Balancing social and commercial objectives within business organisations what can we learn from social enterprise?

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1 Balancing social and commercial objectives within business organisations what can we learn from social enterprise? Introduction The accepted role of business in our society has changed in the last 15 years. A blurring of sectoral boundaries, driven by the increased interest in finding innovative and sustainable solutions to societies wicked problems (Barraket 2010), has increased the push towards greater responsibility and commitment of business to environmental and social areas of activity and performance (Lee 2011; Sridhar 2012). In fact, the overall sustainability of an organisation has shifted from the simple measure of financial performance to the imperative of also incorporating the principles of environmental integrity and social equity (Hubbard 2009). These changes are most clearly evident in the implementation of performance standards such as the Triple Bottom Line, as well as the International standard on Social Responsibility (ISO26000) (Levitt 2012). In light of these changes, the question exists as to whether and how businesses can balance both the social and commercial objectives that these changed performance standards require. Social enterprise is a mode of business that seeks to meet the requirement to balance both social and commercial objectives simultaneously. For these organisations, the generation of financial profits is vital to their ability to be able to achieve sustainable social welfare and environmental outcomes for the individuals and communities they support. By doing so, social enterprises represent the potential for a new way of organising society in which a balance may be achieved between the realities of a market oriented society and societal welfare goals (Pearce 2003). As such, they are the organisational form that can provide the greatest insights into how a business may best balance and manage the achievement of social objectives as well as existing profit motivations. Broadly defined, social enterprises are organisations characterised by: the pursuit of an economic, social, cultural or environmental mission consistent with a public or community benefit; trading that is undertaken to fulfil their mission; a substantial proportion of their income being derived from trade; and the reinvesting of the majority of their profit/surplus into fulfilling their mission (Barraket et al. 2010). Incorporation of these key characteristics means that social enterprises operate differently to organisations within the public and private systems (Bull et al. 2008). Unlike the commercial logic applied by business in its fundamental pursuit of profit maximisation, the application of a commercial logic in a social enterprise results in a more than profit mentality (Ridley-Duff 2008). It involves, in contrast, a commitment to reinvesting the majority of profits back into the enterprise and thus towards achieving its key social mission/s (Ridley-Duff 2008). The pursuit of a social mission is a characteristic shared by both social enterprises and non-profits, however, the generation of revenue via market trading activity is an operational component that differentiates social enterprises from non-profit organisations: the latter, which as their name suggests, do not engage in market trading activities with the aim of generating profits. Research aims The need to balance social and commercial objectives within organisational decision-making is often a source of tension within social enterprises (Dacin, Dacin & Matear 2010): the combination of two vastly different objectives can hinder the formation of an integrated organisation due to the requirement to combine social and profit motives in a manner that

2 preserves the benefits of the for-profit structure (Dees & Anderson 2003), as well as ensuring the creation of social value. In addition, the incorporation of business models into the core operations of the social enterprise can increase sensitivity to market forces presenting both challenges and opportunities for the social enterprise (Dees & Elias 1994). The manner in which social enterprises reconcile the challenges associated with these dualities is a topic that is underdeveloped within the social enterprise literature. The aim of this paper is to address a call for further research in this area by exploring scenarios in which tensions arise within social enterprises in relation to their ability to achieve their social and commercial objectives, as well as to explore the strategies that are applied to reconcile these tensions in order to generate productive outcomes for the individuals and communities they support. The insights developed by this research may contribute to our understanding of the types of challenges that profit oriented businesses may face when seeking to meet social and commercial objectives in their operations, as well as the strategies that may be utilised to help mitigate and/or overcome the tensions that may arise. Research scope and method In order to achieve the research aims, the decision-making of six education and training oriented social enterprises was explored. Semi-structured interviews were undertaken with key decision-makers within each of the enterprises chosen, with a total of 10 interviews being conducted. Secondary sources of data such as annual reports, website material and confidential partnership documentation were collected and analysed. Data was analysed by using the NVivo software program, which enabled the researcher to organise and code data into thematic theme categories. Preliminary findings The preliminary findings indicate that balancing the social and commercial objectives created challenges for all the enterprises studied. The intensity and nature of these challenges varied between cases, and was influenced by a number of factors including the role of beneficiaries within the enterprise, as well as the maturity and size of the enterprise. Nature of the challenges experienced The data indicates that some key challenges were common to all enterprises studied. The first key challenge involved the ability to balance goals for profitability with the need to generate effective social outcomes. As is the case with business organisations, the sustainability of the enterprises studied was inextricably linked to the level of revenue generation achieved from their market trading activities. Many of the enterprises did not receive government funding in any form, and as a result, were heavily reliant upon market trading activities to survive. However, due to the nature of the model utilised, the enterprises were also strongly committed to the generation of effective social outcomes for the individuals and communities supported. As determined by this research, the pursuit of effective social outcomes often led to an outcome of diminished profit generation by the enterprise, which had a number of ramifications in relation to growth strategies, and in some cases, organisational sustainability. It is possible that this challenge may also be faced by businesses seeking to incorporate a greater focus upon social and environmental outcomes into their operations, and they may struggle with the reality that the pursuit of effective social outcomes may not always result in the generation of profits at levels previously experienced.

3 The combination of social and commercial objectives within the enterprises studied led to a number of challenges relating to the legitimacy of the enterprise when seeking to work with organisations from other social sectors. For one enterprise, their alignment with a particular organisation led to the enterprise s social objectives being undermined, thus affecting perceptions of legitimacy in relation to the enterprise s ability to uphold their social values and responsibility towards their beneficiaries. In other cases, the importance of retaining their social legitimacy in the context of collaboration led to the enterprise declining offers for partnerships from organisations within certain sectors, due to the perception that the partner lacked alignment with the social objectives of the organisation, and collaboration therefore had the potential to undermine the ability of the enterprises to support their beneficiaries. In many instances, the decline of offers for partnerships resulted in the enterprise sacrificing opportunities that involved substantial financial benefit to the enterprise. The requirement to consider organisational reputation in the context of collaboration is not a new concept for businesses, however, the addition of a social and/or environmental focus to their operations may require them to consider possible partners in terms of their contribution to both commercial and social organisational objectives. Strategies used to manage tensions between social & economic organisational objectives Discussions with enterprises as to how managed their competing objectives indicate that two types of strategies were utilised. The first involved challenging existing conceptualisations of profit within the social enterprise itself, and creating new dialogues illustrating the legitimacy associated with the ability to generate innovative social outcomes through the generation of profit. As one participant noted: the only way to get the social impact is via sustainability. So unless you re sustainable, it doesn t matter what social impact you re having. Virtually. You re going to get much more social impact over the long-run by ensuring sustainability and requiring sustainability as a fundamental criteria of operating the business (F2) The research revealed that many social enterprises had actively fostered the development of a shared internal understanding of the importance of profit generation in relation to the overall sustainability of the enterprise both in terms of operational viability and the achievement of social objectives. In many instances, it was the participants themselves as key decisionmakers who were challenging existing conceptualisations, and encouraging greater consideration of innovative application of profit oriented activities towards achieving social outcomes. Within these enterprises, the importance of flexibility had been recognised in relation to the ability of the enterprise to balance multiple objectives. In order to achieve both commercial and social outcomes, many of the enterprises were required to adopt an enterprise-wide perspective that accounted for the level of development of the enterprise, and the application of a broad perspective on balance. As stated by one participant: So, I think that balancing act, you can t necessarily say does this project balance? You have to say, on balance for the organisation, have we balanced those two elements (E1) From this statement it is clear that a more productive approach to balancing tensions between achievements of differing objectives is to avoid becoming focused on outcomes at a project level, and instead assess the outcomes at an organisational level according to understood organisational missions.

4 In addition to challenging internal conceptualisations regarding the combination of social and commercial objectives within social enterprise, the enterprises studied were also able to facilitate a balanced approach to their organisational objectives through the implementation of a number of activities and processes. A key mechanism utilised by all enterprises was the implementation of participatory management and decision-making practices that incorporated a number of stakeholders, including employees, beneficiaries, as well as board members. This mechanism has helped the social enterprises protect against mission drift, and ensure that the welfare of beneficiaries remained at the forefront of the enterprise s operation. In addition, consultation with board members was seen to be instrumental in assisting the enterprises studied to retain a focus upon organisational sustainability, and to consider the more strategic components of enterprise operation. A second key strategy utilised by the social enterprises studied relates to the management structure developed by the enterprise. Common to these enterprises was the implementation of structures that reduced the incidence of managers working within silos. Although dependent upon strong team work internally, this strategy required managers from all areas to consider the different aspects of the enterprise within their decision-making. This ensured that decisions were not made in isolation to the bigger picture objectives of the organisation meaning that both the commercial and social objectives were better able to be considered and therefore balanced within organisational decision-making. The final strategy adopted by many of the enterprises studied was their balancing of multiple objectives to ensure adherence to performance standards and decision-making criteria that accounted for both social and commercial outcomes. For some enterprises, measures of social performance were audited using outside parties as a requirement of funding, whilst for other enterprises, performance expectations were measured against criteria developed internally in consultation with a variety of stakeholders. The implementation of assessment criteria was considered by many of the enterprises as a necessary element to their management of the enterprise as it developed and grew, and helped to ensure that each objective was given equal priority within the processes and decision-making that occurred. Implications Through exploring the strategies applied by social enterprises when balancing their social and commercial objectives, this research has generated some valuable practical insights into a number of strategies that could be applied by businesses to help them manage the inclusion of both commercial and social objectives within their programs. It recommends that in order to assist the management of often competing objectives, businesses may gain some value from engaging in internal dialogue regarding the use of profits towards innovative solutions to social problems, whilst retaining an organisational level focus upon the manner in which social and commercial objectives have been achieved. In addition, a number of processes may be usefully implemented to allow the enterprise to manage the achievement of its dual objectives including ensuring participatory management styles and a non-siloed management structure. In addition, the implementation of performance measures and decision-making criteria may also be useful in ensuring that attention is focused upon the achievement of both commercial and socially oriented outcomes. Limitations and future research This research provides an exploration of social enterprise decision-making utilising six case

5 studies within the Australian education and training industry. This specific industry context, combined with the small number of cases explored, creates many opportunities for future research. In order to develop greater insights into the similarities and differences in the experiences of social enterprises when managing and reconciling the tensions between social and commercial objectives, further research is required into the experiences of social enterprises that operate within different industry contexts, and also within different national settings. It is also recommended that future research be conducted to determine whether business organisations do experience similar challenges to social enterprises when balancing social and commercial objectives, and if not, the types of challenges experienced and the strategies used to manage them.

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