What Is Social Entrepreneurship, Social Enterprise and Social Business?30 Oct 2013/0 Comments/in Knowledge
What is an Entrepreneur?
Contrary to common usage of the word, entrepreneur is not a synonym for businessman, nor is anyone starting a business an entrepreneur. The way entrepreneurship is used in contemporary academics and in the social and business society deals with the creation of change and progress, the recognition and exploitation of opportunities, and the creation of innovations that lead to economic progress.
History of the word ‘entrepreneur’
The word ‘entrepreneur’ has a long history, dating back to French economics in the 17th and 18th century, meaning someone who “undertakes” projects or activities (Dees, 1998, revised 30 May 2001). Dees explains further that French economist Jean Baptiste Say is commonly accredited for given the word its meaning as identifying “venturesome individuals who stimulated economic progress by finding new and better ways of doing things. (…) Writing around the turn of the 19th century, Say put it this way, “The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” Entrepreneurs create value.” (1998, revised 30 May 2001, p.1)
In the 20th century Joseph Schumpeter added a new perspective to the concept, focusing his definition on the innovative capacity of entrepreneurs, who drive the “creative-destructive” process of capitalism. Entrepreneurs were thus attributed the capacity of bringing about economic progress by creating new markets and new ways to do things (Dees, 1998, revised 30 May 2001). Entrepreneurship in this view is seen as new combinations including the doing of new things or the doing of things that are already being done in a new way. New combinations include (1) introduction of new goods, (2) new method of production, (3) opening of a new market, (4) new source of supply, and (5) new organizations. (Schumpeter, 1934)
Although many entrepreneurs can be identified using these definitions as individuals starting new, profit-seeking business ventures, starting a business is not the essence of entrepreneurship. Say and Schumpeter created the basis of the current perceptions and understandings of entrepreneurship with their definitions of entrepreneurs as the drivers and innovators of economic progress. (Dees, 1998, revised 30 May 2001)
A study by Meyer, Neck, and Meeks (2002, p.22) gives a number of definitions for entrepreneurship, that show the versatility of the concept as it is used today and the distinction between an entrepreneur and entrepreneurship and the common use of these words as referring to any businessman or other person that is starting up or running a business. One definition for example explains entrepreneurship as “the creation of new business, new business meaning that they do not exactly duplicate existing businesses but have some element of novelty” (Rumelt, 1987). This excludes any business activities that lack an innovative element and thus goes beyond the popular use of entrepreneurship as referring to anyone starting a business.
We find that entrepreneurship is a broad spectrum of activities ranging from the actions of creating new enterprises (Low and MacMillan, 1988) and new organizations (Gartner, 1988), to a way of thinking, reasoning, and acting (Timmons, 1997), and encompasses acts of creation, renewal and innovation taking place both inside as well as outside of existing organizations (Sharma and Chrisman, 1999).
Opportunity and change
Another important aspect in the current use of entrepreneurship is the notion of opportunity and specifically “the ability to perceive new opportunities” (Kirzner, 1979), which according to Peter Drucker does not require the entrepreneur to cause change, but focuses on the opportunities that change creates and on the recognition and exploitation of such opportunities, making it clear that starting a business is nether necessary nor sufficient for entrepreneurship (Dees, 1998, revised 30 May 2001).
Entrepreneurship in this view is “an act of innovation that involves endowing existing resources with new wealth-producing capacity”, and what defines an entrepreneur and entrepreneurship is the fact that “the entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” (Dees, 1998, revised 30 May 2001; Drucker, 1985). The entrepreneur is someone who sees problems as opportunities and transforms his environment by finding resources to act on the opportunities he perceives. In this way entrepreneurs are an important driver of innovation and growth and this is the way in which scholars now perceive Say’s idea of shifting resources to areas of higher yield (Dees, 1998, revised 30 May 2001; Reynolds et al., 2001).
Howard Stevenson added resourcefulness as a last influential element added to the opportunity-oriented definition of entrepreneurship, defining it as “The pursuit of an opportunity without concern for current resources or capabilities.” (Dees, 1998, revised 30 May 2001; Stevenson et al., 1985). As Dees (Dees, 1998, revised 30 May 2001, p.2)describes it:
He found that entrepreneurs not only see and pursue opportunities that elude administrative managers; entrepreneurs do not allow their own initial resource endowments to limit their options. To borrow a metaphor from Elizabeth Barrett Browning, their reach exceeds their grasp. Entrepreneurs mobilize the resources of others to achieve their entrepreneurial objectives. Administrators allow their existing resources and their job descriptions to constrain their visions and actions. Once again, we have a definition of entrepreneurship that is not limited to business start-ups.
What is Social Entrepreneurship and a Social Entrepreneur?
The dictionary describes social entrepreneurship as
n. 1. Recognizing and resourcefully pursuing opportunities to create social value
2. Crafting innovative approaches to addressing critical social needs
Social entrepreneurship is the process of recognizing and resourcefully pursuing opportunities to create social value. Social entrepreneurs are innovative, resourceful, and results oriented. They draw upon the best thinking in both the business and nonprofit worlds to develop strategies that maximize their social impact. These entrepreneurial leaders operate in all kinds of organizations: large and small; new and old; religious and secular; nonprofit, for-profit, and hybrid. These organizations comprise the “social sector.” (Center for the Advancement of Social Entrepreneurship (CASE), 2010)
The definitions of entrepreneurs and entrepreneurship of Say, Schumpeter, Stevenson and the other current theorists described above can also be applied to social entrepreneurship, because they describe a way of thinking, a way of behaving and a mind-set that applies to the social sector as much as it applies to more traditional business environments. Social entrepreneurs are thus seen as a sub-set of the general population of entrepreneurs. Social entrepreneurs are entrepreneurs with a social mission. (Dees, 1998, revised 30 May 2001)
A social entrepreneur is someone who embodies the characteristics of an entrepreneur, who thrives on finding solutions for problems that he sees around himself. A traditional entrepreneur will look for a problem that allows for a profitable solution, the measure of success in his endeavors is profit maximization. A social entrepreneur on the other hand starts by identifying a social problem he would like to solve and then proceeds by using business methods to build a solution for this problem. Where profit-maximization and the creation of wealth is the prime indicator for success for business entrepreneurs, profit is unsuitable as a success indicator for social entrepreneurship, because it does not show the extent to which a social entrepreneurial undertaking is creating social value.
The measurement of success for a social entrepreneur is the extent to which the venture or activity succeeds in creating social value and/or works efficiently on solving or diminishing a clear social problem as its core objective. The focus is not on profit, but on finding a sustainable solution to the social problem or problems identified by the social entrepreneur. However, in the process of creating social benefits his company may become a profitable business that creates surplus profits beyond those needed to solve the social issues attended to, but profits should never be a goal in itself (Dees, 1998, revised 30 May 2001; Yunus, 2010).
Dees gives a definition of social entrepreneurship as follows:
”Social entrepreneurs play the role of change agents in the social sector, by:
- Adopting a mission to create and sustain social value (not just private value),
- Recognizing and relentlessly pursuing new opportunities to serve that mission,
- Engaging in a process of continuous innovation, adaptation, and learning,
- Acting boldly without being limited by resources currently in hand, and
- Exhibiting heightened accountability to the constituencies served and for the outcomes created.”
The article “The Meaning of Social Entrepreneurship” by J. Dees is available at the website of the Center for the Advancement of Social Entrepreneurship (CASE)
Why is there a Growing Need for Social Entrepreneurs?
Social entrepreneurs have the capacity to create social value by finding creative solutions and new and innovative ways to tackle social problems. They find solutions others would not find and they use the methods of business entrepreneurship to create value in ways that are impossible for social actors and organizations that operate within a non-entrepreneurial paradigm. We must understand the value that social entrepreneurs bring to our society and we must support and motivate those individuals who have the characteristics, drive and capabilities needed to become successful social entrepreneurs through legislation, a fitting institutional environment and projects that support these types of leaders. Only then will we be able to benefit from the social improvements that social entrepreneurship can give to our society.
According to Dees (Dees, 2009), social entrepreneurship is necessary to mitigate the financial repercussions on the most vulnerable people in society:
Fewer people will receive adequate health care… Tensions and violence may increase as the poor compete for jobs and income opportunities… Progress will be lost, as families that have been successful in moving out of poverty fall back into it… As government, business, and household budgets tighten, costly environmental protection and clean-up efforts are in jeopardy… Because many social and environmental issues are time sensitive, failure to recognize the importance of social entrepreneurship and provide adequate support for such efforts during this downturn would be a serious mistake.
What is Social Business?
Social business is a term that was brought forward by Prof. Muhammad Yunus, the founder of the concept of social business, to create a clear distinction between socially oriented businesses that still operate within the profit-maximizing paradigm and fully social businesses, which operate outside of the profit maximizing paradigm.
What types of social business exist?
Muhamed Yunus describes two types of social business:
A type 1 Social Business
This is a non-loss, non-dividend company, which is owned by shareholders and focuses on solving a clearly defined social problem.
A number of characteristics apply:
- Investors/owners receive no dividends
- Investors/owners can only get back their initial investment, anything beyond that disqualifies a company from being a social business
- Investments are subject to nominal repayment, following the rule that ‘A dollar, is a dollar, is a dollar’. This means that no adjustments are made for inflation or time-invested. For example, if an investor puts down $1000, he will never receive a repayment of more than $1000.- nominally.
A type 2 Social Business
A profit making company owned by poor people, either directly or via a trust, that is dedicated to a pre-defined social cause.
This type of profit maximizing firm is a social business because its profit benefit the poor, alleviating poverty and thus solving a social problem. This makes it a social business by definition.
In cooperation with a German partner, Grameen Creative Lab, Yunus created the 7 principles of social business, which define a type 1 social business. A business must meet all these 7 principles in order to be labeled a social business.
The 7 principles of Social Business
- The business objective is to overcome poverty or one or more social problems, not to maximize profits. These social problems can for example be related to education, health, technology or the environment, but may include any social problem that exists on any level of society.
- The company will attain financial and economic sustainability. This means that the business must be self-sustainable and not require continuous outside investments in a way that an NGO or traditional ‘social-help initiative’ does.
- Investors get back only their investment amount. No dividend is given beyond the return of the original investment
- When the investment amount is paid back, surplus profits stay with the company for expansion and improvement of the business
- The company will be environmentally conscious
- The company’s workforce gets market wage with better than standard working conditions
- Do it with joy! This last point is an important part of any social business initiative. The joy that comes out of helping others and creating a force for good in the world is an important driver of social business.
(Yunus, 2010, Author’s explanations, red.)
The Distinction between Social Entrepreneurship and Social Business
The regular entrepreneur’s final objective is wealth creation. For the social entrepreneur, wealth creation is simply a means to an end. The social entrepreneur participates in profit-seeking business ventures if only to use the profits generated to create valuable social programs for the whole community. These initiatives have the creation of social benefits as their main driver, but operate within the profit maximization paradigm and are not bound to all of the specific principles that apply to social business.
A social business exists outside of the profit-maximizing world, which characterizes most businesses today. Yunus saw a rise in social entrepreneurial initiatives, some of which had a social focus while still aiming to maximize profits, and felt that a clearer definition was required to prevent confusion of social business with other socially entrepreneurial concepts.
Social entrepreneurial initiatives are not more or less right, they merely have a different aim than a purely social business. Yunus identified a risk of abuse of his concept by those who wanted to find ways to maximize personal gains, even though these represented a minority amongst the good initiatives undertaken, under the flag of social business. This would damage the concepts and principles for which he stands, which is why he set out to more narrowly define the concept of social business.
Social entrepreneurs and social-entrepreneurship are still a force for good in the world and create great benefits for society. It is therefore important not to mistake social entrepreneurship for something bad, but rather to understand that social business is a clearly and narrowly defined business concept that exists outside of the profit-maximizing paradigm, while social entrepreneurship exists on the outmost social and least profit-maximizing end of the profit-maximizing spectrum.
A suggested next step to developing the social business concept is the creation of a social business certification, which could give out a standardized seal of approval to businesses which aim to adopt a social business concept. This could create more clarity for investors and make the social business concept more solid and respected, increasing its potential as an alternative investment and business paradigm.