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  • Writer's pictureMohabbat Ahmadi

Social Entrepreneurship - A Possible Replacement for Capitalism


Abstract

The concept of "Social Entrepreneurship" may be relatively new, but the practice is not. Social entrepreneurs have always existed, they just may not have been referred to as such. A prime example of social entrepreneurship is the Girl Scouts. Although they have been around for a long time and have engaged in entrepreneurial activities, we may not have traditionally thought of them as social entrepreneurs. According to the Girl Scouts website, every cookie purchased from the Girl Scouts helps to fund extracurricular activities such as international trips, summer camps, and community projects.

The purpose of this article is to define social entrepreneurship as an essential paradigm shift in the economic sphere and to ponder over its potential as the future of capitalism. Also, a holistic framework has been provided for individuals to think about before starting a social enterprise. This article exhibits the existing literature and observes a wide range of successful social enterprises to build on the knowledge base. Furthermore, this article introduces Michael Porter’s Five Forces Competitive Analysis as a prerequisite for starting a social venture and provides readers with examples that will help them understand competitive forces and its implication in social entrepreneurship.

It concludes that social entrepreneurship is in complete disagreement with capitalism. It has opened new doors for humanity to improve the livelihoods of billions of people while making profits for business owners. It has created a win-win situation for all stakeholders.

Introduction

The Stanford School of Business argues that it is challenging to suggest an inclusive definition of Social Entrepreneur. However, after a critical review of the literature and evaluation of the existing social enterprises, it proposes the following definition for a social entrepreneur:

“A social entrepreneur is a pragmatic visionary who tenaciously addresses social problems by creating an innovative, sustainable, system-changing solution.

  1. The entrepreneur is a tenacious leader with a pragmatic vision.

  2. The solution addresses a clear social problem.

  3. The solution changes systems, not just symptoms of the problem.

  4. The model prioritizes social impact over financial gain.

  5. The model generates a sustainable funding stream.”

Other sources such as Investopedia associates the social entrepreneur with the characteristic of risk-taking to bring a positive change in the community. ASHOKA, as one of the pioneers in the vicinity of social entrepreneurship, has defined a social entrepreneur as a person who innovates to find a solution to a pressing social challenge. Also, social entrepreneurs are associated with the characteristics of ambitions, and persistence who strive to bring scalable social change for a wide range of people. Roger Martin and Sally Osberg, the authors of “Getting Beyond Better: How Social Entrepreneurship Works”, draw a line between social activism and social entrepreneurship. Social Entrepreneurship does not only focus on solving a social challenge but also focuses on revenue-generating aspects by “creating products or services that spur the transformation of the status quo”.

By concluding the definitions above, we can say that Social enterprise is an attempt to solve a social challenge by developing a business model with the potential to resolve the social issue through an innovative solution. This solution should be profitable and sustainable at the same time.

Why does social entrepreneurship matter?

As our world progresses toward advancement, we are witnessing a rising level of social problems. According to the United States Census Bureau, the population of the world has doubled over 40 years from 3 billion in 1959 to 6 billion in 1999. The forecast predicts that however at a slower pace, the population will continue to grow. The world population is estimated to be 9 billion by 2044. The growth in population triggers many other problems such as inefficient food supply, poverty, unhealthy lifestyle, pollution, global warming, and insufficient resource for energy, to name a few. And as Terri Swearingen, the 1997 Goldman Environmental Prize Recipient said "We are living on this planet as if we had another one to go to" this supports the idea that human beings are living an unhealthy lifestyle. Our challenges are significant already, and we should address them through a strategic approach that can promise a sustainable solution through the incentivized method.

Social Entrepreneurship provides us with a favorable platform to think about resolving social challenges. Social Entrepreneurs invest their time, energy, and resources and endure great risks to identify potentially scalable solutions to social challenges while realizing profit and acknowledgment for their work. Steve Jobs and Steve Wozniak are two excellent examples of such creativity. They made the world a better place by identifying a social need and addressing it by selling their products. A win-win situation for both, the people and the company. Soon after that many other companies also followed suit because Apple alone could not meet the demand, especially in the low-income market where people could not afford such high prices for smartphones.

Fortunately, since mid-eighteenth century industrialization, economic revolutions, and the recent advancement in the technological sphere have taught us so many lessons that can potentially help us create a better world. During this interval, we have invested in the companies that made us significant profits, while it exploited our natural resources unprecedentedly. The urge for more profit-led humanity to engage in increasingly unethical businesses. This unexpected growth came with a high number of opportunities and a very high cost to humanity. To make tomorrow better than today, we already have developed the tools. All we need to do is to marry the advancement in technology with the social needs of the underprivileged, who comprise the majority of the world’s population. Social Entrepreneurship suggests that the focus of an enterprise should divert from making profits/benefits for one person to many.

Social Entrepreneurship has such a vast potential that many scholars believe that it is the future of capitalism. Michael Porter, Professor at Harvard Business School, in his 2011 article “Creating Shared Value” criticizes businesses for their narrow approach to value creation. Instead, he encourages business to focus on shared values that can bring businesses and societies together and preserves the environment, and retain trust in businesses. Similarly, Dominic Barton, in an HBR article, “Capitalism for the Long-Term”, writes that capitalism is on the edge of transformation. He argues that the system should be reformed to retrieve people’s trust in the enterprise. Reform in the system is derived from innovative solutions to the world’s major challenges facing humanity.

These statements explicitly imply that the future of the enterprise is social entrepreneurship. In the future, an enterprise will be defined not only by its ability to create economic returns but also by its ability to innovate and create positive social change. The current economic structure cannot accommodate the interest of a broad spectrum of people. It especially overlooks the interests of the people at the bottom of the pyramid who represent the majority of the world population. The current economic system serves the interests of people with buying power. However, the vast majority of people are struggling to satisfy some of their very basic needs, such as access to clean drinking water, primary education, and energy to name a few.

What factors make a social enterprise successful?

Many factors contribute to a successful social enterprise. In the accompanying paragraphs, I will draw your attention to some of the most important factors and will explain why are they essential to the success of a social enterprise. The authors of Getting Beyond Better: How Social Entrepreneurship Works, have identified a framework for social entrepreneurship that consists of four stages: 1) Understanding the world, 2) Envisioning a new future, 3) Building a model for change, and 4) Scaling the solution. Two additional factors are added to this list in a follow-up article. In a follow-up article, they suggested two additional factors. They have identified the Economic Actors involved, and the Enabling Technology applied in social entrepreneurship as the cornerstone for the sustainability of the social enterprise. I have listed them as numbers 5 and 6. In an attempt to enhance the framework, I would like to propose five additional factors (which will become numbers 7-11). They are: 7) Profitability, 8) Sustainability, 9) Execution, 10) Influencing People’s Perception, and 11) Social Enterprise’s Target. This article aims to provide readers with a complete and inclusive framework to think about before starting their venture.

1. Understanding the World: It is obvious that before we tackle any problem we should understand the context that the challenge arises. For example, in conservative communities in Afghanistan where each family has many children and all of them suffer from malnourishment, a business cannot advertise condoms or other precautionary and birth-control methods as a potential solution. First, it should understand the world as it is, then it should try to find possible solutions. Unless the problem is fully understood, we cannot resolve it inclusively.

2. Envision a New Future: social entrepreneurs should envision a new future. It is not essential how things are done today, instead, how things will be done once a better solution is in place. Envisioning is at the core of innovation and social entrepreneurship. Every step towards the future is adding a block to the grand castle of tomorrow. Our quality of efforts determines how beautiful our future will be. Uber is currently envisioning a future with driverless taxi cabs. It will significantly reduce risks associated with careless driving and at the same time will lower costs.

3. Building a Model for Change: Successful social entrepreneurs develop a model for change through an innovative idea that can potentially solve the social challenge. The innovative design is wrapped in a business plan that ensures sustainable impact, and profitability and addresses the social challenge as well. An excellent example of building a model can be Grameen Bank which had a great model for change and transformed the communities in Bangladesh.

4. Scaling the Solution: Successful social enterprises are usually scalable. This means that the solutions that work in one community are likely to work in other communities as well. When Apple wanted to introduce the new iPhone, it did not envision that people outside the U.S. will also be interested in purchasing such a product. It was difficult to envision at that time that someone will be actually using a smartphone in Delhi, Shanghai, or Dubai. The lack of internet and wifi services supported this notion of thinking. However, as soon as Apple launched its products other companies started benefiting from the spillovers of this new technology and started responding to the unmet demand in underserved communities. Google, Samsung, Huawei, and TATA are among the companies that benefited most from the spillovers of Apple Inc. If scaling is not done properly, you can leave the money on the table for others to enjoy.

5. Economic Actors are comprised of the power of customers, government, and economies. For example, GoodWeave Company was established by Kailash Satyarthi in response to the exploitation of children in the carpet weaving industry. This enterprise certifies the carpet weaving companies that do not employ children as workers and raises awareness among the economic actors. If any offending company is identified, the government is notified to press charges, and the customers are informed to refrain from purchasing carpets from the offending company.

6. Enabling Technology is the medium that assists economic actors to rethink social change. Technology is a prominent factor in the transformation process and can lead to better and more efficient ways of executing the social enterprise. For example, Bart Weetjens founded a social enterprise called APOPO with inexpensive technology to detect landmines and deactivate them. Bart believes, in contrast to the expensive machinery used for detecting landmines and tuberculosis, rats can be trained to do the same more efficiently and accurately. He claims that the relatively light weight of the rats provides this technology a competitive advantage over other technologies.

7. Profitability – Unlike social activities, profitability is vital in social entrepreneurship. This is the one factor that can promise scalability, and sustainability and can lead to employing talent and sustaining and creating shared value. Unfortunately, we do not have many examples of this kind of enterprise because they cannot take off in the first place.

8. Sustainability – Sustainability becomes a concern as soon as the profit margin begins to shrink. Sustaining a business in a rapidly changing business environment is highly challenging and at the same time promising. Companies that survive these changes often enjoy a bigger share of the market since the competing companies could not make it. As more and more companies are relying on technology, adapting to the pace of rapid technological advancement is becoming more important. If a company does not adapt quickly, it cannot survive in the fast-paced market and lose its business to the ones who do.

9. Execution – execution is the most important and crucial part of implementing any social enterprise. There is no point in understanding the social problem and recommending a solution for it without being able to create an inclusive business plan around it that could potentially solve the social problem. Venture Capitalist, Lluis Pareras, in a TED talk explains that there are plenty of great ideas in the market. However, no one wants to invest a penny in it. It is just like saying let’s make a spaceship and go to Mars to conduct a scientific study on the nature of rocks in Mars. Although it is a good idea, it is worthless. A good idea without an execution plan does not have any value. Many existing enterprises in the market survive not because they have a great idea or they are solving a big challenge, but because they have a great execution plan. Small Business Trends reports that almost 50% of startups fail in the first four years. It does not necessarily mean that half of the businesses that had a great idea succeeded, but half of them could execute their concept successfully. We have all seen a new pizza shop opening in our downtown and making profits. However, it is not because it was to alleviate hunger in the world but because of its effective execution plan.

10. Working with People’s Perception - a social enterprise cannot function without the trust of the general public. Even good products need effective and suitable marketing. Therefore, it becomes essential for any social entrepreneur to influence people’s perception of his/her enterprise, so that it can continue delivering value to the marketplace. Influencing people’s perception can take place by providing consistent products/services to the target audience and branding the enterprise the way you would like to be perceived. Heath Shackleford, in his article in FAST COMPANY, reminds us that public opinion is like a highly potent, and dangerously unstable explosive device. If handled cautiously and applied properly, it can be powerfully effective. If not, it can explode in our faces. Thus, it is extremely important to employ customized execution and marketing strategies for different demographics.

11. Social Enterprise’s Target – C. K. Prahalad in his book, The Fortune at the Bottom of the Pyramid, argues that companies should try to invest in solving the challenges of the bottom of the pyramid. This will enable them to reap a lot of benefits as the majority of the human population is at the bottom of the pyramid. Bill Gates has endorsed this argument and encourages enterprises to transform their approach in developing countries to help both sides of the economic equation to prosper.

Cautions for Starters

As mentioned earlier 50% of startups fail within the first four years. The majority of these businesses do not fail because they did not have a good idea. They fail because they did not know what forces are driving the market. In this section, I would like to draw your attention to the competitive forces that determine profitability and sustainability in the long run. The most popular tool for assessing competition within an industry is Porter’s Five Forces Competitive Analysis which is comprised of the Threat of New Entrants, the Bargaining Power of Buyers, the Bargaining Power of Suppliers, the Threat of Substitutes, and Rivalry within the industry. Each of these factors is described with an example of a social enterprise to help us better understand how these forces work.

I. The threat of New Entrants

As the study of economics suggests: resources are scarce, and there is always a grand competition among various players within an industry to acquire/expand their market share. The market is already divided between the existing player. If a new enterprise seeks to get a share, innovation is the key. Innovation is essential for social entrepreneurs. However, innovations are fragile and if not executed properly can have spillovers that will benefit the venture capitalists who are on the lookout for such kinds of spillovers. Therefore, when planning to execute your innovative idea it is also essential to design barriers to entry. Otherwise, venture capitalists with more capital can replicate your business plan and take away their market share instantaneously.

According to Michael Porter, there are six major sources of barriers to entry: Economies of Scale, Product Differentiation, Capital Requirements, Cost Advantage, Access to Distribution Channels, and Government Policy. In the paragraphs below the author has attempted to tailor these significant sources of barriers to entry to social entrepreneurship.

1. Economies of scale

Economies of scale refer to large-scale production to reduce costs. Economies of scale can happen in manufacturing, research, marketing, and services. For example, BioLite HomeStove produces environmental-friendly HomeStoves. If it supplies this innovative product to only one village, it would be costly and unaffordable for anyone to purchase these products. However, when the Company mass-produces the product and supplies in India, Nepal, Bangladesh, and the neighboring countries, the costs reduce significantly and discourage new players to attempt to enter this market.

2. Product differentiation

Product differentiation is another barrier that keeps rivals away from taking your market share. Brand identity comes under this category. For example, Grameen Bank founded by the Nobel Prize laureate, Mohammad Younus, differentiated its products from other financial institutions by providing low-income farmers with small amounts of loans, which they could not have received from other financial institutions.

3. Capital requirements

Capital-intensive businesses are less likely to witness new entrants. An excellent example for this can be Billions in Change. Manoj Bhargava, CEO of Billions in Change says “If it doesn’t make a big difference, we won’t do it. Life is too short to spend time doing things that don’t have a big impact. We’re here to make a difference” (Billions In Change, 2015). High costs associated with Research and Development reduce the chances of any company entering their market.

4. Cost Advantages

Cost advantages can be a barrier to entry as well, and it can be a result of free/easy access to natural resources, government/International aid subsidiaries, strategic business location, and learning curve. For example, TextbooksforChange is a company that associates with student organizations and collects used textbooks from them. They ship 50% of the textbooks to underserved educational institutions in Africa, 20% is sold in North America to fund the initiative, and the remaining 30% is recycled effectively (TextbooksforChange, 2016). Competing with this company would be extremely difficult because they have cost advantages. The raw material does not cost them.

5. Access to distribution channels

It is considered to be difficult for a newcomer to replace an existing product on the shelves at the supermarket. An alternative strategy can be creating your distribution channel, which can be extremely expensive and unaffordable. With a slogan of “WITH EVERY PRODUCT YOU PURCHASE TOM WILL HELP A PERSON IN NEED. ONE FOR ONE” TOMS is making a significant change in people’s lives. TOMS sells high-quality and stylish shoes, eyewear, and bags. Products like this are more likely to acquire popularity and access distribution channels.

6. Government policy

In some cases government policy allows only one company to deal with a social challenge. For example, the Ministry of Social and Family Development (MSF) in Singapore initiated a pilot in March 2015 with the Movement for the Intellectually Disabled (MINDS) to simplify the process to apply for deputyship for young adults with a severe intellectual disability.

II. Power of Buyers

The volume of purchase determines the power of buyers. If the buyers demand a high volume of purchases, their bargaining power increases and vice-versa is also true. Billions in Change is an excellent example of Buyer’s Power. Buyer emphasis on low prices for energy and energy is a problem for underserved and poor people, especially in underdeveloped countries. To meet the unmet demand, this company has to deliver products that can be sold in these underserved markets. If not, then the bottom of the pyramid who are in need cannot afford it and the middle class and rich do not need it. Therefore, buyers determine the price of the products.

III. Power of Suppliers

The pressure determines the power of buyers a supplier can put on the companies to increase the prices, or decrease the quality (Porter, 1979). The more suppliers can influence the process, the more it threatens the profitability of the enterprise. Also, Michael Porter also explains that switching cost is a fixed costs. Usually, social enterprises are driven by innovation. Innovation minimizes the power of suppliers and assures maximizing profitability.

IV. Threat of Substitutes

The power of substitutes is a critical factor in determining the rivalry within the marketplace. The threat of substitute is concerned with the price-value trade-off. Whichever company is providing the product/service with more value and less price is more powerful. A good example of this would be Marc Koska’s reinvention of the syringe. He redesigned the needle in a way that restricts reusing it over and over again. However, it costs the same and improves utilization.

V. Rivalry

Rivalry within the industry is determined by the value a company has to offer. If two companies offer the same value, yet one costs more, consumers tend to go for the one that costs less. Product differentiation, scalability, and pricing are critical factors that can impact rivalry in the marketplace. In social entrepreneurship, the rivalry is determined by innovation and the price of innovation. Usually, social entrepreneurs want to solve the social problems facing the social sphere. Therefore, products/services are priced in a way to attract a maximum number of customers. Manoj Bhargava, CEO of Billions in Change says “if it doesn’t make us money, but it is going to change the lives of people; we are still gonna do it.” This, however, does not mean that the company will run on losses. It means that we are not concerned if one of the products doesn’t make profits but others do. Profits are crucial and vital for the sustainability of the company.

Conclusion

Social entrepreneurship is often perceived as being in fundamental opposition to the principles of capitalism, and its proponents. Capitalism has struggled to demonstrate that it can facilitate inclusive growth. As consumers shift away from mass consumption towards more personalized products and services, trust in capitalism is declining. Social entrepreneurship, on the other hand, is gaining popularity as it promises inclusive growth for marginalized communities. It creates opportunities to improve the livelihoods of billions of people while also generating profits for business owners. It creates a mutually beneficial situation for all stakeholders.

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