Social enterprise models are business models that combine the desire to generate profit with the responsibility to alleviate a social need. Defined as a business with a specific social objective as its primary purpose, a social enterprise aims to maximise profits as well as have social and environmental benefits. Generated financial profits are mainly used to support the enterprise’s social change objectives.
The concept of a social enterprise emerged in the 1970s as an alternative to the commercial business model. It offered a welcome respite from the capitalist tendency to position charitable giving and philanthropy in opposition to the act of generating profit. Social enterprises deliver both. Take a look at Barloworld as an example.
How do social enterprises work?
Social enterprises generate funding through the sale of goods and services to consumers. Profits are then used to deliver a particular social or environmental benefit. The form this takes is as varied as the imagination allows, from building low-income housing to supplying students with textbooks. Profit generation is not generally the top priority for social enterprises, but it is essential to ensure the operation remains sustainable and can continue to service the need it responds to.
This does not imply that social enterprises are non-profit ventures or may not be profitable. However, the act of reinvesting generated profit into providing for a social need takes priority over funding shareholder payouts.
Social enterprises hold a flexible position on the continuum between grant-dependent traditional non-profit organisations (NPOs) that operate with the primary intention of providing social value, and traditional businesses that generate income through trading activities with the goal of economic value creation.
Social enterprises prioritise self-sustainability
The social enterprise model offers some protection from the unpredictability most NPOs face in their reliance on external funding.
NPOs require the steady support of governments, philanthropic bodies, or charitable individuals to maintain their operations. These sources are difficult to guarantee indefinitely, particularly in the face of overwhelming competing needs.
While social enterprises may make use of grant funding at times, sustainable revenue generation is a key part of achieving their goals. Ideally, the social business venture should strive to reduce its costs and reliance on external funding while growing its profitability and beneficiaries.
Social entrepreneurship versus social enterprises
While the two terms are often used interchangeably, social entrepreneurship and social enterprises are slightly different concepts.
Social entrepreneurship is about individuals who use existing business techniques and strategies to find solutions to social and environmental problems. These entrepreneurs look for new ways to achieve social change and may operate a social enterprise. However, social enterprises are built around a business purpose. The resulting commercial activities contribute towards solving social and environmental issues.
How social enterprises contribute to development goals
Social enterprises have a unique and valuable role to play in driving Africa’s social technological and industrial development (hyperlink to article 4.1). They have the potential to create value for business and society, generating financial returns that fund social and environmental change.
Inclusivity is at the heart of social enterprises. As they serve traditionally overlooked markets, they can help to inspire and empower marginalised and under-served groups, particularly women and disabled people, drawing them into broader economic and social participation.
Social enterprises’ objective of delivering social good has the side effect of creating shared value. As they generate resources to address social and environmental needs in their communities, they can create economic value in their markets, reinforcing their own profitability and creating a positive-feedback loop.
In developing and emerging economies, social enterprises have the potential to solve social challenges sustainably, building up organisations that can become independent rather than being perpetually reliant on donations or funding. If successful, this can have a positive impact on poverty reduction.
Challenges facing social enterprises
Lack of funding remains a perpetual challenge for many social enterprises. While there is still a shortfall of the variety of return-driven investors that conventional businesses might draw on, investors are increasingly coming to recognise and respond to the financial-return generating capacity of social enterprises. This should help to increase the capital available for social enterprises to access in the future.
Social enterprises may find it difficult to establish the right balance between delivering both financial and social objectives. It can also be challenging to identify suitable measures to assess both goals. This can make it more difficult for them to scale up and replicate their successes.
They may also find it difficult to navigate legal and regulatory frameworks that are ill-suited to serve social enterprises.
Reasons to invest in social enterprises
Companies looking for good social returns on their investments might consider social enterprises as an option, as they:
- Respond to real and pressing social and environmental problems,
- Are driven by sustainable solutions,
- Offer potentially long-term social value as they set out to be sustainable businesses,
- Are motivated by social or environmental value that generates social capital, reinforcing the likelihood of long-term support,
- Inspire people and communities to become self-sufficient, co-creative participants in solving their social or environmental problems,
- Are inherently collaborative, requiring partnerships with communities, government, NPOs, and companies to deliver the greatest impact,
- Can encourage advocacy towards policy changes that better serve public interests in delivering systemic change that addresses the fundamental causes of social or environmental issues,
- Can take advantage of technological developments to serve their cause, and
- Have the flexibility to innovate and adapt to the evolving needs of society and markets.
