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Economics Essay – Social Enterprise Business

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Published: Tue, 08 Mar 2016

Social Enterprise Business

Exploring the Social Enterprise Potential for Sustainability in the UK

Abstract

Social enterprise is a dynamic and sustainable business model of choice which is able to bring social, economic and environmental benefits to the UK. It operates across all sectors of the economy, serving individuals in the private, public and third sectors. Through out this research will identify the increase levels of understanding of the role and value of Social Enterprise, given that a lack of understanding of the role and value of social enterprises was cited as a major barrier to the acceleration of the use of the business model. The purpose of this research will identify the key barriers faced by Social Enterprise and explore how these barriers have/could potentially be overcome to achieve sustainability. There is also a need to recognise that some social enterprise activity will need an element of finance through public funds, particularly because they are operating in areas of market failure or a non-commercial market such as providing services to vulnerable people, including supported employment in many cases. This paper is intended to create an environment which will lead to opportunities for social enterprise to grow successfully in the future.

Table of Contents

  1. Introduction

    1. A Brief Overview of Social Enterprise

    2. Purpose of Study

    3. Structure of the Report

  2. Literature Review

    1. Roots of Social Enterprise

    2. General Discussion on Social Enterprise

    3. Discussion Relevant to Sustainability of Social Enterprise

    4. Policy Reform and good Governance

  3. Background Information about Social Enterprise

    1. Social Enterprise in The UK

    2. Positive Aspects of Social Enterprise

    3. Barriers of Social Enterprise

    4. Sources of Fund

  4. Methodology

    1. Research Design

    2. Research Approach

    3. Sampling

    4. Data Collection

  5. Research Finding and Implementation

  6. Conclusion

References

Appendix:

Appendix 1: List of Key Informants

Appendix 2: List of Social Enterprise Studied

Appendix 3: Questionnaire

Appendix 4: Summery of Interview Transcripts

List of Tables:

Organizational Profile

List of Figures:

Production of Social Enterprise

Sustainable Social Enterprise

Financial Sustainability

Beneficiaries of social enterprise

List of Acronyms

CDFI Community Development Financial Institutions

DTI Department of Trade and Industry

GEM Global Entrepreneurship Monitor

ICT Information and Communication Technology

NCVO National Council for Voluntary Organization

OECD Organisation for Economic Co-operation and Development

RISE Regional Infrastructure for Social Enterprise

SEL Social Enterprise London

SETL Social Economy Task force for London

SME Small and Medium Enterprise

Chapter 1: Introduction

A brief overview of social enterprise is introduced in the first chapter. Then, the purpose of the study will be next discussed which will end with a specific research question. In the end of this chapter the contribution of this research and limitation of the study are also presented.

    1. A Brief Overview of Social Enterprise

Social enterprises are organisations that supply goods and services as part of the social economy sector; this group constitutes a collection of organisations that exist between the traditionally private and public sectors and has a stronger relationship with the Community and Non-profit sector. This sector has a key role to play in achieving many of its goals, including overcoming social injustice and exclusion

The common definition most often used by social enterprise organisations themselves,

emphasises three common characteristics:

Enterprise oriented – they are directly involved in the production of goods and the provision of services to a market. They seek to be viable trading concerns, making a surplus from trading.

Social aims – they have explicit social aims such as job creation, training and provision of local services. They are accountable to their members and the wider community for their social, environmental and economic impact.

Social ownership – they are autonomous organisations with a governance and ownership structures based on participation by stakeholder groups (users or clients, and local community groups etc.) or by trustees. Profits are distributed as profit sharing to stakeholders or used for the benefit of the community.

Social enterprises are becoming a recognised part of the local and national economy in the UK, and the organisations operating in this sector are aware that becoming sustainable businesses is the path to independence both financially and in mission. However, social enterprises, in common with many small businesses, find growth difficult, and this could impact negatively on their sustainability. These should be supported and encouraged to grow both as a sector and as individual organizations so that these will become more sustainable organizations.

    1. Purpose of the Study

My paper has been developed to explore how the term social enterprise has acquired meaning in England and to illustrate how practitioners, policymakers and academics influence each other in the development of new sustainable ideas, given that a lack of understanding of the role and significance of social enterprises was cited as a major barrier to the acceleration of the use of this business model.

These challenges come in many forms. Some are the same as those affecting any other business including access to business support and finance, a lack of affordable premises and finding skilled staff. However, social enterprises also face one huge barrier that seriously affects their ability to assume a position within the market. That barrier is a lack of understanding of how social enterprises work and of their potential value. This lack of understanding exists across the public, private and voluntary and community sectors. The confusion and conflict about what the model could or should be for results all too often in misrepresentation and exaggeration of its potential, fragmentation in the provision of support and real and perceived barriers to accessing contracts and mainstream funding opportunities.

So my dissertation will identify the key barriers faced by Social Enterprise and explore how these barriers have/could potentially be overcome in order to achieve sustainability. It examines critical incidents that have shaped the meaning of social enterprise in England and reflects on these incidents to draw conclusions about the future sustainable development of social enterprise practice. Through out this paper I will also examine the potential conditions for the growth of social enterprise through a set of outline scenarios. The aim is to inform both policy-making and the wider debate about social enterprise: what its potential might be and how that potential can be realised in different settings. So my research question is:

To explore how the social enterprise is potential for sustainability in the UK

1.3 Structure of the Report:

This research is divided into five chapters: the first chapter is an introduction with purpose and limitation of the study. In the second chapter, literature based review of definitions of social enterprise, roots of social enterprise, discussion relevant to the sustainability of social enterprise, the nature of their contribution and their sponsors and sources of funding. The third summarises the background information of social enterprise in the UK and the fourth and fifth chapter contain the methodology and the summary of the main findings of the study with implications for policy.

Chapter 2: Literature Review

This chapter will give an overview of literature and models that are related to the research problem presented in the previous chapter. This chapter will introduce the roots and concepts of social enterprise in order to give a clear idea about the research area.

2.1 Roots of social enterprise

Scott specified (2006, p50) mentioned The roots of social enterprises and community enterprise overall can be found in the mutual, self help and co-operative sector which goes back, in the UK, at least to the Fenwick Weavers in Ayrshire 1769 and Dr William King of Brighton in the 1820s with earlier antecedents. Within the development of this movement there has always been an important strand which has focused on the local community-based nature of these organisations and also on the economic development of poorer communities including the need to maintain paid work. For example between the two world wars, local community activists such as Harry Cowley campaigned for housing and work for returning service people and support for small local businesses. He organised marches to demand public works ‘job creation’ programmes from the local council for unemployed people with some success.

2.3 General Discussion on Social Enterprise

Social Enterprises combine the need to be successful businesses with social aims. This is a competitive business, owned and trading for a social purpose. They seek to succeed as businesses by establishing a market share and making a profit and emphasise the long-term benefits for employees, consumers and the community.

Today’s completive business world defining social enterprise is a challenging task, according to OECD (1999, p.10) there is no universal, commonly accepted definition of Social Enterprise. However, the OECD (1999, p.10) has defined social enterprise as:

any private activity conducted in the public interest, organised

with an entrepreneurial strategy but whose main purpose is not the

maximisation of profit but the accomplishment of certain economic

and social goals, and which has a capacity of bringing innovative

solutions to the problems of social exclusion and unemployment.

Bob Doherty and John Thompson mentioned in the journal ‘The diverse world of social enterprise stories'( 2006, p.362) that social enterprises are organizations which are seeking business solutions to social crisis. These are needed to be differentiated from other socially-oriented organizations. These also need to take initiatives that can promote to communities but which are not wanting or seeking to be businesses. In this esteem these latter organizations remain dependent on endowments and donations rather than build up true paying customers.

According to DTI report ‘A Progress Report on Social Enterprise: A Strategy for Success’ (2003, p.6), social enterprise is such a business which reinvests its surpluses in the business or in the community rather than increases profit for shareholders or owners.

Peter Drucker argues that social entrepreneurs …change the performance capacity of society (Gendron, 1996, p. 37) while Henton et al. (1997: p.1) speak of ‘civic entrepreneurs’ as …a new generation of leaders who forge new, powerfully productive linkages at the intersection of business, government, education and community .

Ali B. Somers (2005, p.46) stated Social enterprise emphasise creating social and/or environmental value at all stages of their production process, as an intrinsic part of their identity. Following Figure: 1 describes the production process of social enterprise.

Inputs

Production Process

Outputs: Goods and Services

Labour Employee/ Client

Raw Materials: from Environmental Sources

Goods and services sold to market: Economic Profit, Social Profit and Environmental Profit

Economic Profit flows back to Social Enterprise and Ethical Investors

Social and Environmental profit flow to Community

Indicates environmental and social motives affect production

Figure: 1 Production of Social Enterprise

Source: Somers, A.B., 2005. Shaping the balanced scorecard for use in UK social enterprises. Social Enterprise Journal, 1(1), p.46

Laville and Nyssens (2001: p 325) argue that while the origins of social enterprises are based in reciprocity and thus form part of the third system, their strength is based in their ability to tap into all three economic principles and systems. They are different from private enterprise-not only maximization of profit to benefit owners- they do develop market activities and generate profits. They are also different from the public sector in that they are independent from direct control by public authorities. But they benefit to a greater or lesser extent from public subsidy. Thus they mobilize market relations to sell services or goods, and can use redistributive relations by utilizing government funding to finance their services. Their long-term sustainability depends on their ability to ‘continuously hybridise the three poles of the economy so as to serve the project’.

2.4 Discussion Relevant to the Sustainability of Social Enterprise

There has been an unprecedented wave of growth in Social Entrepreneurship globally over the last ten years (Bornstein 2004, pp.3-6). For Example, as part of the 2004 Global Entrepreneurship Monitor (GEM) report a survey was conducted of social entrepreneurship activity in the UK; these data suggested that new ‘social’ start-ups are emerging at a faster ate than more conventional, commercial ventures (Harding and Cowling, 2004, p.5)

There are three sides to sustainability in business activity: environment, economy and community. When aiming for sustainable practice all three factors must be given equal consideration from a local through to a global level.

Environment – Ensuring that business engages in the proper and careful use of finite resources and the management of waste so as to minimize the negative and maximize the positive impact of human activity.

Economy – Ensuring that business is financially viable, engages in good employment practice and is of benefit to the economy as a whole.

Community – Ensuring that business is overall of benefit to communities, their culture & heritage and does not endanger them.

Sustainability

Social Capital

Environmental Capital

Economic Capital

Value and Integrity

Figure2: Sustainable Social Enterprise

Schulyer (1998: p.3) describes social entrepreneurs as …individuals who have a vision for social change and who have the financial resources to support their ideas….who exhibit all the skills of successful business people as well as a powerful desire for social change

Greater flexibility in the use of public resources to respond to innovative community proposals, and venture investments from foundations and the private sector could be used to stimulate innovation in areas thought to be too risky for government as the sole investor. As Catford (1998, p. 96) argues that …social entrepreneurs…will only flourish if they are supported by the right environment, which will be created largely by governments together with the private sector.

2.5 Financial Sustainability

Social Enterprise seeks surplus generation in order to achieve financial sustainability. The need to financial sustainability is fundamental to social enterprises. Emphasizing financial sustainability in addition to profit distribution becomes a way to account for all activities the organization engages in, including advocacy and in support of bono work. Sacrificing one cause and effect chain for another can have significant implications for both the quality of work and social enterprise’s financial sustainability. Whilst many may rely on combination of grant and trading income, ultimately, if an organisation is not financially sustainable, it cannot deliver its social and environmental impact.

Profit Distribution

(Increase Income)

Increase Revenue

Use Resource Efficiently

Trading Revenue

Non Trading Revenue

Manage Cost

Track Advocacy

Financial: Promote Sustainability of organization

Social: Increase value to target community

Fig3. shows how the profit of social organisation is distributed to the organization itself and community.

Figure 3: Financial Sustainability

Source: Somers, A.B., 2005. Shaping the balanced scorecard for use in UK social enterprises. Social Enterprise Journal, 1(1), p.50

Prioritising financial sustainability Social enterprises seek surplus generation in order to achieve financial sustainability. Learning from the work of the OS&G, the component of profit distribution was added so that social enterprise managers could track the objectives that added resources versus those that used them, in order to balance the competing drivers (See Exhibit 6). Emphasizing financial sustainability in addition to profit distribution becomes a way to account for all activities the organisation engages in, including advocacy and pro bono work. Sacrificing one cause and effect chain for another can have significant implications for both the quality of work and the social enterprise’s financial sustainability.

The need to achieve financial sustainability is fundamental to social enterprises. Whilst many may rely on a combination of grant and trading income, ultimately, if an organisation is not financially sustainable, it cannot deliver its social and environmental impact. In existing performance evaluation tools, financial systems record trading activities that earn income, and qualitative systems are used to collect user feedback and measure social impact. The SEBC model provides a method for integrating both outcomes.

2.6 Policy Reform and Good Governance

DTI report ‘ A Progress Report on Social Enterprise: A Strategy for Success‘ (2003, p.6) describes the three key goals for government as creating an enabling environment, making social enterprises better businesses and establishing the value of social enterprise.

The danger in not supporting social entrepreneurship is obvious to Reis (1999: p. 4) who calls for systematic intervention to accelerate and improve philanthropic efforts. Without this he argues that substantial numbers of potential donors and social entrepreneurs could be …discouraged, turned-off, and lost from philanthropy and social change work.

Brown, H and Murphy, E (2003: p.57) mentioned on Bank of England report that Social enterprises, like all businesses, need access to a range of financial products appropriate to their activity and stage of development A HM Treasury report on Enterprise and Social Exclusion (1999, p 108) came to the conclusion, arguing that social enterprise was less understood and rarely promoted in a consistent way by the existing infrastructure for business support.

Thompson et al. (2000: p. 328) describe …people who realize where there is an opportunity to satisfy some unmet need that the state welfare system will not or cannot meet, and who gather together the necessary resources (generally people, often volunteers, money and premises) and use these to ‘make a difference’.

It is more useful to consider and develop social enterprise capabilities rather than skills and capacity building. The fact that social enterprises need to combine commercial objectives with social mission as well as internal governance, means that a capabilities approach is more comprehensive. This is a useful way of recognising factors additional to individual skills that inter-play to determine the effectiveness and impact of a specific enterprise. It also moves away from limited considerations of a key person or group within the organisation, and their specific skills, towards a more holistic view of what the organisation is capable of doing, irrespective of the location of particular skills.

Catford (1998, p.97) who articulates the issues and one possible solution most eloquently: Traditional welfare-state approaches are in decline globally, and in response new ways of creating healthy and sustainable communities are required. This challenges our social, economic and political systems to respond with new, creative and effective environments that support and reward change. From the evidence available, current examples of social entrepreneurship offer exciting new ways of realizing the potential of individuals and communities…into the 21st century.

Academic writing about modern social entrepreneurship skills is relatively limited, compared to mainstream business or charities. The concept of ‘social enterprise’ has been rapidly emerging in the private, public and non-profit sectors over the last few years. Currently, the non-profit sector is facing increasing demands for improved effectiveness and sustainability in light of diminishing funding from traditional sources and increased competition for these scarce resources. At the same time, the increasing concentration of wealth in the private sector is promoting calls for increased corporate social responsibility and more proactive responses to complex social problems, while governments at all levels are struggling with multiple demands on public funds.

Chapter 3: Background Information of Social Enterprise

This chapter will give the idea about the social enterprise in the UK along with the impact, barriers and sources of fund in these organizations.

    1. Social Enterprise in the UK

The UK government has been at the front position of enabling and encouraging the increase of social enterprises as part of both welfare services delivery and community regeneration at the policy level. The impacts and influence of public, private, and citizen are empirically proven and exhibit that these conventional sectors of society are playing a part in re-evaluating the value creation opportunities offered by market (or quasi-market) mechanisms.

  • According to the DTI research, there are at least 55,000 social enterprises in the UK, and combined turnover of 27billion per year. These social enterprises account for 5% of all businesses with employees these contribute to GDP is estimated to be 8.4 billion

  • Cabinet Office mentioned on their website that in 2004/05 the UK’s charity sector had a total income of about 27.6 billion which was increased over 800 million from the previous year. This represents about 2% of the UK’s GDP. The number of registered charities rose from around 120,000 in 1995 to more than 164,000 in 2005, and there are also hundreds of thousands of small community groups.

  • The data obtained from the Cabinet Office website in social sector showed that in the year 2003/04, 56% of third sector organisations reported an increase in activity in the previous year, and 67% of them expected activity to grow in the next three years.

    1. Positive aspects of Social Enterprise:

Social enterprise is a varied activity and can include a range of organisations working on different scales and at different levels of trading. Some work at community level, while others work nationally. They can work in public services or commercial markets. They often work in the most disadvantaged areas and work with the most disadvantaged groups. Some organisations work only as a social enterprise while in other organisations social enterprise is often a part of their activity. This most commonly applies in a voluntary organisation or a housing association. It works in a number of key priority areas for the UK economy- these include:

    • employment and training;

    • childcare and health.

    • adult care services;

    • recycling;

    • renewable energy;

    • transport;

    • financial inclusion;

    • community regeneration; and

    • rural development.

According to Bob Doherty and John Thompson (The diverse world of social enterprise stories, p.362) the common characteristics for a Social Enterprise are:

  • They have a social rationale and yields and surpluses are not shared out to shareholders. Reinvested profit can be used to provide training and development opportunities for staff.

  • They use assets and capital to generate community benefit. This can make sure resources give value for money where a public-sector contract is needed for the activity. This includes working with much marginalised groups, where the enterprise activity helps reduce the amount of public funding needed. Through encouraging social entrepreneurship in communities, levels of public subsidy and grant dependency can be reduced.

  • Members or employees can also take part in decision making. Citizenship participation and volunteering are encouraged within the local community.

  • The social enterprise model could create new forms of entrepreneurship and employment within a community. The enterprise is responsible to both its members and a wider society.

  • Social enterprise can offer goods and services to its customers in a flexible and innovative way. It can focus on their needs to deliver better public services. Often this is in areas where the market has failed or the areas where the private sector does not want to go.

  • The potential of a profits and revenue stream could liberate organisations from the tyranny of fundraising and grant applications.

  • Organisations could flourish effectively and creatively under this model

  • There is either a double or triple-bottom line concept. The assumption is that the most effective social enterprises exhibit healthy financial and social returns rather than high profits in one and lower profits in the other.

Social enterprise makes an important contribution to the social, economic and environmental development of Scotland.?? This can be summarised as follows.

Fig 4: Beneficiaries of Social Enterprise

Source:

    1. Barriers of social enterprise

According to UK Government and various literatures review shows that there are mainly four significant barriers to accessing appropriate business support and finance for social enterprises throughout the region.

1. Cultural barriers between those setting up social enterprises and mainstream business advisors.

2. Lack of clarity about where to access business support at the local level, largely due to the huge diversity of routes into starting up social enterprises.

3. Limited numb


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