Every Business Is Social (Like it or not)

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Mali HealthGiven the great comments on last week’s post and a Huffington Post article on the subject by Matt Murrie, I thought a follow-up was in order.   The comments centered on two themes:

  • Investment funding’s acceptance of “Social” as a viable type of business
  • Business Modeling – social vs. regular

Investment:

Venture capitalists have traditionally funded for-profit businesses with a strong focus on ROI – Return on Investment vs. ROIm – Return on Impact (ROIm will be a forthcoming blog post).  To most, the two ROIs are either incompatible or irrelevant.  Foundations and other philanthropies have traditionally funded non-profits with a strong focus on the ROIm.  Slowly investors are realizing this is an artificial distinction. 

  • No matter what your business, if it’s not having an impact on the customer in a way that delights the customer, you won’t need to worry for long – thank you Darwinism. 
  • The number of investors focused on maximizing both ROI and ROIm  is increasing.  For instance, FSG and New Profit come to mind, with returns some ‘regular’ VCs would love.  Accelerators for social enterprises are helping fledging ventures sustainably scale, such as the SE Greenhouse. 
  • The assumption that you have to be a non-profit to ‘do good’ is slowly becoming arcane.  While there are good reasons for some companies to remain non-profits, there is no reason that a socially-impact minded business cannot be for-profit.  The corporate designation B-Corp allows a company to blend doing well and doing good in a for-profit structure.  Examples include Method Products, Patagonia, Ben & Jerry’s and two of my favorites, Runa and Susty Party.

Business Model:

As an early adopter and co-creator of Alex Osterwalder’s Business Model Canvas (BMC), I use it the most.  A Social Business Model Canvas had been created specifically for social ventures, and there is a lot of value to looking at a business from this perspective.  The reason I prefer the BMC is its flexibility.  You can change the labels on the boxes and use colors to highlight differences. The BMC impels you to think about the sustainability of the business and the compelling value to the customer in a way traditional social businesses haven’t – as a real live business that has to compete for customers’ attention and resources just like everything else – including two of the biggest competitors – “Doing Nothing” and “Good Enough”.   Take a look at a canvas for Pencils of Promise.  Instead of Revenue, the box is labeled Outcomes & Outputs.  Outputs are things like revenue and profit. Outcomes are the difference you make for your customers – the real value you are delivering for them.  In the case of Pencils for Promise, both are important – if they are not having the impact they want – changing lives, educating kids, then what are they doing? Doesn't this also apply to any business - ultimately?

While the Social Business Model Canvas has a box for surplus – what you are doing with what’s left over, I posit that’s a question every company has to answer.  Any business hopefully has a surplus – at least eventually.  If some of that surplus is not reinvested in the company to support, enhance, add to their compelling value proposition, then the shareholders won’t be getting anything back either.  Perhaps a social business will choose to reinvest all of it’s surplus directly into the business while a for-profit may choose to give dividends, but that’s not a hard and fast rule for either type of company.  Reinvesting a surplus can be in all sorts of resources – equipment, material and perhaps most importantly, people. 

This is not an either/or issue – it’s an ‘and’.  Hopefully, over time, the distinctions between social and ‘regular’ businesses can fade, because I truly believe, any business of any sort that doesn’t focus on it’s impact on its customers, communities and the world, on it’s ROIm   eventually won’t have any ROI anyway.

 

Every Business Is (Or Should Be) a Social Business

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Mali Health Clinic

I believe the distinction between social and non-social business is a false dichotomy. And yet, it’s one we continually want to make. We talk about “social businesses” — those that are mission-led and focused on creating positive social change — and “non-social businesses” — those that focus on revenue and profit. Social entrepreneurs launching ventures may ask themselves if their business models need to be different. Does pursuing a social purpose require something unique to describe and structure your business?

As someone who works with a variety of organizations in my roles as strategy and innovation consultant, venture capitalist, professor, and mentor, this question intrigues to me. To answer it, I evaluated a few years worth of business models created and implemented by clients (usually established, mature businesses), invested companies (early stage), entrepreneurs I’ve mentored, and college students starting new ventures. The results? I found that both social and non-social businesses focused on making sure revenues were greater than costs, either through selling something, raising money or getting grants. The differences were more along traditional business characteristics: virtual vs. physical product or service, B2B vs. B2C, etc.

That said, this initial evidence showed that social businesses focus more on achieving a positive impact in each of the nine business model elements — value proposition, customer segment, channels, relationships, key partners, key activities, key resources, costs and revenues — as well as the whole model. Many of the non-social businesses in my sample also focused on the impact of each element and interestingly, they are very successful businesses (might there be a correlation?).

All businesses are social. All companies have people as customers, employees, and suppliers. At some point, in deciding which supplier to use, in engaging your workforce, and in getting your product into users’ hands, relationships with people matter. Improving these their experiences always improves the outcome for your company.

If a business isn’t providing valuable, meaningful solutions to real customers’ problems or delivering outcomes that both make a positive difference in the customers’ lives and support the company’s mission, the business won’t have to worry about profits or outputs for long. The market has a way of taking care of that.

The historical division between social and non-social business and “purpose” vs. “profits” is artificial and antiquated. Almost exactly two years ago, Michael Porter and Mark Kramer called for a new definition of capitalism — “shared value” — to unify this false choice. I think this is how Adam Smith envisioned capitalism; we just redefined it to serve our purposes. In fact, our financial crisis in part stems from non-social businesses divorcing impact from profit and the outcome will haunt us for a long time.

To further test what I had learned, I turned to business model guru and friend, Alex Osterwalder (I’ve used his Business Model Canvas since 2009 because I believe it’s one of the best methodologies out there). He has vast experience creating business models all over the globe, in almost every industry sector, and he came to the same conclusion: There is no significant difference in the business models themselves. In fact, we agreed that for-profit social businesses are a powerful way to increase impact. For instance, Sun Edison’s business model demonstrates that increasing impact doesn’t decrease profitability. One of Alex’s favorite businesses, PeePoople, is implementing a similar model to provide basic personal sanitation to the 2.6 billion people who don’t have it today. As Alex says, “The most amazing business models are those where profit and impact live in harmony. Business models can be designed where impact doesn’t diminish revenues or profit and vice versa.”

Does this answer the question about needing something different for a social business? I think so and the answer is clearly no. It’s time we stop talking about “social” vs. “non-social” and encourage all entrepreneurs to focus on impact in every element of the business model as well as the whole. We read about companies, like Patagonia, Virgin, Cemex, who profitably and purposefully balance doing well and doing good. If they do it, why can’t you?

There are also some quiet, under the radar companies, like 6th generation family-held Menasha Corp. in Wisconsin’s Fox Valley. The 164-year-old corrugated packaging firm has over $1B in revenue. Despite being in a commodity-driven market, it has experienced seven consecutive years of remarkable growth, even during the recession. Menasha’s plants use heat from the corrugators to warm the buildings; they’ve reduced water usage while increasing production; their culture is collaborative; and their people are active in their communities, serving on school boards, supporting art and music, and having plain old fun in the Muscatine Great River Days boat races. The result is synergistic growth of a company and its communities.

By focusing on each individual business model element and the model’s overall impact to create outputs that support sustainable outcomes, perhaps our social entrepreneurs can help society break down this tired, man-made wall between social and non-social businesses.

This post originally appeared in Harvard Business Review's  Scaling Social Impact series.