Social Enterprise Typology
From a ‘Marshall Plan’ for Ukraine 2007:
The following section is excerpted from “Social Enterprise Typology”, by Kim Alter, April 13, 2006. Excerpts are rearranged and edited for presentation in this document.
Preliminary Definitions
Embedded Social Enterprises — Social programs and business activities are one and the same.Non-profits create Embedded Social Enterprises expressly for programmatic purposes. The enterprise activities are “embedded” within the organization’s operations and social programs, and are central to its mission. Social programs are self-financed through enterprise activities and thus, the embedded social enterprise also functions as a sustainable program strategy.
Integrated Social Enterprises — Social programs overlap with business activities, often sharing costs and assets. Organizations create integrated social enterprises as a funding mechanism to support the nonprofit’s operations and mission activities.
External Social Enterprises — Social programs are distinct from business activities. Nonprofits create external social enterprises to fund their social services and/or operating costs. The enterprise’s activities are “external” from the organization’s operations, but support its social programs through supplementary financing.
Social Enterprise Operational Models
Social enterprise models fall into three distinct categories: fundamental models, combined models, and enhanced models. Fundamental models can be combined and enhanced to achieve maximum social value and social benefit creation.
Fundamental models
Fundamental social enterprise models include:
· Entrepreneur Support Model
· Market Intermediary Model
· Employment Model
· Fee-for-service Model
· Service subsidization model
· Market linkage model
· Organizational support model
- Entrepreneur Support Model
The entrepreneur support model of social enterprise sells business support and financial services to its target population or “clients,” self-employed individuals or firms. Social enterprise clients then sell their products and services in the open market
The entrepreneur support model is usually embedded: the social program is the business, its mission centers on facilitating the financial security of its clients by supporting their entrepreneurial activities. The social enterprise achieves financial self sufficiency through the sales of its services to clients, and uses this income to cover costs associated with delivering entrepreneur support services as well as the business’ operating expenses. Economic development organizations, including microfinance institutions, small and medium enterprise (SME) and business development service (BDS) programs use the entrepreneur support model.
- Market Intermediary Model
The market intermediary model of social enterprise provides services to its target population or “clients,” small producers (individuals, firm or cooperatives), to help them access markets. Social enterprise services add value to client-made products, typically these services include: product development; production and marketing assistance; and credit. The market intermediary either purchases the client-made products outright or takes them on consignment, and then sells the products in high margin markets at a mark-up.
The market intermediary model is usually embedded: the social program is the business, its mission centers on strengthening markets and facilitating clients’ financial security by helping them develop and sell their products. The social enterprise achieves financial self-sufficiency through the sale of its client-made products. Income is used to pay the business’ operating expenses and to cover program costs of rendering product development, marketing and credit services to clients. Marketing supply cooperatives, as well as fair trade, agriculture, and handicraft organizations frequently use the market intermediary model of social enterprise. Common types of business that apply this model are: marketing organizations, consumer product firms, or those selling processed foods or agricultural products.
- Employment Model
The employment model of social enterprise provides employment opportunities and job training to its target populations or “clients”, people with high barriers to employment such as market dysfunction, physical and/or mental disability, homeless, at-risk youth, and ex-offenders. The organization operates an enterprise employing its clients, and sells its products or services in the open market. The type of business is predicated on the appropriateness of jobs it creates for its clients, regarding skills development, and consistency with clients’ capabilities and limitations, as well as its commercial viability.
The employment model is usually embedded: the social program is the business, its mission centers on creating employment opportunities for clients. Social support services for employees such as “job coaches,” soft skill training, physical therapy, mental health counseling, or transitional housing are built into the enterprise model and create an enabling work environment for clients. The social enterprise achieves financial self-sufficiency through the sales of its products and services. Income is used to pay standard operating expenses associated with the business and additional social costs incurred by employing its clients.
- Fee-for-service Model
The fee-for-service model of social enterprise commercializes its social services, and then sells them directly to the target populations or “clients,” individuals, firms, communities, or to a third party payer.
The fee-for-service model is usually embedded: the social program is the business, its mission centers on rendering social services in the sector it works in, such as health or education. The social enterprise achieves financial self-sufficiency through fees charged for services. This income is used as a cost-recovery mechanism for the organization to pay the expenses to deliver the service and business expenses such as marketing associated with commercializing the social service. Surpluses (net revenue) may be used to subsidize social programs that do not have a built-in cost-recovery component.
- Service subsidization model
The service subsidization model of social enterprise sells products or services to an external market and uses the income it generates to fund its social programs.
The service subsidization model is usually integrated: business activities and social programs overlap, sharing costs, assets, operations income and often program attributes. Although the service subsidization model is employed primarily as a financing mechanism–the business mandate is separate from its social mission–the business activities may enlarge or enhance the organization’s mission.
Non-profits that implement service subsidization social enterprises operate many different types of businesses, however, most leverage their tangible assets (building, land, or equipment) or intangible assets (methodology, know-how, relationships, or brand) as the basis of their enterprise activities. Commercialization of core social services leads to enterprise activities that are close in nature to the organization’s social programs and may enhance the mission; whereas leveraging physical assets to sell to the public may result in an enterprise that is very different from the organization’s social programs. In financial terms the business benefits from leveraging and cost sharing relationships, and provides a stream of unrestricted revenue to “subsidize” or wholly fund one or more social services. Service subsidization is one of the most common types of social enterprises because it can be applied to virtually any nonprofit. The service subsidization model may conceivably grow into an organizational support model if it becomes profitable enough to throw off revenue to the parent organization.
Service subsidization model social enterprises can be any type of business. Those that leverage intangible assets such as expertise, propriety content or methodologies, or exclusive relationships tend toward service businesses that commercialize these assets: consulting, counseling, logistics, employment training or marketing. Those that leverage tangible assets such as buildings, equipment, land, employees, computers, etc. may launch any number of enterprises that utilize infrastructure and capital assets: leasing, property management, product-based retail businesses; copying, transportation or printing services, etc.
- Market linkage model
The market linkage model of social enterprise facilitates trade relationships between the target population or “clients,” small producers, local firms and cooperatives, and the external market. The social enterprise functions as a broker connecting buyers to producers and vice versa, and charging fees for this service. Selling market information and research services is a second type of business common in the market linkage model. Unlike the market intermediary model, this type of social enterprise does not sell or market clients’ products; rather it connects clients to markets.
The market linkage model can be either embedded or integrated. If the enterprise is standalone; its mission revolving around linking markets, and its social programs support this objective, the model is embedded. In this case, the social program is the business, income generated from enterprise activities is used as a self-financing mechanism for its social programs. Market linkage social enterprises are also created by commercializing an organization’s social services or leveraging its intangible assets, such as trade relationships, and income is used to subsidize its other client services. In this second example, social program and business activities overlap, hence follows the integrated model . Many trade associations, cooperatives, private sector partnership and business development programs use the market linkage model of social enterprise. Types of social enterprises include import-export, market research and broker service.
- Organizational support model
The organizational support model of social enterprise sells products and services to an external market, businesses or general public. In some cases the target population or “client” is the customer.
The organizational support model is usually external: Business activities are separate from social programs, net revenues from the social enterprise provide a funding stream to cover social program costs and operating expenses of the nonprofit parent organization. Although organizational support models may have social attributes, profit not social impact is the perquisite for this type of social enterprise. This model of social enterprise is created as a funding mechanism for the organization and is often structured as a subsidiary business (a nonprofit or for-profit entity) owned by the nonprofit parent. Successful examples of this model cover all or a major portion of the parent organization’s budget.
Similar to service subsidization model, the organizational support model may implement virtually any type of business that leverages its assets. This model is commonplace among western nonprofit organizations across sectors.
Combined Models: Complex and Mixed Models
Model combinations occur within a social enterprise (Complex Model) or at the level of the parent organization (Mixed Model).
Social enterprise models are combined to
1. facilitate enterprise or social program growth;
2. increase revenues by entering new markets or businesses;
3. augment breath or depth of social impact by reaching more people in need or new target populations.
A complex model of social enterprise combines two or more operational models. Complex models are flexible; virtually any number or type of operational models can be combined into one social enterprise. Models are combined to achieve desired impact and revenue objectives. For example, operational models that fall into integrated or external social enterprise categories may yield greater financial benefit, whereas embedded social enterprises offer higher social return, thus models are combined to achieve the dual objectives of the social enterprise. If appropriate for an organization’s target population, the employment model is often combined with one of the other models to add social value–i.e. employment and organizational support model. Operational models are often combined as part of a natural diversification and growth strategy as the social enterprise matures.
Mixed models are often a product of an organization’s maturity and social enterprise experience. This model is common among large multi-sector organizations that establish separate departments or subsidiaries for each technical area–i.e. education, health, economic development, etc. and new business ventures. In nonprofits with mature social enterprises, mixed models are the convention, not the exception, a result of expansion and diversification.
Many nonprofit organizations run multi-unit (mixed) operations, each with different social programs, financial objectives, market opportunities and funding structures. Each unit within the mixed model may be related vis-à-vis target population, social sector, mission, markets, or core competencies. A museum for example, in addition to educational art exhibits, might have both a for-profit catalogue business and highly subsidized research and acquisition operation.
Enhanced Models: Franchise and Private-Sector Partnership
The Franchise Model enhances social enterprises by addressing common nonprofit challenges of replication and scale. Technically, any social enterprise that can be reproduced may be applied to the franchise model. Reproduction requires a viable social enterprise model with clear business and social parameters, which is applicable in different markets or across geographical regions.
An organization can franchise its “proven social enterprise model” and sell it to other nonprofits to operate as their own business. Franchising enhancesnonprofit organizations that have viable, yet non-scaleable social enterprises, through replication. For example, a café that employs disabled people may be profitable only when it employs 12 or fewer disabled people. However, if franchised, the café social enterprise can create employment for hundreds of disabled people. Goodwill Industries’ [http://www.goodwill.org] used clothing and furniture retail stores are a good example of an employment model social enterprise achieving scale through the franchise model.
Hence, the franchise model enhances scalability and social value creation through replication. Purchasers pay franchise fees to receive the social enterprise model, methodology, etc., and ongoing technical support from the franchiser. Buying a franchise enables nonprofit organizations to focus on running operations of a proven enterprise, rather than worrying about what type of business to start, which products to sell, or what markets to enter. Becoming a franchiser creates a new social enterprise for the organization that leverages the organization’s industry and business expertise, and in turn creates new social impact opportunities and another source of earned income.
The Private-Sector Partnership Model represents a mutually beneficial relationship between a for-profit company and a nonprofit social enterprise. Relationships are forged on commercial grounds, whereby each partner is a contributor to the commercial success of the venture. The partnership adds value or enhancesthe nonprofit social enterprise by increasing its viability, and hence its social impact, either directly by reaching more clients through its business model, or indirectly by generating funding for social programs. The private partner also benefits vis-à-vis improving goodwill, increasing customer loyalty, penetrating new markets, attracting more socially conscious consumers, etc., which subsequently translates into higher sales and more profit.
The private-nonprofit partnership model of social enterprise is a mutually beneficial business partnership or joint venture between a for-profit company and a nonprofit organization. The partnership may occur with an existing social enterprise, or may result in the creation of a new entity or a profit center. The social enterprise may or may not be mission-related and leverages the nonprofit organization’s assets, such as relationships with their target population, community, brand, or expertise. For the for-profit, the partnership yields one or more of the following benefits: lowers costs (cheaper labor/lower research and development costs); reduces restrictions (no strict regulatory oversight); improves community relations or public image; enables new product development; penetrates new markets; or increases sales. Partnership benefits for the nonprofit are financial return, marketing and brand equity, and in cases where the activity is mission-related, social impact. The market is most often external–the public, but examples exist where the paying customer and the client are one. The private-nonprofit relationship may be structured as a joint venture, a licensing agreement, or formal partnership.
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