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Home Running A Business How Purpose Can Make Your Small Business Stronger
Why does your company exist? What is it trying to do? For the past 50 years, the answer to that question was that the objective of a business was to increase its profits. After Milton Friedman, a famous University of Chicago economics professor, penned a New York Times essay titled “The Social Responsibility of Business is to Increase Its Profits,” the vast majority of American businesses adopted his philosophy, known as “shareholder capitalism.”
That attitude is starting to change. For a while now, we’ve seen think pieces pop up about why companies need purpose. Millennials, in particular, have been cited as a driving force in the resurgence of the idea that a company has a greater purpose outside of making as much money as possible.
You know that the tides are turning when major players get involved. In August, the Business Roundtable (BR), one of the most influential business lobbies in the United States, penned an open letter titled “Statement on the Purpose of a Corporation.” Similar to Friedman’s famous 1970 essay, this letter pretty much tells you where it stands from the title.
The letter has some tasty little morsels for those who have followed this issue closely. “Each of our stakeholders is essential,” the declaration reads. “We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.”
In addition to the 181 signatures attached to the letter, several prominent business leaders issued statements that further demonstrate their support for this shift in BR’s stance. “Major employers are investing in their workers and communities because they know it is the only way to be successful in the long term,” explained Jamie Dimon, chairman of Business Roundtable and chairman and CEO of JPMorgan Chase & Co, explained. “These modernization principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
“CEOs work to generate profits and return value to shareholders, but the best-run companies do more,” Tricia Griffith, president and CEO of Progressive Corporation, said. “They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value.”
According to research done by the Harvard Business Review, pursuing company purpose lets you have your cake and eat it, too—company purpose can make your business even more profitable.
The key to having the best of both worlds is the way that purpose is executed within the company. The Harvard Business Review found that 2 different types of companies have company purpose.
The first group, referred to as purpose-camaraderie organizations, is comprised of companies that have a strong sense of workplace camaraderie in addition to its high marks on corporate purpose. Those groups said things like “This is a fun place to work,” and, “We are all in this together.”
The second group, named purpose-clarity organizations, includes organizations that demonstrate management clarity along with company purpose. Employees at these companies identified with statements like “Management makes its expectations clear” and “Management has a clear view of where the organization is going and how to get there.”
Quick pop-quiz: which group had stronger profits?
If you answered the second group, congratulations! You scored 100% on this quiz. The Harvard Business Review found that while company purpose was important, it was important for it to be paired with clear direction. They identified middle managers and professional workers as key to the success of purpose-clarity organizations, rather than top-tier management and hourly workers. It’s essential to have “managers who buy into the vision of the company and can make daily decisions that guide the firm in the right direction,” wrote the Harvard Business Review.
Companies choosing to focus on profits over purpose may find themselves losing a competitive edge to purpose-driven organizations. According to a 1,000-person survey conducted by Futerra, a sustainability marketing firm, 88% responded that they would like brands to help them “be more environmentally friendly and ethical” in daily life.
The rise in the importance of purpose matches a rise in consumer consciousness. A resounding 96% of respondents believed that their actions—like donating, recycling, and buying ethically—could make a difference in the world.
Yet the majority of survey participants answered that brands weren’t helping. Almost half (43%) said they thought brands made it more difficult for them to be ethical and environmentally friendly, compared to the 28% who thought brands made it easier. This contrast indicates a gap in the market for purpose-driven organizations.
That doesn’t mean that slapping a purpose on it and continuing business-as-usual will increase profits. Again, we see the importance of a purpose-clarity organization from the consumer side. Remember that what made the difference for those organizations was the ability to make “daily decisions that guide the firm in the right direction.”
A company’s commitment to its purpose through daily actions is important to consumers as well as employees. When companies fall short, they can face backlash. Take the company ThirdLove. Marketed as the feminist answer to Victoria Secret, the brand recently came under fire after Vox reported that the way it treated employees didn’t match the narrative it was selling.
Young consumers are especially adept at noticing this disparity. “Young consumers today don’t just want to just see brands take a stand on social issues, they want them to act on that stand—from the inside out.” Meredith Ferguson, managing director of impact consultancy DoSomething Strategic, told Fast Company.
When brands commit to purpose, they are necessarily held to higher standards. Committing to the daily decisions that reinforce your company’s purpose can help you avoid potential pitfalls and join the group of purpose-driven organizations that stand above the fray. Ferguson explained, “The most exciting brands in the cause-marketing space—Lush, The Body Shop, Patagonia, United By Blue, Toms—are the ones doing more than just raising awareness and more than just writing a check. They’re inviting their consumers and employees to be a part of the social impact action.”
Small businesses have an edge over large corporations when it comes to building a sense of corporate purpose. Because these companies are smaller and more nimble, small business owners have the opportunity to implement change more quickly.
Having less corporate bloat also makes it easier to become a purpose-clarity organization. It’s less complicated to get management on the same page when there are fewer levels of management. As a small business owner, you’re closer to the daily ins and outs. As such, you can make sure that daily decisions are in keeping with company values.
Before you can inspire purpose-driven energy in your employees, you need to ask yourself, “Does your small business have a clear purpose?” We don’t mean a mission statement or a core value. Both are important to have, but they’re different.
Your company’s purpose conveys the fundamental reason you’re in business and what you stand for—ethically, emotionally, practically, and historically. Maybe you started your business with a clear sense of your purpose. If you’re just starting to think about it now, it can be helpful to look at other purpose-driven businesses to see how they do it.
When we think of purpose-driven companies, brands like TOMS and Warby Parker pop to mind. When you buy a pair of shoes or eyeglasses from either of these brands, they donate another pair to someone in need. That’s a version of purpose.
Giving back isn’t the only way to approach company purpose. Some companies see their work as a way to fulfill a social good. At Patagonia, the commitment to purpose means a commitment to sustainability. For grocery stores like Trader Joe’s and Whole Foods, providing healthy food is a central part of their purpose.
To figure out your company’s purpose, you can ask yourself what goal you are trying to achieve through the goods or services you provide. For example, here at Lendio, our purpose is fueling the American Dream. We do that through small business financing. In the long run, what does your product or service offer to your customers?
If you’re stuck, try asking your employees what excites them about the work that you do. They may have noticed something about your business that you didn’t even realize was there (sometimes we all need a fresh set of eyes). Plus, if you build off what’s already invigorating your employees, you won’t have as far to go.
Whatever your purpose, keeping it at the front and center of your daily operations will go the extra mile in making sure that your purpose contributes to the growth of your business.
Mary Kate Miller is a writer based in Chicago, IL. She specializes in covering finance (personal and business), investing, and real estate. Her mission in life is to give readers the confidence and the knowledge needed to grow their wealth by making financial topics more accessible. When she's not writing about topics like business loans, you can find her playing armchair financial advisor to the Real Housewives.
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