A New Catalyst for Social Enterprise (Part II)

Pursuing Profit and Progress

First of all, a little terminology: the term “social enterprise” is often used to describe an entity (i.e. IIC is a social enterprise), while “social entrepreneurship” describes a business practice: using a market-based revenue model to drive a social mission within a firm or organization. This integration of mission and markets occurs along a spectrum, and CSOs and private firms will naturally engage at different points along it. At one extreme of the spectrum lie traditional CSOs: entirely mission-driven and donor-dependent organizations. At the other end of the spectrum lie traditional corporations: companies that still quantify value purely in terms of financial return. Precisely in between would be an independent social enterprise- a self-supporting entity whose internal revenue model fully funds the execution of its mission (disclaimer: this spectrum is my own attempt to organize the social enterprise sector, not HBR’s). In between these well-defined points, things get interesting.

A CSO that preferences mission over markets may still employ a supplementary revenue model that reduces, but does not eliminate, funding dependency. Or such an organization may forgo a revenue model, but still choose to integrate private sector approaches into product/service delivery, impact measurement, personnel management, or other aspects of internal operations. Likewise, most private firms that engage in the social enterprise space will fall somewhere between the midpoint and the extreme end of the spectrum. For these firms market-focus will still trump mission, but ample opportunities will exist for them to align their bottom-line interest with broader social goals. That is the key point HBR drives home- firms can engage strategically in this space and in the process can reap more substantive returns than the “halo effect” generated by traditional corporate philanthropy.

Drayton and Budinich identify Hybrid Value Chains (HVC) as the primary way firms can engage in social entrepreneurship to reap social and financial returns. A HVC shakes up the traditional definition of value creation. HVCs produce financial returns, but also generate larger social or environmental benefits. Thus the concept of value is expanded to capture returns such as a restored environment, improved public health, reduced waste, local economic development, increased literacy, and so on. It’s certainly possible such social returns would not offer reciprocal value to the firm, yet a significant potential exists to generate social benefits that in turn advance a firm’s primary bottom line- creating a sort of virtuous circle.

For example, HVCs may expand or create new markets by lifting communities out of poverty or lowering price points; they may reduce production or material costs by cutting waste; or they may lower operating risk in a certain locations or market sectors by contributing to local economic development, public safety, or public health. The authors emphasize that CSO-corporate partnerships can be instrumental in developing and implementing HVCs, as CSOs often possess fine-grained knowledge of local populations, networks, barriers, and resources. A firm trying to enter a new market, serve a new population, reduce operating risk, or reduce operating costs can gain a lot by leveraging the experience, expertise and networks that CSOs provide. Firms that build such constructive partnerships stand to gain a competitive advantage in the global marketplace.

Implementing a HVC essentially allows a firm to embed a micro-social enterprise within its larger business model. I specify “micro,” because it is unlikely that hybrid ventures will entirely supplant traditional business models in private firms. The authors note that firms must carefully consider where to house their hybrid ventures, as HVCs are more appropriate in certain circumstances than others. One such circumstance they identify is “when charitable funding and free services can be replaced by genuine markets.” Investing In Communities does not seek to fully replace charitable funding with free markets. However, IIC will augment traditional charity with market-based philanthropy, by transforming the real estate industry into a philanthropic engine. In my next post I’ll turn the discussion to IIC, and why it’s poised to become a unique and valuable tool for corporations and CSOs looking to enter the social enterprise sector.