Business Strategy

Differentiating Between Social Entrepreneurship, Nonprofits and Traditional Business

What is social entrepreneurship and why is the concept so confusing to so many people? When most people think of business in our capitalistic society, the choice seems to be between doing well or doing good. “Doing good” for social entrepreneurs means making a difference by applying original business strategies to further social and environmental goals. Social entrepreneurs build profitable business models in which doing good is an intrinsic part of the business and not just a philanthropic sideline. Social enterprises also have a double bottom line: social impact and financial viability. Furthermore, social entrepreneurs solve problems in pattern changing ways by merging mission and money.

Although not a new construct- social entrepreneurship has been around for over forty years-the business model driving the concept is still evolving. As a consequence of the evolving nature of social entrepreneurship, there is confusion regarding what it is and how it is different from a nonprofit organization or a traditional business.

Nonprofits came into existence because for-profits weren’t addressing social needs that our free market system was failing to adequately address such as pollution, poverty, and illiteracy. These organizations rely primarily on charitable contributions, public funding and foundation grants to support their programs and cover their administrative overhead. Nonprofits are often confused with social enterprises. Traditional nonprofits and citizen groups have been mainly distinguished by their benevolent intent. In contrast, social entrepreneurs stand out by their pragmatic emphasis on getting results. The results driving the social enterprise are achieved through the revenue model.

Over the years, nonprofits have increasingly been unable to achieve sustainability and achieve their intended purposes. Consequently social entrepreneurs have found opportunities to fill the void and create businesses that deliver products and services previously provided by nonprofit groups or government agencies and often in a more sustainable manner. The current recession has also contributed to the financial woes of nonprofits by reducing funding and by simultaneously increasing the societal need of their services. As a result, many nonprofits have seen financial pressures that have gradually eroded their reserves and forced them to seek new sources of revenue to finance their programs. While there remains a distrust of the profit motive and capital markets among most nonprofit leaders, some nonprofit groups have somewhat changed their perception of profit as seen in their attempts to enhance their sustainability by adding business activities to the traditional hodgepodge of volunteers, charitable donations, and government subsidies. A few have abandoned dependency on tax and government subsidies entirely, achieving self-sufficiency by focusing exclusively on earned income from their businesses.

There is also confusion about social enterprises by those who believe that there is no real difference between a social enterprise and a traditional business. Traditionally corporate philanthropy took a fairly thoughtless, perfunctory approach. Executives routinely gave corporate grants to their local nonprofits, to the cultural institutions on whose boards they sat, and to universities and other institutions. At some point, the more enlightened companies took care to align their business philanthropy with their strategic goals. Today most corporations recognize the value of participating in social causes that relate to their overall mission. Some corporations have even taken social responsibility to a new level. Companies such as Google, for example, have attempted to incorporate social causes into their missions. Google has created a charitable arm-Google.org-which has committed over 100 million dollars in grants and investments to advance social causes. Does this make Google a social enterprise? To the extent that Google.org is operated as a separate entity, a case could be made that Google.org is a social enterprise but the parent company-Google-is not.

Confusion in the news media regarding hybrid efforts such as Google’s are understandable but news articles or corporate promotion materials at times inaccurately state that a business behaving in a socially responsible manner is engaging in social entrepreneurship. However, with a traditional business the social cause is not the mission, the mission remains tied to generating wealth for shareholders. In contrast, social entrepreneurs confront the major unmet needs of society through the businesses themselves rather than grappling with them indirectly through socially responsible practices, such as corporate philanthropy, equitable wages and the use of environmentally friendly raw materials.

Traditional ways of doing business and operating nonprofits have in many ways been inadequate to meet the needs of society. To meet these growing societal and environmental needs and demands nonprofits and social enterprises will continue to evolve to better fulfill their missions. Traditional businesses also seem likely to increase their contributions to solving social and environmental problems. Social enterprises will also continue to influence and be influenced by trends affecting traditional businesses and nonprofits. Finally, due to the magnitude of social and environmental problems it is reasonable to expect a proliferation of social enterprises in the future.

by Rick Childress

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