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In business, purpose now delivers profit

24 July 2017 by Anthony Hilton

In business, purpose now delivers profit - read more

Choose a point on the business horizon and head for it, says Anthony Hilton

The chief executive of a FTSE 100 company said the other day his biggest challenge was persuading junior executives that it was all right to take risks.

The blame culture whereby every disaster, corporate or otherwise, is followed by a search for someone to blame, combined with the massively increased emphasis in companies on risk assessment and risk control, had created a mindset where everything had to be done by the book and there was no point in suggesting anything different.

Yet the major moves forward in business only come about when someone has the courage to think and do something different.

Most boards think it is important that management at all levels is encouraged to feel innovative and entrepreneurial. The challenge is getting younger executives to believe you want them to be savvy but not fearful.

A second challenge is to create resilient organisations. When you analyse the growth in corporate profitability over the past few years it becomes obvious that the driver is usually not sales growth.

Most of the improved margin has come from cost-cutting.In part this comes from more efficient organisation, with international just-in-time supply chains being an obvious example.

However, it also comes from removing capacity – doing away with backup systems, dispensing with in-house expertise, and generally making moves which save money but make it harder for the business to cope with the unexpected.

This new fragility means that what might once have been an easily absorbed minor blow can now become a major problem simply through the lack of capacity to cope with it.

A third challenge is planning. One of those business futurologists who specialise in scaring the wits out of their audiences by painting pictures of the coming world, which bear almost no relation to the present, says that no one should produce five-year plans any more. The longest time horizon anyone should expect to get remotely right is two years.

Businesses should give up having a detailed route map which they expect to take them from A to B; instead, they should think like a sailor and navigate.

They should have a destination they want to reach, but understand that how they get there will depend on the winds and tides they encounter and the captain’s skill in turning these to their advantage.

“Businesses should give up having a detailed route map; instead, they should think like a sailor and navigate”

An interesting new approach to these problems was produced by the New York-based Beacon Institute, which is part of the accounting and consulting firm EY.

The headline-catching figure of ‘How can purpose reveal a path through disruption?’, a worldwide survey of 1,500 business leaders, many of them running major multinationals, highlighted that they were profoundly rethinking the fundamental purpose of business.

Were such a survey conducted 10 years ago, before the great financial crisis, it would have thrown up overwhelming support for Chicago’s most famous monetary economist Milton Friedman’s aphorism that the purpose of business is business – in other words, it was wholly and exclusively about the pursuit of shareholder value.

However, in this most recent survey, conducted between November 2016 and January 2017, only 15% of respondents said their organisation’s purpose was pursuit of shareholder value.

Some 11% said it was satisfying employees, and 34% said satisfying customers. The remainder (40%) said their purpose was satisfying society or having an ‘aspirational reason for being’.

Interestingly, although three-quarters of respondents said that having a well-integrated sense of purpose will be useful in dealing with disruption, just two-thirds are profoundly rethinking what this purpose should be.

Half of those changing tack said that business must be infused with a desire to meet broader societal goals. Simply satisfying one stakeholder group, or even trying to balance the interests of several, is no longer going to cut it.

Such claims can easily get dismissed as marketing or PR hype and the Beacon Institute exists to help develop a sense of purpose in business, so it is talking its book. Having said that, the survey does stress that simply defining purpose is the easy part, and nowhere near enough.

The real gains only come when that purpose is infused throughout the business, and to do that requires genuine leadership and commitment from the senior executives – in a world which is depressingly short of genuine leaders. It is a genuinely hard thing to do.

It is also worth underlining that the institute’s survey data suggests that organisations which have a clear sense of purpose embraced by all the employees have greater customer loyalty, find it easier to attract and retain staff, suffer less damage to brand values and reputation and – most controversially – are better equipped to innovate and cope with disruption.

Its core message is business should no longer see this as a choice of purpose versus profit; rather it is that purpose delivers profit.

To return to the navigation analogy earlier, purpose provides that point on the horizon towards which businesses can navigate, and provides a constant against which all the immediate decisions can be judged.

In a world characterised by ambiguity and uncertainty, purpose provides a fixed point against which decisions can be taken. And that is why purpose has the flexibility and capacity to innovate in a world where new rivals emerge from where you least expect them.

Anthony Hilton is Financial Editor of the London Evening Standard

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