1 ▪ Strategic Direction

Prioritize Purpose over Profit

Organizational matters matter—not only to financial performance but also to creating value for organizations, the people employed by them, and society at large. For decades, the first of our seven conditions of building a better organization—strategic direction—was designed for one purpose only: to create maximum value for shareholders. But in the digital era, that formula no longer fits. Why? Because strategy that is rooted in a deeper, social purpose ultimately enables speed and resilience. Today, successful organizations create strategies that prioritize purpose over short-term profit, creating long-term value for shareholders and for customers, communities, the environment, and employees.

In the summer of 2020, after the death of George Floyd while in police custody, protests erupted around the country and then the world. Floyd was by no means the first unarmed Black man killed by police. But what was unique was the speed with which a video taken at the scene spread worldwide, igniting a global protest—a phenomenon unimaginable in the predigital era. Equally remarkable was how quickly the public discourse broadened, from a renewed call for racial justice and police reform into a social challenge for businesses everywhere.

Almost overnight, it seemed, corporations that had long dawdled with often-ineffectual “diversity training” were suddenly tackling compelling reformation, and in some cases radical transformation, of their existing talent and organizational practices. For example, retailer Sephora unveiled new customer-service protocols aimed at reducing racial bias in stores, and both Sephora and Ulta Beauty significantly increased shelf space for Black-owned brands.¹ Mean-while, Netflix has doubled the number of Black professionals in its organization.² Both Netflix and Google’s YouTube have made good on their promises to feature more talent and programming from Black artists, and each of the companies has also pledged $100 million toward economic development in Black communities and racial justice initiatives.³

Healthy organizational practices have always mattered, of course, but today the digitization of everything has made them vital for survival. By prioritizing organizational health, businesses can find the tools they need to account for and adjust to the speed and unpredictability with which events unfold. The power and velocity of social media, which enabled the George Floyd video to quickly go viral and become a key piece of evidence resulting in the conviction of his killer, is just one example of the impact of recent technology and digital speed. Consider, too, the following:

• An increasing number of organizations are following the lead of companies such as Microsoft and FirstEnergy, which tie a percentage of CEOs’ pay to meeting diversity goals.⁴

• Top-line growth is increasingly tied to how well companies harness data and analytics to shape their operating models and to inform their strategic planning, resource allocation, and decision processes.

• Consumers’ changing expectations regarding speed, service, and cost are prompting companies to reshape their operating models to achieve operational excellence.

• The U.S. Securities and Exchange Commission (SEC) is pressuring companies to disclose information on their human capital initiatives, per the Human Capital Management Coalition’s petition and Investor Advisory Committee’s 2019 proposal to modernize required disclosures.

• Employee advocacy and stakeholder activism have increased around issues such as climate policies, racial equity, firearm sales and financing of the gun industry, and selling facial-recognition products to police forces (particularly regarding the potential for discrimination those products present against people of color). Such activism has already prompted action by regulators and investors on several fronts—for example, legislation around more consistent use of police body cams.

• The influence of investors is growing around how well businesses monitor organizational topics and environmental, social, and governance (ESG) criteria—and how well they integrate those criteria into mainstream business and investment practices.

Consider too that it isn’t just digital and AI-first companies that are giving more attention to organizational matters; they are also becoming increasingly important to “old economy” companies and to investors. Historically, a focus on people-related issues was limited. But AI-first companies—and their investors—are beginning to understand that org health is the secret sauce to executing on a vision. As Stanford professor and author Jeffrey Pfeffer writes, business success “comes from successfully implementing strategy, not just from having one.”⁵ That implementation depends in large measure on the betterment of the enterprise itself.

Today, as businesses worldwide begin to rebound from the havoc wreaked by the COVID-19 pandemic—while simultaneously contending with continuing social, environmental, and financial uncertainty—the companies that survive and thrive will be those that purposefully develop healthy organizational conditions. In this sense, we can draw from organizational life an analogy to the field of holistic health. Unlike Western medicine, which often focuses on isolated elements of the body, a core principle of holistic health posits that human beings are greater than—and different from—the sum of their parts. Healing human malaise, the belief goes, requires a comprehensive view of mind, body, and spirit, and therefore should focus on understanding the underlying cause of the illness, not simply treating symptoms. Similarly, the sum of a company is greater than its parts, and organizational context requires consideration of all its components.

Note that not every element of organizational health will be salient to all stages across the maturity and growth of a business, or even throughout the life cycle of a deal. That is why leaders in both publicly held and private companies need to hone their ability to identify and manage the relevant aspects at any given stage. For example, in a startup, crafting a well-understood vision and purpose that guides the company’s strategy and key decisions needs the most attention. In a mature, post-IPO company, on the other hand, your focus would be on evolving the company’s structure, job architecture, and career paths to support product expansion and new growth areas.

No matter where your business finds itself within the growth cycle, however, its strategic direction—the first of our seven organizational conditions—will always be central to success. In this chapter, we will explore strategic direction in detail and how identifying an underlying purpose is key to creating a strategy that can harness the power of big data and artificial intelligence to benefit both organizations and society.

Purpose Wanted: Now More Than Ever

What characterizes a successful business strategy? Certainly, it needs to articulate a clear long-term vision and mission. It should account for external environments and market conditions and leverage existing assets and capabilities—or define a clear plan to develop or acquire them. But in the current hypercompetitive and hypergrowth marketplace, companies’ strategies have been challenged by changes in the business environment. In short, constantly changing macro-environmental factors shorten the shelf life of many strategies. Dealing with such disruption requires a series of strategic “micro battles,” discrete, time-boxed initiatives that rapidly bring strategic choices to action and formulate ways to scale the results, resolving conflicts as quickly and as close to the customer as possible.⁶

But while changes to the business environment often force companies to quickly rethink individual business strategies—that is, the set of actions needed to capitalize on growth opportunities—a company’s strategic direction or its articulation of its ambitions, including trade-offs, risks, priorities, and main efforts, is less prone to disruption. Ideally, a clear strategic direction provides the structure to support the organization through stormy weather.

That’s where purpose comes in. The driving force of an underlying purpose is the first and arguably the most important thing that an organization needs when it comes to formulating its direction. Purpose is one of three elements—along with first principles and aspirations—that require wide agreement from the board, founders, and other company leaders. Let’s define these three elements in turn.

• Purpose. A company’s reason for being that guides organizational behavior at all levels of the company and decisions about the business model and key investments—and how to leverage the operating model to execute against those decisions. An example of purpose is CVS Health’s “helping people on their path to better health.”

• First principles. The value-creation drivers that will help the company grow and clarify its value proposition to differentiate itself from its competitors. For example, Haier Group, headquartered in Qingdao, China, transformed from its traditional manufacturing model to a customer-relationship management model by focusing on giving customers what they want most. The company created a statement, the Win-Win Value Added Approach (WWVA), that helped it to operationalize its first principles of being “user-centric, driven by a new, open Internet of Things (IoT) ecosystem linked to other companies’ products and services.”⁷

• Aspirations. The envisioned future and objectives—and the key results a company will seek to achieve in pursuit of those. For example, as it rebranded itself as a health services company, CVS decided to stop selling cigarettes—a bold aspiration and move that initially cost the company $2 billion in lost revenue.

Google offers an example of how organizations can convey purpose, first principles, and aspirations to sharpen strategic direction. The company, which grew from a garage startup in 1998 to a large, complex organization, has always aspired to embody its famous motto of “Don’t be evil.” The company’s bedrock first principles, known as the three “respects” (respect the user, respect the opportunity, and respect each other), are words that are etched into employees from the beginning—as they were for me from my early days as a “Noogler” (or new Google employee).

Historically, the organization has “long believed that over time, companies tend to get comfortable doing the same thing, just making incremental changes,” according to Google cofounder Larry Page in a blog post. “But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.” Therefore, when Google’s existing structure began to limit its potential to expand, it restructured to a holding company, Alphabet. This allowed Google and the portfolio of “Other Bets” to grow autonomously so that Alphabet could meet stakeholders’ expectations and, indeed, outperform competitors.

The change, however, didn’t relieve Google of its responsibility in the portfolio to grow and be profitable. Therefore, Google made the big pivot from being a mobile-first to an AI-first company—marking an important inflection point not only in the company’s history but also in the tech industry overall.

Because I believe purpose is the most important of the three aspects of setting strategic direction, that is where I will focus for the rest of this chapter.

Purposeful Strategic Direction in the Age of AI

Why is purpose so important? The answer comes back, again, to the need for companies today to embody a clearly articulated ambition and enact it with speed. In the current age of digitization, in which artificial intelligence will soon become a default application, technology companies and investors must proactively work together to understand key organizational conditions, such as purposeful strategic direction. This is where we begin to see how our three main building blocks, as described in the introduction—the health of the organization, digital advances, and investment—come together. Dynamic, rapid, and agile investment decision making will depend on such mutual understanding and prioritization.

Here’s why. Near-real-time responsiveness has become the new competitive advantage, but organizations can act only as quickly as their people are willing to do. So, the first essential way to be fast is to capture the hearts and minds of employees at all levels of the organization. A common commitment to a meaningful purpose does that. Purpose offers a strategic direction for the organization, yes, but it also provides something that employees care about. It defines right behaviors and actions to beat the competition, and it empowers people to own their decisions—thereby pulling the company’s strategic purpose directly to customers.

Today’s most purpose-driven organizations—CVS Health, Google, and Patagonia to name a few—place purpose at the heart of their strategic direction, serving as a kind of guiding north star for how they plan to compete. In other words, purpose goes beyond culture to strategy—defined as the long-term roadmap to realize top management’s vision and meet business goals.

But what, exactly, is purpose? It is an organization’s aspirational, human-first reason for being. By this definition, a company’s purpose serves many stakeholders—shareholders and owners, yes, but also employees, customers, the environment, and society.

Once seen as a rather soft corporate issue whose value wasn’t always understood by the C-suite, purpose is now becoming a central tenet of organizational life. Leaders at many levels are using the concept to anchor and guide the decisions they make in response to new situations and unforeseen events—making purpose an inescapable focus for companies grappling with the challenges of today’s disruptive business environment. That is why management teams worldwide are realizing that it’s time to welcome back purpose as a key focus of an organization’s effectiveness.

Consider the following recent headline: “Shareholder Value Is No Longer Everything, Top C.E.O.s Say.”⁸ On August 19, 2019, close to 190 corporate CEOs belonging to the Business Roundtable (BRT) took a moment to pause, reflect, and reevaluate what had become clear: along with any financial investments they considered, companies must also invest in and make new commitments to employees, communities, suppliers, and, most of all, customers. In other words, these CEOs of major public companies that together have a market capitalization exceeding $13 trillion declared their commitment to a broader group of stakeholders. The BRT statement issued a forward-looking view that redefined the purpose of a corporation: to not only advance the interests of shareholders but to also equally advance the interests of employees, customers, suppliers, and the planet. That purpose places ESG criteria, and its stance behind fair and ethical engagement of multiple stakeholders, at the forefront. For most businesses operating in today’s context, this statement reflects a management reset of corporate norms, which many companies are already starting to follow and adopt.

More recently, the coronavirus pandemic has led an increasing number of companies to take a purposeful, employee-first approach, sometimes referred to as “stakeholder capitalism.” In a survey of Fortune 500 CEOs, nearly half said that the pandemic accelerated stakeholder capitalism as a way to address the human suffering caused by the crisis. (Only 18 percent felt the pandemic was slowing such capitalism while companies focused instead on short-term financial pressures.)⁹

With purpose increasingly on the radar of senior executives, it’s no surprise that companies are spending a significant sum of time, resources, and money on purpose-driven campaigns and initiatives. These organizations are wise to place their attention on purpose—after all, a large chunk of their consumers and their own workforces are doing the same. Millennials, who make up the largest portion of the workforce today and who are worth $1 trillion in consumer spending, have become increasingly vocal over the last decade regarding their expectations about where they spend their money, the products they consume, and the companies in which they work.¹⁰

Specifically, this group—sometimes referred to as the “purpose-driven generation”¹¹—expects their jobs to have an underlying purpose that goes beyond a paycheck and returns for shareholders, and they expect their companies to make a meaningful impact on society and the environment. Consider a recent Fast Company survey, which found that nearly 40 percent of millennials choose a job because of a company’s focus and role in environmental sustainability as part of its mission, compared with less than a quarter of Gen X respondents and 17 percent of baby boomers.¹²

No wonder companies that have a guiding purpose are so desirable. In today’s climate of uncertainty and disruption, purpose serves as an anchor for people at all organizational levels. Regardless of their job description, people instinctively seek the kind of grounding that a common and meaningful underlying purpose can provide. What’s more, when you walk into a purpose-driven organization, you can feel the difference. It’s in the air and in the way employees act. People are clearly engaged in what they are doing day to day, rather than resigned or just going through the motions. They are very clear about the company’s strategic direction, and they believe in it, actively translating that higher ambition into the work they do and how they do it. They appreciate their company’s broader societal impact and take pride in their jobs as adding value to a common core purpose.

For organizations themselves, the strategic clarity of a purpose-driven organization pays off in real business results: higher performance on measures such as total return to shareholders (TRS), improved ESG scores, and gains in market share are evident. A Harvard Business School study, for example, cited the importance of a clear sense of purpose to inspire a team to work together and achieve success. This research found that an increase in clarity of purpose can increase return on assets (ROA) by as much as 3.89 percent per year.¹³ Although some might argue that this emphasis on purpose is overdone, the evidence suggests otherwise: purpose-driven companies saw 400 percent more returns on the stock market than the Standard and Poor 500.¹⁴

Take, for example, one leading investment bank, where Organizational Network Analysis was used to identify the instillers of purpose among the bank’s top 600 leaders. The question “Who among you leaves you feeling a greater sense of purpose in your work after an interaction?” revealed that the top quartile of leaders created a sense of purpose for nearly 16 people on average as compared to the bottom quartile leaders, who gave a sense of purpose to fewer than one person, on average. Meanwhile, leaders in the top quartile also were able to attract higher performers to work for them, saw lower attrition rates, and had teams with higher engagement scores.¹⁵ No company is immune to the impact of a clear and compelling purpose on the bottom line. In short, purpose pays.

Companies That Win by Doing Good

Evidence of the significance of purpose over profit across multiple industries is not difficult to find. In the retail sector, for instance, former REI CEO Jerry Stritzke has said, “Purpose drives everything we do at REI. Our belief that a life outdoors is a life well-lived anchors everything. It’s our North Star.” REI has famously closed its doors on Black Friday, encouraging customers and employees alike to instead take an “Opt Outside” day.¹⁶ Unlike in years past, today only 7 percent of Fortune 500 CEOs believe their companies should “mainly focus on making profits and not be distracted by social goals.”¹⁷

At the same time, institutional investors are much more assertive about purpose not only to mitigate risks but also to clarify their ethical value proposition to shareholders and stakeholders, including employees, suppliers, and consumers. At Bank of America, for example, employees are given days off to volunteer and to vote.¹⁸ By taking this stance, institutional investors can influence how companies invest responsibly as they tackle environmental challenges like climate change or social issues such as economic inclusion.

There are many reasons why a purpose-infused strategic direction benefits companies and top management. When an organization aligns its top team around a common purpose, it takes a powerful step toward executing any organizational change, enabling speed and effective direction setting of internal initiatives while eliminating redundant investment in nonstrategic activities. For investors, purpose can guide decisions, including those that involve strategic bets and investment choices. Take the financial services industry, which must deal with fiercely competitive demands and performance expectations. Larry Fink, CEO of the world’s largest institutional investor, BlackRock, puts it simply: “Without a sense of purpose, no company, either public or private, can achieve its full potential.”¹⁹ In a letter published in 2018, Fink encouraged companies to “not only deliver financial performance, but also show how their company makes a positive contribution to society.” For example, through its Social Impact Challenge, BlackRock runs a skills-based hack-a-thon where employees help a local nonprofit solve an organizational challenge.

Or consider Ally Financial, which at the height of the great recession of 2008 managed to reboot itself as an online bank after being spun off from its parent company. Weathering the greatest economic headwinds in a generation, Ally’s spinoff gave it the chance to form a new brand and sense of purpose that was rooted in its brand name—being a relentless ally for its customers by starting with a basic question to clarify its business proposition, most notably: What is every single thing that we hate about banking? As Ally chief marketing officer Andrea Brimmer states, “The world didn’t need a new bank, but it certainly needed a better bank.”²⁰

Leaders like Stritzke, Fink, Brimmer, and Ally CEO Jeffrey Brown not only model the courage and conviction of a leader’s commitment to purpose, but they also fundamentally believe they have a responsibility as citizens of the world to do the right thing. Such leaders are outmaneuvering their competitors by anchoring their strategic direction in a deep sense of purpose, while taking stock of their business’s current trajectory and market implications.

All of which is to say that organizations must step up and demonstrate that their focus around environmental, social, and governance issues are more than just a superficial overlay. Given society’s expectations and the demographic trends that lean more toward sustainability, managers need to make a more concerted push to incorporate purpose, such as ESG metrics, into everything they do and demonstrate the economic value that comes from a focus on these issues.

One company that has taken the rallying cry of purpose to heart is Unilever. Facing unprecedented competitive pressures during the last recession, the company doubled down on a strategy and set of initiatives that connected its leaders’ personal purpose to real and evolving business problems. Unilever’s approach turned the elusive concept of purpose into a permanent feature of business model innovation—and became a case study offering lessons for other companies.

Unilever’s Blueprint for Purpose

In 2009, amid a fast-moving consumer marketplace characterized by volatility, uncertainty, and complexity, Paul Polman took over as CEO of Unilever, the British-Dutch multinational consumer goods company based in the U.K. As one of the world’s leading suppliers of nondurable consumer goods, Unilever counts among its products such household name brands as Ben & Jerry’s, Hellmann’s, Lipton, Dove, and Vaseline. The company sells products used by 2 billion consumers every day in more than 190 countries.

Despite Unilever’s prior success, Polman quickly found himself contending with a number of forces transforming the consumer goods market at the time: shifting consumer demographics and lifestyles, changes in health and wellness concerns, shrinking shelf space amid retailer consolidation and expansion, replacement of food with non-food SKUs, promotion pressure, and rising costs. In its developed global markets, the company struggled with a decline in consumer confidence, high inflation, and low GDP growth. Meanwhile, in its emerging markets Unilever faced a slowdown in the pace of growth, increasing competition, and a series of natural disasters and geopolitical disruptions. Yet somehow the business still needed to see volume and market share gains, continued margin improvement, and strong cash generation if it hoped to meet customer demands and counter unprecedented margin constraints.

Two key trends were impinging on the business: shifts of economic power to Asia, most notably to Southeast Asia, and Latin America; and the shift of power in general to the consumer, because of digitization and social media. Faced with a growth-triggered transformation caused by rapidly shifting market conditions and long-term priorities for growth in profits, volumes, cash flow, and market share, Polman knew he needed to employ a different strategy than what the company typically used. In the past, Unilever had transformed the business through such actions as acquisition and manufacturing rationalization, aligning the organization behind a unified strategy, leveraging global scale and simplifying operations, and growing consumer segments. But if Polman were to take the company to the next level of competitiveness, he and his team knew they had to be audacious and bold and to set ambitious, aspirational goals guided by and rooted in purpose.

A New Strategy. Under Polman’s leadership, Unilever’s top team crafted a new, purpose-led agenda for the company.²¹ Dubbed Unilever’s Compass Strategy, the proposition set out to double the size of the company’s revenues while dramatically reducing its environmental impact and increasing its contribution to social well-being. At the core of Unilever’s Compass Strategy was the Unilever Sustainable Living Plan (USLP), which was intended to help 1 billion people improve their health, halve the environmental footprint of the company’s products, and enhance the livelihood of those in its value chain, which meant, for example, sourcing many of its agricultural raw materials from sustainable sources. The scale of the ambition required a clear link between purpose and social impact on the one hand, and business results on the other—and a new approach to engaging company leaders and the organization. Specifically, the new strategy set out to create, capture, and deliver value across four key areas:

• Ensuring its brands developed superior products and aimed at reaching more consumers

• Leveraging its global scale and local knowledge to address all consumer needs in all markets, given shifting consumer demographics and buying behaviors

• Achieving speed through a lean, simple, and agile operating model

• Attracting, developing, and retaining talent, especially in the emerging markets

To execute on Unilever’s new purpose and Compass Strategy, Polman built a commitment to sustainability into every aspect of the way the company was run (i.e., how it makes money) and organized (i.e., its operating model and its culture) to leverage scale. However, he had to begin with clarifying the company’s values, such as integrity and respect.

But Paul Polman didn’t make these values just empty talk.²² He put in place actions to ensure that the values, purpose, and strategy were embedded in the culture and operations of the company. (See the sidebar “From Purpose to Impact: Unilever’s Approach to Business Model Innovation.”) To ensure success, each leadership layer created its own personal purpose that was tied to Unilever’s organizational purpose, thereby clearly laying out performance expectations and accountabilities. To achieve this, Polman started an initiative to clarify expectations for leadership behaviors with his senior team, and then went on to clarify them with his top 100 executives and then the next 500 executives.

Polman also challenged these leaders to identify the big challenges they could face in creating new businesses—putting business model innovation into action—while adjusting the performance management system to reward people leading new businesses that delivered results. He also addressed the workforce challenges in the company’s emerging markets by leveraging the Unilever Compass vision and a newly created equity, inclusion, and diversity strategy to attract, acquire, and engage employees ahead of the growth curve.

While much of the workforce was aligned with Unilever’s purpose-led strategic agenda, it wasn’t without its naysayers, particularly regarding the USLP, which some skeptics thought was unattainable. As a result, some executives voluntarily decided to pursue careers elsewhere. Others who held on to outdated assumptions and mind-sets were encouraged to leave the company.

A New Focus on Performance and Values. In the end, Polman’s efforts paid off. During Paul Polman’s tenure as CEO, Unilever outperformed its industry on both the top and bottom lines and delivered an impressive 290 percent shareholder return. In short, his focus on purpose not only delivered better business results but also better results for Unilever’s people and society, based on his ambition to make an environmental impact, while nurturing the next generation of purpose-driven leaders. Despite the odds, Polman’s tenacity over time enabled him to successfully steer the company it has become today by going back to its roots and making sustainability an integral part of the business model—to make it, in fact, the strategy.

Polman’s success was due to his use of purpose as an enterprise compass and critical component of the strategic direction that differentiated Unilever in the market. Then he not only aligned his top teams around that purpose with clear targets and accountabilities, he also empowered employees to live and act based on Unilever’s purpose. Not unlike John Pettigrew’s method at National Grid (described in the introduction), Polman relied on a holistic approach. Rather than taking a siloed perspective to organizational health, he focused instead on a global view and was relentless about keeping his efforts on track. What Unilever and National Grid have in common is a focus on leaders articulating a clear strategic direction, developing new capabilities to lead differently and drive impact, building on that foundation with an operating model designed to be fit for purpose, and an adaptive culture to drive speedy execution.

Continued Impact Today. Polman retired in 2018, but his legacy of purpose lives on, and most recently it helped steer the company through the tumultuous time of the COVID-19 pandemic. Purpose has served to anchor employees in making decisions close to the customer, enabling newfound speed and adaptiveness. As Unilever’s current CEO, Alan Jope, explains, “We’re actually moving away from scenario planning and trying to focus on building agility and responsiveness into the company. . . . We’ve discovered a new responsiveness in Unilever that I wish we had unlocked years ago, but it’s taken this crisis to do that.”²⁴

In short, a purpose-led strategy, like the one that Polman put in place at Unilever, is only gaining relevance, releasing the speed and responsiveness needed for the digital era. Whether you are a senior leader, an investor, or a board member, the Unilever story illustrates how a clear, purpose-infused strategic direction is essential for delivering profitable growth.

Not every company, of course, manages to build the success story that Unilever did. The challenges in the process are real. Leaders who are working to infuse purpose into the heart of their organizations should be aware of the pitfalls—and how to avoid them. Read on.

Three Pitfalls to Avoid on the Road to Purpose

As anyone who has ever been on the receiving end of shallow slogans or campaigns can attest, some purpose-driven initiatives have a very short shelf life. Recent research shows that often official corporate values espoused in support of an organization’s purpose have no correlation to corporate culture at all.²⁵ Further, when the commitment to becoming a purpose-driven company and the set of initiatives to support it have little connection to employees’ individual purpose or day-to-day activities, it is even less likely to matter.

All of which is to say that leaders who try to define a purpose-infused strategic direction for their organizations typically face three common challenges: (1) fuzzy priorities—or a lack of clarity about direction, (2) fuzzy accountability—or a lack of agreement and/or support from senior leadership around the shift in focus, strategy, or value proposition, and (3) culture clash—or a clash between the company’s established culture and the new strategic direction.

Let’s look at each of these pitfalls and how leaders might address them. Note that in each case, the solution often lies in a triage approach among the three building blocks for better organizations: boosting the health of the organization, leveraging digital tools, and ensuring that you have enough support to carry out your vision with investor resources.

Fuzzy Priorities

Strategic direction, anchored in a rock-solid purpose, is at its best when there are clarity, engagement, and action. Only then can leaders engage in productive debate, turn insight into an actionable value-creation plan against which they are willing to allocate resources, and execute a chosen course of action in a timely way. Such organizational agility depends on the interplay among three key elements—priorities, accountabilities, and capabilities. These must be carefully coordinated and tightly integrated into a company’s strategic direction.

How, then, do leaders prioritize opportunities, resources, and actions to improve performance across an enterprise? The first key to achieving this is foresight. Yet the environment has grown so uncertain that leaders can’t exactly plan anymore. For example, how can you develop and launch new ideas faster when new market entrants like Instacart, Pinterest, Airbnb, and countless others are digitally disrupting incumbent organizations across all industry sectors and introducing new business models? Such realities are prompting today’s enterprises to shift from scenario planning to scenario modeling— in essence, using advanced algorithms to provide real-time data by scanning the environment. Gathering data is how leaders turn strategic insight into actionable strategies for a multitude of potential futures which are explicitly articulated and sufficiently detailed. Airbnb, for example, used scenario modeling to increase the volume of global rentals without owning any assets to do so.

Fortunately, such turbocharged, data-driven, AI-enabled approaches to strategy formulation and development are already well underway in a number of organizations. For example, companies may use advanced analytics and sophisticated algorithms to perform “sentiment analysis” against social-media feeds and news-media content, thus evaluating users’ positive or negative feelings about a company’s product or service. The application of advanced analytics to specific business challenges has started to deliver value not only for blue-chip companies but also for institutional investors. Today, investment managers can conduct rapid reviews of quarterly earnings of thousands of companies and pinpoint key stocks worthy of more in-depth analysis. Portfolio managers are then able to prioritize and make better, unbiased investment decisions quickly and consistently. What used to take an army of human analysts employing spreadsheets and crunching data around the clock for weeks can now be done in just a matter of hours and with far greater accuracy, driving faster insights to shape business and investment strategies.

Truly healthy organizations, however, have leaders who realize that data and insights must be supported by good judgment and decisions that can be understood and adopted by senior leaders throughout the organization. Similarly, value creation always comes back to strategy. (See the box “How Digital Advances Can Improve Strategy.”) Integrating digital advances such as machine learning (ML) and natural language processing (NLP) into strategy and practice can pragmatically improve how capital is allocated—or in private equity, how deals are sourced and developed, leading to long-term health and agility.

Leveraging a private equity-style approach to strategic direction entails moving from long-term to a targeted analysis based on a start-from-scratch (i.e., clean sheet) model. In a from-scratch model, where no sacred cows are allowed, advances in digital can help leaders de-bias their decisions and take actions that align with the investment thesis in short, intense time horizons. In such situations, having a fixed ambition combined with a hunger for truly differentiated sources of value creation and agreement on priorities can make the difference in value creation and value capture for the business. In sum, adopting a PE-style approach means taking a three-pronged approach. First, start with a bias for action, followed by a clear basis for action. Second, define a lucid investment thesis—in other words, how your company will become more valuable within a certain time horizon. And third, clarify what needs to change in your organization and, most importantly, what needs to remain intact.

Organizations powered by digital advances can provide fast-paced and high-precision assessments, insightful analysis and reporting for objective decision making, or focused action planning in a time-bound and outcome-oriented manner. But it wouldn’t be a complete approach without the use of measurable metrics. A PE-style approach demands that leaders leverage digital advances to measure what they can track and measure what matters to a particular part of the business. In other words, human judgment combined with the power of AI can help even the most experienced executive or investor avoid a “gut feel” approach and instead, be relevant, targeted, and simple.

How Digital Advances Can Improve Strategy

Fuzzy Accountability

When there is leadership engagement that reflects visible willingness and expressed support for a chosen strategic direction, then there’s hope for the organization’s people to fall into alignment as well. Such a purposeful, common direction allows organizations to continually outperform competitors through consistent execution. At root, it goes to the heart of the way a company’s senior leaders make money and run the business—clear decision making and the commitment to allocate resources that constantly drive premium results. Companies that can apply such agile approaches to identify and allocate resources swiftly are the ones that will be best positioned to handle uncertainty and change at a metabolic rate.

But to do that, companies also need something else—a dynamic governance structure. That means empowering small teams, especially those on the front line, to engage in rapid decision cycles on business-critical issues. For example, Tencent Holdings helps its small teams to develop products by giving them complete autonomy over day-to-day decision making (top management checks in only when it comes to resource allocation and overall strategy).²⁶

Setting a successful strategic direction also involves something else: the ability to forecast future bets and the benefits of investments. Today’s companies can do this by making use of sophisticated algorithms combined with human judgment.

While some companies are using machine learning and AI to enhance productivity of existing business practices, others are taking advantage of new digital advances such as natural language processing. NLP enables rapid analysis of operating models’ information and workflow, while improving the decision effectiveness of business and investment decisions. Indeed, to explore the consequences of a decision before making it, some investment firms are, in fact, “appointing” algorithms to their board of directors, as demonstrated by Hong Kong venture-capital fund Deep Knowledge Ventures. Focused on age-related-disease drugs and regenerative medicine, the company assigned an AI system called VITAL to its board of investors, giving it a vote in every investment decision. How does a machine make decisions? VITAL does it by scanning prospective companies’ financing, clinical trials, intellectual property, and previous funding, and then casting a vote to reflect the most probable advantageous outcome.²⁷

Thus, Deep Knowledge Ventures and others like it are ensuring engagement and accountability around strategic direction by integrating smart machines into their top management decision-making bodies. Whether an organization is publicly traded or backed by private equity, the machines’ digitally enhanced insights can help CEO, staff, and others make optimal decisions and take on more considered, targeted work.

Culture Clash

Leading companies are constantly refreshing their ability to build a distinct organizational identity and culture—a key focus for chapter 2—that supports execution and has the most impact on overall performance. To be sure, the relentless pursuit toward assessing, evolving, and building distinctive capabilities—the specific internal advantages that a company possesses that are hard to replicate—is a cornerstone to the holistic view of taking stock and leveraging the organization’s health. Whether those advantages include an efficient supply chain, or a set of patents and a proprietary software code that can enable executional leadership, or some other advantage, problems arise when a company’s established culture clashes with the new strategic direction. The resulting misalignment can stymie growth.

For example, Zappos, under the leadership of its late founder Tony Hsieh, was on a quest to become more entrepreneurial, more self-organized, less hierarchical, and more responsive to customer needs.²⁸ But its established operating model and culture were set up to resist such changes. Zappos finally was able to transform only after it focused on the company’s distinct capabilities by reorganizing purely around roles and responsibilities.

In other words, purpose-driven leaders know how to identify talent skills and gaps, and when to adapt their organizational design for new product lines or geographic expansion. By rectifying structural holes, such leaders keep their companies competitive. When combined with equitable and inclusive workplaces, these are the companies that raise the competitive bar another notch. Namely, they boost innovation and align to the greater good, ensure workforce well-being and productivity, and unleash work-force passion and potential by committing to a higher purpose. They do this by establishing a set of leadership or operating principles deeply embedded in how the leadership team makes decisions and fosters a culture where openness and dialogue are highly valued.

At Google, I experienced such an alignment between culture and action firsthand. The company embraced full transparency, so employees and outsiders alike could clearly see that, while annual objectives and key results evolved depending on market dynamics, Google’s quarterly objectives and key results did not waver.

Organizational health and agility are top of mind for executives today and will only grow more important as it becomes key to companies’ ability to scale and grow in the 2020s. As businesses contend with increasing uncertainty, volatility, and the eventual rebound from COVID-19, companies that have purposefully developed the organizational aspects of their enterprise—in essence, those that have institutionalized organizational health under conditions where the speed and unpredictability with which events can unfold abound—are most likely to survive and thrive.

Defining a clear purpose as the bedrock of an enterprise’s strategic direction is only the beginning of a company’s journey toward organizational health. The next step is to activate the purpose-led strategic direction throughout the organization by using it to shape and reshape the enterprise’s culture and identity—becoming something that affects every employee’s day-to-day experience.

A tighter integration between the business and culture shaping agendas—a key focus of the next chapter—allows companies and investors to seize opportunities to create new business models, transform operations, and scale their ways of working more quickly and efficiently.