Two separate findings by M&O profs Michael Pratt and Metin Sengul suggest better ways for companies to state their purpose and set goals
When asked to describe the purpose of their organization, an overwhelming majority of CEOs can’t do it. But if you hope to make your company the exception, don’t go overboard and draw up a whole laundry list of objectives, for there’s danger in spreading yourself too thin.
Taken together, that pair of findings, in separate studies by professors in the Carroll School’s Management and Organization Department, might point the way for a company to define what it does, and to navigate the tradeoffs necessary to make that definition a reality.
O’Connor Family Professor Michael Pratt
In one article, O’Connor Family Professor Michael Pratt and two colleagues analyzed the company descriptions elicited in a survey of nearly 2,000 CEOs, of companies of various sizes and across diverse industries and regions of the world.
“Incredibly,” the researchers wrote, “we found that 93 percent failed to state why their company is in business.” Pratt (who is also director of the Ph.D. program in Organization Studies) and his collaborators published the survey results, along with their interpretation and recommendations, in Strategy+business magazine.
Many of the CEOs’ responses drew on their corporate purpose statements, and many of those statements fall short, Pratt and colleagues wrote: “They rely on platitudes, fail to connect with an audience or beneficiary,” or are either too abstract or too specific.
Crafting an effective purpose statement is not an empty exercise, the scholars wrote. An express raison d’être can serve as an organization’s anchor, grounding employees and helping them to focus on the most pressing problems. And it can provide competitive advantage, by declaring what is unique about a company.
To make corporate purpose statements meaningful, Pratt and his fellow experts suggested three steps. First, clearly state the company’s reason for being. In other words, not only what you do, but why. One example they cited was “[to] discover and bring to market innovative medicines and vaccines to create a healthier world.”
Second, identify the primary beneficiaries of the organization’s work. Who are your stakeholders, beyond shareholders? Put them at the forefront. Finally, find the golden mean between abstract and concrete. An example of such a balanced statement: “to provide choice and affordability to meet our customers’ evolving energy needs.”
Associate Professor of Management and Organization Metin Sengul
Of course, a company’s purpose statement should reflect the company’s true purpose. And that purpose is tied to its objective(s). Forthcoming in the Strategic Management Journal, a study by Associate Professor of Management and Organization Metin Sengul and a colleague has found support for what the authors call “the folk theorem of multiple objectives”: that when companies make an objective explicit, they perform better in that area, but that performance diminishes with the number of other objectives pursued at the same time.
Previous studies have connected goals to performance at the individual employee level, but Sengul’s is the first empirical paper to analyze the link between multiple organizational objectives and firm performance. Looking at a large sample of French manufacturing firms, the researchers found that firms lose about half of their performance gains from setting a goal in a given area (e.g., increasing revenues) due to “goal multiplicity,” or the simultaneous pursuit of multiple goals.
Nevertheless, companies can benefit from setting multiple goals. For example, the researchers found, firms that set explicit objectives for both increasing market share and reducing costs manage the tradeoffs between those two goals much better than firms that set an objective for just one of them, or neither. “There are always trade-offs,” Sengul explained. “So it's a question of how you manage multiple objectives.”
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One way to better manage the trade-offs, Sengul and his co-author found, is to hold more frequent face-to-face management meetings. Unfortunately for the pandemic era, the researchers found (during their pre-pandemic study) that reliance on information and communication technology exacerbates the diminishment of performance gains. However, they found another trick to maintaining gains that should continue to be handy in the current moment: offering performance-based incentive pay.
—Carroll School News