Management Challenges for Social Enterprises - Term Paper Example

Management Challenges for Social Enterprises Introduction Social enterprise is a new and emerging concept that outlines the need for the application of commercial strategies to maximize the impact of organizations in increasing the overall well-being and also sustain the environment. A social enterprise, therefore, is not focused on maximizing the wealth of the shareholders but rather is focused on an increase in the overall environmental well-being of the stakeholders (Lyons, 2012). It is critical to note that a social enterprise is not necessarily a non-profit organization that is focused on generating wealth; however, for profit organizations engaged in the environmental well-being of the stakeholders can also be considered as social enterprises. From the point of view of asset management, a social enterprise can increase the overall diversification of the portfolio while, at the same time, add more ethical trading and investing philosophy into the overall portfolio management also. It is believed that portfolio managers may have only to invest in the commercial entities to generate more value for their clients. Overall risk diversification and return strategies are, therefore, often tailored according to the dynamics of how a for-profit business operates and generates more value for the portfolio managers. Non-Profit wealth creation through social enterprise is viable and sustainable activity and can increase the overall well-being of the society while, at the same time, allowing asset managers to actually diversify their risks and also add more ethical investing and portfolio management orientation to the whole process of asset management (Field, 2014). This paper will be focusing on understanding the impact of non-profit wealth creation on the overall portfolio risk and return. This paper will further add on to whether the non-profit wealth creation will add more ethical orientation to the portfolio management or not. Social Enterprise      Before discussing further, it is critical to develop comprehensive understanding of what a social enterprise is and how it operates and creates value for all stakeholders. The overall concept and idea of a social enterprise existed for long. However, it has recently gained more momentum with large organizations such as Dannon entering into joint ventures to form social enterprises. A social enterprise’s focus is on the use of commercial strategies and tactics to achieve more value and improvement in the human and environmental well-being. A social enterprise’s main objective, therefore, is not the maximization of the shareholders’ value or wealth but to help improve the environment and the human life. It is critical to understand that a social enterprise can either be for profit and non-profit, therefore, it is not necessary that a social enterprise should be a non-profit entity. Considering this flexibility, it is clear that a commercial and the for-profit entity can also be operating as a social enterprise. The overall notion and the meanings developed out of the social enterprises differ from country to country. In United States, a social enterprise is mostly related to the concept of charity through trade i.e. social enterprise becomes an instrument through which the charity can be done. The overall cultural context of social enterprises, therefore, is essential in understanding as to how the social enterprises operate and are being managed across different cultures. Social enterprises often are either considered as part of the subgroup of organizations or a separate group itself (Chowdhury, n.d.). Over the period, social enterprises have been mostly modeled on the basis of the non-profit and charitable work. Their survival has been dependent upon social community as it is from there they attracted the human, as well as the social capital. Later emphasis, however, has shifted towards the self-sustaining of such organizations and making them self-sustaining in a manner that can help them to evolve and develop in the longer run. Over the period, social enterprises have also been considered as part of the third sector, which existed alongside other systems of capitalism. Along with planned economy and private and profit-oriented economy, there existed another system also which is called social economy. This social economy was based on social businesses and social firms and community enterprises, which attempted to produce social good and achieve the required degree of well-being in human life and the environment within which they live. It is also critical to understand that social enterprises are just one part of the social economy as social economy comprises of other organizations and entities also which are not directly related to the trade linked activities or which are not directly linked to the generation of profits for the wealth building or value creation (Doherty, et al., 2009). Social enterprises traditionally operated to highlight deep societal issues such as hunger, environmental pollution or homelessness. Social enterprises traditionally have also provided other social goods such as education, basic medical services and other social care. However, recently, there has been a shift in the overall orientation of the social enterprises making them more of for-profit entities engaged in commercial activities also. The traditional streams of revenue of the social enterprises have been fees, as well as government and public grants. Since the services delivered were mostly of the social nature, therefore, the reliance was mostly on the revenues generated from different sources. However, later one, social enterprises have started to develop alternative revenue streams also and now are engaged in commercial activities. Organizations such as Save the Children are using auxiliary commercial activities to develop more streams of revenue. By selling shirts and other items of smaller value, these organizations focus upon generating more revenue to support their activities to become self-sustaining entities. These activities make social enterprises a new player in the commercial market where they compete at relatively lower level with the mainstream commercial entities also. The overall purpose of such activities is to reduce the dependencies of the social enterprises on their traditional sources of funding. Most of such organizations operate in areas where there is a direct link between the people, environment and the overall activities of the social enterprise. As such, the nature of activities of such non-profit organizations restricts their abilities to develop a model of revenue, which can help such organizations to surpass their traditional sources of funding and revenue. Some of the examples of activities performed by social enterprises include helping children with disabilities, providing vision glasses, fulfilling nutrition requirements of the children, etc. (Bloom & Skloot, 2010). More importantly, social enterprises are even commercializing their core programs to accomplish their overall objectives. The commercialization of the core activities of social enterprises makes it possible for the social enterprises to actually rely less on traditional form of revenues i.e. fees and grants but rather generate their revenue through contracts and fees obtained through sale of their core services and products (Solomon, 2011). This gradual acceptance of the commercialization of the non-profit social enterprises has been made possible due to the global acceptance of capitalism as the dominating form of economic activity. There has been a widespread celebration of market-forces and how they can help to sustain the creation of wealth and generate more value for all stakeholders. The wealth creation of social enterprises is also attributed towards the notion of bringing in more efficiency in such enterprises and how such efficiency can transform into more wealth creation for such enterprises. The notion of efficiency is also critical from the perspective that the performance of social enterprises may not be up to the mark if there is a lack of commercial wealth creation in such organizations. For their long-term survival and self-sustainability, it is more important actually to help social enterprises to become commercially oriented while, at the same time, maintaining their non-profit status. Another critical reason as to why social enterprises are engaging in non-profit wealth creation is the reduction in the overall dependencies of the people on the social enterprises. It is argued that offering free products and services may result in low self-esteem of the people receiving such products and services. As such offering them at low prices i.e. no loss no profit basis, it may not only boost the self-esteem of the people but will also result in increase in the revenue and profitability of social enterprises. Such increase in value will ultimately transform into more value for all stakeholders. Non-Profit Wealth Creation     Non-profit organizations also require strategic management practices that can help them to remain as healthy and vibrant organizations. In order to remain healthy and vibrant, they require consistent streams of income while, at the same time, paying attention to the accounting standards implementation and the implementation of other financial management principals.    The traditional portfolio management theory was introduced by Harry Markowitz, who discussed the notion of risk and return and linked it with the overall portfolio diversification principles. The first principle that the average return of a portfolio is the average return of all the assets held in the portfolio emphasized that the expected returns can have a range of uncertainty, and each security has a different range of uncertainty associated with it. Another important principle of portfolio management was that of the returns of the securities don’t move together. This reflects the overall risk of the portfolio and also indicates that the overall risk of the portfolio can be reduced through diversification. Though the principles of the portfolio management are being used in the modern investment practices; however, the overall orientation of the portfolio managers in managing the non-profit organizations and earning returns on the assets held by these organizations differs from each other. The overall asset allocation strategies of the fund managers dealing with normal common assets and the assets of the non-profit organizations differ. Not only capital preservation is one of the main objectives of the portfolio managers but they also seek consistent returns on such investments (Field, 2014). One of the key differences between the non-profit social enterprises and other organizations is that of emphasis on the diversification. Fund managers maintaining the non-profit social enterprises funds tend to focus more on reducing the diversification rather than having well-defined liabilities. The endowment model, which is being used and followed by the non-profit social enterprises, focuses more on generating returns from wider sources of assets including both the liquid, as well as the illiquid sources of assets. The use of more illiquid investments and the alternative investments dominates the overall investment philosophy and value creation approaches of the non-profit social enterprises. It is also critical to note that the overall asset allocation decisions for the large, as well as small social enterprises, differ from each other. Fund managers often take different approaches when dealing with the decision of making asset allocation decisions for the large, as well as small non-profit organizations. Further, the overall risk and return criteria are relatively same large, as well as smaller organizations attempt to take different levels of risks according to the overall size of the funds. The overall return generated by these organizations is, however, viewed from two different perspectives i.e. the social return on investments and the financial return. The financial returns on investment, historically, have been dominated by the prudence and hence more conservative approaches have been adapted, however, to more risks taken, it is expected that the overall returns on investment would greatly increase. As the overall range of investments and the support received by the non-profit social enterprises differs from each other, the overall nature of the returns is relatively different too. When investments are made by the capital markets through equity investments in non-profit social enterprises, the overall focus is on generating more financial returns. However, the grants and other fees given to the non-profit social enterprises are largely focused on generating more social returns. As such, non-profit organizations face a dilemma in terms of how to maintain the overall expectations of different stakeholders (Yale, 2014). From the perspective of a portfolio manager, the overall focus is on generating more value through the investment rather than increasing the overall returns. By adapting a different strategy of achieving the diversification while earning relatively modest returns, portfolio managers attempt to achieve more value proposition through their investments in not for profit social enterprises. One of the best success stories of social enterprises delivering more value to all stakeholders while, at the same time, generating sufficient returns is that of the Grameen DANONE Foods Ltd., which is operating in Bangladesh. The overall aim of this social enterprise is to fulfill nutritional deficiencies of many rural children in Bangladesh. This enterprise was based on offering 1% dividend return to the stakeholders that it continued to provide till 2009 when the Board of Directors of Grameen DANONE waived all the monetary benefits to any stakeholder. As of now this enterprise works with the no loss, no dividend basis and is offering no returns to the stakeholders (Yunus, 2007). Grameen Bank itself is the biggest example of how social enterprises can fulfill their objectives while, at the same time, earning reasonably well to generate returns and deliver more value. Though the overall size of profit of Grameen Bank is relatively low i.e. less than $1 Million, however, it has been an instrument in achieving phenomenal growth in its overall asset size while its recovery rate of debts is one of the highest as it focuses on women while making any lending decisions (GDRC, n.d.). The low number of existing social enterprises in the market, nowadays with them rarely disclosing their annual financial statements, has made it relatively difficult to scrutinize the returns they offer. However, because of their successful delivering of social good, their overall objectives have become easier to achieve. Stakeholders of Social Enterprise Social enterprise, like all the other organizations existing in the market, involves the interaction of different stakeholders who benefit from their series of action. As it has divergent stakeholders, social enterprise differs from traditional businesses, government agencies, and other organizations. Other types of business usually only have two specific distinctions of their stakeholders: the shareholders and the clients. Social enterprise, however, does not consider these two as their major stakeholders. As an organization, it also holds the philosophy of achieving its mission designed to foster social and environmental well-being through the application of market-based strategies (“Social Enterprise,” n.d.). In other words, it endeavors to establish a sustainable society that it allows businesses to become a catalyst for social change by generating profit instead of maximizing shareholder value that would further realize environmental and/or social goals. Social enterprises are said to be an integral part of the community. To some degree, they are owned by it, as they exist to serve the people. They are less categorized by the assets and finances they own, but more on their contribution to the society. Doing otherwise will diminish the real identity of social enterprises (Doherty & Thompson, 2006). This claim is supported by the dissection of Mason, Kirkbride, and Bryde (2007) on the governance approach that each social enterprise must utilize in order to address the different needs of its vast stakeholder base. The best approach is said to be the combination of stakeholder and stewardship theory. Stakeholder theory, when applied in the context of social enterprise, functions in almost the same manner as the other business structures. Since stakeholders have legitimate interests in the firms’ business activities, this theory holds some degree of moral aspect, which must be integrated into the organization toward a better perspective of the internal and external business environment (Marcon & Dorigo, 2012). However, in social enterprise, it is essential to highlight the elements of mutuality and solidarity in order to live up to the expectation of an organization that recognizes the importance of the stakeholders’ well-being in lieu of wealth creation. Stewardship theory, on the other hand, serves as the invisible hand that guides the execution of different business practices by incorporating non-economic factors such as trust, honesty, and leadership. With this theory, partnered with the personality of the enterprise, managers are bound by the obligation to create decisions for the benefit of their beneficiaries. Managers are more inclined to being socially empathic, working in order to prioritize, safeguard and balance interest of everyone. Because of this theory’s characteristics, it is the most implemented rule of action at the management level (Mason, Kirkbride, and Bryde, 2007). Social enterprises’ stakeholders may be slightly similar to others, but their focus is directed to the opposite side. Since it does not focus on wealth maximization, it diverges from shareholders with the beneficiaries at the end portion of their supply chain as the priority. One good example is the Big Issue of United Kingdom. It is a newspaper provider that hires homeless or poor individual as sellers. The Big Issue gives their newspapers at the very low price of 1.00 pound, which they resell at twice the price. The vendors serve as the beneficiaries of The Big Issue. The social company gives their sellers the opportunity to earn twice their capital even though it lessens the company’s profit margin (“Social Enterprise,” n.d.). Success Factors of Social Enterprise Given that social enterprises do not work for the purpose of gaining wealth for their shareholders, at some point, it becomes questionable as to why these organizations stay for a long time, even longer than those who are dedicated to making huge market. For instance, social enterprises have served as a driver for economic growth in India, one thing that other traditional and government organizations have failed to do. Notably, the failure of the NGOs to serve their purpose in the community is a significant factor that contributed to the success of social enterprises in India (Doane, 2014). Social enterprises have slowly become a strong foundation of the societal pyramid, as organizations from the top crumble due to the presence of different challenges. These include budget cuts, backlash and an increasing demand for accountability. During these times, social enterprise has been declared as India’s saving grace. This can be attributed to the ability of the social enterprise to provide employment benefits, conduct fair trade transactions and a proactive approach to solving different social issues including health, education and orderliness (Doane, 2014). The Operation Asha, for example, is one of the leading social enterprises in India, which is notably successful in terms of providing treatment of tuberculosis and other health services at a relatively low price. Another success factor relevant to social enterprise is having the sense of empathy and commitment to philanthropic mission for the less fortunate. This can be observed in the willingness of the enterprise to address social issues and promote sustainability, which, in turn, can help strengthen trust and loyalty from a number of stakeholders. This also creates investment opportunities as beneficiaries entrust their welfare to the enterprise, which, at the same time, also trusts its beneficiaries in realizing its mission to achieve a sustainable society (Al-Ubaydli, 2013). Lastly, the promotion of nonprofit wealth creation through social enterprise has, indeed, created a positive impact with the downfall of the world’s social structures and institutions. As such, it has even been considered as a new model, one that can totally eliminate the existing ones that has ceased to be productive and has become a hindrance to growth and prosperity. With this, social enterprise has triggered the desire to reinvent, to create something new from something old instead of resisting change or by being in denial of things that could have been (Frankel & Bromberger, 2013). Challenges faced by Social Enterprise One fundamental challenge that every social enterprise faces is the financial source. Social enterprises do not usually earn back their capital during the first few years of operations, with some only lucky enough to breakeven. Therefore, social enterprises are usually on the brink of financial failure over the other types of businesses (The Benevolent Society, 2013). As a result, they are likely to depend on the aid of external financial assistance like government funds and donations. However, this may require the need to establish strong ties and recognize the benevolence of people willing to provide them with support, a resource also known as social capital (Nkala, n.d.). This, in return, can be a contributing factor for conflict of interest, in the long run (The Benevolent Society, 2013). Another prevailing challenge is directed towards its management. Management issues are basically centered on the dilemma as to what type of legal and governance structure should be implemented in order to create a balance between the enterprise’ social and financial functions. This dilemma is rooted from the different origins of the different social enterprises, as well as from their type difference. Furthermore, their goals as an enterprise also play a great role in determining what management style is suited for them (Spear, Cornforth, & Aiken, 2009). Additionally, according to Borgaza and Solari (n.d.), because social enterprises are more bound to their social oath than any other organization, not to mention the people or entities that have provided them with support at their start-up stage, they are more exposed to conflict of interests when it comes to the management of their assets and resources. Social enterprises and other types of companies usually deliver the same or competing products and services, with quality and vigor almost to the same degree. However, what set social enterprises apart from these other types of companies is its ability to provide extensive purchase care. This contributes to additional expenses and effort for the enterprise. Competing firms can take this advantage of this by targeting the market through price leadership. The existence of the previously mentioned challenge can also trigger the emergence of another challenge. As they try to minimize their operating cost, quality of product or service can be compromised (Mehta & Ashok, 2012). Social enterprises are under strong constraint of raising the prices of their offerings while, at the same time, staying responsible for the well-being of their employees and generating enough revenue to finance their future endeavors and to continue operation. Some of the most costly social endeavors for social enterprises are the hiring and training of non-experienced and disadvantaged members of the labor force, as well as the creation of a sustainability program in order to become an environment friendly organization. This challenge somehow limits the abilities and capabilities of social enterprises. Lastly, social enterprise is also exposed to the different policies governing the community, as well as to the high expectation of the public. As the social enterprise ventures into commercial activities to gain revenue, it is torn as to what existing policies they should adhere to. As the boundaries between social enterprises and for-profit entities diminish, the legitimacy, accountability and performance quality of social enterprise get challenged. Furthermore, because of the benevolent mission of social enterprises, the public usually have high hopes from them, putting these organizations on a pedestal, exposed to scrutiny and biases. Any failure from the performance of social enterprises, or if cases wherein they stray away from their social mission, they are dangerously prone to public judgment, and with trust being one of the most important elements for a social enterprise’ success, everything else can soon start falling apart (Spear, Cornforth, & Aiken, 2009). Success Stories of Social Enterprise Social enterprises usually start small. There are some who have decided to create their social enterprise upon seeing the great need for the world. Sam Goldman and Ned Tozun created cheap lamps and sold them to areas with unstable source of electricity. Jane Chen, upon witnessing the shortage of supplies in maternity hospitals, created “Thermpod,” a device that can provide heat for underweight babies born in hospitals with dysfunctional heat lamps. Then there’s Tom Skazy, an environmentalist who manufactures fertilizers and 250 other products out of 60 waste streams to diminish pollution to the environment (Coster, 2011). Another successful social enterprise today is Groundswell. Groundswell is an enterprise known for providing efficient and effective ways of energy consumption. Groundswell introduced the concept of “Civic Consumption”, a process wherein they unite together people or organizations into buying energy efficient items in bulk, lowering the price while, at the same time, ensuring usage from huge pool of consumers, making the environmental impact more noticeable (Johnson, n.d.). The Create Foundation CIC is also social enterprise with an impressive success story. It has started by being a training ground for the least fortunate job seekers, like the homeless, marginalized and the vulnerable. They are well known for providing top of the rank trainings, as well as providing the trainees different opportunities to hone their skills during the year 2007. Now, The Create Foundation CIC is already a premium provider of hospitality and catering in Greater Manchester and has made it into the list of best social enterprise in Yorkshire (Wainwright, 2012). Lastly, there is Divine Chocolate, the 2014 winner of the yearly Social Enterprise Awards in United Kingdom. This yearly award giving acknowledges social enterprises that have made a great difference within the year. UK is now composed of approximately 70,000 social enterprises that have been annually contributing £24 billion to its economy. Divine Chocolate is the sole chocolate company in UK that is co-owned by cocoa farmers, giving them a part of the earning made by the company. It is one of the most outstanding Fair-trade participants and is slowly shaping the chocolate industries all over the world. Another winner of the awarding event was Furnishing Lives of FRC Group. As part of their social mission, this enterprise distributes their unsold, but still in best condition, furniture to the poor. This act has made the enterprise worthy of the award “Strongest Social Impact for the Year” (“Sue Perkins Announces,” n.d.). Ethical Impact of Non-Profit Wealth Creation Wealth creation and ethics are strongly interrelated. The connection runs by the principle that a business is not just about gaining profit the right way since business is not only about money. Without considering external factors and perspectives, business ethics will cease to exist. Business ethics covers not just the creation of wealth, but the distribution of wealth, as well. The process of acquiring wealth from others is not similar to wealth creation, but rather, it is only a form of redistribution. Wealth creation is more than that. It involves much deeper motivations. The economic status is only one of the many problems that every society faces. There still exist issues regarding non-economic elements such as social and environmental. True wealth creation can only exist if all these problems, both economic and non-economic, are addressed together. Only by addressing all these elements together can wealth be created. These problems are strongly interconnected that one can become a liability to the other, in the long run. One example is this: if a company gives its employees enough rest and feeds them right, as well as proper training, they will become more productive, and thus, can bring more money to the company. However, the company may experience a sort of extra expenditure to support the said social action, but it will be paid off in the long run as the profit accumulates and as the employees absorbed the nurturing given to them (Enderle, n.d.). Therefore, given that social enterprises stick true to its mission, it can be said that it has a higher degree of ethical orientation against others. As it tries to develop people, they, in return, will also play a great role in sustaining the enterprise, increasing the level of confidence of the society that it is within (Rhode & Packel, 2009). It can be said that social enterprise “hits two birds with one stone,” and by doing so, it addresses more global problems that any other organization could. Conclusion     Social enterprises are not a new phenomenon as they existed for many years in different forms. Their overall objective has been to serve the social good and improve human and environmental well-being. By focusing on improving human life and sustaining the environment, social enterprises play an important role that mainstreams for profit organizations often fail to achieve. Most social enterprises operate on a non-profit basis; however, it does not mean that they do not engage in activities that generate more profit and revenue for them. Except a few, most of the social enterprises engage in commercial activities in order to expand their sources of revenue and reduce their dependencies on the traditional sources of funding. The overall revenue generating activities, therefore, have been focused on generating more resources to supplement the existing sources of funding. It is clear that social enterprises can generate profits and add more value for their stakeholders; however, the traditional principles of asset management and portfolio risk may not apply to them. Traditionally, such investments are held to diversify the risk and generate more value rather than expect higher rates of returns. Having investments in social enterprises also adds more ethical connotation to the overall investment philosophy of the fund managers. Since the overall purpose of social enterprises is to improve human life; therefore, the overall wealth creation by such organizations invariably adds more value for their shareholders in terms of the overall social returns achieved on such investments. Social enterprises are like other companies; however, they are also something that others are not. Its social mission has drawn the society towards it, enabling customer loyalty that other firms fail to achieve. However, this does not mean to say that social enterprises are free from what other companies are experiencing today the entire dilemma that the others are experiencing today. In order for a social enterprise to continue existing, it needs to find a perfect way to make its economic functions meet with its non-economic function without compromising either of them. Social enterprise needs to balance more things at once, making it exposed to threats as much as the other. Nevertheless, with proper governance and diligence in following through its social mission, social enterprise can be a very important tool in making this world a better place. Bibliography Al-Ubaydli, M. (2013). How social enterprises can succeed as businesses. Retrieved March 2, 2015, from The Guardian: http://www.theguardian.com/social-enterprise-network/2013/jan/31/social-enterprises-succeed-business. 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