Toward a theory of business model synergy among hybrid social enterprises

Importance and Key Contribution The social entrepreneurship literature is maturing, having recently moved from the initial stages of defining the field and describing how and why such organizations come about, to now... [ view full abstract ]

Importance and Key Contribution
The social entrepreneurship literature is maturing, having recently moved from the initial stages of defining the field and describing how and why such organizations come about, to now examining, theorizing and testing phenomena related to growing and managing the performance of such enterprises. We build on recent studies that begin to explain how social enterprises might best accommodate their hybrid nature when pursuing their goals (e.g. Kroeger & Weber, 2014; Pache & Santos, 2012; Wilson & Post, 2013). In line with this recent work we define a social enterprise as an organization that employs market-based methods in pursuit of a social mission. Our study centres on the fact that the hybrid nature of such enterprises requires them to employ two business models; a social model and a commercial model. A business model is a depiction of an organization’s strategy representing the “logic of the firm, the way it operates and how it creates value for its stakeholders” (Casadesus-Masanell & Ricart, 2010; 196). More specifically, a business model describes how an organization creates, delivers and captures value for its stakeholders (Osterwalder et al., 2005).

Evidence from the management literature highlights the difficulty of pursuing two business models (in essence two strategies) at the same time in the same organization or unit (e.g. Porter, 1987; Markides & Charitou, 2004). As hybrid organizations, social enterprises, by definition, operate two business models in order to create both social and commercial value. We reason that social enterprises that find ways to increase the synergy between their two business models will gain the performance—effectiveness and efficiency—benefits associated with single-business model organizations. Before this instrumental relationship can be examined, however, we first need to understand 1) how to measure synergy or overlap between business models, and 2) to what extent the level of synergy varies among the population of social enterprises. This paper reports on our efforts and findings related to these two research aims, and then develops propositions for further theoretical and practical study.

Theoretical Base
In this grounded theory study, we build on extant literature in the nascent social entrepreneurship field regarding hybridity. Initially seen as a minor variant of commercial entrepreneurship, there is a growing literature that indicates social entrepreneurial phenomena are distinct from commercial entrepreneurial phenomena in important ways. Having progressed from the initial stages of defining and describing the field and its members, social entrepreneurship researchers are now investigating more performance-related phenomena, such as how social enterprises might best accommodate their hybrid nature when pursuing their goals (e.g. Pache & Santos, 2012).

The work of Pache and Santos highlights the difficulty social entrepreneurs face in satisfying expectations for both the social and commercial logics they must address as hybrid organizations, with the potential for having to incorporate essentially incompatible practices in order to accommodate both logics. Consistent with Dees and Anderson (2003a), Pache and Santos (2012) demonstrate how an inability to address these competing logics can lead to sub-optimal performance in delivering satisfactory outputs to stakeholders, and ultimately to organization failure. Alternatively, their case study work indicates that by selectively combining elements of each competing logic these undesirable outcomes can be avoided. Working in the context of institutional theory, Pache and Santos refer to the two hybrid aspects of a social enterprise as different “logics”, but this duality can also be considered in the context of strategies and business models.

Whereas a strategy represents a direction for movement toward a desired state, a business model is a depiction of strategy, representing the core logic and structure of an organization’s efforts (Dahan, Doh, Oetzel, & Yaziji, 2010). This relationship between strategy and business model, by deduction, indicates that all organizations must have a business model (Teece, 2010), just as they must have a strategy; although, as with strategies, the business model is not always explicit, as entrepreneurs and managers may be unaware that they are creating or working with a particular business model. Dahan et al. (2010) confirm that social organizations use business models and emphasize the need to look at the creation of both social and economic outputs. Yunus, Moingeon & Lehmann-Ortega (2010) demonstrate that social enterprises employ business models in much the same way as for-profit organizations, except that in social enterprise business models “stakeholders replace shareholders as the focus of value maximization” (:309). They identify two ways in which business model innovation in social enterprises differ from that in commercial enterprises, however: “the need to involve socially-oriented shareholders and to state the intended social profit explicitly” (:310).

Some of the difficulties for social entrepreneurs who try to manage both social and economic business models, include mis-alignment of interests between payers and consumers, inability of consumers to fully appreciate and assess quality of products and services, and difficulty in comparing consumer value with social benefit (Dees & Anderson, 2003a). Wilson and Post (2013) reinforce the value of integrating social and commercial business models, but do not actually delineate the individual business model elements or the social and commercial components. Thus it is not clear that there are two business models operating, which have been integrated, or if so, to what extent they have been integrated. And while the work of Pache and Santos, and Wilson and Post provides some indication of how business model synergy might impact organizational outcomes—such as delivery of social and economic goals, or temporal sustainability of the organization—the lack of clear delineation of business models and the inductive nature of their work suggests that further development of this research stream is required before we can draw generalizable conclusions about what impact business models and their level of integration or synergy might have on social entrepreneurship outcomes.

Research Questions

Research objective 1: Develop a method to measure synergy or overlap between business models within an organization, and across organizations, social fields and geographies.

Research objective 2: Determine to what extent the level of synergy between the social and commercial business models varies among the population of social enterprises.

Research objective 3: Identify patterns that might exist in the ways that social and commercial models are integrated.

Findings
To address these research objectives we employ the case study method, an appropriate research strategy where a contemporary phenomenon is to be studied in its natural context (Yin, 2003).
This research analyzes case studies of social enterprises in Vietnam, where seven cases were chosen using purposeful selection with the aim of representing the range and diversity of the social enterprise population (Eisenhardt 1989) in terms of sectors, social fields, target groups, and geographical location, consistent with the needs of theoretical sampling.

We first develop a method for comparing the synergy between business models and then test our method using a sample of seven social enterprises operating in different social fields. Our findings indicate that the method can be applied consistently across a wide variety of social enterprise types. We then use data from our method test to establish and compare synergy levels across organizations, finding that variation in synergy levels is considerable with synergy indices ranging from 9% to 77%.

Implications
We develop and test a method to measure business model synergy. Then, using findings from this exploratory study we develop the following propositions, which form the basis for an initial theory of social enterprise value creation performance. Stemming from our findings we propose:
P1: Social impact model and commercial business model will always integrate at a certain level but the two models are not identical.
P2: Social value proposition and commercial value proposition are always distinct to each other to a certain degree, but are fundamentally interconnected in the value chain of a social enterprise.
P3: Different social enterprises adopt different levels and structures of integrating social impact models and commercial business models, reflecting the strategic settings of value creation architecture, operational constructs and income streams.
P4: The levels and structures of integration are influenced by the social enterprises’ structure of target groups, including target beneficiaries and customer segments, and the interrelationship of social value proposition and commercial value proposition.
Using our learning from this exploratory study and the propositions so far, from Proposition 1, that business models are always divergent but have some level of synergy, and from Proposition 2, that the level of synergy varies considerably across the population of social enterprises, we consider learning from the strategy literature that indicates the integration of dual business models is associated with higher levels of effectiveness and performance against organization goals, and propose:
P5: The greater the degree of synergy between the social and commercial models employed by a social enterprise organization the more effective they will be in both social and commercial value creation
P6: The greater the degree of synergy between the social and commercial models employed by a social enterprise organization the more sustainable the organization will be, temporally.
Together, these six propositions form the basis of our initial theory of social enterprise value creation performance.

social entrepreneurship, business models, hybrid organizations [ view full abstract ]

social entrepreneurship, business models, hybrid organizations