Businesses must root strategy in moral purpose to thrive in a complex, rapidly changing world.
MIT Sloan Management Review
Ikujiro Nonaka and Hirotaka Takeuchi
August 12, 2021
Image courtesy of Michael Austin/theispot.com
We live in a world of discontinuity and uncertainty, where norms are rapidly disintegrating and businesses are losing their footing.
We live in a time of flux and fluidity, when mandates for growth are driving high-velocity, unrelenting change. We live in a messy world, where boundaries are becoming more porous and unprecedented complexity adds ambiguity and reduces predictability.
Our traditional approach to strategy, based on data and analysis, is at a crossroads in this era of unknown unknowns.
The most well-trained AI, built on vast stores of data, information, and knowledge, could not have predicted how the COVID-19 pandemic would affect a world made more open and connected by digital technologies.
Can strategy be reframed so that companies can thrive in the face of our current and future challenges?
Can strategy be reframed so that companies can thrive in the face of our current and future challenges?
We believe not only that strategy can be reconceived, but that it must be.
In our 50 years of researching companies both in the U.S. and in Japan, our view of the organization has evolved from information processing machine (as influenced by Herbert Simon) to living organism continually creating new knowledge. We argue that to survive in today’s world, this living organism must be grounded in moral purpose and guided by the goals of offering value to customers, contributing to society, living in harmony with nature, and creating a better future.
The Soul of an Organization
Advances in neuroscience research in recent years have shed light on the biological factors driving humans’ sense of purpose.
We now know that the most basic need we are compelled to meet is social connection — it has a stronger motivational pull than even food, water, and shelter.1 Neuroscientists have also found that the human brain exhibits a predisposition to seek the common good via egalitarian and altruistic behavior.2 And it is able to combine data from multiple sources of sensory input to plan future courses of action and to handle unexpected and novel situations.3
These findings suggest that our purpose as human beings is rooted in our universal tendencies to relate to and care for one another, that we share the ability to rapidly adapt to changing circumstances, and that we can imagine together how we might create a better world.
The same sense of purpose and set of capabilities exist in the living being that is the company.
Kazuo Inamori, who founded Kyocera in 1959, believed that a company, as a collection of human beings, should strive to operate in a way that is good and right, just as individuals strive to work hard, think good thoughts, do the right thing, practice self-reflection and self-discipline, refine their minds, and elevate their character in everyday life.
Inamori’s 2004 book, Ikikata (which translates to “how to live”), describes such conduct as living with the purpose of elevating our souls so that each day they are a little more beautiful, developed, and noble.
These principles have guided Inamori, who is also a lay Buddhist monk, as a human being, as a CEO, and as a chairman, when he resurrected Japan Airlines from bankruptcy.
Similarly, Tadashi Yanai, CEO of Fast Retailing, which operates the Uniqlo stores, is guided by 23 management principles that he calls the “soul” of his company, and he believes that a soul is the most important thing we have in life.
Influenced by running a single shop in the 1980s, Yanai’s first principle is “Meet customer needs and create new customers.”
This is done a little at a time, he explains, by devoting your life to meeting customer needs a little better every day.
Yanai’s second principle, “Put good ideas into practice, move the world, and change and contribute to society,” reflects his conviction that a company exists to serve society.
These principles are integral to his leadership: At a 2010 meeting of his global management team, Yanai spent a day and a half going over the 23 principles so that executives could internalize them and put them into practice globally.
The underlying concept — the soul of an organization — has also shaped the vision of U.S. business leaders such as Microsoft chairman and CEO Satya Nadella and Salesforce cofounder Marc Benioff.
Nadella explored the idea in his 2017 book, Hit Refresh: The Quest to Rediscover Microsoft’s Soul and Imagine a Better Future for Everyone.
He identified his company’s higher purpose as helping every person and every organization on the planet achieve more.
And he connected soul and strategy: Rediscovering the soul of Microsoft, he argued, will lead to getting its strategy right, which in turn will improve life for all customers, employees, partners, and members of society.
Benioff tied purpose even more explicitly to the organization’s role in society, writing in his 2019 book Trailblazer:
“Today’s world is so rife with challenging economic, social, and political issues that it’s no longer feasible for a company to turn away and conduct business as usual. …
Over time, your employees and customers, not to mention investors, partners, host communities, and other stakeholders, will want to know your philosophy for doing business. They want to know if you have a soul.”
Over time, your employees and customers — not to mention investors, partners, host communities, and other stakeholders, — will want to know your philosophy for doing business. They want to know if you have a soul.”
Strategy at the Crossroads
As the CEOs of two leading American companies talk openly and passionately about the idea that organizations are living beings with souls — invested in improving everyone’s prospects, not just their own — we expect that other business leaders will embrace that message.
We believe more and more of them recognize that CEOs must start
- formulating strategy with their souls
- and then execute it with their brains.
We believe more and more of them recognize that CEOs must start formulating strategy with their souls and then execute it with their brains.
What do we mean by that? Let’s examine our terms a little more closely.
We use “soul” to describe the simple truths and principles that guide us to do what is right as human beings, representing a living philosophy born from experience and practice.
We use “soul” to describe the simple truths and principles that guide us to do what is right as human beings, representing a living philosophy born from experience and practice.
Soul helps us find our way every day through uncertainty and hardship — it is a way of life.
We use “brain” to refer to the analysis that will help companies operate in a messy world and wend their way through its complexities and ambiguities.
Today we have vast amounts of data available, and advanced technologies such as internet-connected sensors and AI allow us to gather, process, and interpret that data in ever more sophisticated ways.
This means organizations can develop more complex scenarios and simulations, conduct more experiments, and overall respond much more adaptively to unforeseen events than they used to.
By starting with the soul, companies can crystalize how they are going to achieve their purpose of making a better future for everyone.
Drawing on deeply held values, companies can imagine what kind of future they wish to create and then use their brains to make it happen.
They have all the analytical tools they need to achieve their goal of generating superior returns.
The key question then becomes, “How should companies use both souls and brains so that strategy becomes relevant to the world we live in?”
Drawing on deeply held values, companies can imagine what kind of future they wish to create and then use their brains to make it happen.
The key question then becomes, “How should companies use both souls and brains so that strategy becomes relevant to the world we live in?”
Six Practices That Infuse Strategy With Soul
Doing the ordinary things in life a little bit better every day elevates individuals. During the COVID-19 pandemic, for instance, small things such as wearing masks, washing hands, and keeping social distance have all helped prevent the spread of the disease. Each small practice that makes our bodies a little healthier, our minds a little more peaceful, the air we breathe a little cleaner, and the places in which we stay a little more beautiful helps us connect to the goal of improving ourselves and our world.
Likewise, doing the ordinary things a little bit better every day in our jobs — such as working hard, making ethical choices, being kind, practicing self-reflection and self-discipline, being humble, and being thankful — elevates our work lives. This builds culture at the organizational level and character at the personal level. These behaviors have to be practiced every day so that they become a way of life — just like Toyota has built daily routines, or kata, into its famous Toyota Production System (TPS).
Kata is defined as “a means for keeping your thoughts and actions in sync with dynamic, unpredictable conditions.”4 It includes process-related practices such as “Ask why five times,” the kanban card that accompanies components sent along the production line, yokoten (best-practice sharing), jidoka (automation), mieruka (visualization), and the A3 reporting process (named after the paper size). It also includes conduct-related practices like OASiS, an acronym for saying ohayo (good morning), arigato (thank you), shitsurei-shimashita (pardon me), and sumimasen (excuse me; I’m sorry) on the shop floor. These practices ensure that things get done the right way in any company that follows the TPS.
Similarly, as we have learned over decades of studying organizations, companies can adopt six daily practices to elevate strategy to a way of life:
- Cope with complexity.
- Adapt to change.
- Embrace dynamic duality.
- Empathize with everyone.
- Tell stories.
- Live with nature.
This set of practices helps organizations connect to the goal of building better lives and futures for company stakeholders and other members of society. You may be familiar with each one, but the key lies in doing all of these things habitually, a little better every day; that’s how their impact will become greater than the sum of their parts. We will discuss one at a time, describing how each practice infuses strategy with soul and thus helps companies define and pursue business goals that support the common good.
Cope With Complexity. The growing complexity of our world and its many interrelated systems is widely acknowledged. To solve our most pressing problems, we must tap diverse perspectives and sources of expertise across multiple domains — no single approach or field of study will provide the answers. Likewise, we must bring all of our own diverse capabilities to bear: The ability to sit with a complex problem and tap both analytical and intuitive thinking to address it is increasingly crucial to organizations.
An aircraft represents the epitome of complexity at the product level. Take the HondaJet plane, which consists of some 200,000 parts. It took more than nine years and 200 million pages of documentation for North Carolina-based Honda Aircraft to receive U.S. Federal Aviation Administration certification for this plane.
Yet the breakthrough innovation that launched the company’s success was a simple idea that came to aircraft designer Michimasa Fujino one night in 1997 as he lay in the dark: Why not put the engine on the wing? He jumped out of bed, turned on the lights, and roughly sketched out his idea on the back of a calendar page because he had no other paper close at hand.
When he showed his sketch to his development team members the next morning, everyone laughed at him. These aviation experts “knew” that mounting the engines on top of the wings was taboo: It would kill the aircraft’s aerodynamics. Undeterred, Fujino dug into the complex problem and worked slowly but steadily to prove that the over-the-wing concept would produce less drag. Finding the precise place to mount the engines on the wings was a delicate process; move the engines four inches away from the sweet spot, in any direction, and the plane would not fly. Fujino finally figured out where to position them when he tested a scale model at Boeing’s wind tunnel facility. He had overturned conventional wisdom while coping with an extremely high level of complexity.
HondaJet made its maiden flight in 2003 in the U.S. and received rave reviews. However, Fujino was exhausted by his decades-long quest to create an industry-changing small jet: He had been working on the challenge since 1986, when Honda first assigned him to an R&D team working to develop an experimental aircraft. He confided to us that when he took a three-week vacation with his family in the Bahamas after the test flight, he considered quitting the company. Fortunately, an American executive staying in the same hotel told him how cool the jet looked and promised to buy one. According to Fujino, that’s when he understood what his superiors in Tokyo had always told him: that he was working for the customer, not for the company. The soul of the company rested in founder Soichiro Honda’s Three Joys principle — the joy of buying, the joy of selling, and the joy of creating.
The ability to cope with complexity allowed Fujino to successfully persevere and introduce a transformative innovation. But to keep moving forward long term, he had to be guided by the organization’s soul. By recalling the three joys and the idea of making things better for the customer, Fujino also recalled his essential purpose. When Honda finally decided to put the HondaJet into commercial production in 2006, Fujino was named president and CEO of its new Honda Aircraft group — and he went on to become one of the most lauded innovators ever in aeronautical research and design.
Adapt to Change. The rapid rate of change that characterizes the modern world — driven largely by accelerated technological progress — demands that leaders and organizations anticipate and adapt to new circumstances at a pace unprecedented in human history.
Microsoft’s renaissance under Nadella shows how a leader who begins by establishing a deeper purpose for the organization — and is guided by that purpose rather than a strategy of, for example, market dominance — can more clearly see emerging trends and cultural changes and successfully adapt to them. For example, Nadella understood that the technology world was shifting to ecosystems of partners linked with open systems and the proprietary approach that Microsoft had long favored would no longer confer advantage. He also understood that the company had to move beyond a strategy rooted in trying to preserve the past — that is, Microsoft’s dominance of the PC market via the Windows operating system. He recognized that the most important emerging areas in tech were cloud and AI, so he made major investments in both that have kept the company at the forefront in these areas.5
Being adaptive involves being humble, and Nadella’s leadership has been characterized by a humility rarely displayed by his predecessors. He has been quoted as saying, “From ancient Greece to modern Silicon Valley, the only thing that gets in the way of continued success and relevance, and impact, is hubris.”6 His example shows that grounding strategy in soul is linked to the ideal of servant-leadership, where the focus is on the greater good rather than oneself. Under his guidance, Microsoft has achieved great success while also shedding its reputation as a bully that used questionable tactics to dominate. Internally, he has been credited with overhauling outdated management structures and creating a more collaborative culture, where previously the culture had been shaped by performance management practices that fueled competition among employees and undermined cooperation. And he created internal hackathons that helped break down entrenched silos across the business and got more people working together.
Purpose — soul — has been at the core of Nadella’s ability to lead the organization through change. In an email to employees when he took the helm, he wrote, “This starts with clarity of purpose and sense of mission that will lead us to imagine the impossible and deliver it. We need to prioritize innovation that is centered on our core value of empowering users and organizations to ‘do more.’ … The best work happens when you know that it’s not just work, but something that will improve other people’s lives. This is the opportunity that drives each of us at this company.”7
Embrace Dynamic Duality. In the West, an intellectual tradition of dualistic thinking (drawing sharp distinctions between mind and body, self and other, humanity and nature) has led business executives to neatly divide knowledge into two categories: explicit knowledge, which can easily be articulated and shared, and tacit knowledge, which is more intuitive and gained from lived experience. They often value the former more highly than the latter. In contrast, the intellectual tradition in Japan has stressed oneness of body and mind, of self and other, of humanity and nature. This tradition has led Japanese executives to view explicit and tacit knowledge as mutually complementary, with the emphasis placed more on the latter. Tacit and explicit knowledge form a dynamic duality interacting with, and interchanging into, each other to create something new through life experiences.
After a six-year study of Toyota, we concluded that the company actively embraces and cultivates contradiction, opposites, and paradoxes, making dynamic duality an integral part of its culture. In 2008, three of us from Hitotsubashi University in Tokyo wrote a book that focused on how Toyota reinforces the culture of dynamic duality, making it a way of life.8 We identified six traits:
- Toyota moves slowly, a little at a time, but takes big leaps once in a while.
- It is frugal on a daily basis but splurges on key events.
- It is efficient on day-to-day operations but redundant in its use of employees’ time.
- It grows surely and steadily yet is constantly paranoid.
- It is hierarchical but gives employees freedom to push back.
- It simplifies internal messaging but builds a complex analog web of human relationships to share knowledge throughout the organization.
The current CEO, Akio Toyoda, sees himself at the center of this analog web, calling himself an oyaji (old man) of a small- to medium-sized enterprise (SME). In a 2016 interview, he said about himself: “An oyaji in a SME … sees straight into employees’ faces, feels their body temperatures, and comes close to empathize with them. I don’t want to say that I cannot do these things because I run a big company.”9 That is a duality he embodies. As our interaction with Akio Toyoda and the company that bears his name illustrates, Toyota keeps on pursuing dynamic duality — idealism and reality, analog and digital, unpredictability and stability — as a way of life.
Empathize With Everyone. Human survival has always depended on our ability to organize in mutually supportive groups for food and protection — which is why social connection is our top priority. At the root of connecting with others is empathizing with them. Facing today’s crises, political and business leaders should unite, using this unique quality that we humans have. To empathize on a deep level, we need to develop a keen understanding of others’ perspectives and cultivate compassion in our hearts.
That’s exactly what Eisai, a leading Japanese pharmaceutical company, is doing with its 10,000 employees in Japan and abroad. Each employee spends a few days a year with patients in health care facilities, learning about their specific ailments and developing empathy for what they are feeling deep inside. Haruo Naito, who has been CEO since 1988, explained, “We get to know how patients feel by spending time with them, which eventually moves all of us to tears. Our motivation comes from our desire to do something about the true needs we grasped then and there.”10
This ability of humans to perceive others’ feelings and sensitivities, to collaborate and build relationships, will be invaluable in a digital-led, highly automated world. Soulful companies that lead the way will make it part of their purpose to help employees, customers, and others develop a deeper understanding of and respect for one another in a future where a torrent of technology may otherwise dehumanize us.
Tell Stories. Effective business leaders understand the power of using stories to communicate the essence of their beliefs and ideals and to help the organization internalize strategy.
The recently retired chairman and CEO of Fujifilm, Shigetaka Komori, created two guiding narratives about the company.11 First, to help people envision a different future for the company at a time when the market was transitioning from photographic film to digital technology, Komori chose to reinterpret a famous quote from German philosopher Georg Wilhelm Friedrich Hegel: “The owl of Minerva spreads its wings only with the falling of the dusk” became “The owl of Minerva spreads its wings at the beginning of a new age.” The original quote depicted knowledge (symbolized by the owl) as hindsight, arriving only when the day is done. In the reinterpretation, we see how knowledge can bring us into the future. Komori’s strategic narrative identified Fujifilm with the owl of Minerva taking off at the beginning of the new age of digitalization.
Second, Komori used stories to encourage all of his employees to use their “whole body” intelligence — not only their five senses but also the intuition that springs from lived bodily experience. He told this story to make his point: “If you are caught in a fire, which direction and how fast should you run to escape the flames? The difference between the people who escape to safety and those who don’t is not based on intelligence; it is a difference of instinct and intuition.”12
Indeed, Fujifilm escaped the “fire” that has destroyed other analog businesses. In 2018, it generated its highest revenue in its 87-year history. It had transformed itself from a photographic film company into one engaged in six core businesses: health care, graphic systems, highly functional materials, optical devices, digital imaging, and documentation. According to Komori, Fujifilm achieved that business success by extracting the experiential knowledge of all its employees (what he calls “muscle intelligence”) and by sharpening all their human capabilities (using what he calls “the whole body theory of business”). He warned, “If one element is missing, the totality will be reduced, results will not follow, and defeat will ensue. After all, it is through their capabilities as total human beings that top leaders are able to engage each individual employee and lead the company as a whole.”13
Live With Nature. Complex systems in nature — like Earth’s climate — predate Homo sapiens by more than 3 billion years, and we humans have been living with them since our species first appeared. Shinto priests at Ise Grand Shrine have been rebuilding the shrine every 20 years for the past 1,300 years, an act of renewal that honors the cyclical quality of nature. Shinto (which most Japanese view not as a distinct religion but as a “way,” or practice) teaches that gods (kami) dwell in all things in nature. The Japanese tradition of “oneness of humanity and nature” — also practiced by many indigenous cultures around the world — has taken on new relevance as humankind seeks to repair the damage to our natural environment caused by industrialization.
This concept also serves as the foundation of a course that one of us (Takeuchi) has been teaching since 2012. The course has included a visit to the Tohoku region of Japan, which was hit by the 2011 earthquake and tsunami, and by the subsequent nuclear accident at the Fukushima power plant that caused radioactive contamination of the air, land, and water. Local high schoolers who experienced the triple disaster, some of whom lost loved ones, have spoken with our students on the meaning of happiness and the role humans have in living in harmony with nature and preserving it.
Our students have visited the oyster farms in Tohoku to learn about symbiosis, a word derived from the Greek for “living together.” At the coastal town of Kesennuma in Miyagi Prefecture, the symbiosis between the forest and the sea was recognized — and restored — through the initiative of one fisherman running an oyster farm. Shigeaki Hatakeyama noticed that his oysters were turning blood-red due to the outbreak of red tide in the mid-1960s. When he realized that the tide was caused by the contaminated river water flowing into the bay, he convinced his fellow fishermen to start planting trees in the forest to protect and preserve the river basin. He was motivated by elders’ teachings that essential nutrients for the sea are carried by rivers from the forest.
Hatakeyama established a not-for-profit organization to do this work. Its name, roughly translated, means “The forest is the lover of the sea.” The name conveys its purpose, but the tagline makes the symbiotic relationship crystal clear: “The forest is longing for the sea. The sea is longing for the forest.” In other words, the people at the sea are saying, “We need the forest to make sure oysters live,” and the people on land are saying, “We need the oysters to make sure reforestation continues generation after generation.”
When the earthquake and tsunami hit Kesennuma in 2011, Hatakeyama lost his mother and his boats. His only solace came when he found later that there were enough healthy plankton in the bay to feed the oysters, and that is what kept him and his organization going. When we value living with nature, we care for the environment — and in turn preserve our livelihoods.
Surviving the Future
These six practices must become a way of life for companies to survive in this day and age of “unknown unknowns.”
They must also become the modus operandi in the life of a strategist who seeks to meet the unprecedented challenges facing businesses and humankind.
Observing leaders who consistently do these things has taught us the following lessons about strategy.
- First, strategy must be driven by human beings.
Strategy is as fundamental as thinking good thoughts, doing the right thing, and practicing self-reflection and self-discipline in everyday life. The six practices we discussed represent our philosophy of doing business — what we call soul. Our customers, employees, suppliers, communities, and shareholders want to know whether we have a soul, if we are to build mutual trust and connection.
- Second, strategy is driven by wisdom.
Mother’s wisdom (what elders have taught us) and practical wisdom (what lived experience has taught us) enable us to grasp the essence of a matter intuitively and, at the same time, cope with the fast-changing world. Companies have to continuously change to survive, so they should focus on becoming a little bit better every day rather than fixate on drawing up a precise plan. Practical wisdom enables managers to make judgment calls on how to act at certain times, under specific conditions, and to undertake the best action at each juncture.
- Third, strategy is about future-making.
The future is hazy and unpredictable, which is why leaders need to tell stories about where they are headed — it allows others in the organization to follow. Narratives illustrate a set of beliefs about what the company stands for and what kind of legacy it wants to leave behind for future generations. These stories bind the organization together and help strategy become a way of life for all employees.
- Last but not least, strategy is about making choices.
It is about choosing the future we want to make, and that future must extend beyond the narrow interests of the company. Only then will companies start thinking of themselves as social entities that have been charged with a purpose to create lasting benefits for society and to improve the human condition. No company will survive long term if it does not start with a moral purpose and end up offering value to customers, contributing to society, living in harmony with nature, and creating a better future — every day, as a way of life.
About the authors
Ikujiro Nonaka is professor emeritus at Hitotsubashi University.
Hirotaka Takeuchi is a professor of management practice at Harvard Business School.
References
- M. Lieberman, “Social: Why Our Brains Are Wired to Connect” (New York: Crown, 2013), 43.
2. For more on recent findings in neuroscience, see I. Nonaka and H. Takeuchi, “The Foundations of Knowledge Practice,” chap. 2 in “The Wise Company: How Companies Create Continuous Innovation” (New York: Oxford University Press, 2019); and I. Nonaka and H. Takeuchi, “Humanizing Strategy,” Long Range Planning 54, no. 4 (August 2021).
3. C. Koch, “Consciousness: Confessions of a Romantic Reductionist” (Cambridge, Massachusetts: MIT Press, 2012), 129–130.
4. M. Rother, “Toyota Kata: Managing People for Improvement, Adaptiveness, and Superior Results” (New York: McGraw Hill, 2010), 16.
5. As of late May 2021, Microsoft’s market capitalization exceeded that of its two biggest rivals in cloud, Google and Amazon.
6. R. Waters, “ Satya Nadella Brought Microsoft Back From the Brink of Irrelevance,” Los Angeles Times, Dec. 21, 2019, www.latimes.com.
7. S. Nadella, “ Satya Nadella Email to Employees on First Day as CEO,” Microsoft, Feb. 4, 2014, https://news.microsoft.com.
8. E. Osono, N. Shimizu, and H. Takeuchi, “Extreme Toyota: Radical Contradictions That Drive Success at the World’s Best Manufacturer” (Hoboken, New Jersey: John Wiley & Sons, 2008).
9. “Shadowing Akio Toyoda: 72 Hours in Germany,” President, Aug. 1, 2016, 109 (in Japanese).
10. Based on an interview with Naito in 2005, when Nonaka started to serve on the Eisai board.
11. Based on interviews with Komori on multiple occasions, from 2012 to 2019, in Tokyo.
12. S. Komori, “Innovating Out of Crisis: How Fujifilm Survived (and Thrived) as Its Core Business Was Vanishing” (Berkeley, California: Stone Bridge Press, 2015), 134–135. The parentheses were added and the paragraphs shortened by the authors.
13. Komori, “Innovating Out of Crisis,” 157.
Names cited:
Kazuo Inamori, founder of Kyocera
Tadashi Yanai, CEO of Fast Retailing
Satya Nadella, Microsoft chairman and CEO
Marc Benioff, Salesforce cofounder;
Michimasa Fujino, Honda aircraft designer;
Soichiro Honda’s, Founder of Honda (Three Joys principle — the joy of buying, the joy of selling, and the joy of creating);
Akio Toyoda, current CEO of Toyota;
Shigetaka Komori, recently retired chairman and CEO of Fujifilm;
Michimasa Fujino, Honda aircraft designer;
Shigetaka Komori, recently retired chairman and CEO of Fujifilm
Originally published at https://sloanreview.mit.edu on August 12, 2021.
