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Social enterprise terminology
Five essential definitions
After years of hovering around the edges of the nonprofit sector, social enterprise today has moved into the mainstream. Venture philanthropists, traditional grant-makers, Boards of Directors, nonprofit entrepreneurs, consultants, academics and others are all rushing to the table. But there is still confusion about terminology. Here are five of the most essential concepts:
"Dependency": The traditional business model for nonprofits, in which they depend solely or almost entirely on charitable contributions and public sector subsidies, with earned income either non-existent or minimal
"Sustainability": The ability to fund the future of a nonprofit through a mixed revenue stream -- a combination of earned income, charitable contributions and public sector subsidies
"Self-sufficiency": The ability to fund the future of a nonprofit through earned income alone
"Social entrepreneur": Any person, in any sector, who runs a social enterprise
"Social enterprise": Any organization, in any sector, that uses earned income strategies to pursue a double or triple bottom line, either alone (as a social sector business) or as part of a mixed revenue stream that includes charitable contributions and public sector subsidies
A practical lexicon for social entrepreneurs
(definitions of 80 terms)
AFFIRMATIVE BUSINESS: A social enterprise created specifically to provide permanent jobs, competitive wages, career tracks and ownership opportunities for people who are disadvantaged, whether it be mentally, physically, economically or educationally. John DuRand of Minnesota Diversified Industries created the concept in 1973 and simultaneously emphasized the importance of a blended work force. The employees for an affirmative business might include people who are developmentally disabled, chronically mentally ill, recovering substance abusers, former convicts, visually impaired, physically challenged, or grappling with some other disadvantage. In the United Kingdom, an affirmative business is known as a “social firm.”
BLENDED VALUE: While every organization attempts to create value of one kind or another, the central premise of the blended value proposition is that value is itself a combination, a “blend,” of economic, environmental and social factors, and that maximizing value requires taking all three elements into account, regardless of whether the organization is in the for-profit or nonprofit sector. The key areas in which both investors and organizations are working to maximize the impact of blended value are corporate social responsibility, social enterprise, social investing,
strategic philanthropy and sustainable development. Jed Emerson and Sheila Bonini began developing the concept of blended value in 2003.
BLENDED WORK FORCE: In order to maximize productivity and increase its ability to compete, an affirmative business commonly employs a blended work force comprised of people who are mentally, physically, economically or educationally disadvantaged and those who are not. A typical mix draws about 60 per cent of the employees from the ranks of people who are disadvantaged.
BUSINESS MENTORS: Among others, the entrepreneurial planning team assembled to help create a social sector business typically includes three or four entrepreneurs who have built successful businesses from the ground up. These veteran entrepreneurs provide an invaluable reality check throughout the planning process.
BUSINESS PLAN: The essential ingredients of a business plan include an executive summary (typically written last); descriptions of the company, the management team, and the products or services being offered; an analysis of the market, the competition and the industry; a marketing plan; an operations plan; a financial plan (with cash flow projections); and a risk analysis (the most important part of the plan). Most effective business plans contain no more than 20 to 30 pages of narrative plus financials.
BUYER: The customer and the client are not always the same, but both are buyers. Customers are those who pay for a product or service: They are interested in both the price and the social outcomes. Clients are those who receive a product or service: They are interested primarily in the social outcomes.
CAUSE-RELATED MARKETING: Cause-related marketing occurs when a nonprofit licenses the use of its name to a commercial company. The combination can be powerful: It can enhance the reputation and boost the sales of the commercial company and simultaneously expand the reach and generate earned income for the nonprofit. Cause-related marketing is one of the four most effective types of strategic partnerships between a commercial company and a nonprofit. See distributor relationships, operational philanthropy and supplier relationships.
CAUSE-RELATED PURCHASING: A business relationship in which a commercial company, as part of its ongoing business operations, purchases components or finished piecework provided by a nonprofit. Dan McKinnon coined the phrase in 1998 during his tenure as President and CEO of NISH, formerly known as National Industries for the Severely Handicapped. See operational philanthropy.
CLIENT: The individual or the organization receiving a product or service. If the client is not the customer, he or she will be interested primarily in the social outcomes, not the price.
CORE VALUES: A set of fundamental beliefs that define an organization and dictate the behavior of its employees. To be effective, core values must be clearly articulated, institutionalized, and constantly reinforced: Organizations should identify them before doing anything else; make sure they can be quantified; build them into strategic plans and annual operating plans; monitor them religiously; measure progress periodically; and report results to stakeholders. To qualify as a “core” value, an organization must be willing to live with the consequences of embracing it, the value must be freely chosen from genuine alternatives, it must be acted upon as a regular pattern of action, it must apply everywhere in the work, it must last over time, and the organization must be proud of it.
CORPORATE SOCIAL RESPONSIBILITY (CSR): The CSR movement calls for businesses to behave ethically and contribute to economic development while improving the quality of life for employees, local communities and society at large. A socially responsible company will identify and engage its stakeholders, then determine, measure and report the ways in which they are affected.
CRITICAL SUCCESS FACTORS: Beyond the factors that must exist for any business to succeed (e.g., capable management, positive cash flow), there are also critical factors that differ depending upon the type of business (e.g., location, price, distribution, convenience, options, warranties). Unless entrepreneurs can identify the factors that apply to their type of business and compete effectively in those areas, they will fail.
CUSTOMER: The buyer of a product or service. The customer may or may not be the client. As buyers, customers are interested in both the price and the social outcomes.
DEPENDENCY: The traditional business model for nonprofits, in which they depend solely or almost entirely on charitable contributions and public sector subsidies, with earned income either non-existent or minimal. See sustainability and self-sufficiency.
DIRECT COSTS: The actual, out-of-pocket expenses associated with a program, product, service or business (e.g., travel expenses, long-distance telephone charges, conference fees). See also indirect costs.
DISTRIBUTION CHANNELS: One of the four parts of the marketing mix. Distribution channels are the routes products and services travel from the provider to the receiver. There may be intermediaries along the way (individuals or institutions) that must be compensated as part of a company’s distribution costs.
DISTRIBUTOR RELATIONSHIPS: Distributor relationships occur when either a commercial company or a nonprofit channels its products or services to customers through the other’s network. A common example in the United States takes place when commercial companies partner with nonprofits to access federal and state “set-aside” programs (in which government contracts are offered first to nonprofits). It is one of the four most powerful types of strategic partnerships between a commercial company and a nonprofit. See cause-related marketing, operational philanthropy and supplier relationships.
DOUBLE BOTTOM LINE: The simultaneous pursuit of financial and social returns on investment – the ultimate benchmark for a social enterprise or a social sector business. See triple bottom line.
DUE DILIGENCE: The process potential investors use to investigate and evaluate a business venture before committing funds. Due diligence can also refer to the process used by a social enterprise to assess the viability of ideas for earned income strategies or a social sector business. See market research and feasibility studies.
EARNED INCOME: Income is “earned” when there is a quid pro quo – a direct exchange of product, service or privilege for monetary value. Earned income for a nonprofit includes payment for such things as tuition, products or services, government contracts, consulting fees, membership dues (when dues purchase tangible benefits), sale of intellectual property, agreement to use the nonprofit’s identity, royalties, ticket sales, property rentals/leases, and so on. Earned income does not include such things as corporate or foundation grants, government grants or subsidies, financial contributions from individuals, or in-kind donation of products or services. Most earned income strategies mounted by a nonprofit are designed to cover part of a specific program’s cost, not necessarily make a profit; the program makes up the difference through charitable contributions and public sector subsidies. The one exception is a social sector business, which depends on earned income alone.
EARNED INCOME STRATEGIES: An attempt by a nonprofit to cover part of its costs by capitalizing on the earned income potential of its programs, products and services. A strategy that depends entirely on earned income is called a social sector business.
ENGAGED PHILANTHROPY: See venture philanthropy.
ENTREPRENEUR: A person who organizes and manages a business undertaking, assumiong the risk for the sake of profit. Starting with nothing more than an idea or a prototype, entrepreneurs have the ability to take a business to the point at which it can sustain itself on internally generated cash flow. Generally speaking, entrepreneurs need the freedom to operate without much supervision. They also need clear definitions of success and failure, immediate feedback, rewards for performance, and ongoing challenges. See social entrepreneur, nonprofit entrepreneur and entrepreneurial nonprofit.
ENTREPRENEURIAL BRAINSTORMING: A facilitated process designed to generate ideas for earned income strategies or a social sector business. An effective process typically lasts no more than 90 minutes and involves about 20 people. To make sure all possible ideas are broached, every idea is welcomed, criticisms are not allowed, and nobody is held accountable for his or her idea. The ideas generated during an entrepreneurial brainstorming session fall into one of four categories: Market penetration (offering an existing product or service to an existing target market); market development (offering an existing product or service to a new target market); product or service development (offering a new product or service to an existing target market); or diversification (offering a new product or service to a new target market).
ENTREPRENEURSHIP: The ability to convert an idea or a prototype into a business that can sustain itself on internally generated cash flow. See innovation.
ENTREPRENEURIAL NONPROFIT: A nonprofit that seeks to match its core competencies with marketplace opportunities in order to simultaneously generate more earned income and expand its social impact.
ENTREPRENEURIAL PLANNING TEAM: A group of experts assembled by a nonprofit when it begins planning a social sector business. In addition to members of senior management, a typical team might include three or four members of the Board of Directors; three or four business mentors (successful entrepreneurs from the local community); and at least one or two wild cards, people who know very little about the organization but will act as devil’s advocates throughout the planning process.
ENTREPRENEURIAL STRATEGIC PLANNING (ESP): A process by which a social enterprise analyzes each of its products and services from both a social impact and an earned income perspective. The goal is to create an entrepreneurial business plan that expands the organization’s most effective and needed products and services and productively disposes of its more peripheral ones (see organized abandonment). Making these types of strategic decisions, however, is more difficult for a social enterprise than it is for either a traditional nonprofit or a purely commercial company, both of which are primarily concerned with a single bottom line. A traditional nonprofit will continue offering products and services that have a significant social impact even if they lose money; commercial companies will not. On the other hand, a social enterprise will give weight to both bottom lines before making decisions about which products and services to expand, nurture, harvest or kill. The intersection of social impact and financial returns can be viewed as a matrix:
ENTRY STRATEGY: A nonprofit starting a social sector business will either deliver a product or service that is already being offered by others or create one that has never been offered before. In either case, it will typically enter the market by developing the business itself, buying a franchise, purchasing an existing company, or forging a strategic partnership. See feasibility studies and market research.
ENVIRONMENTAL FORCES: The uncontrollable forces (demographic, economic, sociological, technological, political and regulatory) that have a positive or negative effect on an earned income strategy or a social sector business. Although it is not possible to control most environmental forces, it is possible to convert them into opportunities or to minimize their negative impact by isolating and attending to them in advance. In addition to identifying the force itself, an environmental scan also includes an assessment of its size, timing, duration and the most productive response.
EXIT STRATEGY: A plan to divest a program, product, service or business. Exit strategies are typically prepared well in advance of implementation, which can occur for both positive and negative reasons: To convert an asset into cash; to find a home for an asset in order to increase social outcomes; or to exercise damage control, sometimes by allowing a program, product, service or business to die a natural death.
FEASIBILITY STUDIES: Used to determine whether an idea for an earned income strategy or a social sector business can succeed in the marketplace. The objective is to eliminate ideas as quickly as possible to avoid wasting time on those that are not workable. A typical feasibility study makes successive passes through the surviving ideas, winnowing them each time. See market research and risk analysis.
FEE-FOR-SERVICE: Earned income received in exchange for delivery of a specific unit of service. Payment may be made either by the person or organization receiving the service or by a third party such as an insurance company or a public sector reimbursement program such as Medicare or Medicaid.
HYBRID BUSINESS: A social sector business that simultaneously employs the people it serves (see affirmative business) and delivers a product or service that has a direct impact on a social need (see mission-driven product or service business).
HYBRID BUSINESS CULTURE: A business culture that combines the best of both the traditional nonprofit mentality and the traditional for-profit mentality. See “Crossing the Cultural Divide”® on pp. __ and __.
INDIRECT COSTS: The costs associated with a program, product, service or business that are typically “hidden” (for example, a percentage of a senior manager’s time devoted to product development or marketing; or overhead costs such as rent and utilities allocated to a specific product or service). Too often, nonprofits fail to consider indirect costs when creating their business plans and therefore develop inaccurate financial projections. See also direct costs.
INNOVATION: The creation of something new. Innovation is often confused with entrepreneurship, but innovation does not necessarily include earned income.
INNOVATORS, ENTREPRENEURS and PROFESSIONAL MANAGERS: All three are needed during the evolution of a successful social enterprise, but in sequence – and few people excel in more than one of the three areas. Innovators develop and field-test prototypes; entrepreneurs turn those prototypes into businesses; and professional managers develop and install whatever infrastructure is needed to secure the future.
MARKETING: Marketing is not a business function – it is the business, and it begins with decisions about what products and services to offer (see strategic marketing) and what target markets to pursue. See entrepreneurial strategic planning, marketing plan and tactical marketing.
MARKETING COMMUNICATIONS: One of the four parts of the marketing mix. The goal of marketing communications is to convey key messages to target markets, and the primary techniques are advertising, publicity, personal selling and sales promotion.
MARKETING MIX: See tactical marketing.
MARKETING PLAN: Development of a marketing plan begins with the answers to five questions, and all of marketing takes place in the gap between the answers to questions four and five:
The goal of marketing, therefore, is to win a share of client, customer or stakeholder mind, and the people being targeted must be led through four stages:
The marketing team will need to develop appropriate positioning strategies and use a variety of tactical marketing weapons to guide its clients, customers and stakeholders through the process. However, there are four major obstacles to creating a successful marketing plan:
MARKETING RESEARCH: Unlike market research, which investigates the viability of a specific product, service or market segment, marketing research evaluates the effectiveness of an organization’s packaging, pricing, distribution and marketing communications strategies. See tactical marketing.
MARKET PULL and MARKET PUSH: If a social enterprise starts with its current products and services and then tries to find somebody willing to pay for them, it will be trying to push itself into the market. However, if the business starts with its potential customers, discovers what they need and are willing to pay for, and then builds it, the customers will pull it into the market and significantly increase its chances for long-term success. The preferred approach, therefore, is to begin the process with thorough market research. However, if a business is introducing a product or service that has never been offered before, then the research may not be conclusive and market push might be the only alternative.
MARKET RESEARCH: Intelligent decisions about what products or services to offer and what target markets to pursue can only be made after thorough research, which typically occurs in two stages:
The goal during both stages is to eliminate possibilities as quickly as possible in order to avoid unnecessary time and expense.
The first step in market research is market segmentation. The next steps are to answer a series of questions about each segment:
MARKET SEGMENTATION: Every business has both a “subject” and a “predicate” – a specific product or service aimed at one or more specific target markets (for example, “tutoring services for potential high school dropouts” or “computer training for men and women on welfare”). Dividing mass markets into smaller components is called “market segmentation,” and the criteria for dividing a consumer market could include such things as geography (e.g., nations, states, regions, counties, cities, neighborhoods, climates); demographics (e.g., age, income, gender, marital status, family size, occupation, education, income, nationality); psychographics (e.g., customer lifestyles, activities, interests, social class, personality characteristics, political leanings); or the way customers behave toward a specific product or service (e.g., frequency of purchase, sensitivity toward price, levels of desired quality, and so on). For an industrial market, segmentation could be based on such things as the type of end user, the size of the customer, the cost of distribution, or many other factors.
MISSION-DRIVEN PRODUCT OR SERVICE BUSINESS: Unlike an affirmative business, which employs the people served by a social enterprise, a mission-driven product or service busienss generates revenue from the delivery of a product or service to the people being served, although payment may come from a third party such as a government agency or entitlement program or from a private insurance company. Examples include such things as hospice care, tutoring services for potential high school dropouts, assistive devices for people who are physically disabled, and personal care services for elderly people. See hybrid business.
NICHE MENTALITY: A business approach that emphasizes specific products or services aimed at specific target markets rather than trying to be all things to all people.
NONPROFIT BUSINESS VENTURE: See social sector business.
NONPROFIT ENTREPRENEUR: An individual who pays increasing attention to market forces without losing sight of the nonprofit’s underlying mission. See social enterprise and social entrepreneur.
OPERATIONAL PHILANTHROPY: Operational philanthropy occurs when a nonprofit becomes an integral part of a commercial company’s business activity by acting as a manufacturing sub-contractor (see cause-related purchasing) or by serving as one of the company’s distributors. In essence, the commercial company creates a business relationship with a nonprofit instead of giving it a grant – and therefore becomes dependent on the nonprofit’s performance for its own success. The phrase was coined Gary Mulhair of Pioneer Human Services in 1997, and operational philanthropy is one of the four most powerful types of strategic partnerships between a commercial company and a nonprofit. See also cause-related marketing, distributor relationships and supplier relationships.
ORGANIZATIONAL CULTURE: The (often unspoken) compacts that enable the members of an organization to understand why it exists, who it serves and how to serve them. The precepts of the organization’s culture determine the perceptions and behaviors of its members, both positively and negatively.
ORGANIZED ABANDONMENT: A term coined by Peter Drucker to encourage nonprofits to eliminate programs, products and services that are no longer needed, are no longer competitive, or no longer fit their mission. “The Organized Abandonment Grid”®, created by Jerr Boschee (see p. __) operationalizes Drucker’s insights. See entrepreneurial strategic planning.
POSITIONING STRATEGIES: The tools an organization uses to differentiate itself from its competitors in the minds of its clients, customers and other stakeholders. Each organization must develop an overall positioning strategy and complementary strategies for each of its programs, products and services. At the overall level, success or failure begins and ends with the organization’s image, and every organization has one whether it wants to or not – the only question is whether it will help shape the image (see marketing plan) or leave the shaping to others. The stakes are high: A positive image enhances employee morale, gives donors additional confidence, improves community relations, lowers the cost of sales, makes higher prices palatable, speeds market penetration, builds customer loyalty, and enhances recruitment of employees. At the program, product and service level, developing a positioning strategy is a three-step process: Discovering what people think are the most important dimensions of the program, product or service (market research); building them into the program, product or service; and then telling clients, customers and stakeholders what has been done (marketing communications).
PRICING STRATEGIES: One of the four parts of the marketing mix. The most common pricing strategies are “penetration” pricing (typically used when introducing a new product or service or to build market share); “prestige” pricing (to establish a reputation for quality); “value” pricing, which rises or falls according to market demand; “cost-oriented” pricing (typically used to achieve a specific profit margin or return on investment; and “psychological” pricing (e.g., discounts and flexible payment plans).
PUBLIC SECTOR SUBSIDIES: Payments made by the public sector to a nonprofit that are not tied to a specific quid pro quo. See earned income.
RESEARCH AND DEVELOPMENT (R&D): An often overlooked expenditure essential for a social enterprise to remain competitive, either by improving its existing products and services, developing new ones, or changing its target markets. See market research.
RETURN ON INVESTMENT: Financial return on investment (FROI) is concerned with the cash flow, profitability, balance sheet and other financial results necessary for an earned income strategy or a social sector business to be deemed successful. Social return on investment (SROI) is concerned with the social outcomes of the strategy or business, and environmental return on investment (EROI) is concerned with the environmental impact. In all three areas, the desired returns will differ depending on the type of strategy or business – and the definition of “success” will vary from organization to organization.
RISK ANALYSIS: A thorough analysis of risks – along with an outline of planned responses – can be the most credible part of a business plan.
SCREENING CRITERIA: In order to sift through the many possible ideas for a business venture, the members of a nonprofit’s entrepreneurial planning team should identify five to seven criteria that capture the parameters of a perfect business venture for their organization (e.g., capital constraints, required expertise, market conditions, competitive strengths, environmental forces).
SELF-SUFFICIENCY: The ability to fund the future of a nonprofit through earned income alone – without having to depend in whole or in part on charitable contributions or public sector subsidies.
SEPARATION STRATEGY: A social sector business started by a nonprofit will have a better chance to succeed if it is separated as much as possible from its parent. In his book Managing for Profit in the Nonprofit World, Paul Firstenberg writes: “The greater the separation in terms of form, staffing, oversight, and location, the greater are the chances that the profit-making component will be able to function with the necessary clarity of purpose and operating style appropriate to its objectives.” Among other things, separation might require the business to adopt a different name, seek a different location, recruit a different type of employee, and install radically different incentive packages.
SOCIAL ENTERPRISE: Any organization, in any sector, that uses earned income strategies to pursue a double bottom line or a triple bottom line, either alone (as a social sector business) or as part of a mixed revenue stream that includes charitable contributions and public sector subsidies.
SOCIAL ENTREPRENEUR: Any person, in any sector, who runs a social enterprise.
SOCIAL ENTREPRENEURSHIP: The art of simultaneously pursuing both a financial and a social return on investment (the double bottom line).
SOCIAL FIRM: See affirmative business.
SOCIAL INVESTING: Occurs when individuals or institutions combine their financial objectives with a commitment to social concerns such as social justice, economic development, peace or a healthy environment. See double bottom line and triple bottom line.
SOCIALLY RESPONSIBLE BUSINESS: See corporate social responsibility.
SOCIAL SECTOR BUSINESS: A business designed to directly address a social need and simultaneously make a profit through earned income alone, regardless of whether it is structured as a for-profit or nonprofit entity.
STAKEHOLDER: Any person, group or institution with an impact on an organization or affected by it.
STRATEGIC FRAMEWORK: Every organization, in any sector, must create and constantly refine a strategic framework for its activities. The framework consists of the answers to five questions:
STRATEGIC MARKETING: There are six fundamental strategic marketing questions (see also tactical marketing):
STRATEGIC PARTNERSHIPS: Entrepreneurial alliances between nonprofits and commercial companies. See cause-related marketing, distributor relationships, operational philanthropy and supplier relationships.
STRATEGIC PHILANTHROPY: See venture philanthropy.
SUPPLIER RELATIONSHIPS: Supplier relationships take place when either a nonprofit or a commercial company supplies personnel, raw materials and/or finished components to the other. They are one of the four most powerful types of strategic partnerships between a commercial company and a nonprofit. See cause-related marketing, distributor relationships and operational philanthropy.
SUSTAINABILITY: The ability to fund the future of a nonprofit through a combination of earned income, charitable contributions and public sector subsidies.
SUSTAINABLE DEVELOPMENT: Community and economic development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
TACTICAL MARKETING: Once an organization has answered its key strategic marketing questions, it must adopt whatever tactics are necessary to sway its clients, customers and other stakeholders. The four tactical marketing weapons are known collectively as the marketing mix: “Packaging” (product or service design), pricing strategies, distribution channels and marketing communications.
TARGET MARKETS: The segments of a mass market that have the most potential for a specific product or service. See market segmentation.
TRIPLE BOTTOM LINE: The simultaneous pursuit of returns on investment in three areas – financial, social and environmental. See double bottom line.
UNRELATED BUSINESS INCOME: Earned income derived from products or services not directly related to the charitable purpose of a nonprofit, including income from the organization’s under-utilized assets (such as facility downtime) or as conveniences for its clients or patrons (such as gift shops, parking lots or cafeterias). In the United States, unrelated business income may be subject to federal tax and, at significant levels in proportion to total income, may jeopardize a nonprofit’s tax-exempt status.
VALUE RUBS: When two or more of a social enterprise’s economic, social and environmental bottom lines are in conflict and decisions must be made that may temporarily or permanently disrupt the existing balance.
VENTURE CAPITAL: The money and resources made available to startup firms and small businesses with exceptional growth potential. It typically comes in stages:
VENTURE PHILANTHROPY: The application by donors and investors of certain principles traditionally associated with venture capitalists to improve the capacity or performance of a nonprofit or to invest in a social sector business. Key elements typically include a combination of cash and expertise, including long-term funding relationships (three to six years), more direct engagement and problem-solving with leadership, development of business plans, performance monitoring, and an exit strategy.
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