For such a fundamental business principle, there remains a significant lack of consensus, research and understanding around the concept of organizational purpose.

While there is significant data to demonstrate the effectiveness of purpose in improving a range of business outcomes, there is little agreement on how to determine, implement, disseminate, and measure it. Even the very definition of “business purpose” can vary.

That is what inspired Rotman strategic management professor Anita McGahan and a team of colleagues to analyze the widely used but often misunderstood term.

Defining purpose

The paper “Purpose in the For-profit Firm: A review and framework for management research,” defines purpose as capturing “the essence of an organization’s existence by explaining what value it seeks to create for its stakeholders.”

The researchers explain that a purpose statement provides a clear definition of the firm’s overall intent and reason for existing, serving as a shared rallying point for a range of stakeholders and establishing a clear framework for the organization’s aspirations and actions.

“There’s been a long history of work on purpose in the field of strategic management, and yet there hadn’t been a coherent, unified definition or understanding of how individual contributors’ work fits together,” McGahan says.

Without that definition, McGahan says it was difficult for researchers to know if they were studying the same concept, and hard for businesses to establish best practices for pursuing that shared vision. At the same time, research cited in the paper finds that purpose-driven companies enjoy greater customer loyalty, better stock performance, and greater employee enthusiasm - especially among younger workers.

“Most organizations can’t attract enough talented employees, motivate their stakeholders fully, sustain customer enthusiasm, and sustain investor enthusiasm in tough times without conveying some link between the company’s agenda and what’s important in the world around us,” McGahan says. “Money is important, but it’s got to be contextualized against a framework in which the firm’s license to operate, its stakeholder enthusiasm, its value creation, is all supported, and the value it captures is a consequence of those achievements. A strong purpose helps insiders and outsiders to the organization understand how the company aspires to create value that can later be distributed to stakeholders and fund continuing operations.”  

Framing purpose

To establish an effective purpose for an organization, leaders must consider the company’s reasons for existing beyond financial incentives. The researchers recommend an evaluation of both internal and external drivers, including the things the company wants to achieve for itself alongside those it wants to achieve for the wider world. “An essential challenge for the chief executive of every organization is understanding what’s unique about this organization’s value-creating approach,” adds McGahan.

She explains that while purpose statements are unique to each individual organization, leaders should strive to craft one that is ambitious but realistic, and neither too specific nor too general.

“It’s problematic when firms articulate a purpose that’s so broad, so abstract, so lacking in specificity that it’s unactionable — it’s so mushy that its ineffective,” McGahan explains, advising instead to “figure out how to get good at articulating purpose, shaping ideas, telling a story that’s going to engage critical stakeholders at the right time and in the right way to get alignment and move toward execution more effectively.”

McGahan points to Brazilian cosmetics brand Natura, which states a purpose of protecting the Amazon rainforest.  “They measure their success by the retention of carbon density in the tribal communities from which they source ingredients,” she says. “That’s an idiosyncratic measure that reflects their dedication to the success of their supplier communities.” 

Formalizing purpose

Developing an organization’s purpose is more than a thought experiment and can’t drive results without being put into action.

“Purpose that’s just in the head of the CEO doesn’t get us anywhere; you actually have to implement it in ways that people can understand,” McGahan says. “It’s about actually articulating your purpose, creating your statements of purpose, and then you’ve got to implement it in the institution, which means you have to hold people accountable to it, you have to measure it, and you have to execute effectively.”

McGahan says leaders often spend days in strategy sessions developing their organization’s purpose, only to email the results to staff without context or an explanation of what to do with that statement.  

“You’ve got to disseminate a theory of action, and then measure and hold people accountable to that theory of action in order to get something to happen,” she says. “You have to implement - and companies tend to be bad at that.”

Realizing purpose

Leaders are encouraged to articulate how their purpose will drive high-level decisions, use it as a motivating force to rally engagement, and measure whether they are holding true to those values.

How you measure effectiveness, however, will largely depend on the nature of the company itself. What’s important, says McGahan, is to distinguish financial performance from progress towards that higher purpose. 

“These things will be imperfect, so a balance of methods and approaches to metrics is frequently useful,” she says. “Things like employee surveys, customer surveys, focus groups, and complementing quantitative analysis with qualitative analysis. Are you attracting and retaining the targeted employees? Have you been successful in attracting investors that buy into your story?”

Part of the measurement and implementation strategy may include external partners who can help measure and track the organization’s progress, or help it better achieve its purpose. “The final piece is influencing the broader ecosystems and institutions that are around the organization so that there’s a more systemic response to the purpose agenda than only internally,” McGahan says.

While the researchers say more study on the topic is needed, McGahan hopes the analysis will help move the conversation from understanding what purpose is to understanding how it can best be implemented.

“We absolutely know that firms that have clear goals do better than firms that don’t,” she says. “If the purpose of a corporation is not compelling to a wide range of stakeholders, it’s not likely to lead to value creation — and if you can’t create value, you can’t capture value.”