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Basics of Social Enterprise Dr Alessandro Giudici – Lecturer in Management e-mail: [email protected] Cass’ CENTIVE Research Centre: http://www.cass.city.ac.uk/research-and-faculty/centres/centive/business-models
#centive @cassinthenews @giudicialex
AGENDA
1. Taking stock of common conceptions of social entrepreneurship
2. Defining an appropriate domain for social entrepreneurship
3. The Social Entrepreneur’s Check List and implications for scaling
“Over the last decade, social entrepreneurship has become an increasingly important international cultural
phenomenon... Its growing appeal appears to be especially strong among a group of socially aware people who have become more skeptical about the ability of governments and businesses to meaningfully address pressing social problems such as poverty, social exclusion, and the environment… At the same time, a number of influential organizations and associations are carefully promoting social entrepreneurship by providing compelling anecdotal evidence of heroic individuals “changing the world”… Who could argue with the images of altruistic and passionate individuals skillfully captured through awards, films, and case studies and who are celebrated by powerful intermediaries such as Ashoka, the Skoll Foundation, the Schwab Foundation, and Fast Company?”
(Dacin, Dacin & Tracey, 2011).
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USEFUL RESOURCES TO START WITH
• Impact Hub (www.impacthub.net )
• UnLtd (unltd.org.uk) o https://unltd.org.uk/wp-content/uploads/2012/11/Creating_Social_Enterprises_v1_0FINAL020909.pdf
• Social Enterprise UK (www.socialenterprise.org.uk)
• School for Social Entrepreneurs (www.the-sse.org) o www.the-sse.org/about-school-for-social-entrepreneurs/glossary
• Ashoka UK (uk.ashoka.org)
• The Guardian o www.theguardian.com/us/sustainable-business o www.theguardian.com/sustainable-business/social-enterprise-blog
• Big Society Capital (www.bigsocietycapital.com)
• Social Investment Business (www.sibgroup.org.uk)
• Royal Bank of Scotland o http://www.inspiringenterprise.rbs.com/inspiring-social
• ClearlySo (www.clearlyso.com) o www.clearlyso.com/what-is-a-social-enterprise-2
LET’s START WITH SOME EXAMPLES
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WELL-KNOWN UK EXAMPLES
cooperative
all profits donated
WHAT ABOUT?
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WHAT ABOUT?
The Wikimedia Founda/on, Inc. is a nonprofit charitable organiza/on dedicated to encouraging the growth, development and distribu/on of free, mul/lingual, educa/onal content, and to providing the full content of these wiki-‐based projects to the public free of charge.
WHAT IS A SOCIAL ENTERPRISE?
or
Social Business, Mission-driven Organization,
Impact/Positive Entrepreneurship, etc. ???
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CONCEPTUAL FOUNDATIONS (I) (Kickul & Lyons, 2012; Santos, 2009)
• People have been engaged in the types of activities that today we include under the umbrella we call “social entrepreneurship” for centuries: ministering to the sick, feeding the hungry, teaching the illiterate to read, and so forth.
• Economic and social phenomena such as the spread of capitalism, the rise of the welfare state, and the decline of the traditional family support structure have served to make these activities more necessary and caused them to grow in scale and level of sophistication.
• Typical definitions: o “Social enterprises are businesses that trade to tackle social problems, improve communities,
people's life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community.” (Social Enterprise UK)
o “An entrepreneurial activity with an embedded social purpose” (Austin, Stevenson & Wei-Skillern, 2006)
• Yet, these definitions are highly tautological and therefore the concept of social entrepreneurship is poorly defined from a theoretical standpoint and its boundaries with commercial entrepreneurship remain fuzzy.
CONCEPTUAL FOUNDATIONS (II)
• The phenomenon of social entrepreneurship seems to challenge mainstream economic theories based on the assumption of self-interested economic actors.
• When a phenomenon is not easily classifiable is often called a hybrid. In this respect, social entrepreneurship is commonly seen as a hybrid that mixes commercial and social sectors elements.
• It is often said that the chief difference with commercial entrepreneurship is the social entrepreneur’s focus on social mission achievement as opposed to the commercial entrepreneur’s focus on profits for the enterprise’s owners. Put another way, the former serves stakeholders; the latter serves shareholders.
• However, although it is true that social entrepreneurs pursue certain social values and/or social change, an excessive emphasis on the ‘social’ element in the definition is problematic because the definition of ‘social’ is always somewhere else. It requires subjective assessments about who is in need of ‘social help’ and assume that there is some metric or set of values objectively defined that make certain values ‘social’ and others not.
• Besides, it tends to assume ‘values’ as ‘neutral’ and ‘change’ as positive per se.
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hBps://www.youtube.com/watch?v=_mbEsSQZ5yw
“What kind of world is this? Should we leave everything to the decisions of the profit-‐maximizers so that their benefits is what decides the world?
Or there is something else to bring in? That’s the basic quesDon.” Muhammad Yunus, 2006 Nobel Peace Prize
STRATEGY =
VALUE CREATION
(for customers/ beneficiaries)
VALUE CAPTURING (uniqueness/
differentiation)
TOUGH CHOICES (trade-offs)
WHAT IS ‘STRATEGY’?
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VALUE CREATION vs VALUE APPROPRIATION
• At the roots of any economic activity there is a choice about whether the predominant focus of the organization is about value creation or value appropriation.
• Any perceived shift or ambiguity may lead to a loss of legitimacy among stakeholders.
• Example The Mexican bank Compartamos operated for many years as a microfinance institution, trying to maximize on value creation by lending to the poor and charging an interest rate that allowed it to cover costs and reinvest in growth. In the 1990s, a period of high inflation forced managers to raise interest rates significantly. After the inflation came down, they realized that the business was highly profitable and kept the interest rates high with a view for an IPO. In 2007, managers and initial investors cashed out via the IPO with very high rates of ROI and the new shareholders demanded that the value appropriation strategy continued. Yet the bank lost legitimacy in the microfinance field and Yunus complained that the whole movement risked losing its soul.
WHY A CLEAR FOCUS MATTERS?
• Being clear about whether the organization focuses on value creation or appropriation drives the choice of actual business activities.
• For example., a pharma company focused on value appropriation would not invest in vaccines for diseases that plague developing countries due to the lack of ability to pay by its potential clients. However, one focused on value creation would invest in that activity given the strong and measurable impact for society. More importantly, it would seek novel solutions to the problem (e.g. OneWorldHealth).
• Although it might be possible to temporarily develop win-win scenarios and combine goals, conflicts will inevitably arise when trade-offs between value creation and appropriation surface – generally after a certain growth threshold – unless appropriate governance mechanisms are in place to counter-balance them.
• For example, Grameen Phone, the joint-venture between the Norwegian telecom company Telenor and Grameen Bank to deploy low-cost mobile phone access in Bangladesh, collapsed because the growing success of the initiative pushed Telenor to renege an earlier promise to cede majority ownership to Grameen on the top of many ethical and legal problems in the way the partnership was managed. Yunus complained that the agendas of the partners were increasingly in conflict.
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KEY POINT 1 - SOCIAL ENTREPRENEURSHIP IS ABOUT VALUE CREATION
(Source: Santos, 2009)
SOCIAL ENTREPRENEURSHIP AND THE ECONOMIC SYSTEM?
• Economic theory suggests that, in perfect market conditions, economic agents pursuing their own self-interest (proxy: profit maximization) will lead the economy to an optimum level where resources are put to the best possible use and individuals consume the services that they most value. This in turn will maximize welfare since no re-allocation of resources will be more efficient (i.e., the ‘invisible hand’ of the market of Adam Smith).
• Obviously economies are never static and over time corporations can become locked in old business models, wrong capabilities and thus becomes unable to balance the system. It is the role of the (commercial) entrepreneur to act as a dynamic mechanism that keeps economies evolving towards an equilibrium where resources are optimally allocated (i.e., the ‘continuously destructive entrepreneur’ of Schumpeter).
• Since economic activity does not happen in an institutional vacuum, governments and institutions take care of the infrastructure of the system (e.g. property rights, rule of law, etc.) and monitor competitive behavior. Besides, since the ‘invisible hand’ of the market may be efficient economically but ‘might’ generate inequalities, the ‘visible hand’ of the government is expected to assume a redistributive function through the tax system and social coverage.
• However, government action generally favor broad solutions and not customized ones and might miss particular social inequalities. Charities are expected to act as the dynamic mechanism that re-balances the economy in terms of distribution and not just allocation of resources.
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THE PROBLEM OF EXTERNALITIES
• This simple economic architecture is spoiled by the presence of externalities, i.e. positive or negative implications that go beyond the objective functions of any economic agent.
• When there are externalities, the decisions of self-interest actors are no longer optimal for society since they ignore second-level impact on others.
• Examples of negative externalities are pollution or the over-production/consumptions or activities with negative consequences (e.g. car usage). Positive externalities lead instead to the under-provision of goods that would create value for society (e.g. education, vaccines).
• Four mechanisms to correct for negative externalities: - Regulation - Taxation - Market-based (e.g. carbon-emission trading system). - Self-regulation (e.g. CSR, industry best practices, etc.).
• Social activism provides a distributed and dynamic mechanism to try to correct market failures due to negative externalities, creating pressures for governments and corporates.
WHAT ABOUT POSITIVE EXTERNALITIES?
• When there are positive externalities, it means that self-interested actors do not perceive an adequate potential for value appropriation.
• Governments may decide to provide directly services that counter-balance this market failure or to subsidize self-interest actors. Governments have, however, multiple attention foci and (very) scarce resources. And increasingly so.
• KEY POINT 2 - SOCIAL ENTREPRENEURSHIP IS THE DISTRIBUTED AND DYNAMIC MECHANISM FOR THE PURSUING OF NEGLEGTED POSITIVE EXTERNALITIES.
• From this perspective, the legal form of social enterprises or how much value social entrepreneurs appropriate through their activities is (in principle) irrelevant because what matters is their motivations to tackle these neglected positive externalities. (Of course it matters in practice, particularly with respect to governance – see the key resources on Slide 3).
• Very often social entrepreneurs sense and try to address these ‘social opportunities’ very early on BEFORE governments and market players react. An Ashoka report in 2007 claimed that over half of their members influenced national legislation within 5 years from launch.
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WHAT TYPE OF POSITIVE EXTERNALITIES?
• SUB POINT 1 – Social entrepreneurs are more likely to operate in areas with localized positive externalities that benefit a powerless segment of the population.
- When positive externalities may benefit disproportionally a specific constituency such as isolated citizens, racial minorities, or elderly people, the government may have a weaker mandate to intervene using public funds.
- When these constituencies have collective power (e.g. farmers) then the government has more incentive to act. Left ‘by themselves’ are those constituencies that are small in size and have low status, low resources, low ability for collective movement and low influence on public opinion.
- These areas will present not just market failure but system failure, with a mismatch between the social need and the market solution yet in presence of certain kinds of profit opportunities (i.e. willingness to pay but not enough for self-interested actors).
WHAT’s THE GOAL OF SOCIAL ENTREPRENEURSHIP?
• SUB POINT 2 – Social entrepreneurs are more likely to seek sustainable solutions than to seek sustainable advantages
- In contract with organizations focused on value appropriation – and therefore on sustainable competitive advantages – social entrepreneurs will mainly strive to create long-term fixes to the social opportunities they identified.
- These sustainable solutions either address the root causes of the problem or create an institutionalized system that keep addressing it over time, ideally with limited intervention from the social entrepreneur.
- Put differently, a successful social entrepreneur makes the problem disappear, at least in principle.
- An implication is that social entrepreneurs should follow a non-dogmatic approach to problem resolution. What works is what matters, irrespectively of whether is market-based, community-based, requires partnership with the government or other constituencies.
• SUB POINT 3 – Social entrepreneurs are more likely to develop a solution built on the logic of empowerment than on the logic of control.
- Ideally, they strive to make themselves unnecessary.
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THE SOCIAL ENTREPRENEUR’s CHECK-LIST (MacMillan & Thompson, 2013)
FROM POSSIBLE TO PLAUSIBLE 1. Articulate the social problem and your sustainable solution 2. Assemble an advisory board and crash-test both the problem and the solution 3. Define and validate your main social impact and revenue units 4. Define your target segment of beneficiaries and why the solution will be attractive from their perspectives vs competitive alternatives (including ‘no change’) 5. Conduct a careful strategy assessment of the necessary resources and capabilities and the inevitable contextual socio-political dynamics
FROM PLAUSIBLE TO PROBABLE 1. Frame your target social impact and minimum financial goals 2. Scope the necessary economics of the business to achieve the social impact 3. Specify your deliverables (i.e. do some proper business calculations)
FROM PROBABLE TO PLANNABLE 1. Launch and monitor the business, keeping your assumptions under control 2. Monitor second-order externalities (i.e., your social enterprise might generate unintended consequences too!) 3. Pre-define success and failure and your disengagement rule if things do not work out (i.e. avoid escalation of commitment) 4. Scale up (next slide)
IMPLICATIONS FOR SCALING
OWNERSHIP MEANS ENDS
• Nevertheless, social entrepreneurs can also address their target constituencies focusing on OWNERSHIP (e.g. employee-owned cooperatives such as The People Supermarket) or on MEANS (e.g., paying the living wage, giving back all profits, etc.).
• It is important to note that the potential for scaling impact up differs significantly. In END-oriented social enterprises, the primary driver of scalability of impact is the size of the social opportunity. In OWNERSHIP- and MEANS-oriented social enterprises, the scalability of impact strongly depends on the size of the market opportunity.
• A direct implication of the proposed theoretical view of social entrepreneurship is that social entrepreneurs are likely to be more effective when they focus on social opportunities as ENDS, i.e. on clear social needs in the presence of neglected positive externalities.
• This means that there are some (significant) localized and powerless segments of population that may be profitably served but not at the level expected by market operators. These ‘beneficiaries’ may pay directly or another beneficiary (e.g. the local council) may pay for them via a multisided-business model (e.g. Better Leisure Centers).
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THE CHALLENGES OF SCALING UP (MacMillan & Thompson, 2013)
• Scaling up usually follows 3 options: - Expansion from the core – wholly owned. - Partnership-based replication – either social franchising or semi-centralized
network governance
• Key challenges (among many…): - Hazards of visibility: increased competition, more attention from authorities, obstruction from
vested interests, organized labor force. - Strains on the ecosystem: suppliers’ system overloading, escalating demand sophistication,
increased employee turnover thanks to improved skills. - Other growth challenges typical in commercial entrepreneurship: e.g., increased demand for
marketing and finance resources, production reliability, management coordination and control costs.
MORE ON SCALING NEXT WEEK!
KEY REFERENCES
• Santos, F. M. 2009. A positive theory of social entrepreneurship. INSEAD Faculty & Research Working Paper.
Additional references: • Kickul, Jill; Lyons, Thomas (2012-03-22). Understanding Social Entrepreneurship: The
Relentless Pursuit of Mission in an Ever Changing World. Taylor and Francis. • MacMillan, I.C., Thompson, J.D. 2013. The Social Entrepreneur’s Playbook. Wharton
Digital Press: Philadelphia, PA. • Yunus, M., Moingeon, B. & Lehmann-Ortega, L. 2010. Building Social Business
Models: Lessons from the Grameen Experience. Long Range Planning, 43: 308-325.
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THANK YOU! Q&A
