Social business and social entrepreneurship are ‘buzz words’ that have been dominating the social sector in recent years. Although I had dabbled part-time in social business, I didn’t feel like I fully understood the challenges and differential business decisions that would need to be made, when trying to achieve ‘Profit with Purpose’.
A social business is a business that strives to create positive change in society, by using a business approach that could generate profits, which are used to sustain and expand its social impact. This creates an interesting duality of objectives, where one has to often make trade-offs between maximizing Profit and Social Impact, a challenge especially when social impact is so hard to measure.
So what makes the organization I’m working in today (Meds and Food for Kids http://mfkhaiti.org/) a social business? With a mission of saving the lives of malnourished children and improving livelihoods in Haiti, it has made several ‘SOCIAL’ choices that a traditional profit maximizing business may not have.
Consider a business that produces peanut based medicines needed in Haiti for treating child malnutrition:
1. Where should the product be manufactured?
Ideally, a location with a low cost of doing business, good infrastructure and a stable political and regulatory environment. Apart from low cost labor, Haiti offers none of the mentioned! The infrastructure is poor or lacking, government is volatile with unpredictable changes in law, and energy is expensive. Yet, the decision to locate production in Haiti was made, to create employment for 50+ Haitians, a critical choice in a country that has unemployment rates in the range of 70%
2. Where should Peanuts be sourced, a key ingredient of the medicine?
The lowest cost supplier/country would be the natural way to go, but the organization decided to source as much as possible from Haiti, even though peanut quality is lower, and costs are ~2X the imported variety. Why? To support the livelihoods of ~500 Haitian farmers, 80% of whom remain below the poverty line.
3. What should business Profits be used for?
Return profits to shareholders or owners would be one option, but the ‘social’ choice was made here too, where profits are reinvested to further the mission by donating medicines to clinics that cannot afford to buy it, increasing purchases of expensive local peanuts to grow farmer incomes, and providing more training/equipment to local farmers.
As you can see from the above, a series of ‘social’ choices were made along the entire value chain of the business. These no doubt come at a cost and create profitability challenges when you need to compete with low cost manufacturers that can easily export into Haiti. Herein lies the challenge of social businesses, an innovative yet robust business model is needed for survival – more on this in a future post.
Why social business and not traditional aid through governments and charities? Sustainability and effectiveness – governments and charities are facing unprecedented funding challenges brought on by the global recession, and in some cases, the interventions just have not worked. Using a business approach to solve social problems provides independence from unpredictable funding from donors and governments, as well as the opportunity to increase social impact when profits are generated.
MFK is fulfilling its mission by creating a Value Chain of ‘SOCIAL’ choices – made In Haiti, By Haitians, For Haitians