SpirE-Journal 2010 Q3

Can Social Enterprises thrive in a Market Economy?

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Can Social Enterprises thrive in a Market Economy?

A decade ago, the term Social Enterprise was virtually unknown. Today, in a world where being Green and ethical is becoming downright fashionable, social enterprises are attracting immense interest. Spire examines the rise of social enterprises, their impact on emerging markets and their sustainability in the long term.

The Emergence of Social Entrepreneurship

Though the concept of social entrepreneurship has been in existence for a few decades now, with the term gaining prominence when Bill Drayton founded Ashoka in 1981, it was only in the last ten years that social enterprises gained immense popularity.

Mohammad Yunus, 2006 Nobel Peace Prize Laureate and founder of Grameen Bank, defines social enterprises to include both non-profit organizations that use business models to pursue their mission and also for-profit associations whose primary purposes are social. By their very definition, social enterprises seem to challenge the basis of classical economic theory, which recognizes only for-profit businesses.

The most famous example of a social enterprise remains Grameen Bank, which pioneered the provision of microcredit to the rural poor in Bangladesh. Today, Grameen Bank is a large and complex organization not unlike a Multi-National Corporation in structure and internal processes, and operating multiple programs. Among these are a Village Phone program allowing female entrepreneurs to start a business by providing wireless payphone services in rural Bangladesh; and Grameen-Danone, a collaboration between Grameen Bank and French corporation Danone, which produces nutritionally-enhanced yogurt at affordable prices to help poor children stave off malnutrition.

The impact of Social Enterprises

Statistics on the social enterprise population are hard to come by, as most countries do not require businesses to indicate their “for-profit” status at the point of incorporation.

An indication of the scale of the phenomenon comes from a survey for the Social Enterprise Unit within Britain’s Department of Trade and Industry (DTI). It revealed that 1.2% of British companies could be classed as social enterprises by virtue of the nature of their incorporation – for example, as companies limited by guarantee. A subsequent survey in 2006 suggested that 5% of all British companies defined themselves as social enterprises. A 2009 assessment suggested that there were 62,000 social enterprises in the UK alone, contributing 24 billion pounds to the British economy. By this measure, and taking into consideration the prevalence of rural co-operatives, artistic and culturally-oriented businesses and even faith-based businesses, it is estimated that social enterprises in the emerging world would number in the hundreds of thousands.

In the past, social enterprises may have been largely Non-Governmental Organizations (NGOs) which chose to structure themselves as businesses, for various reasons. However in the 21st century, social enterprise increasingly looks more like a branch of regular enterprise than a part of the NGO sector. A look at the more prominent social enterprises quickly reveals that these are mostly attempts to create entities that are both commercially sustainable and so will not have further use for charity, and yet yield tangible social, moral or ecological benefits. The social entrepreneur thus sees herself in a role similar to that of governments who promote “infant industries” – as providing a jump-start to a viable and beneficial business that might not have made it to commercial sustainability had it not been for some external, non-commercial assistance.

Asia has many examples of successful social enterprises. Rags2Riches, based in the Philippines, creates high end fashion apparel and home accessories that are eco-friendly and ethically produced. Its merchandise is made by women from poor communities who recycle scrap cloth discarded by garment factories. In Singapore, social enterprises such as KHearts and Immanuel Beauty School provide training and employment opportunities for marginalized communities such as recovering substance abusers, ex-offenders and differently-abled people.

Social enterprises have also emerged as champions of innovation, refuting the notion that only the profit motive fosters innovation. For example, Husk Power Systems in India is a rural electrification company that converts rice husks into electricity. Bloom Bags in Cambodia, started by Singaporean Diana Saw, provides employment opportunities to poor Cambodian women through the production of eco-friendly handbags from materials such as discarded rice sacks.

For-Profit or Non-Profit?

Bloom Bags is an example of a not-for-profit organization whose products are positioned in the mid market price range. The company, which was founded with Diana Saw’s life savings, faces stiff competition from local manufacturers who use cheap labour and materials to produce similar products, or import similar products from neighbouring countries to sell at a cheaper price. In order to compete with these products, the company targets ethical consumers in markets as far afield as the USA. Bloom’s products are marketed through word of mouth, social networking sites like Facebook and via bulk orders to Non-Government Organizations (NGOs) like Amnesty International.

Other social enterprises, in contrast, pursue a for-profit model. One example is D.Light, founded in Palo Alto, California in 2006, which aims to replace kerosene lamps with solar powered LED lanterns. The company was initially funded by Acumen Fund, which only supports businesses that are able to benefit approximately one million end users within a five year period. In June 2010, D.Light received an additional US$5.5 million in financing from the Omidyar Network, an investment firm targeting companies that empower individuals and improve quality of life. D.Light is targeting its lamps at households and businesses in Africa, China and India. As at April 2010, it has impacted one million users.

Surviving in a Market Economy

While conventional businesses are measured by revenues and profits, social enterprises measure success by the impact of the business on people or the environment. However, like all businesses, they face pressures to generate revenues and reduce costs in order to sustain their existence in a market environment. Very few social enterprises achieve an annual profit that is anywhere near the US$ 5.38 million (2009) registered by Grameen Bank.

Though the social enterprise business model allows firms to recover their initial investment, the shareholders normally do not take dividends beyond that point. Profits need to be re-invested in the company in order for the company to grow and serve more customers. This can create immense challenges. Often, social enterprises find that once they have pioneered a new business model or product category with profit potential, traditional businesses start entering the market and competing with them on price. Thus many social enterprises have sought to differentiate themselves through a variety of techniques. These include targeting ethical consumers, branding their products differently, educating consumers about their objectives and selling at price points that are so low as to be commercially unattractive.

Most social enterprises today exploit social media platforms like Facebook, Twitter, blogs and e-community websites to promote their message. For example, Bloom Bags has a “Bloom Eco-bags” page on Facebook which updates its fans about new products and achievements, in addition to a blog by Diana Saw called “Cambodia Calling” which highlights key issues in Cambodia. Husk Power Systems in India and Rags2Riches in the Philippines also use Facebook to update their fans about new breakthrough

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