The world faces major problems such as poverty, hunger, sickness, and climate change — the list is a long one. Governments have not been able to solve these problems by themselves. Social entrepreneurs have stepped in to fill the breach. Today there are millions of social enterprises around the world tackling these problems, and their impact is significant. In Sub-Saharan Africa alone, social enterprises are estimated to have created between 28 and 41 million jobs. Social entrepreneurship is not just a developing country phenomenon. In the UK, for instance, there are estimated to be over 100,000 social enterprises. Many of these social enterprises are small, but like millions of fireflies that light up the night sky, collectively, their impact is huge. One social enterprise in particular, BRAC, has been credited as a major contributor to Bangladesh’s graduation from being one of the poorest countries in the world in the late twentieth century to a low-middle-income country today.
As a mentor with Miller Center for Social Entrepreneurship, I have had the privilege of speaking with some of these inspiring entrepreneurs. Many have sacrificed potentially lucrative careers to pursue their callings to tackle key societal problems. From them, and from numerous case studies of social enterprises, I have learned about the challenges social enterprises face and the practices adopted by some of the more successful ones. I have also observed that many social enterprises remain small and local, struggle to remain solvent, and have problems measuring their impact. I realized soon enough that social enterprises have to adopt business models that are quite different from those of commercial enterprises here in the US. In this brief essay, my aim is to present a summary of what I have learned.
Challenges faced by Social Enterprises
Complex Value Chains
Social enterprise value chains are often more complex than the common unidirectional value chains of commercial enterprises, with suppliers on one side and customers (buyers) on the other. Social enterprise value chains are often bidirectional — the social enterprise can be both a buyer and a supplier to its customers, and in addition, it may have other types of customers for its finished products. An example is Grassland Cameroon which works with small-holder farmers supplying them with financing, agricultural inputs, and training and also buying their produce and selling standardized graded products to industrial clients. Similarly, All Across Africa sources raw materials and supplies them along with financing options to artisans — its customers — and sells those same artisans’ products to leading retail chains — also its customers — in the US and Europe.
Bi-directional value chains are harder to manage since they deal with multiple types of customers, customer relationships are complex, and service levels have to be managed on multiple fronts. A larger organization is often necessary to manage operations.
High-touch Engagement with Tough Customers
As customers, people living in poverty face unique constraints and limited choices. Their decision-making under these circumstances may seem counterintuitive or even sub-optimal to the entrepreneurs who serve them. Even if the benefits of products and services offered by social entrepreneurs are clear, customers may not adopt them. Research by Mullainathan, Shafir, and their colleagues has revealed that poverty imposes chronic stress, which impairs cognitive function and the quality of decision-making. Stress, in combination with limited choices, may cause those living in poverty to use less preventive health care, fail to adhere to drug regimens, be less productive at work, and sometimes make poor financial decisions. We see this in immunization campaigns, changes in food habits (toward more nutritional foods), and the use of mosquito nets. Social entrepreneurs need to understand the special circumstances of their customers while developing their products and services and the strategies for marketing them.
Social enterprises need to have deep engagement with their customers to educate them on the benefits of their products or services. Communication, demonstration, training, and monitoring are important. Working with community leaders to build trust in the community is key.
Consider farmers in Malawi who were reluctant to adopt productivity-enhancing technologies because they lacked persuasive information on the proper use of new inputs or agricultural techniques from credible sources. Researchers found that the position of a trained lead farmer within a community’s social network affected other farmers’ decisions to adopt a new agricultural technology. Results suggest that having access to multiple lead farmers/central individuals has the potential to increase adoption and speed the diffusion process of the technology. Targeting multiple central lead farmers was necessary to increase technology adoption and speed the diffusion of the technology in Malawi.
Difficult Product/Service Design Choices
Products designed for customers served by social enterprises need to be simple to use, durable, and priced to be affordable. These goals sometimes conflict and cannot always be achieved. Social enterprises typically choose one of these approaches:
- Give the product/service away free or at a highly subsidized price. Enterprises will have to rely on grants (which typically impose significant overhead) or on subsidies from the government to finance their operations. An example is Population Services International (PSI) with a mission to provide access to healthcare to the most needy. The organization used funds from foundations, such as the Gates Foundation, to distribute treated mosquito nets for free to combat malaria in Kenya and other countries. Researchers had found that a much wider distribution of these nets could be achieved if offered for free. While a business cannot be built by giving products away for free, entrepreneurs can apply business best practices to manage their operations in a cost-effective manner while delivering high-quality products and services. In fact, PSI describes itself as a social enterprise, in spite of being funded almost entirely by grants, since it is constantly looking for better, faster, and cheaper ways to deliver value to its customers.
- Target customers who can afford the product. Many enterprises take this route in search of self-sustaining earned income. Customers in the bottom-of-the-pyramid are excluded from the target market. RioFish, a for-profit fish production and distribution enterprise in Kenya, found that it could not meet the price point for the lowest-income consumers. Instead, the company targets lower-middle and middle-income consumers.
- Sell at a profit to higher-income consumers and use the profits to subsidize lower-income consumers. It can be difficult to differentiate consumers by income unless they are geographically separated. Some enterprises achieve this by designing different products for different income segments.
Overcoming Institutional Voids
Developing countries have what Harvard Business School Professor Tarun Khanna refers to as “institutional voids” — the absence of “specialized intermediaries” that allow new enterprises to reach a broad market. Institutions such as courts that adjudicate disputes, financial institutions that lend money, and accreditation agencies that corroborate claims are often missing or sub-par. Many social enterprises are often forced to set up their own functions to cover these gaps — provision of first-loss guarantees is one example, and creating reliable distribution channels for their products is another. While business integration of this sort can be strategic in some cases — for better control over quality and reliability — it adds significant costs that many startups may not be able to afford. Besides, it bloats the organization, which impedes scaling. By working with fishermen and women fish traders to expand the supply of fish in Kenya, RioFish improves income levels for both fishermen and traders and mitigates the practice of sex-for-fish. But due to the lack of proper distribution channels, RioFish has to buy trucks and hire staff to manage the transport and distribution of fish, which is both costly and management-intensive.
Strategies for Success
Validate Theory of Change
Successful social entrepreneurs know that although it is commonly referred to as a “theory”, their “theory of change” is just a hypothesis (based on assumptions) until it is proven to work. Successful entrepreneurs expend considerable time and effort to articulate their theory of change and to validate it in the field. A proper theory of change is a statement about who will be impacted, how, and over what period of time. It should include an explanation of how the intended interventions will achieve the desired impact. It should include measurements of outcomes that can be used to unambiguously verify the theory. The most conclusive method of testing an intervention is through a randomized control trial (RCT). However, an RCT can be costly and may not always be feasible. In those instances, informal methods can be used whereby communities where the interventions were performed are compared to similar communities without the interventions. Outcomes should be monitored over a long period of time to ensure that the outcomes are durable.
Organizations such as JPAL and IPA run numerous RCTs (randomized control trials) to test interventions for a variety of goals. Much can be learned from reviewing this research while designing one’s theory of change. However, social enterprises cannot assume that interventions that worked in one region can be ported to another without changes. It is important for social enterprises to test the intervention in the specific context (geography, population segment) and for the specific impact goals of the enterprise.
Many enterprises fail to adequately test their theory of change and hence fail to realize their intended impact. In some cases, their interventions have unexpected consequences. Consider the case of cookstoves. Approximately three billion people in villages and slums across Africa, Central America, and Asia use wood, dung, or charcoal fires to cook their daily meals. The smoke produced by these stoves is estimated by health officials to shorten millions of lives every year. The World Health Organization, in 2004, labeled household pollution “The Killer in the Kitchen.” Women and children nearest the hearth paid the greatest price. Besides, emissions from the fires were believed to contribute to global warming, and the harvesting of wood for cooking led to diminishing forests. After several years of distributing improved cookstoves and millions of dollars spent, studies show that these improved cookstoves had low adoption rates since they did not meet the needs of their users. Further, they did not significantly reduce users’ risk of deadly illnesses like heart disease and pneumonia, nor did they have significant environmental benefits, in part because the environmental harm due to the traditional stoves was not as big as expected. What is worse, in one case, biodigester cookstoves were linked to an increase in childhood diarrhea in Nepal. From an environmental point of view, ironically, propane — a fossil fuel — has been found to be more environmentally friendly than biomass.
Interventions to combat malaria by distributing insecticide-treated mosquito nets in Africa, while largely successful, have had some unexpected consequences. These nets, usually given away free, are estimated to have saved millions of lives globally and have been a significant contributor to cutting malaria mortality by 36% from 2010 to 2020. While these nets have had a significant impact in reducing the spread of malaria, many recipients have used the nets for fishing. Recipients’ basic need for food and sustenance trumped their fear of becoming malaria victims. They found the nets to be great for fishing.
Measure Impact Comprehensively
There are three dimensions to impact: breadth (or reach), depth, and durability. Breadth (or reach) is measured in terms of the sheer number (or percentage) of customers. Depth should be measured in terms of the magnitude of impact on each customer — this could be the increase in income, the improvement in health metrics, the improvement in literacy, or a different measure appropriate to the nature of the intervention. Durability has to do with whether the change is long-lasting or not. Durability is the most important of all since, unless the change sticks, the whole project should be considered a failure. Ensuring durability requires that the social enterprise monitor impact over several months or more to ensure that the improvement is sustained.
There is usually a trade-off between breadth and depth. Unfortunately, to cater to the demands of investors and funders, social enterprises tend to focus on breadth alone. This is detrimental to their social mission. It behooves the social enterprise to choose investors who share in their goals.
Leverage the Ecosystem to Scale
Scaling or the ability to grow impact is key for the success of the social mission. Scaling can take significant investment, and it may be best to scale up after validation of the enterprise’s theory of change. The early stages of social enterprises are a period of experimentation to validate their theory of change and business model. This can take years in some cases. However, scaling modestly gives one the opportunity to run experiments in parallel to test different versions of an intervention. In dynamic environments where the future is uncertain, scaling before fully establishing the theory of change or the business model is possible, as this case study suggests. However, the enterprise must remain nimble and maintain the ability to change course.
An enterprise’s ability to scale is determined by whether it can grow the breadth and depth of its impact without a commensurate increase in expenses. A common strategy for scaling is to add staff and grow the organization. This adds significant costs and effort and, at best, allows for modest scaling. However, some social enterprises feel they have no choice as they feel a need to integrate vertical or horizontal functions such as distribution and financing to make up for institutional gaps.
As an alternative, based on their experience with Ashoka’s Globalizer program, Waitzer and Paul advocate for a two-pronged strategy for scaling impact. The first imperative is for the enterprise to open-source its innovation or, in other terms, create a playbook for its interventions that can be readily applied by others (or, in their words, “liberate the core”). The second imperative is to form networks in the ecosystem (networks of entrepreneurs, funders, and other enterprises) based on a shared mission (or, in their words, “become a magnet”).
Innovative social enterprises have found ways to work with their local communities to outsource operations. One such organization, MREF (Myanmar Rural Electrification Fund), which builds mini-grids in remote villages in Myanmar, works with their client communities to form associations consisting of residents in the village which will take over grid operations, freeing MREF to operate as an independent power producer (IPP) selling power to village associations. MREF trains community members to operate and maintain the grid. Husk Power Systems is another enterprise that builds mini-grids in India, Nigeria, and Tanzania. In the early days, Husk Power Systems was the builder, owner, operator, and maintainer (BOOM) of the grids. Once the company proved its technology and business case, it switched to a Build, Own, and Maintain (BOM) or Build and Maintain (BM) model wherein a local entrepreneur operates (under BOM) or owns and operates (under BM) the grid. Offloading these responsibilities has allowed Husk Power to scale its impact fast. Husk Power Systems also established a university to develop manpower, including technicians and entrepreneurs, for its plants and training as part of the offering under the BOM and BM models.
How Accelerators Can Help
Social enterprise accelerators, such as Miller Center, can help in fostering the ecosystems that promote the growth and scale-up of social enterprises. This can be done by adopting a geographical focus while admitting enterprises that provide the products and services that fill the “institutional gaps”. This can complement the current program foci on topics such as climate and women’s economic empowerment.
The benefits of business agglomeration that comes with a geographical focus are well understood. Agglomeration is the process by which concentrating economic activity in one place makes businesses more productive. It works through three main channels:
- Sharing — the ability to share inputs, supply chains, and infrastructure
- Matching — access to a large pool of workers
- Learning — the ability to exchange ideas and information, known as ‘knowledge spillovers’.
An argument can be made that agglomeration attracts venture investors. Data shows that venture investments are clustered in areas close to their offices. There are several reasons for this. Networking is an important part of these investors’ playbooks. Networking plays a big role in sourcing and meetings with founders — close contact is important in closing deals with strong opportunities. Venture investors help find key employees, and it’s much easier to close on local talent.
Nurturing ecosystems is a way for accelerators to scale their own impact rapidly. If the current approach of supporting social enterprises is like growing trees spread out geographically, nurturing a business ecosystem is like seeding a forest — an entity that feeds on itself and develops the ability to grow and sustain itself.
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Miller Center Impact Pioneer: Prabhakar Krishnamurthy
Photos:
- All Across Africa
- Husk Power Systems
