Using ‘theory of change’ to build a strategy with impact

In our last blog, we talked about the concept of value creation, a buzzword that has been going around for a few years. As we explained, there are plenty of frameworks that explain the how and what about value creation. In essence, it’s really just about one question: How does – what we do – make everybody profit? This is one of the hard questions, but one that companies should be asking themselves. We believe that, in essence, the answer to this question lies in the ability of ‘integrated thinking’, and how that’s acted upon on a day to day basis. In this blog, we’ll give you a starting point to get this way of thinking going.

Planning for impact starts with a vision

We believe companies have a big role to play in addressing socio-economic and environmental needs. Some make this explicit with a societal purpose, or a so-called ‘big hairy audacious goal’.

Take Philips for example. Their aim is to make impact by ‘improving the lives of 3 billion people a year by 2025’. And they put their money where their mouth is, with a clear definition of how to measure when a life is in fact improved, and progress reporting on a quarterly basis:

(Click to open the interactive map in a new window)

Philips creates value for its company and for society by delivering meaningful health innovations and as a result, health impact. They have a vision for the future, and their business model has changed as a result, going from light bulbs and TV’s to health & wellness.

How to plan for purpose and impact?

To become an impactful company that creates value in all dimensions, for all stakeholders, you need to start by thinking about the value you actually want to create. Even better is writing it down as a vision, making it visible and tangible. Explicitly mapping (potential) impact is a great guide for strategic thinking and action.

But where to start? One way is to draw up a Theory of Change (ToC). A Theory of Change visualizes how and why a desired change is expected to happen. Change here means societal or environmental progress, and company’s influence on that high-level change is impact. As such, a ToC also helps to ask the difficult questions: ‘What do we as a company believe needs to happen in the world, and what is our role in it?’ What is our purpose, our vision?’ It also means having to be brutally honest when it comes to negative impact.

How to draw up a theory of change model?

So, how to get started? A theory of change model looks like this:

This logic model, much like the ‘value creation model’ of IIRC, describes the resources needed (inputs), the activities and direct results thereof (outputs). These outputs can often be expressed through existing company performance indicators, such as number of products sold, score in customer satisfaction or amount of materials re-used. But what are the outcomes, and finally, what is the impact?

These seem like difficult questions, but from a distance, it’s usually pretty simple. It really helps to start at the end, with the desired impact, and follow a process of backmapping to specify what your company needs to do to achieve this impact.

To give an example, a real estate company may state their vision to contribute to a climate neutral society by 2050. What are they doing, or should they be doing, to make this happen? Outputs, in this case, may be solar panels on property roofs, or homes fitted with smart meters to measure energy and water use. Those are ‘outputs’. The effect, or outcome, is that CO2 emissions are reduced. Ultimately, the impact is offsetting or mitigating climate change is what’s being contributed to.

Some companies are taking serious steps in quantifying or even monetizing these high-level impacts (so-called impact measurement), but just mapping these cause-and effect paths qualitatively without adding data is a valuable step in itself.

Tips for mapping your Theory of Change (ToC)

To map the ToC for your company, here are some guiding questions:

For Inputs:
What are my inputs (financing, staffing) that my company truly needs to do what we do? Here, you can think along the lines of the 6 capitals as formulated by the IIRC: financial, human, social, manufactured, intellectual and natural capital. Instead of including everything, focus on the most relevant resources.

For Business model & Strategy
What do we do? What is our purpose, our strategic ambitions? What do we need to do or be good at, to remain relevant and financially viable in the short and long term?

For Outputs:
What are we creating and delivering? In terms of products of services, but also unintended by-products, like waste? What are the relevant indicators we use to steer and measure progress?

For Outcomes:
What are the effects we are achieving for our various stakeholders? For example, if we are actively investing in our employees, how is that actually affecting them and us?

For Impact:
Looking at the big themes that we say we want to contribute to, have we moved the needle? What is our impact on society, qualitatively or even better; expressed in data?

Of course, mapping your company’s change theory won’t turn your company into a buzzing value creating factory overnight, with ‘shared value’ product or service innovations rolling of the conveyer belt on the daily. But going back to the drawing table to create this ToC map and testing some basic assumption in the process is a good starting point.

Next blog: start by crunching the numbers

Instead of focusing on drawing the big picture in a ToC, it’s also possible to start with focusing only on the impact side. Here we enter the field of impact measurement.

Our partner Ace & Tate, the fast growing Dutch eyewear brand, started exactly there. Back in 2017, we worked with them to calculate the environmental impact of glasses. Since then, they have been using the insights to make some serious changes. Amongst others, Ace & Tate reduced all the unnecessary packaging and redesigned the glasses case. And in the process, their ambition became clear: to become a driver for change in the industry.

In our next blog, we’ll go into more detail on quantifying and measuring impact using our custom Externalize methodology.

In the meantime, if you’d like to know more about how we can help you develop a ToC, or if you want to talk about impact management, don’t hesitate to get in touch.

Author: Jacqueline Houweling