Social enterprise: It takes a network

22 April 2010:

The popularity of social enterprise—business with a social mission—is surging. MBA courses on the subject are oversubscribed and the number of social enterprises is growing around the world. But it’s hard enough to start a successful business; founding a social enterprise that must compete in the marketplace and create social impact is an even taller order. That’s why few social enterprises have achieved substantial financial scale: decades after the first social enterprises were founded, there are few if any examples with revenues of $1 billion per year. For example, in annual revenue terms, Amul Dairy in India has just over $1 billion, BRAC in Bangladesh has $200+ million, and Grameen Bank, also in Bangladesh, has under $100 million. Perhaps there are a few other social enterprises in these leagues, but not many. By comparison, in India alone there are 124 traditional, profit-oriented businesses with over $1 billion in revenues.

There are two important realities of social enterprise that must be acknowledged at the outset. First, social enterprises are at a comparative disadvantage to business. At its core, this is because the social impact these enterprises are seeking entails cost. In some cases, this may be because social enterprises pick the most difficult, not the most lucrative, markets in which to work. And if they find a way to turn a profit, traditional businesses will come pouring in. For example, a social entrepreneur may begin by serving a difficult market, such as the rural poor, that big business has largely ignored. At first, the social enterprise may be able to provide the best, lowest-cost solution to its customers in that market, perhaps by investing “sweat equity.” But once the business grows and the model is proven, the transaction costs of market entry come down and competition is likely to arrive. Many of those competitors will be better funded. A case in point is the microfinance industry. In the most difficult markets, it is often social enterprises leading the way; as markets get more developed, commercial banks begin to dominate.

In addition, new competitors may not feel the same need to serve a social good. A social enterprise may make hiring from disadvantaged populations or producing environmentally-friendly products a priority. But these kinds of initiatives, which support a social mission, may lead to higher costs and put the social enterprise at a price disadvantage.

Second, it is difficult to have a social impact by yourself. Much of the impact that social enterprises achieve is the result of influencing others to follow their lead. When a social enterprise shows that a product can be produced using fair-trade policies or with less environmental impact, for example, it pushes businesses and consumers to expect new standards in the marketplace. The organic food, cosmetics, and renewable-energy industries are all examples of cases where social- enterprise pioneers have pushed big businesses to take up new social and environmental standards.