6.1.Introduction
SEs have often more complex business models than their conventional counterparties, as explained in Chapter 1. This complexity is based on SEs (i) simultaneous focus on customers (those who pay for product and service) and beneficiaries (those who benefit from the activities of SEs), (ii) simultaneous work with employees (paid for their work) and volunteers (not paid for their work), and thus they require different mechanisms for motivation, (iii) simultaneous work with own resources or resources offered by others, which reduce the SEs control on their overall operations, (iv) various income streams, ranging across sales, donations, subsidies and grants, (v) legal structure (NGO or for-profit type of structures), that make some funding possibilities challenging and (vi) the combination of social and economic goals. SEs’ business models are thus associated with higher levels of complexity than conventional business models based primarily on income from customers, work with employees, accumulate own assets, and develop partnerships based on market logic. The level of complexity in a business model is different among the variety of social entrepreneurs. Our goal with this chapter is not to argue for reducing the complexity of SEs’ business model, which in many occasions is impossible, but to rather streamline their logic.
The attention to the “business model” of SEs has no intention to push social enterprises in the commercial direction. We understand a broad variety of SEs’ initiatives can fall under the umbrella term. It is up to every SE to decide what would be the best mix of funding sources for their activities. Yet, we would like SEs to pay closer attention to business model thinking since it is helpful to streamline the logic behind SEs’ activities. A streamlined logic makes the communication (Chapter 3) and the impact measurement (Chapter 4) much easier, as well as the positioning of the social enterprise within the ecosystem (Chapter 5). As a consequence of a clear business model logic, SEs are more likely to gain access to the various funding sources as outlined in Chapter 2.
6.2.The Importance of Business Model Thinking
At the heart of Business Model Thinking is the overall logic of the activities of any organization. In this sense, we refer to the definition of Magretta (2002, p. 6), who sees that “business models’ great strength as a planning tool is that it focuses attention on how all the elements of the system fit into a working whole.” In other words, business model thinking can help SEs to separate all different elements of their organization, and to focus on the logic that binds them together. Business models are also effective tools for communicating the activities of an organization to various stakeholders. The different funding organizations, as much as any stakeholder related to SEs, are looking to see if their overall organization of activities makes sense (Weick, 1995). In this sense, a business model will help SEs to “capture, visualize, understand and communicate [… and to] improve measuring, observing and comparing” (Osterwalder, 2004, 19-22) the overall logic of their social enterprise.
It is important to stress here that we do not want to suggest in any possible way, that attention to business model thinking should lead to more commercial activities of SEs. Business model thinking is often wrongly reduced only to profit generation (Markides, 2006; Teece, 2010). Business models are helpful tools to explain how organizations generate value for a variety of stakeholders (Casadesus-Masanell & Zhu, 2013). Therefore, in this chapter, we elaborate further on the different building blocks of business models and present the main ideas presented in the literature of sustainable-and inclusive business models.
6.3.Sustainable and Inclusive Business Models
Sustainable and Inclusive Business Models are two established streams of literature that explain how business model thinking can provide a solution to social and environmental challenges. Sustainable business models do not focus on profit generation as a central objective of organizations (Dentchev et al., 2018), but rather on how an organization “captures economic value while maintaining or regenerating natural, social, and economic capital beyond its organizational boundaries.” (Schaltegger et al., 2016, p. 6). Therefore the literature on sustainable business models could be quite useful for SEs with hybrid business models, combining social and economic logics. The sustainable business model stream of literature has gained momentum during the past decades, with numerous special issues, conference organization and a prolific research agenda (Dentchev et al., 2018; Lüdeke-Freund & Dembek, 2017). SEs could greatly benefit from the various practical insights of sustainable business model archetypes (Bocken, Short, Rana & Evans, 2014; Yip & Bocken, 2018), describing what a different business model type can contribute to sustainable development.
Another valuable tool for SEs could be the different ontologies for sustainable business models (Breuer, 2013; Heyes, Sharmina, Mendoza, Gallego-Schmid & Azapagic, 2018; Joyce & Paquin, 2016; Upward & Jones, 2016). Ontologies discuss the different building blocks of a business model, and one of the most frequently used is the Business Model Canvas of Alexander Osterwalder (2004, see https://www.strategyzer.com). Sustainable business model ontologies can be seen as an extension of Osterwalder’s (2004) ontology in encompassing the following building blocks from an SEs perspective:
•Key activities: What do you do to resolve social and environmental problems?
•Key resources: What resources do you need to develop your activities?
•Key partners: Which partners can help you to further develop your activities?
•Value proposition: What is the value that your activities generate for beneficiaries and/or customers?
•Beneficiaries and/or Customer Segments: Who are the different types of beneficiaries and customers?
•Beneficiaries and/or Customer Relationships: How do you serve your beneficiaries and customers?
•Distribution channels: Through which channels can we best reach beneficiaries and customers?
•Cost streams: Which costs are associated with our activities?
•Revenue streams: What are our sources of revenues?
•Social and environmental impact: What is the social and environmental value of our activities?
The different building blocks of the sustainable business model ontologies are interrelated to each other. SEs can thus use similar ontologies to carefully analyze the building blocks of their activities and to improve them.
Another established stream of literature, useful for SEs, is related to inclusive business models (Dentchev, 2020). The literature on inclusive business models is concerned with how to integrate various poor communities and disadvantaged people in various places of the value chain (UNDP, 2008). Inclusive business models can provide valuable insights into social entrepreneurs interested in fair trade (Moore, 2004; Telser, 2005), and integrating the agricultural or artisanal production of poor communities (Kelly, Vergara & Bamman, 2015). In this sense, inclusive business models can be seen as vehicles for the so-called base-of-the-pyramid communities to overcome extreme poverty (London & Hart, 2004). Inclusive business models literature could also inspire SEs interested in developing business models for work integration of disabled people (Davister, Defourny & Gregoire, 2004; Spear & Bidet, 2005), or people with social problems (e.g. alcohol, drugs, criminal activity, etc.). Overall, the literature on sustainable-and inclusive business models provides valuable arguments for SEs to have a closer look at their business model and to streamline the logic of their activities. Figure 10 presents an overview of the different building blocks of the business model of SEs.
6.4.Business Models of Social Entrepreneurs
A good overview of the definitions of business models in the context of social entrepreneurship is provided by Lee (2015, p. 285), who summarizes it as: “A social enterprise business model is a decision-making framework for developing logically coherent activities to support social mission-driven value creation and formulating strategies to sustain competitive advantages”. The words “competitive advantage” need further highlight in this definition, as many SEs are not thinking in terms of completeness. Even SEs are developing their businesses using an NGO legal form, without customers and sales, there is always competition. There could be direct (organizations doing exactly the same) or indirect (organizations providing alternative solutions) to a social issue. Knowing the direct and indirect competitors could provide valuable benchmarking insights, which can help to improve the business model. In any case, please note that decision-makers amongst the potential partner or funding organizations will monitor if the solution that SEs propose is among the most successful ones.
The discussion of SEs’ business models brings us to different types of operations. Alter (2007) has identified nine fundamental business models of social entrepreneurs:
1.Entrepreneur Support Model: the social enterprise organizes sales to individuals or organizations to find a market for their products.
2.Market Intermediary Model: the social enterprise provides consulting services to individuals or organizations in order to help them to find a market for their products.
3.Employment Model: the social enterprise provides employment and training to the disadvantaged people that they want to help.
4.Fee-For-Service Model: the social enterprise develops services and charges those whom they want to help.
5.Low-Income Client as Market Model: this is similar to the above model, but focused on poor communities.
6.Cooperative Model: the social enterprise develops services for its target groups, who at the same time are co-operators.
7.Market Linkage Model: the social enterprise develops information services that help others to design products or services useful for disadvantaged communities.
8.Service Subsidization Model: the social enterprise sells products and services on the market, and uses the funds to subsidize its social activities.
9.Organizational Support Model: the social enterprise develops the same products or services, which it sells to the general market but gives for free to their target groups.
Based on the above, consultancy services appear to be among the typical income sources of SEs. Social entrepreneurs possess expertise, knowledge, or networks that can generate win-win situations with other societal actors. Often, this consultancy service is combined with workshops, events, or (job) training, where, for example, governments or companies are the SEs’ primary customers. SEs can also act as intermediaries, both in terms of products or employment services. They form a bridge between two actors or markets and profit from making those connections. Price discrimination is another prime example, when one party pays more than another, or even the model of “buy one, give one” is adopted. SEs often apply a cooperative or community mindset to solve social problems, as such, a fees-based membership/subscription model would not be surprising as a way to generate income. It is important to mention that the business models of SEs can pivot over the lifecycle of their venture. They can use one type of business model during one stage and adapt to another later on. A combination of the above mentioned business models is also a possibility. It is important that SEs keep on evaluating their business models over time, and thus always try to increase their social impact. We provide in the Appendix 2 a list of 30 different social enterprises from Belgium with a wide variety of business models. We hope this list can serve as a source of inspiration and illustration of this chapter.
6.5.The need of Financial Planning
The financial planning is where the logical part of the business model gets translated into financials, such as fixed assets (machinery or equipment for example), current assets (inventories for example), operating (rent or utility costs for example), financial or personnel expenses. These costs are often looked for by impact investors or other financial actors, who aim to understand how efficient the SE runs its organization. It provides them with the knowledge to evaluate the trade-off between means required, and impact achievements. As such, it is always a good idea to review and evaluate how cost-efficient the organization is being run. Investors will do it anyway. Being aware of these elements, positions the SE as knowledgeable and trustworthy towards potential investors.
But more importantly, financial actors will also be interested in understanding to what extent an SE can manage those costs. They will want to hear what kind of activities the SE sets up in order to generate income, and cover their expenses. Various stakeholders next to the impact investors, as a matter in fact, will want to understand what kind and variety of income sources the SE manages in order to serve its intended beneficiaries.
Depending on the SE’s focus, it could provide a well-balanced mix of funding sources or a focus on one particular source (subsidies, grants, donations, or customers). We already discussed the variety of sources and its reasons behind it in previous chapters. But also, here, some financial jargon, such as equity (capital or reserves), debts (loans or taxes), operating or financial revenues, translates the logical part of the business model into terms more commonly known to some actors in the EE. Some of them even might want to take a cash-flow perspective, and understand how much and by which intensity you’d be burning money (per month for example) to achieve your social mission.
These elements are logically found across both the balance sheet as well as profit and loss statement of the SE’s organization. What makes the building blocks interesting to use, is that it provides the means for SEs to “translate” their stories into a different language, without losing the perspective of the social mission on the long run. An SE needs to master its capability of providing a moving narrative of what he or she intends to achieve to a wide audience of stakeholders.
6.6.Lean structures
Looking for activities that can contribute to your independence can be combined with efforts to stay as efficient and low-cost as possible. Lean organizational structures require fewer resources and create more value than classic organizational structures would (Ries, 2011). Such philosophy, being lean and mean, makes the organization flexible and responsive towards opportunities and threats, yet comes at a cost. The workload and strain of small core teams are quite high, and social entrepreneurs are not too keen to acknowledge this but it also puts high pressure on them mentally. There will always be more demand than the supply offered by the SE (Kickul & Lyons, 2012) and can give them a feeling of being pressured to grow impact as quickly as possible.
SEs should consider doing as much as possible through partnerships and voluntarism (Hu et al., 2019). This helps them to relieve some of the workloads and keep your organization lean, low-cost and helps you to focus on their core activities that will contribute to your blended value proposition. This requires them to have a clear image of what the next milestones or impact indicators are and to be achieved. What also contributes to a lean organization structure is the iterative process of critical reflections (Jay, 2013) on more efficient operations. And finally, investing in the right kinds of people who have not only the just set of values and intrinsic motivation but also the right set of capabilities and skills that you need within their social enterprise (Weber et al., 2012). This assures the organization’s most fundamental work units are aligned and on the same page regarding the mission, vision, and values of the organization. An important aspect of lean structures is that they need to stay focused on what is purely essential and must-haves to operate. It requires SEs to limit their nice-to-haves or wants, recruitment possibilities or overhead costs. Staying cheap and focusing on delivering a good impact on a small scale is essential to be able to grow afterwards.
A couple of governance mechanisms can contribute to the management of lean organizational structures. First, SEs should consider having a great board of directors (Mason & Roye, 2007; Doherty et al., 2006) that help you maintain an overview of your duality, while also keeping your team members, partners and volunteers aligned and enthusiastic. Second, because of your transparent communications efforts, SEs can continuously engage with a variety of stakeholders (both internally and externally), keeping channels open for feedback or opportunities. And finally, because of the empowered position of their core team, they are not relying on inefficient hierarchical structures.
Below, we offer some tips that can help SEs to strengthen their business models:
✓Traditional business models (and tools) can help social entrepreneurs orientate in a first phase. Lots of building blocks from traditional and social entrepreneurs overlap. But beware… they are not completely appropriate for social enterprises (considering their goal/mission), as some aspects need a different type of attention (Seanor & Meaton, 2007).
✓Although there are hundreds of social problems waiting to be solved, and hundred more ways exist to solve them (possibly), the most fundamental forms of SE business models are boiled down into 9 types (Alter, 2007). Sure, there might have been some tweaking or adaptations taking place, but you should be able to find your activities aligned with one of the examples given by Alter.
✓Benchmark your business model to the ones of your environment/competition/colleagues. Don’t be afraid to discuss, you could get much more out of those feedbacks than if you keep things to yourself!
✓However painful it might be, … be open for criticism with your business model. Yes, you want to make a difference and achieve social change. We commend you for this. And that’s why we advise you to go to experts! Network organizations, professionals, academics… get that business model out in the open, and let other great minds share their thoughts on it. They will gladly contribute with their knowledge, expertise and networks to sharpen something useful and good for society!
✓Every business model has its own path towards growth/scaling (Saebi et al., 2019). Be aware of which growth strategies you’d want to pursue… and how this is positioned towards your business model.
✓A well performing SE is constructed in a consisting manner across all aspects of the BM. The linkages between your mission, the activities focused on the social aspect and the activities focused on your commercial activities need to be well aligned (Grassl, 2012).
✓Keep on challenging yourself by doing the business model exercise, over and over again. It’s a fundamental tool that will help you “translate” your story to potential investors or partner organizations who are more accustomed to these types of pitches, rather than the passionate speech about a societal problem.
✓The business model of an SE takes time to evolve. Start off with something simple. Your business model will not be perfect from the start. It can take up to two decades before it will be well-balanced and sustainable.
As such, stay aware to constantly innovate your business model. It is at the heart of an SE’s success (Davis & Doherty, 2019).
6.7.Summary in bullet points
•We use the term business models to refer to the organization and the logic of the activities of SE (including their business activities). Some SEs are not inclined to recognize having a business model in their organization.
•Every social enterprise, from the smallest to the largest, should be aware of all different components of their business model. The level of complexity in a business model is different among the variety of social entrepreneurs.
•The literature on Sustainable and Inclusive Business Models has a focus on how organizations approach social and environmental issues.
•We introduce the building blocks of the business models for SEs: partners, value proposition, beneficiaries, customers, costs, revenues and social impact.
•We have discussed 9 different SE business models.
•Different business models may apply in different stages of maturity of SEs.
•It is possible to combine multiple business models. Beware the complexity that multiple business models can bring to the enterprise.
•A strong business model means more social impact. The more the business model should be thus well aligned with impact creation.
Suggested additional reading for this chapter
•Bornstein, D. (2007). How to change the world: Social entrepreneurs and the power of new ideas. Oxford University Press.
•Elkington, J. & Hartigan, P. (2008). The power of unreasonable people: How social entrepreneurs create markets that change the world. Harvard Business Press.
•Yunus, M. (2010). Building social business: The new kind of capitalism that serves humanity’s most pressing needs. PublicAffairs.
•Ries, E. (2011). The lean startup: How today’s entrepreneurs use continuous innovation to create radically successful businesses. Currency.
•MacMillan, I. C. & Thompson, J. D. (2013). The Social Entrepreneur’s Playbook, Expanded Edition: Pressure Test, Plan, Launch and Scale Your Social Enterprise. Wharton School Press.