7 Strategies for making your Purpose profitable!

Finding a real purpose that clearly makes a positive impact in the world and is therefore perceived as relevant and authentic is already an achievement as such. The company is now aligned and recognizes its responsibility towards society and the environment as important stakeholders.

However, the company must also ensure profitability to meet the expectations of all stakeholders, including employees, who anticipate competitive salaries and compensation packages, as well as shareholders, who expect solid dividends or stock price appreciation.

It is true that embracing and authentically pursuing a purpose that is trusted by external stakeholders and adopted by internal stakeholders can unlock numerous benefits, as supported by multiple studies.

• Attracting top talent and enhancing employee engagement
• Improving stakeholder alignment
• Driving innovation
• Increasing brand reputation and deepening customer loyalty
• Achieving higher revenue growth and profitability as a result

(see my article “4 Reasons high impact Entrepreneurs and CEO’s have a purpose” https://bit.ly/3XHskKD ).

However, it is important to note that this is not automatic; rather, it must be proactively strategized, planned, and managed.

Companies can encounter difficulties to serve the needs of all its stakeholders at the same time and strike the balance of purpose and profit.

A McKinsey survey indicated that 33 percent of managers experienced trade-offs between purpose and profit (McKinsey organizational purpose survey, October 2019).

And I would assume that the other 67% do not experience this just because their purpose is well chosen and they are actively managing and balancing the two.

Purpose-Profit Trade-off

In his thought-provoking book "Deep Purpose", HBR Professor Ranjay Gulati offers a simple 2x2 matrix crossing the social and the commercial logic to pinpoint this tricky trade-off.

? The resulting lower left quadrant ("Underachiever") depicts companies that fail on both fronts.

??Companies in the lower right quadrant ("Good Samaritan") focus on social impact but neglect profitability.

??Companies in the upper left "Profit First," shows firms prioritizing financial gains often at the expense of societal benefits.

?? Finally in the upper right ("Purpose AND Profit") is where companies aspire to be, achieving a win-win situation.

But let’s make no mistake. It’s difficult to match this balance all the time and in all aspects of business operations.

Companies may find themselves temporarily in the "Profit First" or "Good Samaritan" quadrants as part of their strategic journey. For instance, they might prioritize profit in the short term to fund long-term purpose-driven projects or focus on social impact activities that may not initially be profitable, but will as e.g. newly targeted customer segments for new purpose aligned products are gradually growing.

The goal is always to move toward the "Purpose AND Profit" quadrant over time

Business model type determines Purpose-Profit trade-off

To some degree this is determined by the company’s business model.

Companies can be grouped into 5 Clusters according to the societal impact its business model is causing. Subsequently, the 5 Clusters are roughly outlined:

Cluster 1: Purpose driven by design

Companies in this category inherently align their core products and services with societal problems. Their business models are deliberately built around addressing pressing societal issues, and their operations are designed to avoid creating additional problems. Often (but not always) they are relatively new and also smaller companies. For these companies, purpose and profit are naturally intertwined, and their success in the marketplace equates to success in achieving their purpose.

Typical industries are green technologies, renewable energies, social enterprises, etc.

Cluster 2: Purpose neutral business model

These companies offer harm free products and services that fulfill everyday needs but are not inherently designed to address societal challenges like those of Cluster 1. Also, their operations are potentially ethical and sustainable, ensuring they do not contribute negatively to societal or environmental issues.

Typical industries are professional service, financial services, education, etc.

Cluster 3: Purpose neutral products with harmful operations

Companies in this category provide products that meet every day needs that neither are inherently harmful (Cluster 2) nor address current societal problems (Cluster 1), but their production processes or supply chains and in case of consumer goods also their packaging have significant negative impacts on society or the environment. These impacts might include high resource consumption, pollution, or unethical labor practices.

Typical industries are FMCG, apparel, electronic manufacturing, etc.

Cluster 4: Purpose neutral products with externalities

Companies in this category offer products or services that fulfill essential needs or provide significant value but have substantial negative externalities, such as environmental degradation, health risks, or social issues. The challenge is to maximize the positive aspects while mitigating the negative externalities.

Typical industries are fossil fuels, automotive, chemical manufacturing, etc.

Cluster 5: Purpose negative business models

These companies produce goods whose positive contributions are limited or debatable, while their negative impact is clear and significant. Other than Cluster 4 companies, which products have an important societal function but cause externalities, Cluster 5 products intended use already creates problems.

Typical industries are tobacco, alcohol, gambling.

?(For the framework that groups these 5 Clusters, incl. its comprehensive description and discussion, its possible areas to formulate a real purpose, and the corresponding strategies to achieve it, see my article “Does your Company pursue a real or pseudo Purpose?” https://bit.ly/3Zm4NBo )

Cluster 1 companies don’t have that Purpose-Profit trade-off, as their “purpose” equals their “mission” (=description of their business model) and they “only” need to make their business model work (which is difficult enough of course).

For the rest of the companies it depends on how big the gap of the business model to their purpose is. Companies that just need to extent their business model to pursue its purpose like in Cluster 2 (small gap) have a potentially lower purpose-profit trade-off than companies that have to restructure their operations like in Cluster 3 (middle gap), or change their product mix like in Cluster 4 (large gap).

?? The larger the gap the higher the purpose-profit trade-off.

That’s why Cluster 5 companies often don’t even have a real purpose or no purpose at all, because if they had one the purpose-profit trade-off would be huge or in fact so big that ultimately they might have to divest their business and transition into other ones.

Obviously these were very demanding strategic and managerial challenges and it's plain to see that leaders would think twice to actually take them on.

The following table shows that relationship between business model and potential purpose profit trade-off.

A potentially high profit-purpose trade-off however, does not automatically equate low profitability. It just means the required management attention to transcend this trade-off is high.

Doing so, it could even catalyze and unleash intrinsic profit potential, e.g. by forcing the company to increase innovation effort and penetrate new untapped market segments making the company even more profitable than before pursuing its purpose.

Trade-offs emerge when executing the purpose

Belonging to a certain cluster is only a rough indication though; ultimately, the purpose-profit trade-off depends on the specific purpose the company has chosen and how effectively it is executing it.

While it’s significantly easier to transcend this purpose-profit trade-off if the optimal purpose is deliberately chosen right from the outset, it’s clear that finding and then defining this purpose is only the beginning.

The real challenge lies in implementing and executing the purpose, as this is where the potential conflicts and trade-offs with profitability tend to emerge - specifically, when concrete measures are taken to bring the purpose to life. In fact this can lead to exactly the above situations where profit and purpose temporarily need to be traded-off.

Breaking through this trade-off requires a constant flow of well-informed, situational management decisions in the course of daily operations. This involves continually balancing and optimizing purpose and profitability, case by case, based on probing, testing, and organizational learning.

Additionally, there should be a strategic framework in place that address and transcends this purpose-profit trade-off in order to inform and support these daily situational management decisions.

These specific strategies and tactics depend on the concrete purpose the company is pursuing, and can only be identified, defined, and planned, knowing and considering the industry's unique characteristics and the specifics of the company’s business model.

Transcending Purpose-Profit trade-off

Nevertheless, there are 7 generic industry overarching strategies to overcome that potential purpose-profit trade-off any company can adopt. The following list should be understood as rough strategic approaches that need to be concretized and adapted, according to the actual industry specifics and situation the company is operating in:

1. Purpose integration into core business model

• Value proposition enhancement: Align the company's purpose with its core value proposition by ensuring that products or services provide clear environmental or social benefits that resonate with consumers. For example, an automotive company could emphasize the long-term cost savings and environmental benefits of sustainable vehicles, making these benefits central to its sales pitch.
• Revenue diversification: Explore new revenue streams that align with the company's purpose. For instance, automotive companies can also develop subscription-based models, like offering renewable energy-powered charging services for electric vehicles, that provide ongoing value to customers while reinforcing the company’s purpose.

2. Purpose-based branding and premium pricing

• Market segmentation and targeting: Identify and target market segments that prioritize sustainability or social responsibility. These consumers are often willing to pay a premium for products that align with their values, thus improving profitability. ??For instance Rothy’s, a smaller sustainable brand, known for its eco-friendly, stylish shoes and accessories made from recycled plastic bottles and marine waste is sharply focused on stylish yet eco-conscious consumers.
• Brand differentiation and premium pricing: Use purpose as a key differentiator in the market. By building a strong brand around sustainability or social impact, companies can command higher prices and foster customer loyalty, leading to sustained profitability.?? Rothy’s unique value proposition consistently centers around sustainability, zero waste, and ethical production practices but also individuality, uniqueness, style and creativity. Rothy’s shoes are priced at a premium compared to mass-market footwear brands. Most of Rothy’s flats typically costs well above €200, while mass-market brands like H&M or Zara offer flats around €30–€50.

3. Purpose-driven innovation and product development

• Sustainable or social innovation: Invest in R&D to develop products and services that align with the company’s purpose while also offering competitive advantages. ?? For a purpose-driven bank, this could mean offering credit solutions tailored to environmentally sustainable projects, such as green bonds or financing for renewable energy projects. Additionally, the bank could develop financial products aimed at socially marginalized groups, such as microcredit programs for low-income entrepreneurs, affordable housing loans, or financial literacy programs.
• Lifecycle thinking: Apply life cycle assessment to design products that minimize environmental impact from production through end-of-life. This can lead to reduced resource consumption and at the same time cost savings in the long term through recycling, remanufacturing, or refurbishment. ?? E.g. Apple’s iPhone refurbishment program minimizes resource use by reusing components from used devices, reducing the need for new materials. Buying back and refurbishing is cheaper than manufacturing new phones. Apple resells these devices at a lower price, still generating margins and tapping into additional price-conscious customer segments (or complying with its warranty obligations).

4. Purpose-driven operational efficiency

• Lean and green operations: Implement lean manufacturing and operational processes that reduce waste, energy consumption, and costs. For example, adopting energy-efficient technologies or optimizing logistics to reduce emissions can simultaneously lower operating costs and support sustainability goals.
• Supply chain optimization: Work with suppliers to enhance sustainability across the supply chain. This might involve sourcing sustainable materials, reducing transportation emissions, and improving supplier practices. While this may involve higher upfront costs, it can reduce long-term risks and improve the overall efficiency of the supply chain.

5. Strategic partnerships and ecosystem engagement

• Collaborative innovation: Partner with other companies, governments, or NGOs to co-develop solutions that align with the company’s purpose. ?? For instance, a healthcare provider could collaborate with government health departments, that provide data and credibility, and tech companies to create mobile health platforms aimed at improving healthcare access in remote or underserved areas. This could involve telemedicine solutions or mobile health apps allowing patients to access consultations and medical advice, while opening up new market segments.
• Regulator advocacy: Actively participate in shaping industry standards and regulations that align with the company’s purpose by engaging with regulators and industry bodies . This can provide competitive advantages, such as securing early access to incentives or influencing favorable policy developments.

6. Long-term investment in purpose and value creation

• Purpose investments: Make strategic investments in initiatives that support long-term societal or environmental value. These investments might not yield immediate returns but build brand equity and position the company for future success. ??E.g. a mid-sized electronic manufacturer decides to make a strategic, long-term investment in renewable energy infrastructure for its plants and offices, including solar farms and wind energy projects to power its entire production process with 100% renewable energy. This incurs significant upfront costs for installation, energy storage, and transitioning to renewable energy sources. Over time though, the company reduces its reliance on non-renewable energy, shielding itself from rising fossil fuel prices and increasingly stricter regulation. Eventually, the energy costs decrease, providing significant long-term savings.
• Future-proofing strategy: Align the company's business strategy with long-term social and demographic shifts, such as increasing urbanization or digital transformation. Companies that strategically anticipate these changes can secure a competitive edge while addressing broader societal needs. ?? E.g. real estate development company aligning with trends toward smart cities and sustainable urban development by incorporating technologies like IoT, AI, and renewable building materials into their projects. This helps reduce energy consumption, enhance resource efficiency, and meet the demands of eco-conscious urban dwellers.

7. Use of Technology and digital tools for purpose-driven impact

• Data-driven decision making: Leverage advanced analytics and digital tools to optimize operations and reduce waste through predictive maintenance and AI-driven logistics, while aligning with sustainability goals. ?? Unilever e.g. uses AI, satellite imagery (in cooperation with google), data analytics and block chain technology to optimize its supply chain transparency and efficiency, reducing waste, energy and water consumption across its global operations, which supports both sustainability goals and cost savings.
• Digital customer engagement: Use digital platforms to engage customers in purpose-driven initiatives, such as sustainability education, interactive eco-friendly tools, or gamified programs that reward sustainable behavior. ?? E.g. Starbucks’ mobile app encourages sustainable practices by offering rewards for customers who bring reusable cups, helping to reduce single-use waste while increasing customer engagement and loyalty.

Conclusion

Transcending the purpose-profit trade-off is not straightforward and requires a strategic approach that balances societal impact with financial performance. While the journey toward aligning purpose with profit may involve temporary trade-offs, companies that adopt proactive strategies can find long-term success. By integrating purpose into their business model, fostering innovation, and leveraging technology, businesses can create sustainable value that not only benefits society but also enhances their profitability.

Each of the seven overarching strategies presented offers a roadmap for companies to follow. However, these approaches must be tailored to the specific context, industry, and business model of each company. By continually adapting and refining these strategies, organizations can position themselves in the "Purpose AND Profit" quadrant, ensuring both financial sustainability and a meaningful, positive impact on the world.

Which Purpose-Profit transcending strategies that work (or not) do you see? Please share your thoughts!??

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?? ???????????? John-Oliver Breckoff ?????? ???????????????????? ?????????????????????? & ???????????????????? ????????????