boost growth, they identified a fourth driver: purpose.
Research by Leleux and Van der Kaaij in 2019 indicates that companies with a clear purpose improved their performance. The presence of a purpose statement with a well-defined impact on society is essential for developing the company’s direction. In their research, based on the Dow Jones Sustainability Index data from 10 sample industries, the top decile performers outperformed their peers by as much as 27%. This work supports the idea of having an explicit formulation of a purpose statement with a precise societal scope that concentrates on just a few sustainability issues.
A 5-step framework
We have three clear reasons which highlight how purpose plays an important strategic role. Purpose helps companies to redefine their playing field, one that is inspired and led by the values, beliefs, heritage and history of the company. Another reason is that purpose reshapes the value proposition and creates differentiated offerings and is transformative to the core business. And finally, Malnight et al. (2019) state that purpose-driven strategy can overcome the challenges of slowing growth and declining profitability. It affects the corporate strategy task of budgeting, forecasting and investments and consequently builds the case for transformation.
Inspired by Kate Raworth’s 2017 Doughnut framework we can identify 5 strategy levels for how purpose is addressed in the corporate strategy task.
Level 1 – Do nothing with purpose
Typically, strategy takes the state of the business and industry for granted and just narrows the corporate strategy task to the identification of opportunities to add value and assess risk. This point of view presumes the strategy task focuses merely on the market opportunities and doing business within regulatory boundaries.
Level 2 – Do what pays
Typically, strategy determines the level of the company’s material, technical and financial resource impact to its ecological overshoot. Strategy primarily considers the bottom-line impact of the company’s business model in the annual strategic planning cycles. Examples include companies that feel the need to accelerate efforts to reduce their carbon emissions by 2030 and ‘go green’.
Level 3 – Do your fair share
Typically, strategy takes a more proactive portfolio management approach to the business units in a company. This is a portfolio approach to assess the non-economic responsibility of the company to society. In this stage, it is not an incremental, once-a-year process but the strategy commits to targets to cut greenhouse emissions and to fulfil its fair share in tackling inequality. One example of this is AIG’s Insurance nonprofit and community efforts in achieving sustainable and resilient development to offer end-to-end resilience services with the Rockefeller Foundation’s 100 Resilient Cities (100RC) programme.
Level 4 – Do mission zero
Typically, strategy gets to a purpose definition that is essential to the core business and part of the mission. Strategy aims for a transformative responsibility at both portfolio and business unit level to relate to the ecosystem of the company and address all value chain opportunities to reduce ecological overshoot and social shortfalls. Examples include those companies that make a serious attempt to meet SDG goals. Companies put a strategy in place to become socially transformative, such as Lemonade’s insurance model with a giving back to causes that matter to people, protecting people and strengthening local communities.
Level 5 – Be generative and responsible
Beyond any ‘add on’ this gets to a true purpose-led strategy that brings ‘doing well and doing good’ together and brings humanity in the business. The strategy typically takes the lead in the business and corporate strategy dialogue and lifts these meetings to a Purpose Dialogue. The business values and corporate strategy dialogues take the driver’s seat and guide the way decisions are taken. Industry scenarios are built up and a transformative direction is set which takes into account the overshoot, shortfalls and accompanying value creation. At this level, these audacious goals can be transformative.
Thinking differently
Two examples of companies that think differently and act on the generative and responsible ‘level 5’, include Ørsted and DSM. Both companies completely transformed and purposefully revamped their core business. Ørsted, once a coal-intensive energy utility provider has become a pure-play renewable energy provider. Their transformation of divesting in fossil fuels and Ørsted’s investments in offshore wind power is guided by their purpose and vision of a world that runs entirely on green energy. Ørsted takes responsibility for the ecological overshoot and sets out to provide solutions to the world’s most difficult and urgent problems, to speed up the green action and to say farewell to coal in 2023.
DSM transformed itself from coal mining to chemicals to nutrition. The level 5 approach of their corporate strategy cycle and their 5-year strategic programmes were induced by purpose dialogues over the period between 1995 and 2020 and transformed the core business into nutrition by 2021. DSM rejuvenated the strategy around the belief of ‘doing well and doing good’. DSM’s purpose is to create a better life for all and includes the goal of keeping the world’s growing population healthy. This includes measurable purpose goals like ending all forms of malnutrition by 2030. The strong financial performance shows clear signs that a purpose-led strategy can take the lead in both doing well and doing good.
Key takeaways
Purpose is a ‘hot button’ topic for strategy, and we have clear reasons demonstrating that purpose plays an important role in the strategy process. Academic research and increasing evidence shows that accomplishing societal purpose as part of the core strategy adds up to better company performance.
Purpose is not an add-on and companies need to avoid superficial purpose statements. It can start by defining and understanding the ecological overshoot and social foundation shortfall of the company at the business portfolio level.
Deploy purpose statements in the strategy cycle with purpose dialogues. This will guide strategy to make better decisions or make other decisions. If strategy includes the purpose dialogue in the annual strategy process one can start to crystalize the ways to address ecological overshoot and social shortcomings and the consequences for strategic plans and investment decisions.
Purpose-led strategy builds the case for transformation. Purpose, as an integral part of the business and corporate strategy dialogue, will drive the leadership and investment agenda to identify new opportunities and get to a generative level of transforming the core business and guiding new directions for innovation, research and development.
Download the working paper
For more details on this topic, download the full working paper that was created by ZHAW School of Management and Law – Department of Banking, Finance, Insurance.
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Edward Huizenga
Extraordinary Professor in Strategy, Innovation and Change at UMIO | Maastricht University
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