For social entrepreneurs, the social mission is explicit and central to their endeavors. The organizational model that these entrepreneurs choose must be suitable to create and sustain their social mission, but is also without a clear way of measuring the total societal value created.
Social transformation doesnt benefit from the same performance indicators that business entrepreneurs have, but we understand that your organization must have a model that can withstand economic factors allowing it to create productive movement toward that aim continually.
Social entrepreneurship drives social innovation and transformation in various fields such as health, environment, education and enterprise development. It applies innovative, practical and sustainable approaches to benefit society, with an emphasis on marginalized or impoverished populations. Social entrepreneurs seek to combat poverty by deploying various entrepreneurial dimensions and business methods. Thus, a social enterprise may be a nonprofit organization that employs a business operational management model or a financially stable organization those transitions into the non-profit area (Seforis, 2014). Social entrepreneurs establish strong and sustainable enterprises based on three types of innovation: economic, transformational and political (Nicholls, 2008). These three types of innovation tend to influence one another hence ensure a growth of the business. For instance, the economic innovation tends to place business knowledge, technology, entrepreneurship and innovation at the center of the model rather than seeing them as independent forces. Also, the transformational and political innovation also helps the entrepreneur to identify the necessary changes needed in the business and ensure that the visions are created to aid in giving guidance to the changes through inspiration and guarantee execution of these changes with the committed team of employees.
Our research uncovered four major organizational models used within social entrepreneurial ventures. They include the leverage non-profit model, Social Business Venture Model, Hybrid Profit Model, and Hybrid Non-Profit Model. The explanations are as follows:
The first is the "Leverage Non-profit Model."
Typically, this model is used when an organizations social mission is in response to a market or government failure. This type of organization leverages their charitable funding directly in communities they serve. Examples might include grant assistance programs that increase local spending and through the multiplier effect benefit the community with further increases in income and consumption. Consideration is that financial sustainability has a reliance on charitable funding.
The leverage non-profit model addresses market or government failures. Entrepreneurs establish this type of nonprofit organization to foster adoption of innovation. The entrepreneur engages the community, including public and private organizations, to spearhead innovation through the multiplier effect, where an increase in spending produces increased income and consumption greater than the initial amount spent. In most cases, leveraged non-profit enterprises depend continuously on outside philanthropic funding which could be a weakness of the model as the success of venture relies on external fundraising. However, their longer term sustainability is often enhanced since cohorts have vested interests in the survival and progress of the enterprise. The main opportunities in this model are a high level of sustainability since partners have vested interest. It also leads to multiplier effects since the addition of extra income lead to more spending creating more income (Fouad, 2015).
The second is the "Social Business Venture Model."
Typically, in this model investors are sought out to fund the venture. Any profits are reverted into the organization allowing further growth so that its social mission may be expanded through those gains. Although a Limited Liability Social Enterprises would allow for flexibility with managerial control of the organization, there is shareholder element to be considered.
Through the social business venture model, the entrepreneur establishes a business to provide an ecological or social product or service. "The entrepreneur of social venture seeks investors interested in combining social and financial returns on their investments" (Nicholls, 2008). Although profits are ideally generated, the model aims to grow the social venture to reach more needy people as opposed to maximizing financial returns for shareholders. Since the primary purpose of a social business venture is not the accumulation of wealth, profits are reinvested in the business to cater for expansion. The social business ventures tend to encourage comprehensive financial planning, fiscal responsibility and make the organization more innovative, efficient and effective. However, keeping it innovative and effective is challenging because they are never self-sufficient, the social venture always requires mixed revenue support models (Center, 2007). Perhaps, external support for the well-defined cause or objective is likely to enhance this model's competency.
The third is the "Hybrid Profit Model."
The hybrid model is a type of model which aids to strike a balance between the commercial enterprise and the social mission, and it is a promising model for most businesses. Within this model, there is a unified strategy whereby revenues produce the social value. Here you can address a social issue or promote social change from the sale of good or services, and the social entrepreneur becomes revenue philanthrocapitalist. An example might be a profitable service program that also develops the workforce. The consideration that this model may be suited to the delivery those revenue generating services offered by your organization, but it does not address the criteria need to resolve the stigma associated with any profit model organization.
A hybrid (for) profit model is established when funding is a matter of concern that requires assessment of different opportunities and options. Here, a for-profit business uses its revenues gathered through sales of goods or services to fund its social welfare mission, subsequently reducing the dependency level of grants, donation, and subsidies. Organizations that use this model are commonly forprofit firms that later add a charity or service program to its structures (Haigh, & Hoffman, 2011). One example is Hot Bread Kitchen, a hybrid owned by a New York City bakery. It has integrated social welfare by developing the local workforce, which increases the revenue generation that finances the commercial activities of the firm (Battilana et al., 2012). This model thus produces a combination of commercial revenues and social value in a unified strategy.
The development of this model is driven by the willingness of social entrepreneurs to have sustainable financial models with little dependency on subsidies and donations (Battilana et al., 2012). As entrepreneurs execute commercial activities, the revenue generated enables them to address social issues that society faces, such as health care, law, politics, education, housing, hunger, and culture. A study conducted by Echoing Green and Harvard Business School to increase the understanding of hybrid models found that organizations that incorporated both earnings and donations to finance operations have a significant level of growth. The study revealed that there was an increase in the number of firms that used the hybrid profit model. This was evidenced by an increased establishment of hybrid profit models in 2010, over 50% of the firms relied on this model as compared to 37% recorded in 2006 (Battilana et al., 2012). The main advantage of this form of enterprise model is the ability to attract funding from various capitalist ventures, thus providing a large scope for scaling up and expansion of business operations.
The major challenges that firms face in creating a hybrid business model, especially a for-profit entity, are the legal and structural issues. In most countries, two legal structures exist where each has particular benefits. In for-profit firms, the aim is shareholder value maximization while non-profit firms focus on charitable activities. The difference in the mission of the two firms can create complicated legal issues, such as taxation of hybrid models. The structural difference also contributes to financing problems because no clear ways of funding hybrids exist. Battilana et al. (2012) argue that grant funders prefer financing the nonprofit social mission, making many hybrids reliant on the nonprofit sector. Also, a for-profit hybrid model is perceived as riskier than a non-profit model because it gains funds through commercial activities that are subject to market uncertainty, and lacking investor support leaves them vulnerable and dependent on the non-profit sector. However, despite being risky, they are more efficient and sustainable due to low donor reliance in pursuing their social welfare missions.
The fourth is the "Hybrid Non-Profit Model."
Hybrid Non-profit model is a flexible model which combines the commercial logic of a for-profit organization, with the social logic of a non-profit organization. Sustainable Social Movement is supported by placing the right structures that can accommodate earnings that feed those efforts. The legal considerations for this type of organization are often more complex as they typically involve creating multiple legal entities with designed administrative separations though this varies depending on the sources of your capital.
Under the hybrid non-profit model, the entrepreneur establishes a nonprofit organization that utilizes some degree of cost recovery via the sale of goods and services to both private and public institutions. In most cases, the entrepreneur creates many legal entities (with the social cause) to accommodate earnings and charitable expenditures under the most favorable structure. However, the entrepreneur also mobilizes other sources of funds such as quasi-equity, loans, and grants from philanthropic and public sectors to sustain the transformative activities and address clients' needs effectively. The problem with this model is that it requires restructuring and can be complex to govern, however, the Hybrid non-profit model becomes an asset while competing for the private and public resources and encourage the potential political support (Smith, 2010).
However, the study is not limited to the four aforementioned and discussed models. Others comprise of the multiple entity models and the legal structure pathway. They are also discussed as follows:
Multiple Entity Model
The multiple entity models combine both nonprofit and for-profit models. Since this model contains a mix of nonprofit and for-profit legal entities, whereby each may require its governing board of directors, legal and accounting administrators, this model entails complex administrative separations and design requirements that can burden management (Coetzee, 2014). These models have multiple challenges - for example, different skill sets are required for nonprofit operations as compared to for-profit. Also, each entity will have different methods for product costing and determining profit margins.
Legal Structures Pathways
One of the major decisions in establishing a social enterprise is the legal structure. The structure must be selected based on its size, type of activities, modes of funding, credibility with stakeholders (for example, its employees and customers), tax liabilities and its social objectives. The right legal structures have enabled simple ideas to thrive and become big enterprises...
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