Business & Economy

How on Earth Do Social Enterprises Survive?

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Michael Hodson

Business for Good

Many people today believe there is a new kind of business that’s telling a new story. They are known by various names: social enterprises, hybrid companies, for-benefit corporations. However, social enterprise is the term that is gaining recognition internationally. Social enterprises speak about business for good. They challenge the view that business and ethics are separate. They say we should set right the problems of the economy within the workings of businesses themselves. What’s exciting is that social entrepreneurs are putting what they say into practice.

The social objectives of social enterprises usually fall into a small number of categories, providing:

  • employment, not just for the hard to employ but also for women freed from trafficking. (See the case study of BASHA)
  • cultural goods such as classical music or dance;
  • a service or product for people with low incomes; for example medical care, housing, consultancy or microfinance. In fact it was microfinance that first drew the attention of many to social enterprise when Muhammad Yunus and the Grameen Bank jointly won the Nobel Peace Prize in 2006;
  • a fair price to suppliers, particularly suppliers of agricultural goods;
  • community infrastructure including community gardens and retailing where for-profit stores have closed;
  • care for the environment, such as Living Forest Communities, founded by Regent graduate Doug Makaroff, which combines eco-housing with the preservation of ancient forests.

Many of these social objectives are also the concern of government. So in many countries the largest activity of social enterprise is the delivery of government services.

Starting up is Never Easy, but Surviving is Harder

Most enterprise start-ups don’t last long. For example in the United States about 32% of start-ups fail within two years and 49% within four years.[1] Furthermore most start-ups don’t grow very much in size. While there are many self-operators and small enterprises, in most industrial countries progressively fewer companies employ larger numbers of people.

In theory survival should be harder for social enterprises and growth more difficult still. Like commercial firms, social enterprises cover their costs through the sale of products and services. But they also have a social objective. Achieving that social objective should add to cost. So, for example, employing hard-to-employ people may raise employment costs by 30%. It should also distract management. This should place social enterprises at a competitive disadvantage relative to for-profit firms.

Yet Social Enterprises are Still with Us

Statistics on the number of social enterprises are hard to get. No doubt this is due in part to differences in definitions. In the UK, which was hit hard by the recession and where arguably more data are available, there is some evidence that social enterprises have survived better than others. A survey by New Philanthropy Capital in September 2010 estimates that 75% of four-year old social enterprises had survived compared to 55% of all UK businesses.[2] Moreover the UK Charities Commission reports that 56% of social enterprises have grown during the recession compared to 28% of small and medium sized enterprises (SMEs).[3]

How do Social Enterprises Survive and Grow?

Given that social enterprises are not focused purely on the bottom line, how do such enterprises grow, or at least survive? The answer is partly by adopting the tactics of many small businesses, turning weakness into strength and using their major competitive advantages, their ability to appeal to the good will of others.

Small Business Tactics

Social enterprises can try to avoid the areas where large firms have a competitive advantage. Since large firms can spread overhead costs more widely they are best suited to the division of labour and other economies of scale. As Adam Smith noted, the division of labour is limited by the extent of the market, and therefore large firms are best suited to large markets and small firms to smaller ones. Social enterprises often choose therefore to deliver services or make products designed for limited markets with limited potential for economies of scale. So a social enterprise might produce pottery but not ceramics for example.

However, other SMEs will also seek to compete in these markets. Unless there are barriers to entry competition will increase to the point where all enterprises achieve a normal rate of return. With higher costs, social enterprises may get squeezed out. So social enterprises may look for sources of economies of scope and networks that don’t require scale. Many use the network effects of the web for example.

Social enterprises may also try to avoid such competition. Commonly they do so by differentiating their product or service. This is not as easy as it sounds. If their product is a good one, other companies may copy it; and social enterprises may not be able to afford patents or legal fees to challenge copyists. A more viable strategy may be to differentiate a product or service to suite a specific geographical area. Using local knowledge and relationships the social enterprises can design or sell products suited to local demand, sustaining higher prices and covering higher costs. In particular good relationships and reputation with local people equip many social enterprises to deliver government services more effectively, and hence increase the willingness of government to pay.

Turning Weakness into Strength

In some cases social enterprises can turn a seeming disadvantage into a competitive advantage. For example, hard to employ people may have higher labour productivity in some tasks than other people. A social enterprise may have the social objective of employing people with limited social skills and sensitivity to noise. While such people may find it difficult to work in a noisy manufacturing or office environment, they may be highly productive in jobs that require attention to detail and concentration that can be done in a quiet space.

Or the social enterprise may seek to employ hard-to-employ people who nevertheless have some knowledge that others do not have. For example, Mission Possible in Vancouver seeks to provide employment for people who are either living on the street or in hostels. Such people are often more ‘street wise’ and have greater ‘street cred’ in some geographical areas. They may also be content to go into areas that others would consider dangerous and not be willing to enter. Mission Possible uses such people to remove graffiti and to help bring peace and reconciliation in such areas.[4]

Through the Good Will of Others

One of the major competitive advantages of social enterprises is the good will they engender. People empathise with the vision of the social enterprise. Some are willing to make a personal sacrifice to help realise this vision. This can happen throughout the enterprise.

Social enterprises may sometimes rely on the good will of their investors. The social enterprise responds to competitors by matching prices. However, since its costs are higher it has less profit and a lower rate of return. Some Investors may accept a lower rate of return or one that is capped in order to ensure that the enterprise is capitalised and is able to start fulfilling its mission.

Conversely, the good will of suppliers may help reduce the operating costs of the social enterprise. For example, hotels in the Vancouver area provide a social enterprise with used soap for free and pay for its collection. The social enterprise processes the soap and sells it for export to help improve hygiene and health in low income countries. It reduces its costs and earns revenue as well as employing formerly homeless people. For its part the hotels support the work of the enterprise and win the good will of their customers by publicising the way the soap provides employment.

Employees have a need to feel integrated into the world and will sometimes trade meaning against wages. The social enterprise provides employees with a greater sense of purpose and meaning to their lives. In return employees are often willing to work for lower pay than they could obtain elsewhere. They may also work harder and more conscientiously. They may engage in less ‘rent seeking’, better team-working and be more loyal too. This reduces production and staffing costs and may speed innovation cycles.

Lastly, social enterprises may also rely on the willingness of consumers to pay higher prices than those charged by their competitors. The enterprise covers the additional cost of meeting a social need through the higher prices. The consumer enjoys the added satisfaction of knowing they have supported the social need.

However, to succeed this strategy requires the credibility of the social enterprise and the trust of the consumer. Social enterprises have used accreditation and branding to win this trust. “Fair Trade” is an example of this. Its logo certifies that, for example, the coffee consumers buy has come from a producer who has been paid a “fair” price for their beans. Producers may also use the web to be transparent about the distribution of benefits to suppliers.[5]

But is this a Good Thing?

Social enterprises seek to use business to overcome social problems. However, this comes at a cost to society. If they were to focus exclusively on producing and selling their products and services, social enterprises could most likely market their output at a lower cost. From a strictly material point of view an economy comprised largely of social enterprises would be inefficient. The economy could produce the same amount without using any more resources. Some might say that social enterprises are a prescription for profligacy, wasted resources, and national poverty.

On the other side of the balance sheet are the societal benefits of the social enterprises. The social enterprise may provide employment, community development, and help for the disadvantaged. Are these advantages worth the material costs? How can we tell?

Is support for social enterprise like writing a blank cheque? It’s true that there is no way of adding up the social benefits from social enterprise and comparing them in money terms.[6] It’s not true, however, that social enterprises lack any form of ‘market discipline’ and accountability. The social entrepreneur is not the final arbiter of whether their enterprise lives or dies commercially. The financial viability of social enterprise depends on selling products and services at a profit. What’s also true is that generating an acceptable profit depends on the good will and sacrifice of others. Others must literally judge whether they invest in the enterprise’s purpose, work towards its vision, or buy into its values. Is the enterprise a good steward of their generosity? Do the benefits justify their sacrifice? It’s for society to judge.

This is not a market discipline in the commonly understood sense based on satisfying purely material needs. It’s a moral discipline based on a shared moral vision. Enterprise is like politics. Just as the electorate gets the politicians it deserves, the society gets the type of enterprise it deserves.

Footnotes:

  1. Bureau of Labor Statistics. Business Employment Dynamics – Establishment Age and Survival Data, 2013. See Table 7: "Survival of private sector establishments by opening year" http://www.bls.gov/bdm/bdmage.htm, accessed on 17 January 2014.
    In the UK rates are comparable with 27% of new start-up failing within two years and 51% within 4 years (2). See Business Demography, 2012. UK Office for National Statistics, 2013, Table 5; accessed on 17 January 2014 from: ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-329345.
  2. Eihlin Ni Ogain (2011). "Are social enterprises more resilient in times of limited resources?" New Philanthropy Capital, p. 2. Accessed on 3 February 2014 from http://www.thinknpc.org/publications/are-social-enterprises-more-resilient-in-times-of-limited-resources/.
  3. Charity Commission (2010). "The 4th Economic Survey of Charities: ‘Charities and the Economic Downturn’ referred to in Ogain, "Are social enterprises more resilient in times of limited resources?", 2011, p. 2 note 5.
  4. See the Mission Possible web site at www.mission-possible.ca/services-and-social-enterprises/mp-neighbours, accessed on 30 January 2014.
  5. Level Ground is an example of a social enterprise showing its distribution of prices through its web site. See: http://www.levelground.com/about/direct/transparency/ accessed on 3 February 2014.
  6. However, nor can we add up the benefits and costs of a strictly for-profit economy. Inter-personal comparisons of even the material benefits of market transactions are not possible, as even economists admit.

Source: Marketplace Institute



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