COVID-19 demonstrates how brands can serve society without sacrificing profits
The COVID-19 crisis highlights one of the most fundamental tensions that business leaders face.
The coronavirus crisis is highlighting one of the most fundamental tensions that business leaders face: do they pursue purpose or profit?
Sainsbury’s has chosen purpose. They’ve reserved the first hour on every Monday, Wednesday, and Friday for elderly and vulnerable customers, and are giving them priority access for online delivery slots. The supermarket is also limiting the number of high-demand items that each customer can buy, to prevent the panic buying and empty shelves that have been a defining picture of the crisis. Doing so is fully in line with Sainsbury’s vision, which involves “putting our customers at the heart of everything we do.”
But such a strategy is fully out of line with maximising short-term profit. A profit-focused company would encourage consumer rushes and empty shelves – a sign that everything has been sold. It would never prioritise the elderly and vulnerable over bigger spenders such as families and young professionals.
Yet it needn’t actually be an either-or choice.
While Sainsbury’s motive is genuinely altruistic, it may end up unexpectedly benefiting as a by-product. Its employees may be more motivated, knowing that their efforts are helping those most in need. And not just now, but when the crisis is over, reassured that they are working for a company that wants to make a positive difference to the world.
Suppliers – manufacturers who similarly produce goods due to a sense of purpose – may be more willing to forge long-term relationships with a retailer that channels their products to the best social use. And customers themselves may be attracted to a store which truly puts them “at the heart of everything we do.”
It might seem too good to be true that serving society might ultimately boost profits. So we need large-scale, rigorous evidence. That’s what I gather in a new book, “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”. It presents the results of multiple studies – spanning industries, countries, and decades – on the long-term performance of companies that deliver value to society. They find that such companies typically outperform – and its purpose that leads to profit, rather than profit allowing a company to pursue purpose.
The implications for business are profound. Many leaders run their businesses with the “pie-splitting mentality”. This views the value that a company creates as a fixed pie. Any slice that goes to society reduces the slice taken by shareholders. So they maximise profits by exploiting society – cutting wages or price-gouging customers.
But the evidence supports a new approach to business – the “pie-growing mentality”. By having its primary objective as creating social value, a company isn’t sacrificing investors’ slice, but grows the pie, ultimately benefiting shareholders. Profits remain important but are generated as a by-product of serving society rather than the end goal in itself.
So how does a company put this into practice and actually “grow the pie”?
How can companies serve society?
The starting point is to define its purpose. The word “purpose” is commonly used nowadays, but often without thinking about what it actually means. I define “purpose” as the answer to the question “how is the world a better place by your company being here?” This highlights that a purpose cannot be to earn profits – instead, profits are a by-product of serving a purpose. This is similar to how a citizen’s vocation is not to earn a salary; instead, she earns a salary by choosing a career she enjoys and thus flourishes in.
Moreover, thinking about this purpose this way shifts our thinking about what being a purposeful brand actually entails. Conventional wisdom is that it’s one that splits the pie equitably. It pays fair taxes, wages, and prices to suppliers. Certainly these things are important – but they’re not enough. A purposeful brand is one that grows the pie – that creates social value. Being inspired by social value drives companies to innovate and do some amazing things.
For example, Vodafone rightly received plaudits for releasing the world’s first tax transparency report in the telecoms industry – an industry in which tax-dodging is relatively easy, since you can choose to locate your licenses in low-tax countries. But that that’s an example of splitting the pie fairly, not growing the pie.
Vodafone had a much greater impact on society by launching M-Pesa, a mobile money service in Kenya, which provided financial inclusion to the unbanked and lifted 196,000 Kenyan households out of poverty in the first seven years. Most of these households were headed by women, by allowing them to shift out of agriculture and into business and retail.
Being driven by social value is equally relevant in the current crisis. It might seem that it’s supermarkets, food delivery companies, and healthcare firms who can make the biggest difference. But leaders of all businesses should ask themselves “what’s in my hand?”. What resources does their company have that they can use to serve society?
1Rebel gym is offering its space to the UK’s National Health Service to be used for beds or facilities. Chelsea Football Club is allowing health workers to stay at their hotel for free, to avoid long and disrupted commutes due to the reduction in public transport.
If there is any silver lining to the crisis, it’s that it may permanently inspire leaders to think creatively about how they can use the vast resources they’re entrusted with to serve society. Doing so will build a brand that truly reflects purpose.
Alex Edmans is Professor of Finance at London Business School and author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit, published by Cambridge University Press.