3.3.2 The purpose of firms

Helpful prior knowledge and learning objectives

Helpful prior learning:


Learning objectives:

In 1968, five friends in Uruguay wanted to help rural women. They started Manos del Uruguay, a business that created jobs to improve women’s lives and preserve traditional crafts.

Manos del Uruguay began by setting up workshops for women to make wool blankets and horse saddle pads. They taught the women how to manage production, run cooperatives where they shared ownership of the business, and balance work and family. Each product comes with a tag signed by the artisan, showing the personal story behind every piece.

The cooperative uses local materials like wool and leather in small batches so as not to put too much pressure on the environment. They also use traditional dyeing and spinning techniques to keep crafts alive. As part of the World Fair Trade Organization, Manos del Uruguay runs 12 cooperatives owned by the artisans. Profits are shared or reinvested to strengthen communities even further.

A photograph of wool yarn

Figure 1. Wool yarn from Manos del Uruguay

(Credit: The Bees, CC BY-NC 2.0)

The regenerative purpose of Manos del Uruguay shows how businesses can positively transform lives and communities while caring for the planet and strengthening their cultural roots and traditions. The short video below describes the impact of Manos del Uruguay.

What is the purpose of business?

The purpose of a business is the main reason why it exists. In capitalist economies, many businesses are created to maximise profits and increase the wealth of their owners or investors (Section 3.2.1).

However, not all businesses are about making as much profit as possible. Some focus on solving real-world problems, meeting human needs and strengthening social and ecological systems. They work to find the sweet spot in the Doughnut Economics model (Figure 2) (Section 1.3.4).

The model has two important parts. The inner ring or social foundation, focuses on meeting basic human needs like food, water, housing, and healthcare. The outer ring represents the planetary boundaries, the limits of the nine key ecological systems that sustain life on Earth (Section 1.2.7). Businesses that follow this model aim to operate in the “safe and just space for humanity” between the two rings, ensuring they help people while protecting the planet, creating and maintaining the conditions needed for all life on Earth.

Doughnut Economics Model

Figure 16. The Doughnut Economics model showing the “safe and just space for humanity” (Credit: Kate Raworth and Christian Guthier CC-BY-SA 4.0)

Businesses with a social and/or ecological purpose are often called social enterprises, an idea made popular by Bangladeshi economist and entrepreneur Muhammad Yunus. Unlike businesses that aim to maximise profits, social enterprises exist mainly to solve social or ecological problems, like poverty, lack of education, or river pollution. They reinvest their profits to keep working toward their social or ecological mission. Social enterprises find a balance between making enough money to keep running, called commercial viability, and making a positive impact on society. This makes them different from both profit-focused companies and charities, which usually have a strong social or ecological purpose, but rely on donations to keep running. 

Figure 3 below shows some data about social enterprises in various countries.

Manos del Uruguay, described at the start of this section, is an example of a social enterprise. What is its social or ecological purpose? How does it remain commercially viable?


Given the social and ecological crises we face, it is clear that new businesses should focus on meeting real human needs within planetary boundaries, and existing profit-driven businesses need to rapidly transform their operations. All businesses should, in fact, be social enterprises.

Is a mission and vision enough to give business purpose?

Mission and vision statements help guide businesses in the right direction. A vision statement is a company’s long-term dream for the future. It gives a sense of where the business wants to go. On the other hand, a mission statement focuses on what the company is doing right now to reach its vision. For example, the Ellen MacArthur Foundation explains its mission and vision like this:


Our mission is to accelerate the transition to a circular economy

We develop and promote the idea of a circular economy. We inspire and work with business, academia, policymakers, and institutions across the globe. 

Our vision is an economic system that’s better for people and the environment.

Logo of Ellen MacArthur Foundation

Figure 4. The Ellen MacArthur Foundation has a clear mission and vision on its website

(Credit: Ellen MacArthur Foundation)

In practice, many businesses blur their mission and vision, or use other ways of communicating their purpose. For example, they may instead define a core set of values. Whichever way they do it, businesses should communicate its purpose clearly to all the stakeholders, so that everyone involved with the business works towards the same goals.

While vision and mission statements are important for stakeholders, they are not sufficient to really give a business purpose. Purpose is reflected in the business’ culture, actions, and products:

Figure 5. The difference in purpose of a fast-fashion clothing manufacturer and Manos del Uruguay

(Credit: Doughnut Design for Business - Core Tool, CC BY-SA 4.0)

How a business handles trade-offs can reveal its true purpose. If a company only takes regenerative actions if those actions also maximise profits, then profit is still the main goal of the firm. You can also see purpose in what a business decides to stop doing. For example, a company that genuinely wants to improve customer health will stop selling unhealthy products even if they are profitable. A business aiming to be regenerative will stop high-CO2-emitting operations, even if it reduces its profits.

What’s the right balance of purpose and profit?

Balancing profit and purpose can be challenging, but it’s important for businesses that want to make a positive impact while staying financially stable. Businesses often face tensions between doing what’s good for people or the environment and making enough money to survive. Sometimes, making responsible choices, like paying living wages or using renewable materials, costs more in the short term. But these actions help to support a more stable and resilient society and ecosystems on which the business itself depends.

To stay commercially viable, businesses must ensure they earn enough to cover production costs and can withstand problems and disruptions. For instance, a social business that provides clean water needs to cover operational costs and pay staff. Focusing too much on purpose without considering financial stability can lead to failure. In the end, social enterprises must carefully balance their social and ecological purpose with the need to make enough money to stay resilient and grow their positive impact on society and ecosystems. 

Still, it’s important to understand that providing for many essential human needs may not be profitable at all. This may be because those who need the products or services are not able to pay for them, or because social and economic systems have conditioned people to undervalue what the business is offering. This is especially true of care services in many societies (Section 1.3.7), but also applies to many other essential needs. Thus, we cannot expect for-profit businesses to meet all human needs effectively on their own through market mechanisms, and must support diverse types of organisations and strengthen other provisioning institutions (households, commons, state) to build resilient societies.

Activity 3.3.2

Concept: Regeneration

Skills: Thinking skills (transfer)

Time: 40-45 minutes

Type: Individual, pairs, and/or group, depending on option

Option 1: Identifying and discussing your school’s purpose

Option: 2: Investigating the purpose of a local or non-local business

You could undertake a similar short investigation, using the steps in Option 1 to consider a local or non-local business.

Option 3: Acumen Fund impact investing case studies

Access the case studies of the Acumen Fund, a global impact investment firm that supports social businesses around the world. Individually, with a partner, or in a small group:

Option 3: Discussion - Part of the solution or part of the problem?

Note: This activity could take longer than one class period if more time is allocated for students to research.


There is a well-known saying: 


If you are not part of the solution, you are part of the problem. 


We face urgent social and ecological crises. To what extent should societies allow the continuation of businesses that use Earth’s limited resources to produce goods and services that do not contribute to human wellbeing, or even harm people? If it is helpful for you to consider specific examples of businesses that we might question, you might consider a sweetened fizzy drinks business, a business that creates unhealthy foods, or a cigarette manufacturer.


Use a discussion format/process that you are familiar with to consider different points related to this question and discuss in a small group or as a class. You can also write or video/audio record a reflection.

Ideas for longer activities and projects are listed in Subtopic 3.5 Taking action

Checking for understanding

Further exploration

Sources

Doughnut Economics Action Lab (March 2024). Doughnut Design for Business DEAL’s guide to redesigning businesses through Doughnut Economics – Core workshop Version 1.2. https://docs.google.com/presentation/d/1x8flVhi7JKRRzQClrJnlGkdjd7TpIGXeQiVMQotIH0Q/edit?usp=sharing.

Kelly, M. (2012). Owning our future: The emerging ownership revolution. Berrett-Koehler Publishers: Oakland.

Kelly, M. (2013). The architecture of enterprise: Redesigning ownership for a great transition. The Good Society, 22(1).

Raworth, K. (2017). Doughnut economics: seven ways to think like a 21st century economist. London: Penguin Random House.

Sahan, E. (2023, January). Doughnut Design for Business: Introduction to Redesigning Businesses through Doughnut Economics [Video]. YouTube. https://youtu.be/ViHwewmuArI.

Sahan, E. et. al. (2022, November). What Doughnut Economics means for business: creating enterprises that are regenerative and distributive by design. Doughnut Economics Action Lab. https://doughnuteconomics.org/rails/active_storage/blobs/redirect/eyJfcmFpbHMiOnsibWVzc2FnZSI6IkJBaHBBcXNpIiwiZXhwIjpudWxsLCJwdXIiOiJibG9iX2lkIn19--259000ee416367cd44b4e63d37637ded7c89f384/Doughnut%20&%20Enterprise%20Design%20-%20CET_DEAL%20paper%20V.1.0.pdf

Terminology

Link to Quizlet interactive flashcards and terminology games for Section 3.3.2 The purpose of firms - in order of appearance


cooperative: an organisation owned and controlled by people to meet their common economic, social, and/or cultural needs

profit: total revenue minus total cost

reinvest: putting the profit on a previous investment back into the same business or activity

capitalist: a person who has capital invested in business with the aim to make a profit

economy: all the human-made systems that transfer and transform energy and matter to meet human needs and wants

wealth: the total value (stock) of someone’s assets such as money, house, or investments

system: a set of interdependent parts that organise to create a functional whole

Doughnut Economics model: a model for sustainable development shaped like a doughnut, combining the concept of human needs with planetary boundaries

social foundation: human needs that need to be met for human survival and wellbeing

planetary boundaries: the limits of Earth systems to absorb the impact of human activity and continue to function

social enterprise: a business that operates for a social or environmental purpose

commercial viability: the ability of a business to earn enough revenue to at least cover costs of production

charity: an organisation set up to provide help and raise money for those in need

vision statement: a statement of a business’s long-term dream for the future, giving a sense of where the business wants to go

mission statement: a statement focusing on what the company is doing right now to reach its vision

stakeholder: a person who has an interest in or is impacted by some activity

culture: the beliefs, values, attitudes, behaviours and traditions shared by a group of people and transmitted from one generation to the next

value: ideas about what is important or good

living wage: a wage that is high enough for a person to cover their living expenses

renewable materials: natural resources that can be replenished indefinitely

resilient: able to recover after a disturbance

care: the act of providing what is necessary for the health, welfare, upkeep, and protection of someone or something

provisioning institution: a group of people and their relationships as they try to meet human needs and wants