business primer

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John Elkington, Founder & Chief Entrepreneur, SustainAbility

Sophia Tickell, Chair, SustainAbility

Comments? [email protected] or [email protected]

SPONSORED BY THE SKOLL FOUNDATION

Scalable Solutions The role of social entrepreneurship insolving sustainability challenges

Skoll Paper 1November 2006



Scaleable Solutions November 2006 Page 1 of 26

Contents

Foreword................................................................................................................................. 2 Executive Summary ................................................................................................................ 4 1 Introduction...................................................................................................................... 6 2 Definitions........................................................................................................................ 7 3 Social Entrepreneurship in Context ................................................................................. 9 4 The Business Case........................................................................................................ 13 5 Five Sectors, Five Issues............................................................................................... 15 6 No Easy Road Ahead .................................................................................................... 20 7 Conclusions and Looking Forward................................................................................. 22 APPENDIX 1: Some Definitions & Criteria............................................................................ 23




Foreword

A core part of SustainAbility’s mission is to identify, track, evaluate and—where necessaryand appropriate—help build trends that drive business strategy and markets towards more just and sustainable forms of value creation. From 2001, we concluded that the growingworldwide interest in social entrepreneurship would be one such trend—and began workingwith such organizations as The Schwab Foundation for Social Entrepreneurship and theWorld Economic Forum. But when we announced to our clients that we had been awardeda $1 million, three-year grant from the Skoll Foundation to help develop the field of socialenterprise, we were surprised to find that several major companies protested what they sawas our impending shift from the mainstream into the outer darkness.

Surprised because it is our belief that far from being a ‘soft’ sideline to mainstream business,in the next decade social enterprise will significantly shape both business practice and themarkets in which leading companies operate. To set out our case, we have written thisbusiness primer, the first in a planned series as part of our evolving Skoll Program, focusedon Scalable Solutions to sustainability challenges1.

A changing theory of change

SustainAbility’s basic theory of change is evolving. When the organization was founded in1987, our theory of change was fairly simple, albeit unusual for the time. We aimed to pushtowards more sustainable forms of development “with business, through markets.” Wechose to focus on the private sector and on big international companies in particular,because we felt that this is where the greatest leverage for change would be found. We also

stayed small, to cut overheads and enable us to turn away certain types of work and certaincategories of client.

The business case for focusing on large companies was multi-dimensional, for example:(1) such companies had—and continue to have—major economic, social and environmentalimpacts, both for good and ill; (2) they have the ability to do new things at scale; and (3)when they take on new priorities, they can cascade the new thinking through their supplychains or value webs and, via their lobbying and public policy work, powerfully influencegovernment.

A sub-component of our early business model was that we chose not to work in thedeveloping world, despite calls to do so, on the basis that the work often meant working with

public sector clients, among them development banks and aid agencies, rather than with theprivate sector.

This model has served us well – and, we hope, our clients, partners and the widersustainability agenda, too. But along the way we have encountered several challenges fromclients and other stakeholders. In summary, we have been asked, Why SustainAbility doesnot: (1) work with governments and the public sector—because they have a crucial role toplay; (2) work with small and medium-sized enterprises—because SMEs represent such adominant part of our national and global economies, with commensurate social andenvironmental impacts; and, just as important, can be the source of innovative,entrepreneurial ideas; (3) work in the emerging economies and developing world moregenerally—because the potential for positive change is greatest there; and (4) grow our

business in order to play an even more powerful role in defining and driving the sustainabilityagenda?




All excellent questions—and this document reflects the fact that answers that served us wellin the past need to change to reflect changing market conditions. Indeed, our theory ofchange and our business model are evolving in ways that begin to answer all of the above.

So, in 2006, following a major strategy review, we have formalized our commitments to:(1) invest more time in understanding public policy drivers of corporate behavior; (2)integrate social entrepreneurship considerations into all our work and support a growingnumber of entrepreneurial start-ups over the next 3-5 years; (3) substantially develop ourwork in four emerging economies—Brazil, South Africa, India and China; and (4) grow thebusiness significantly over the next 3-5 years, in support of these objectives.

While the majority of our effort will still ultimately be focused on large companies andfinancial institutions, because that is where some of the most interesting opportunities toproduce scalable change are found, we also plan to invest growing effort in four key driversof corporate change:

o governments (e.g. policy, regulations, subsidies and pricing signals, all of which driveand incentivize a great deal of corporate change);

o financial markets (which can have an even greater impact);

o civil society (e.g. voting, NGO membership and consumer pressure); and

o entrepreneurial activity, which signals where future markets, innovation and businessmodels need to head next.

As an integral part of this latter component of the new strategy, we plan to invest more effortexploring social entrepreneurship and social enterprise, seeking to connect our corporatenetworks and this emerging field. Our 3-year funding from The Skoll Foundation is a majorcontributor to this end.

This paper is part of an evolving dialogue and attempts to provide a snapshot of a rapidlychanging landscape. When they are published, it should be read alongside two otherpublications SustainAbility is currently working on with help from the Skoll Foundation,Global Reporters 2006 and Globalization 2017 , in addition to a book that John Elkington andPamela Hartigan of The Schwab Foundation are writing for Harvard Business School Press,due for publication early in 2008. We would very much welcome any comments and viewsyou may have.

John Elkington ([email protected]) andSophia Tickell ([email protected])




Executive Summary

Social entrepreneurs are people who, through the practical exploitation of new ideas,establish new ventures (social enterprises) to deliver a range of goods and servicescurrently unmet by existing markets. The emphasis on social returns on investment is whatsets social entrepreneurs apart from the mainstream. In the course of their work, socialentrepreneurs often signal impending changes in how value is defined and co-created. Lessobvious, but arguably more important over time, is the fact that the ideas, attitudes andapproaches of social entrepreneurs have the potential to disrupt assumptions and businessmodels in a way that could eventually have a profound effect on mainstream markets.

The paper concludes that there is an increasingly powerful business case for corporateengagement in the world of social entrepreneurship, which is largely, but not exclusively,based on the lessons it offers about innovation, new market opportunities and potentialdisruption to existing business assumptions. As is recognized by many leading companies,these attributes are particularly relevant in a global operating context that is experiencingprofound change. Their interest is reflected in an increase in attempts to quantify andmeasure intangibles such as an organization’s license to operate, business continuity andlonger term security. We conclude that there are at least four business drivers forconnecting mainstream markets and social entrepreneurs.

o Market intelligence: Most companies considering engagement with socialentrepreneurs and social enterprises start out by thinking in terms of the potentialenhancement of their brand and reputation through cause-related marketing. And thereare no doubt various ways in which such connections can be made and real value

created, on both sides. But an equally important area can be the gathering of marketintelligence. As interest in base-of-the-pyramid markets grows, social entrepreneurs areexperimenting with new business models, services and products in many of the marketsthat major companies are beginning to take seriously.

o Innovation: At a time when success in tackling many of the great divides between richand poor seems virtually out of reach, leading social entrepreneurs are plunging in,taking risks that few if any major companies would dare to take, and—in some cases—beginning to attract significant funding and other forms of support.

o Leverage, Replication and Scale: As we move into an era in which it is no longer viableto postpone attention to environmental issues or the poverty agenda, the spotlight will

inevitably shift towards innovation and entrepreneurial solutions. In the process,conventional corporate responsibility (CR) strategies and initiatives may begin to looksomewhat ‘tired’. This is where social entrepreneurs potentially come in, given that theyoffer greater leverage than traditional non-profit partners. Significantly, too, partnershipsbetween major businesses and social enterprises hold the promise of better scalability.

o Metrics: One of the most important—and potentially tedious—areas in the pursuit of anyform of change is measurement. But, tedious or not, the old management mantra thatwhat you can’t measure you can’t manage applies here, too. That said, most metrics inthe corporate social responsibility (CSR) and sustainable development (SD) fields todaytend to focus on policies, systems and procedures, rather than on impacts andoutcomes. By contrast, the major foundations that are investing in social

entrepreneurship are increasingly requiring evidence of impacts and outcomes.




These benefits are already playing out in real cases. In capital markets and the financesector, for example, social entrepreneurs are precipitating a revolution in assumptions aboutwho is credit-worthy and where profit can be made. The concept of microfinance, which hasspread to the boardrooms of some of the world’s biggest banks, originally evolved from the

absolute fringes of the system. Possibly even more disruptive to the finance sector thanmicrofinance is the work being undertaken by social entrepreneurs to capture long-termvalue in investment decision-making. Coinciding with increased corporate attempts tomeasure intangibles, the financial community is beginning to acknowledge some of thenegative impacts of short-termism on the long-term value of investments, particularly in keysectors with long investment requirements, such as pharmaceuticals and energy.

The social and environmental challenges facing humanity are hard to overstate and the“can-do” attitudes of the social enterprise movement have generated high hopes and greatexpectations that they will succeed in rising to a wide range of economic, social andenvironmental challenges. There are, however, major hurdles ahead. The enthusiasminspired by social entrepreneurs creates a biotechnology-type risk that their potential

contributions are overestimated in the short term, with consequent disappointment when theearly impacts are less than had been anticipated. It is also clear that the social enterprisemovement will eventually find itself facing the profound challenges that have facedgovernments, NGOs, companies and multilateral organizations who have stepped up to theplate before them. Among them are equity and the scaling up of best practice; social justiceand the principles of universal provision; and trade justice and how to thrive in the face ofglobal competition.

In summary, social entrepreneurship is relevant to big business for a number of reasons.First, the next phase of the sustainability debate will focus on the sort of creativity, innovationand entrepreneurial solutions in which leading social entrepreneurs excel. Second, thebusiness case for action will increasingly focus on value creation, well beyond the basics ofcorporate citizenship and corporate responsibility. Third, while definitions vary, socialentrepreneurs bring new mindsets, perspectives and business models to bear on some ofthe crucial challenges of our day. Fourth, though material issues will vary considerably fromsector to sector, we suspect that the centre of gravity—and influence—will begin to shift topeople who to date have been fairly resistant to these issues, among them chief financialofficers, financial analysts, mainstream entrepreneurs, venture capitalists and investmentbankers. For such people, the work of social entrepreneurs is already providing earlymarkers of future risks and opportunities and of the processes by which tomorrow’s valuewill be created in novel ways.




1 Introduction

In the next decade, social entrepreneurship and social enterprise will come to significantlyshape both business practice and the markets in which many firms operate. Themechanisms of change are likely to be both direct (as when social enterprises identify andcapture new markets) and indirect (as when larger companies model at least part of theirbusiness model and behavior on those of social enterprises).

We assess what is happening in the field; why business needs to understand theimplications and trajectories; and how companies and other business organizations mightidentify and respond to some of the challenges this field of activity poses.

The paper—which very much represents work in progress—is divided into seven sectionsand an Appendix.

o Section 2 explains what social entrepreneurship is and describes what socialentrepreneurs do.

o Section 3 outlines how social entrepreneurship fits into rapidly evolving globaldiscussions about the role of markets in delivering social and environmental goods.

o A discussion of the business case for mainstream corporations to focus on this area canbe found in Section 4.

o Section 5 probes five sectors and five issues, including scale, security and universality.

o Section 6 offers a note of caution about the road ahead.

o And Section 7 provides our conclusions and thoughts for continued engagement with theevolving discussion on scalable solutions.




2 Definitions

2.1 Who and what are Social Entrepreneurs?

Social entrepreneurs are people who, through the practical exploitation of new ideas,establish new ventures (social enterprises) to deliver a range of goods and servicescurrently unmet by existing markets. The emphasis on social returns on investment is whatsets social entrepreneurs apart from the mainstream. Historically most have assumed thatsuch ventures will be non-profit, or at least where profits are made they will all be reinvestedin the organization’s mission. More recently, however, there has been a growing interest inhybrid not-for-profit and for-profit models—and in models that are designed from the outsetto profitably produce blended value. (Appendix 1 provides additional definitions.)

The most accomplished of these people have had notable success in using market

principles to deliver a range of education, health, environmental and other goods andservices to people who—prior to their involvement—it had been assumed the market couldnot reach. Social entrepreneurs are both a response to and a potential solution for marketand government failure. In the process of their work, they signal impending changes in howvalue is defined and co-created. Often, they seek and harness the talents of people whoseskills are undetected by existing employment radar screens, providing them with income-generating opportunities. Less obvious, but arguably more important over time is the factthat the ideas, attitudes and approaches of social entrepreneurs are disrupting assumptionsand business models in a way that could eventually have a profound effect on mainstreammarkets.

According to The Schwab Foundation, whose mission is to support social entrepreneurs,the discipline of social entrepreneurship is: (a) about applying practical, innovative andsustainable approaches to benefit society in general, with an emphasis on those who aremarginalized and poor; (b) a term that captures a unique approach to economic and socialproblems, an approach that cuts across sectors and disciplines; and (c) grounded in certainvalues and processes that are common to each social entrepreneur, independent of whetherhis/her area of focus has been education, health, welfare reform, human rights, workers'rights, environment, economic development, agriculture, etc., or whether the organizationsthey set up are non-profit or for-profit entities. It is this approach, the Schwab Foundationnotes, “that sets the social entrepreneur apart from the rest of the crowd of well-meaningpeople and organizations who dedicate their lives to social improvement.”2

Social entrepreneurs are as varied as the communities they aim to serve. This group of‘New Heroes’ includes the likes of 2006 Nobel Prize-winner Muhammad Yunus, founder ofthe Grameen Bank. A native Bangladeshi and economics professor, Professor Yunus pilottested and scaled a new business model to provide credit to the world’s poorest citizens.Today the bank has nearly six million customers, almost all of them women, and boasts a98% repayment rate. Or consider Vinod Khosla, an entrepreneur who is now playing a keyrole in the emerging biofuels sector—a sector that has seen boom conditions as energysecurity concerns grow in the United States and elsewhere.

Nor are such people alone. The Grand Prix motorcycle racing arena sparked another socialenterprise targeted at tackling a simple, yet critical element, of the African health caresystem: transportation. By providing bikes and maintenance support services, AndreaColeman and her organization, Riders for Health, have extended the reach of health careproviders to 11 million Africans. The group finances itself through private funds and receivesno government support. And, to take just one more example of how social entrepreneurshipis emerging all around us, consider Victoria Hale and her enterprise OneWorld Health. After




an ‘Aha’ moment in the back of a New York taxi cab, Dr. Hale, a pharmaceutical scientist,launched the world’s first non-profit pharmaceutical company. By matching orphan drugswith orphan diseases, OneWorld Health is developing safe, effective and affordablesolutions for people previously unserved by mainstream firms.

2.2 Why are Social Entrepreneurs important?

Social entrepreneurs are engaged in what we might see as a massively parallel, opensource market research survey, offering substantial potential value to mainstream business.

Successful entrepreneurs not only see the future coming—they help to create it. Indeed,Swiss billionaire Stephan Schmidheiny has explained one key to his success as his interestin observing “social movements, seeking to detect the first signs of change in what seemedto be a static context.” This, he said, “is the best early warning system to detect both risksand opportunities.” By identifying and getting into embryonic markets, social entrepreneurs

signal emerging opportunity spaces. Their business models, often mutated to suit localcircumstances, offer important clues as to how larger, mainstream, businesses will need toadapt to successfully enter these new markets.

In addition to early warning of impending market trends, there are several other reasons forcompanies to focus more intensely on best practice in social entrepreneurship:

o First, leading social entrepreneurs have demonstrated both the passion and momentumneeded to intervene successfully in markets to address social and environmentalchallenges. Meanwhile, the main body of the corporate social responsibility movementseems to be in danger of losing both passion and momentum.

o Second, the timing is right, as the preconditions build for a new wave of societalpressure on business, with a growing focus on the need for entrepreneurial solutions tosustainability problems that can both be replicated and scaled up.

o Third, at a time when there is growing mainstream interest in base-of-the pyramidmarkets, these people are in the thick of the BoP action, working out new strategies toharness a wide range of resources to the task, while simultaneously experimenting withnew ways of meeting the myriad commercial needs of poor people.3 Their hands-onknowledge of such markets and of the political and regulatory environments potentiallyoffers valuable market intelligence.

o Fourth, and by no means finally, their approaches hold the potential of higher leverageas a result of more sustainable and market-oriented business models and the use of newand rigorous outcome and impact metrics to quantify success.




3 Social Entrepreneurship in Context

3.1 The Next Pressure Wave

In the past twenty years the role of business in meeting the world’s great social andenvironmental challenges has been subject to fierce debate. Figure 1 plots these debatesas three waves—three successive cycles in the never-ending effort to civilize capitalism.The small print tracks key events in each year. The rapidly emerging social enterprisemovement is both a product and a symbol of the latest phase in this continuum. Thoughchopped back by the events of 9/11 and their aftermath, the third wave is building backpowerfully at the time of writing. The likelihood is that upwave and downwave cycles willcontinue, but underlying these fluctuations is a rising tide of pressure driven bydemographic, technological, societal and environmental trends.

Figure 1: Pressure waves, 1960-2006

SustainAbility described some of the likely characteristics of this emerging operatingenvironment in a 2001 book, The Chrysalis Economy 4, which argued that the 30-year periodfrom 2000 would see profound changes in the global economy, increasingly driven by thesort of limits first identified in the ‘Limits’ era by the MIT ‘Limits to Growth’ team and others,including—more recently—the Millennium Ecosystem Assessment team. One implication isthat the agenda will increasingly engage the people who create and build—rather thansimply run—businesses (Figure 2). Key issues are likely to include energy security, the roleof financial markets in helping to scale up successful initiatives, the future role of intellectualproperty rights as open source solutions—and, less positively, counterfeiting—spread; and,




perhaps most taxing of all, the question of how to achieve universal provision of the sort ofservices that social entrepreneurs are developing.

Figure 2: Who’s involved in business?

Tomorrow

Today

1990s

1980s

1970s

CFOs, Entrepreneurs, Investment Bankers, Venture Capitalists

CEOs, Boards (e.g. Non-Executive Directors), Investor Relations

Process and Product Design, Marketing, Managers

Environment Managers, Project Planners

Lawyers, Public Relations

So how has this process played out in business itself? Figure 2 illustrates the way that thecentre of gravity of attempts to curb the worst excesses of capitalism, driven by a range ofexternal pressures, has percolated (or been forced) up through corporate hierarchies inrecent decades. In the process, the spotlight has expanded from defensive functions (suchas public relations and legal affairs) to the point today where many boards are becominginvolved, whether or not they welcome the fact or have the skills to deal with the relevantissues. One key factor driving such processes has been the growing complexity andpolitical charge associated with many triple bottom line issues. Now, increasingly, we seean involvement of those who create new businesses, among them entrepreneurs, venturecapitalists and investment bankers.

So what have been the net results to date of these pressure waves? Given the scale of thecurrent challenges, and the failure to ensure suitable forms of governance to manage theprocesses of globalization, some might query whether much progress has been made at all.

In the decade following the fall of the Berlin Wall, a newly unfettered capitalism emergedapparently triumphant: in country after country, governments and business queued toreshape the economy along free(ish) market lines. During this ongoing ‘Globalization’ era,governments have deregulated and liberalized markets at an unprecedented pace and on aglobal scale.

The outcome has been a near-exponential growth in the flow of goods and services acrossthe world, accompanied by the rapid expansion of communications and accelerated capitalmovements. While the net benefits of these changes are hotly disputed, it is clear that asbenefits have accrued to some people, so too has evidence of multiple market failures. Andthese failures have been increasingly visible because of the extraordinary advances incommunications, including the Internet, search engines like Yahoo! and Google, and the

worldwide emergence of 24/7 rolling news outlets (with over 30 in India alone).




Through the third upwave and its aftermath, the euphoric language linking the evolution ofdemocracy with the advance of the market has been tempered by the realization that toomany people have not benefited by global growth—and that there are growing numbers ofpeople out there prepared to capitalize on this fact. The economic, cultural and political

impacts of the rise of radical Islam became apparent following 9/11 and continue to play outin the disastrous aftermath of the Iraq war. Non-violent, but nonetheless also potentiallydisruptive of the prevailing market paradigms, is the recent electoral success of left-leaningpopulist leaders in Latin America. These figures, including Hugo Chavez of Venezuela andEvo Morales in Bolivia, generate a heady clash of ferocious animosity and fervent support,seeking to counter what they see as the worst of the globalization trend by reassertingcontrol over key resources and industries. Their argument is that this is the only way thatsufficient rents can be obtained to fund social programmes.

3.2 The Rise of the Social Enterprise Movement

It is against this complex, dynamic backdrop that the social enterprise movement has moved

into the spotlight—spurred along by the award to Muhammad Yunus and The GrameenBank of the 2006 Nobel Peace Prize. Interest in social entrepreneurship is literally sweepingacross the globe, triggering a secondary boom in websites, publications (books, reports,newsletters), conferences, government initiatives, awards schemes and, to a degree,funding. The 2006 WEF Summit was the fifth in the series to formally embrace socialentrepreneurs, a process led by The Schwab Foundation for Social Entrepreneurship5, whilethe Skoll Foundation is developing its own series of major conferences in partnership withthe Saïd Business School at Oxford University6.

Although social enterprise is in part a logical response to the global trends outlined above, it

has its own particular antecedents as well. The delivery of social, environmental and ethicalvalue using market-based techniques has a very long history. This fact was underscored byDavid Bornstein in his excellent book How to Change the World 7, which tracked the fieldback to such people as St Francis of Assisi and Florence Nightingale. Parts of themovement find their origins in such people as the Quakers, with their ultimately successfulbattle against slavery and corruption—and their involvement in the founding of a range ofsuccessful companies. The roots of the modern movement can also be traced back to thework of international development organizations—multilateral as well as NGOs—which haveprovided support for income-generating activities, health and education services fordecades.

Social entrepreneurs are not a new phenomenon, but it seems, the social enterprise

movement is. What then, has changed an unrelated network of driven individuals into anincipient movement?

The context appears to be crucial. The ‘New Economy’ era spawned new fortunes—andnew forms of philanthropy, particularly so-called ‘venture philanthropy’ (see separate‘Barefoot Billionaires’ paper). The names associated with comparably generousphilanthropic gestures are the late nineteenth and early twentieth century philanthropists—Rockefeller, Carnegie and Cadbury. For these extremely wealthy individuals, the context ofacute inequality, in which the juxtaposition of great wealth against mass and wretchedpoverty was highly visible, acted as a spur to action. It is no coincidence that massivesupport for social entrepreneurs is now coming from modern-day equivalents, people likeGeorge Soros, Stephan Schmidheiny, Microsoft co-founder Bill Gates (with massive

additional aid from Warren Buffett), eBay founders Pierre Omidyar and Jeff Skoll, andGoogle founders Sergey Brin and Larry Page. The wealth, social and other divides have




opened out strikingly over pretty much the same period that they have been building theirsuccessful companies.

The involvement of these well-connected and highly strategic social investors has the

potential to make a huge difference. They have created organizations to seek out, track andsupport social entrepreneurs across the globe. When these newly networked socialentrepreneurs share experiences using new communications technologies the outcome—asin the work of organizations like the Acumen Fund and Endeavor Global—can be bothinspirational and widespread.

The involvement of some of the most influential and wealthy people on the planet has playeda decisive role. It was no accident that the theme of the 2006 annual summit of the WorldEconomic Forum was ‘Creativity’8. There is an increasingly urgent sense that a new wave ofcreativity, innovation and entrepreneurial solutions is needed to meet the challenges ofreducing poverty and improving environmental stewardship; challenges which will becompounded by predicted massive demographic growth and by the growing urgency of

resource limitations linked to water, land and fossil fuels9. While mainstream companies andgovernments are often still at the stage of acknowledging these challenges, socialentrepreneurs are getting on with finding solutions, market or otherwise. And it is this thatleads us to argue that the world of social entrepreneurship can be seen as a massivelyparallel experiment in sustainable development10.

Unhampered by sunk costs, institutional culture, comfort zones or bureaucracy, socialentrepreneurs are developing into one of the most interesting vectors of experiment andchange. For the first time a convergence of these bottom up and top down approaches isapparent. Social enterprise efforts and events now attract a small but growing number ofvisionary mainstream financiers and other funders who are seeking to identify new researchtools to help them understand medium and long-term factors that will affect the businessesin which they invest, but which are not, as yet, adequately factored into fund-managementdecision-making. The appetite that exists to better analyze these trends has drawn theirattention to the work of social entrepreneurs who have attempted to quantify their uniquecombination of values and outcomes from the word go. They are explicitly influenced bybusiness and determined to ensure that there is a measurable value to what they do.

The movement is fresh, energetic and inspiring. It parallels and complements—but alsosignificantly challenges—current governmental, non-governmental and corporate strategies.One example is the field of corporate social responsibility. Despite its rapid growth in recentyears, CSR often appears bureaucratic and stodgy compared to what is being achieved byleading social entrepreneurs. There is a serious possibility that it will increasingly be

challenged by higher leverage, results-driven and intensively measured forms of socialentrepreneurship. This, however, may prove to be a minor impact, compared to thedisruptive effect that its creative ideas could have on business, a trend which is explored inthe next section.




4 The Business Case

For two decades SustainAbility has worked with business through markets to meet socialand environmental challenges. The experience of tracking relevant trends during this timehas given us sensitive antennae that help identify important developments early in theirevolution. There is, in our view, a strong business case for corporate engagement in theworld of social entrepreneurship, which is largely, but not exclusively, based on the lessonsit offers about innovation, new market opportunities and disruption to existing businessassumptions. These attributes are particularly relevant in a global operating context formainstream corporations which is experiencing profound change. This is recognized bymany leading companies and is reflected in a growing interest in quantifying and measuringintangibles, license to operate, business continuity and security.

Social entrepreneurs boldly go where mainstream companies cannot or will not. Theirexperimentation with new technologies and business models might be assumed to applyonly to niche markets. However, this would be a mistake. While they have beendemonstrably successful in developing some niches, such as fair trade and organic food,there is evidence that their innovative approaches and continual experimentation withmarkets is already leading mainstream companies to experiment with alternative businessmodels and to pilot interesting ideas in new markets. Below we outline four key areas ofpotential value-added, followed by a more in-depth look at five sectors: finance, energy,food, healthcare and ICT.

o Market intelligence: Most companies considering engagement with social

entrepreneurs and social enterprises start out by thinking in terms of the potentialenhancement of their brand and reputation through cause related marketing. And thereare no doubt various ways in which such connections can be made and real valuecreated, on both sides. But an equally important area can be the gathering of marketintelligence. As interest in base-of-the-pyramid markets grows, social entrepreneurs areexperimenting with new business models, services and products in many of the marketsthat major companies are beginning to take seriously.

An example of a social entrepreneur helping a major company to access marketintelligence is the recent announcement of a joint venture between the Grameen Bankand Danone. According to the press release, “Grameen Danone will be highly committed to protect the environment of its communities developing solar energy and bio

gas energies. It will also develop innovative and environmentally friendly packaging for its products. The initial focus of Grameen Danone will be to launch an easily affordable dairy product to fulfil the nutritional needs of children in Bangladesh and contribute to their strong growth by bringing them the benefits of milk and micronutrients that they lack, including vitamins and minerals such as Iron, Zinc, and Calcium.”

o Innovation: At a time when success in tackling many of the great divides between richand poor seems virtually out of reach, leading social entrepreneurs are plunging in,taking risks that few if any major companies would dare to take, and—in some cases—beginning to attract significant funding and other forms of support.

An example of a social entrepreneur helping a major company to innovate—or think

more innovatively—is that of the creation of the world’s first not-for-profit pharmaceuticalcompany, One World Health (see below for details). This takes archived intellectual




property from mainstream pharmaceuticals to develop new drugs for neglected diseasesof the developing world.

o Leverage, Replication and Scale: As we move into an era in which it is no longer viable

to postpone attention to environmental issues or the poverty agenda, the spotlight willinevitably shift towards innovation and entrepreneurial solutions. In the process,conventional CR strategies and initiatives may begin to look somewhat ‘tired’. This iswhere social entrepreneurs potentially come in, given that they offer greater leveragethan traditional non-profit partners. Significantly, too, partnerships between majorbusinesses and social enterprises hold the promise of better scalability.

An example of how mainstream companies can pursue leverage, replication and scale isthe announcement of a major hydrogen power project for California by BP and EdisonMission Group in February 2006. Other market opportunities for social entrepreneursand large corporations alike have been created via calls from the European Commissionfor solar power to be installed on half a million roofs by 2010, stimulating demand for

manufacturing, leading to a market worth some 10 billion dollars, and creating 100,000new jobs.

o Metrics: One of the most important—and potentially tedious—areas in the pursuit of anyform of change is measurement. But, tedious or not, the old management mantra thatwhat you can’t measure you can’t manage applies here, too. That said, most metrics inthe CSR and SD fields today tend to focus on policies, systems and procedures, ratherthan on impacts and outcomes. By contrast, the major foundations that are investing insocial entrepreneurship are increasingly requiring evidence of impacts and outcomes.




5 Five Sectors, Five Issues

5.1 Overview

The social and environmental challenges facing humanity are hard to overstate. It isperhaps inevitable that the “can-do” attitude and insistence on outcomes over intention ofthe social enterprise movement have generated high hopes and great expectations. But isthis euphoria reflective of reality? Below we take a look at five key sustainability challengesand early signs that entrepreneurial solutions are gaining traction.

5.2 Capital Markets and Finance: The Issue of Scale

A quiet revolution in assumptions about who is credit-worthy and where profit can be madeis taking place in the financial community. It evolved not from the core of the financialpowerhouses, but from the absolute fringes of the system, and has spread from the slums ofBangladesh to the boardrooms of some of the world’s biggest banks in financial centerssuch as New York, London and Zurich. Ten years ago microfinance – the term to describethe often tiny loans made out to very poor people was almost unheard of. It is now commonparlance. And as the ideas behind it spread it has mutated and developed so that its rippleeffects are now felt not just in South Asia but also in the delivery of new products andservices sold across the globe. It has provided opportunities for poor people to accesscredit, but it has also created a potentially huge market to cater for individuals wishing toinvest imaginatively in enterprises that deliver both profit and social and environmentalgoods. It took a social entrepreneur to effect this revolution.

For the majority of people in rich countries being able to access credit and other financialservices is relatively easy. The recycling of saving funds to mortgage lending, start-upventures, capital development and other borrowing requirements underpins manyeconomies. This lending is usually predicated, however, on clients having collateral toreceive loans, meaning that poor people everywhere have struggled to qualify. Traditionalbanks have been long been reluctant to lend to people and communities that have beencalculated to be a high credit risk or whose financial needs are too small to administereconomically.

Microfinance—also known as “banking for the poor”—was pioneered by Muhammad Yunus,the Nobel Peace Prize-winning professor of macroeconomics who developed anastonishingly simple and effective means of empowering very poor people around the worldto pull themselves out of poverty. Grameen explains its philosophy as follows: “Relying ontheir traditional skills and entrepreneurial instincts, very poor people, mostly women, usesmall loans (usually less than US$200), other financial services, and support from localorganizations called microfinance institutions (MFIs) to start, establish, sustain or expandvery small, self-supporting businesses. A key to microfinance is the recycling of loan dollars.As each loan is repaid—usually within six months to a year—the money is recycled asanother loan, thus multiplying the value of each dollar in defeating global poverty, andchanging lives and communities.”

Possibly at least as disruptive to the finance sector as Grameen’s challenge as to who is

creditworthy is the work being undertaken by social entrepreneurs to capture long-termvalue in investment decision making. Coinciding with increased corporate attempts tomeasure intangibles, the financial community is beginning to acknowledge some of the




negative impacts of short-termism on the long-term value of investments, particularly in keysectors with long investment requirements, such as pharmaceuticals and energy. The resultis a growing move towards the definition—and ultimately measurement—of newly identifiednon- or extra-financial indictors of value. An interesting case here is Generation Investment

Management, an asset management company created by David Blood and Al Gore, whichattempts to balance conventional equity analysis with long-term sustainabilityconsiderations.

5.2 Energy: The Issue of Security

The longer term risks of basing our economies on oil has become increasingly obvious. Fordecades scientists have worked to tap economically viable alternative energy sources.Successful experiments with solar and photovoltaic energy creation have beencomplemented by work on biofuels. Until relatively recently, however, the renewableslandscape has largely been populated with a succession of failed or only partially successfulpilot-scale experiments.

Today, by contrast, wind power is growing rapidly (albeit from a small installed base) inEurope, US and China. Solar technologies are also attracting growing investment fromenergy groups like BP and Chevron, and a small number of social entrepreneurs—like FabioRosa of IDEASS in Brazil—are linking solar technology to novel power supply methods andbusiness models to afford poor people access to electricity and other types of energy.

One of the most striking ideas to have emerged in recent years in the energy area is that ofapplying the principles of the Internet and World Wide Web to energy production and supply.With radical decentralization, there would be a much lower risk to our economies from

threats from major oil-supplying regions, and the related infrastructure would open the gatesto a wide array of fuel cell and other more sustainable technologies. Alongside the work ofpeople like Richard Sandor of the Chicago Climate Exchange and Tessa Tennant of theCarbon Disclosure Project, such concepts could help drive a radical transformation of theenergy sector in the coming decades.

The global backdrop to these attempts is a world of energy haves and have-nots: anestimated 1.6 billion people lack access to modern energy services. More recently, soaringoil prices have driven energy security issues up the consumer, business and politicalagendas. There have been many factors at work, among them conflict, politicaldevelopments in places like Venezuela, Russia and Iran, the growing appetite for energyand other resources from emerging economies like China and India, and the problems that

forced BP to shut down major parts of its Alaskan operations. But there is an even biggerissue at work here, the growing sense that the world may already be in its ‘Peak Oil’ period,when we move beyond the point of having consumed half the available oil resources—andthe challenge of winning future oil becomes progressively more difficult.

5.3 Food: The Issue of Traceability

In February 2005, the British public woke up with a start to the news that Sudan was nolonger only the biggest country in Africa. Instead it was a toxic dye, alleged to becarcinogenic, that had found its way into soups, sausages, crisps and over 600 ‘readymeals’ on which busy consumers increasingly rely. Sudan I, imported from India, was at theheart of the latest in a series of food scares, which highlighted the extraordinary distancesand complex routes food now travels from farm to plate.




Globalization of international trade has led to radical changes in the way that food is grown,produced, bought, prepared, distributed and sold. The industry is being consolidated to thepoint where, according to one analyst report, by 2015 there will be only five global retailersand ten global manufacturers with a number of suppliers competing to supply their demands.

Successful food producers and retailers have strengthened their position by lowering costs,diverting investment to core businesses; and transferring to suppliers down the chain manyof the risks embedded in production and/or manufacturing, including demand for flexibility,tighter control over inputs and standards and ever lower prices.

Transferring risks to suppliers, who often pass on increased costs to their workers—whileextremely efficient, is not without downsides. Farmers in rich countries and developingeconomies are critical suppliers for whom the food industry creates many jobs andemployment opportunities. As they have become more involved in the global food trade sotoo they experience many of the negative side effects: ‘just in time’ delivery requirementscan lead to dramatic increases in hours and compulsory overtime. The transfer of cost andcommercial risks increase suppliers’ costs and can lead to: lower wages; reduction—or

denial—in the provision of benefits; and the denial of labor rights.

One of the early responses of social entrepreneurs to the newly globalized food market wasthe creation of fair trade brands. Though initiatives date back to the 1940s, it wasn’t until1989 that the international development agencies worked together to create the first fairtrade consumer guarantee, Max Havelaar. Working on the principle that producers shouldbe able to sell their produce at a price that meets their basic needs, fair trade is a form ofmarket intervention, but one that increasing numbers of consumers are prepared to support.Fair trade marked products are now sold in 20 countries across Europe and North Americaand through recent breakthrough agreements with supermarket chains in some productcategories are achieving 15% of total national market share.

As food scares increase in regularity and the depth of media coverage grows, the cumulativeeffect has led growing numbers of consumers to ask where their food has come from, how itwas produced and by whom. This is the issue of traceability, which is likely to be central tothe food industry in future. Innovation is absolutely vital for the sector particularly due to theslow or even static demographic growth in its key markets. In the past, innovation has beenfocused on achieving efficiencies in supply chain management and product creation. Infuture, if demands for traceability achieve critical mass, which is quite likely given the scaleof some recent food scares, the challenge to food companies will be to link their greatestassets—brand and price—to successful traceability strategies.

The questions that will need answers include: Will the demand for traceability—which is

most marked in areas like the organic and fair trade sectors—expand out into other sectorsas retailers and others gain experience and are forced to manage risk in new ways? Andhow can companies respond to the technical, branding, communications and ethicalchallenges in one of the most competitive and low-margin sectors of all? Among leadingsocial entrepreneurs working in this space are Dr. Ibrahim Abouleish of SEKEM in Egypt,Craig Sams of Green & Black’s (now part of Cadbury Schweppes) in the UK, and JohnMackey of Whole Foods Market in the US.

5.4 Health: The Issue of Universality

At first glance, the fundamentals underlining the future business of the pharmaceuticalindustry seem healthy. Aging populations in wealthy markets, increasing disposable

incomes, advances in science—biotechnology, diagnostics and devices, opportunities inemerging markets—all point to future prosperity. But the landscape in which the business




must be developed is highly complex and it takes little to trigger an underlying public uneaseabout the fact that a profit-seeking private enterprise lies at the heart of drug development.

A near-perfect storm hit in 2001, in the form of public outcry over the price and lack of

availability of AIDS medicines in Sub-Saharan Africa. It combined new technologies offeringmiracle cures for a terrifying plague, the viral spread of information—words and pictures—illustrating the human cost to those unable to pay for drugs, and the citing of co-defendantNelson Mandela, one of a handful of global statesmen, by an industry unable to appreciatethe extensive damage its court case against the South African government would cause.

The controversy also spotlighted the challenge increasingly facing us all: how to balanceshareholder expectations with society’s expectations of universal access to effective,affordable healthcare. The challenge—considerably more acute in developing countrieswhere decades of poverty and under-investment in health mean that the baseline isincredibly low—is one that faces health providers worldwide.

A number of social entrepreneurs have stepped into the field to experiment with newbusiness models able to meet the needs of low income individuals who, even collectively, donot offer the industry a commercially interesting market. One astonishingly successful socialentrepreneur in the field is Victoria Hale, a pharmaceutical chemist of considerableexperience, who opted to use her skills and expertise in drug development to create theworld’s first not-for-profit pharmaceutical company.

OneWorld Health (OWH) is dedicated to the development of safe, effective and affordablemedicines for people with infectious diseases in the developing world. The basic idea is thatOWH takes dormant intellectual property, owned by academia or companies in thepharmaceutical and biotechnology industries, and develops it into medicines to treatinfectious disease in developing countries. OWH’s flagship project has successfully takenparomomycin through clinical trials as a treatment for Visceral Leishmaniasis. Partneringwith the Indian government has secured OWH a distribution agreement to guarantee thetreatment’s availability for those who need it most—India’s rural poor.

Clearly, the OWH business model is highly reliant on the goodwill of industry. Many drugleads and compounds are made available to OWH by innovator companies. Theorganization’s work has successfully evolved due to partnerships, exchange andconstructive relationships with industry. But, a key question, could all of this move beyondleveraged corporate citizenship to market disruption? Could the very existence of suchorganizations as OWH end up contributing to the disruption of the pharmaceutical industry’scurrent ‘blockbuster’ business model?

One reason to think that they might is this. OWH operates a business model which makespublicly available information about the costs of all stages of the drug development process,how much it costs them to bring a drug to market and what this has to do with the price atwhich it is sold. What is already clear is that, despite the fact that OWH does not have tofactor in the costs of failure in the way that Big Pharma (the large pharmaceutical companysector) does, the alternative cost model could well prove disruptive in a world where thechallenge of providing access to quality, universal healthcare provision means thatpharmaceutical costings are under closer scrutiny and value for money is likely to be morerigorously tested.




5.5 ICT: The Issue of Accessibility

Roughly 186 million new people sign up as mobile phone users each year, bringing the

global total to 2 billion. At the same time, while the trends are hard to keep up with in thishighly dynamic sector, up to 80% of people in Africa have never heard a dial tone, let alonesurfed the Web. This disparity, known as the ‘digital divide’, has a significant impact onequality of opportunity, job prospects and social inclusion. Globally it reflects and, someargue, aggravates sharp and growing economic inequalities between the rich and the poor.

However, the ICT sector has proved capable of developing leapfrog technologies that arebetter adapted to the economic realities of its customers. Access to pay-as-you-go mobilephones has meant that shanty-town dwellers in developing countries—previouslyuncontactable due to the price of fixed line telephones—are available to potential employersas never before. Many have completely bypassed the traditional route from fixed line tomobile. Shared access internet centres in rural villages have given farmers unprecedentedaccess to price information about the commodities they will to sell and even in some casesdirect access. And these innovations have bled back into developed country markets.Parents eager to avoid extortionate phone bills have eagerly supported the transfer of theirteenagers’ phone agreements from contract-based payment to ‘pay as you go’.

The digital divide remains a very real challenge around the world and one which socialentrepreneurs have risen to meet, in the process further challenging assumptions about howmarkets work. The Grameen Bank (see 5.2, above) is one of the social enterprises that hasspawned a telecoms sister company, GrameenPhone. Strikingly the GrameenPhone hasbeen made available explicitly to innumerate and illiterate women. Skeptics initially arguedthe lack of basic skills would make it impossible for these women to make use of this

technology, but the astonishing success of the enterprise proved that Muhummad Yunus’basic premise that they would learn fast and effectively if the outcome was better access tomarkets, more income generating potential and increased opportunities. Other leadingsocial entrepreneurs active in this area include Rodrigo Baggio of CDI (Brazil), Rory Stear ofFreeplay Energy (UK) and Orlando Rincón Bonilla of ParqueSoft (Colombia).




6 No Easy Road Ahead

Standing back from all of this, however, it is worth sounding a note of caution. The

enthusiasm inspired by social entrepreneurs creates a biotechnology-type risk that theirpotential contributions could be overestimated in the short term, with consequentdisappointment when the early impacts are less than had been anticipated. There is even adanger that this could result in the withholding of support necessary to realize theirextraordinary longer term potential.

It is also clear that sooner rather than later, the social enterprise movement will find itselffacing the profound challenges that have faced governments, NGOs, companies andmultilateral organizations which have stepped up to the plate before them. Among them:

Equity and Social Justice: The more successful the work of social entrepreneurs, themore quickly they will be faced with the challenge of who their work benefits, how suchbenefits are most effectively measured and rewarded, and how best practice can be scaledup. Though the number of governments unable or unwilling to provide services to those whoneed them remains very high, the aspirations of equity and universality of provision ofservices are still very much alive. The role of NGOs in filling the gaps has long beenaccepted, but the outcome tends to be both patchy and serendipitous.

The challenge is the greater because since the end of WWII the concept of universal humanrights has gained ground, with governments slowly but surely coming to understand thatthese rights—which place an obligation on us all to ensure that fellow humans enjoy thesame rights—refer not only to civil and political rights, but also to social and economic rights.In theory at least, governments accept their responsibility to meet the needs of their citizens

on grounds of the important principles of universality and equity.

Social entrepreneurs are challenged to think whether the models they develop may havewider applicability. Many social entrepreneurs thrive in the absence of bureaucracy andsucceed due to their impatience as well as their drive and stamina. But what kind ofrelationships should they seek to establish between their successful programs and local ornational government so as to achieve more universal provision?

Other Obstacles: Many of the movement’s predecessors, also inspired to act locally tomeet immediate needs, were struck by the structural obstacles preventing their work frombeing replicated or scaled up. These obstacles can be similarly local—the result of localauthority obstacles or apathy, national—the result of government behavior, or international—

such as global trade barriers or protectionism. Social activists have responded to thesechallenges by undertaking advocacy work to change the policies and practices that preventthe poor from successfully competing in markets and to encourage policies that ensureuniversal provision of the pre-requisites for anyone to participate in markets—including basichealth and education.

Just as social entrepreneurs working on service sector delivery have faced the challenge ofscaling up to address issues of universality, so too small enterprises attempting to scale upto trade in today’s markets will face problems of trade justice. Today’s markets aredominated by global companies working to scale. It can be tremendously difficult for smallenterprises to survive and thrive when faced with competitors whose economies of scaleand technical expertise permit them to understand and work global markets using highly

sophisticated technologies, business models and logistics.




Moreover, businesses in developing countries often trade in agricultural commodities whichare further disadvantaged by trade barriers which prevent or circumscribe the sale of theirproducts in protected rich country markets. A Paraguayan dairy farmer with newly acquiredproduction and marketing skills will still find it difficult to sell to a local market if she is

competing with subsided milk from the European Union, likewise grain farmers arestruggling to compete with subsided wheat from the US.




The Foundation argues that it is this combination of approaches that sets the socialentrepreneur apart from the rest of the crowd of well-meaning people and organizations whodedicate their lives to social improvement. Schwab defines a social entrepreneur as:

o A pragmatic visionary who achieves large scale, systemic and sustainable socialchange through a new invention, a different approach, a more rigorous application ofknown technologies or strategies, or a combination of these.

o Combines the characteristics represented by Richard Branson and Mother Teresa.

Social entrepreneurs share come common traits including:

o an unwavering belief in the innate capacity of all people to contribute meaningfully toeconomic and social development

o a driving passion to make that happen.

o

a practical but innovative stance to a social problem, often using market principlesand forces, coupled with dogged determination, that allows them to break away fromconstraints imposed by ideology or field of discipline, and pushes them to take risksthat others wouldn't dare.

o a zeal to measure and monitor their impact. Entrepreneurs have high standards,particularly in relation to their own organization’s efforts and in response to thecommunities with which they engage Data, both quantitative and qualitative, aretheir key tools, guiding continuous feedback and improvement

o a healthy impatience.

As a result, social entrepreneurs don’t do well in bureaucracies. They cannot sit back

and wait for change to happen—they are the change drivers.

www.schwabfound.org

THE SKOLL FOUNDATION

Entrepreneurs have always been the drivers of progress. In the business world, they actas engines of growth, harnessing opportunity and innovation to fuel economicadvancement. Social entrepreneurs, like their business brethren, are similarly focused;they tap into vast reserves of ambition, creativity and resourcefulness in relentless pursuitof hard, measurable results. But social entrepreneurs seek to grow more than just profits.

Motivated by altruism and a profound desire to promote the growth of equitable civilsocieties, social entrepreneurs pioneer innovative, effective, sustainable approaches tomeet the needs of the marginalized, the disadvantaged and the disenfranchised. Socialentrepreneurs are the wellspring of a better future.

Throughout history, such individuals have pioneered solutions to seemingly intractablesocial problems, fundamentally improving the lives of countless individuals, as well asforever changing the way social systems operate. Among them are Florence Nightingale,who transformed hygiene practices at hospitals, dramatically reducing death rates; MariaMontessori, who created a revolutionary education method that supports each child’sunique development; and, more recently, Muhammad Yunus, who began offering

microloans to impoverished people in Bangladesh in 1976 to allow them to becomeeconomically self-sufficient, a model that has been replicated in 58 countries around theworld. So while social entrepreneurship isn’t a new concept, it is gaining renewed




currency in a world characterized by a growing divide between the haves and the have-nots.

Today social entrepreneurs are working in many countries to create avenues for

independence and opportunity for those who otherwise would be locked into lives withouthope. They range from Gillian Caldwell of WITNESS, who uses video andcommunications technology to document human rights abuses, to Amitabha Sadangi ofInternational Development Enterprises-India, who develops low-cost irrigationtechnologies to help subsistence farmers survive dry seasons. They include Victoria Haleof Institute for OneWorld Health, who taps existing but abandoned pharmaceuticalresearch to bring new drugs to the world’s poorest people, and William Foote, whopromotes a more equitable and sustainable model of international trade for a range ofcommodities, including coffee.

These individuals and other social entrepreneurs share a commitment to pioneering

innovations that reshape society and benefit humanity. Whether they are working on alocal or international scale, they are solution-minded pragmatists who are not afraid totackle—and successfully resolve—some of the world’s biggest problems.

www.skollfoundation.org

1Funded by The Skoll Foundation, www.skollfoundation.org

2http://www.schwabfound.org/whatis.htm

3C.K. Prahalad, The Fortune at The Bottom of The Pyramid, Wharton School Publishing, 2005.

4John Elkington, The Chrysalis Economy , John Wiley/Capstone Publishing, Oxford, 2001.

5 http://www.schwabfound.org

6 http://www.sbs.ox.ac.uk/skoll/index.html 7

David Bornstein, How to Change the World: Social Entrepreneurs and the Power of New Ideas ,Oxford University Press, 2004.8 http://www.weforum.org/site/homepublic.nsf/Content/Annual+Meeting+2006

9 http://www.businessweek.com/innovate/index.html

10The Social Enterprise Issue, Radar , August/September 2005, SustainAbility

business primer

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