Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 The Role of Socially-driven Enterprise and the Poor in Poverty Alleviation from a Business Model Perspective Chureerat Haq*, Ram Vemuri** and Faiz Shah*** Social enterprises are designed from different business models to attend social issues while operating business. This paper aims to examine roles of social enterprises and the poor for poverty alleviation from a business models perspective. The paper will adopt Alter's 2006 Social Enterprise Models as the theoretical framework, which categorizes business models into seven categories. The categories include entrepreneur support, fee-for-service, employment, service subsidization, organizational support, market linkage, and market intermediary. This paper will investigate the role of social enterprises, the role of the poor, the key driver and mechanism of poverty alleviation of each of the business model categorized. The investigation will extend to the literature knowledge of social enterprise's contribution to poverty alleviation from a business models perspective. 1. Introduction The social enterprise concept continues to evolve and develop, entering mainstream discourse as an alternative to traditional business models, particularly the one that has potential for stemming rising income disparities even in relatively stronger economies. This is largely due to its use of the power of the market to create economic opportunities for poverty-strapped populations. The 1990s saw widespread developments that characterize this trend. In particular, the widening acceptance of microfinance products across a wide range of economic environments, or the steady growth of business in fairtraded consumer products. It reflects the viability of socially driven business models and their potential for addressing economic, social, and environment issues. While the links between the increasing ubiquity of socially driven business and reduced levels of poverty may appear obvious from some vantage points, the fact remains that not much generalisable evidence is currently available on how the success of social business and the participation of the poor play a role in poverty alleviation. This knowledge gap is even wider when seen from the business model perspective. Using Alter‟s 2006 Social Enterprise Business Models as a theoretical framework, this paper examines the role of social enterprises and the participation of the poor in poverty alleviation from a business model perspective. As poor people are not homogenous and conditions and circumstances poor face are not the same in all countries and in all contexts, a practical question that arises therefore is which of the model is most appropriate under which conditions? _____________________ Chureerat Haq, School of Business, Charles Darwin University, Darwin, Australia, Chureerat.Haq@cdu.edu.au Professor Ram Vemuri, School of Business, Charles Darwin University, Darwin, Australia, Ram.Vemuri@cdu.edu.au Dr. Faiz Shah, Yunus Center AIT, Asian Institute of Technology, Bangkok, Thailand, fshah@ait.ac.th Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 Despite their recognised value, business models have not been studied extensively as an interdisciplinary research topic in social sciences and business studies (Teece, 2010). The focus of this conceptual paper is on the social enterprises and the poor to alleviate poverty from several business model perspectives highlighting aspects of what is emerging as a discussion on "enterprise-led development" by examining key stakeholder roles in how they might help or hinder success of a social business in leading individuals and the communities out of poverty. Within ongoing discussion on definitions, Yunus et al (2010) differentiate a conventional business from a social business. Both types of business are identical in that they seek to be profitable. Where they diverge is that while profits from a conventional business enrich shareholders, profits from a social business are pumped back to grow the enterprise in scope or scale, thereby serving to enrich whole communities. Thus, from a business model perspective it is how profit is managed that differentiates a social enterprise from a conventional one. When surplus from a social business drives expansion of the enterprise, the result is wider and deeper impact for poverty-mired target populations. As such, profits from social business are key growth drivers for sustainable development in society (Yunus, 2006). Understanding of models relevant to social business will process this study to inquiring into the dynamics of roles and relationships between social enterprises and their poverty-ridden target communities. Building an understanding the role of the poor, as key stakeholders in enterprise-led development will guide the many actors, including the poor themselves, as develop and implement initiatives towards to alleviate poverty. 2. Social Enterprises Business Models Category Various authors such as Katzenstein and Chrispin (2011) and Bull (2007) have attempted to categorise social enterprise business model from different purposes and perspectives. So far the work of Alter (2006) contributes a singularly appropriate categorisation of business models for the purpose of this paper. This paper sees social enterprise business models in seven mutually exclusive categories, although in practice overlaps and intersects may often be evident. This study will use the seven models as a point of reference to explore the roles and relationships that its key stakeholders establish, maintain and manipulate in each of the models so as to achieve a measure of poverty alleviation through business success. 2.1 Entrepreneur Support Models Social enterprises in this category provide business support and financial services to target population, which typical comprises poor people. The target groups then create value by selling their products and services in their local markets. Social enterprises that employ this model most commonly include microfinance institutions, and small & medium enterprises (SMEs) that deliver business or financial services. Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 In this business model, the major driver of poverty reduction is access to capital otherwise not available, such as through micro-lending, creating opportunity through financial inclusion triggering entrepreneurial prospects and micro-enterprises (Alter, 2006; McKague, 2012). Such social enterprises gain financial sufficiency from sales of their services to clients to cover costs occurred from services provided to their clients (Alter, 2006). The strength of this model is that it focuses on poverty reduction (Marr and Awaworyi, 2012; Srnec and Svobodova, 2009; Brau and Woller, 2004). Microfinance has been recognised as an effective entrepreneur support approach since more than thirty years (Marr and Awaworyi, 2012; Emmons, 2007). Recipients of microcredit support were traditionally viewed as an unprofitable segment due to high transaction cost, high risk and less substantial collateral (Marr and Awaworyi, 2012; Mishra and Nayak, 2004), and as such, remained financially and economically marginalised. Since the underlying mechanism for driving poverty reduction is the stimulation of economic activities for financial self-independence (McKague, 2012), including more and more people in the microfinance net has created significant value in a number of poor communities. This model allows the poor to assume the main role of being entrepreneurs (McKague, 2012). There is evidence to support that access to financial services not only reinforces economic wellbeing of poor people but also empowers women socially, with demonstrable positive impacts on household income, decision making, production, and children education (Baruah, 2010; Brau and Woller, 2004). Credits are often seen as having temporary poverty relief than long term poverty reduction such as asset creation and endure future economic and health related (Baruah, 2010). A study from Hulme and Mosley (1996) reveals consistent results that from 13 micro credits schemes in Asia, Africa and South America in improving incomes, most clients benefited from the schemes were near the poverty line, not the poorest (Mishra and Nayak, 2004). Among the main reasons are people with higher income have better access to market information, the poorer are often able to only invest in the least profitable entrepreneurial activities, and the limitation and saturation of rural markets (Mishra and Nayak, 2004). The unspecified loan is often utilised for immediate needy consumption purpose (Baruah, 2010; Mishra and Nayak, 2004). Although credit is important, it is the first step (Baruah, 2010). This model does not take account of the fact that not everyone want to become entrepreneurs (Mishra and Nayak, 2004). Without market knowledge and high value market access, many poor people from the same areas receive credits then sell same products for same markets (Mishra and Nayak, 2004). In developing economies where markets are highly imperfect and unstable, the major constraint is in fact not financing but business issues such as saturation, competition, product differentiation, competition information, and pricing uncertainties (Baruah, 2010). This is fortified to provide micro lending for entrepreneurship with a provision of business knowledge or training. Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 2.2 Fee-for-Service Model In this model social enterprises provide social services of their specialty directly to clients who include individuals, companies, communities or a third party payer (Alter, 2006). Social enterprises gain financial sufficiency from the fees they charge for services to pay expenses to deliver services as well as expenses from business operation (Alter, 2006). Examples of social enterprises employing this business model are hospitals, schools, universities, membership organisations, museums, power energy providers, and publishers. In sectors such as publishing and advertisement, the publishers provide affordable fee to social enterprise communities or the government to support social programs or social event activities. The primary role of the poor in this business model is being consumers or a third party and the key driver of poverty reduction for this model is low cost consumption and affordability (McKague, 2012). The value of this model is that many people can‟t afford basic necessities such as health and education, the fee-for-service business model provides more accessibility and affordability of living costs to the public thus reducing cost of living for the poor (Wallace and MacEntee, 2012; Maharaj and Paul, 2011; Hwang and Christensen, 2008). The bottom line of a demand of value from this model can be defined as the ability to provide quality features for a lower price for target population (Shortell et al., 1994). Using McKague (2012) as an analytical framework, it is apparent that the key outcome of poverty reduction from this model is the provision of access to innovative low cost products and services. The underlying mechanism of poverty reduction of this model is mutual value creation through fee charging and the provision of access to low cost consumer products (McKague, 2012). However, in business term, the challenge for social enterprises employing fee-forservice model is that, due to high operation costs for public services, only few are selfsufficient. Primary support, including financial and in-kind, usually comes from local government, charitable donations from private sector (Maharaj and Paul, 2011). It is critical for enterprises employing this model that receive public funding in part to balance external and internal generated resources in order to allow meeting its expenses while, irrespective of donor preferences, maintaining independency to determine its program priorities (Maharaj and Paul, 2011; Alter, 2006). 2.3 Employment Model In this model, social enterprises provide employment and training opportunities to their clients by operating business and employ clients (Alter, 2006). Work integration social enterprises (WISEs) is a form of employment model with slightly different names worldwide, provides hard skill, soft skill training, work experience and in-house business (Cooney, 2011). Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 Social enterprises that adopt this model are in manufacturing and retail services such as woodworking, mechanical repair, light manufacturing book stores; personal care services, domestic care services such as cleaning services; business services such as messenger services; food services such as cafés, restaurants and bakeries, and travel and entertainment services (Cooney, 2011; Ho and Chan, 2010; Alter, 2006). People using the service of this model are people with high employment barriers such as disabled, homeless, at-risk youth, ex-offenders, welfare to work recipients, mental health and drug addicts (Lysaght et al., 2012; Alter, 2006). Social enterprises gain financial sufficiency through selling products and services to market to cover costs which include wages and employment related expenses from hiring clients (Alter, 2006). Work is considered as one of the most effective tools for acquiring social and practical skills (Ho and Chan, 2010). The key driver of poverty reduction in this business model is the creation of opportunities for stable employment (McKague, 2012). The value of this model is through producing, marketing and selling products and services to the public while improving work related skill levels and employability, providing opportunities for engagement, increased income and social interaction of their employee with the public (Lysaght et al., 2012; Ho and Chan, 2010; Alter, 2006). As far as poverty reduction concerns, the major role of the poor in this model is being employees. In this business model, the poor are encouraged to create personal responsibility to find employment rather than passively given benefits, a transform from welfare dependency to self-reliance (McKague, 2012; Ho and Chan, 2010). However, studies show that the obtained employment is not sustainable and the work experience involves low skills sectors in an entry level labour market which does not develop into higher pay employment (Cooney, 2011). Many businesses with this model structure their staffing by allowing the enterprises to expand quickly with demand and cut back on hours when business is slow. This results in a small number of target populations being offered full-time or substantial part-time jobs and creates unstable working conditions (Cooney, 2011). Furthermore, the key outcome of this business model does not only contribute to poverty reduction but also social inclusion of disadvantaged groups in the labour market by strengthening the target population with hard and soft skills, a sense of belonging among marginalised groups, in particular people with disabilities and mental disorders, and develop their social and supporting networks with each other. That is, it addresses inequity and injustice existing in society (Zaniboni et al., 2011; Ho and Chan, 2010). One of the challenges for social enterprises employing this model is to try to compete with other businesses while employing people with barriers to work at full capacity in addition from having to provide better job conditions (Cooney, 2011). The main expenses in this model come from human resource costs linked with training and labour protection (Ho and Chan, 2010). This challenge has seen many social enterprises chose to survive financially by assisting less marginalised target (Cooney, 2011). Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 2.4 Service Subsidisation Model According to this model, the social enterprises sell products or services to external parties and use the profit to fund their social programs, hence social enterprises work as financing mechanism to serve social mission to subsidise or wholly fund social services (Alter, 2006). Social enterprises employing service subsidization can commercialise social services such as consulting, counselling, employment training or marketing, product-based retail businesses, and transportation (Alter, 2006). Similar to the fee-for-service model, generally the role of the poor in this model is being consumers and the key driver of poverty reduction in this context is low cost consumption, affordability, and accessibility (McKague, 2012; Chitonge, 2010). In theory, the value of social enterprises using this model is through providing their products and services to poor people by subsidization for more accessibility and affordability (Alter, 2006; Hwang and Christensen, 2008). Hence social enterprises with this approach help lowering the cost of living for the poor and also encourage or strengthen their target investment in, for example, education, health or employment (Alderman, 2002). In terms of social equation, from the equity perspective, service subsidisation addresses equity issue in that the approach ensures the poor have access to basic necessities at expenses they can afford (Chitonge, 2010). Policy implication has targeted food subsidies with the aim to achieve direct impact on poverty. The assistance to consumers for each subsidised food is demonstrated as the difference between the subsidised price of the food and what the target population would have to pay for this food in the free market in the absence of food subsidies. However, the pattern of failure from the approach has been criticised from perspectives that poverty reduction could have been reached with much lesser costs (Besley and Kanbur, 1988). Substantial rural poor do not receive equal benefits from food subsidies which are their main daily expenses compared to urban areas due to the fact that they either produce their own food and they trade directly from neighbours or they are cash constraints (Alderman, 2002). Since many poor people are producers, lower produce prices from subsidisation will lower their incomes hence more problems with poverty reduction. This problem is particularly severe in countries where production of food is more than the consumption (Besley and Kanbur, 1988). Developing countries have moved their trade policy away from heavily tax the major agricultural commodities and controlling prices to increasingly providing short-term subsidies for the commodities (Laiprakobsup, 2011). However, inefficiencies in the system such as corruption, unequal distribution, targeting ineffectiveness, leakage, and cost ineffectiveness prevent the poor from receiving full benefits from this business model (Baruah 2010). From poverty reduction perspective, generalised subsidies, where both the haves and the haves not consume, in fact creates more leakage to the rich. It is a trade-off of the approach (Besley and Kanbur, 1988). Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 2.5 Organisational Support Model Social enterprises in this model sell products and services to external markets, businesses, general public or target population (Alter 2006). Social enterprises with this model act as funding mechanism or income generator to cover expenses of the parent organisation‟s social programs. The primary role of the enterprise employing this business model is to generate profit to feed the parent organisation and business activities are unconnected from social programs (Alter, 2006). Social enterprises adopting this business model generate income to feed parent organisation so that target population of parent organisation can benefit from the operation. In the context of poverty alleviation, the poor are program recipients or program beneficiaries. The increased role of the poor could be fostered by the program objectives. In this model, social enterprise can expand into different segments. The key outcome of this business model depends on the results of the social programs set by the social enterprises. The separate identity from parent organisation also allows the flexibility of product proposition and operation. The advantage of this model is that the social enterprise can enjoy the diversification of products and services by choosing to operate in various businesses since the operation of the organisational support enterprise is separate from the operation of the parent organisation (Alter, 2006). Diversifying income sources has become a survival strategy for non-profits for long term sustainability due to a decrease in funding (Alymkulova, 2005). In competitive business environment, however, it is very challenging for social enterprises with non-profit parent organisations employing this business model in terms of income generation. It is due to crucial fact that this model is aimed to fund significant income hence the enterprise must create substantial profit (Alter 2006). To succeed, effective business management is highly required and the organisational culture of the business in non-profit organisations needs to be business-ready. Although this business model is employed widely among non-profit organisations, private companies should be encouraged to engage in poverty alleviation using this business model. With business-culture-ready, a company can create a social enterprise unit to generate income to serve important issue such as poverty. Government can play an important role in providing intensives to private companies aspiring to set up social enterprises. Intensives include tax benefits, access to business knowledge and training, distinct considerations in government contracts and so on. 2.6 Market Linkage Model In this model social enterprise gains financial sufficiency by acting as a broker to connect buyers to producers and vice versa, and charge a fee for the service or by commercialising social services such as trade relationships, market information and research services (Alter, 2006). Target groups for this model are individual small Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 producers, local firms or cooperatives. Sectors employing this model include importexport, market research and broker services. Trade associations, private sector partnership and business development programs use this model to help poor people. The difference between market linkage business model of social enterprises and standard business is that the market linkage business model adds value by linking poor producers with higher value markets and income from fee is used for self-finance to pay operating costs and support their social programs, instead of sharing profits among shareholders or business partners (Alter, 2006). The major role of poor people in this model is being small producers or suppliers, both individually and in a group. Producers or suppliers generally sell their products through traditional brokers or local village markets with low prices hence the value of their products is decreased by different services and transactions including local collectors, brokers, traders and retailers (Kaganzi et al., 2009). Common feature of successful linkage involves producers‟ participation in taking leading or sharing control in the action. Despite of having market linkers, strong leadership within the producer group is consistency shown to be one of the most important factors in identifying and maintaining market linkage (Gebremedhin et al., 2006; Kaganzi et al., 2009). It is critical that to be able to act as a broker, social enterprises employing this model must be resourceful in social, technical and marketing skills (Kaganzi et al., 2009). In this model, social enterprises are risk-neutral broker in that they do not trade on their own account (Klerkx and Leeuwis, 2009). To coordinate transactions, the linkers perform match making and brokering activities, clear the markets, coordinate buyers and sellers (Spulber, 1996). The key driver of poverty reduction in this context can be identified as market enhancement and growth (McKague, 2012). Market linkage model represents the need for linking agents who have a capacity to provide poor producers or suppliers with market awareness and knowledge to engage with business (Kaganzi et al., 2009; Gebremedhin et al., 2006). In this concept, the presence of the third party strengthens the business of the two parties (Khurana, 2002). 2.7 Market Intermediary Model Market intermediary model is the seventh and last related model assessed in this paper. Social enterprises adopting this model are usually in marketing, fair trade, consumer products, retails, agricultural products, food, and beauty products. Social enterprises in this model generate income to gain financial sufficiency through sales of their services to external markets, often overseas clients (Alter, 2006). Value of this model is created by purchasing client-made products at fair prices and then sold to higher value markets at a margin, facilitating product development, market access and credit services (Alter, 2006). In order to add value to the products and services, market intermediaries often transform products and manage transactions such Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 as designing, transporting, repackaging, labelling, assembling, pricing, marketing, inventory management, market and product information, certify and quality guaranty to build or maintain a good reputation, access to market and financial credit, and monitoring performance (Sodhi and Tang, 2011; Spulber, 1996). Hence, prominent role of this business model is the reduction of transaction costs by centralising exchange among different actors (Khanna and Palepu, 1999; Spulber, 1996). Similar to the market linkage model, the major role of poor people in this market intermediary model is being producers or primary suppliers who include individual small producer, firms or cooperatives. Since small producers can only produce on a small scale, it leads to high unit transaction costs. High value markets such as supermarkets and their wholesale suppliers often deal with large scale producers due to quality and quantity requirements. As a result, small producers cannot sustain or even have an access to markets (Poulton et al., 2010). One of the fundamental approaches for the market intermediary business model is to ensure poor people receive a fair treatment in terms of value of their products in markets and wages under safe working conditions. The approach encourages equal partnership and restructures relationship between producers, consumers and social enterprises themselves (Raynolds, 2002). This model theoretically places poor people neither as passive receivers of assistance nor as courageous free-market entrepreneurs (McKague, 2012). There are limitations to what poor people can achieve for themselves and the market intermediary business model is crucial to provide support in terms of maximising internal resources and gaining access to outside inputs (Khurana, 2002). Using McKague (2012)‟s pattern of analysis, it is identifiable that the key driver of poverty reduction of the market intermediary is market enhancement and growth. The underlying mechanism of poverty reduction in this context is the redistribution of social control to overcome market and government failures and this model represents intermediary who have a capacity to provide poor producers or suppliers with market enhancement and growth (McKague, 2012). The key outcome of poverty reduction in this model is market structural developments that create economically viable value chains (McKague, 2012). The improvement of product quality and certification demands substantial increase of labour and employment opportunities for local members for paid work are boosted (Spulber, 1996). However, social enterprises adopting this business model have been under criticism on the approach that they purchase products from suppliers. One example is from the coffee industry where fair trade has established good reputation in helping small producers. Raynold‟s (2009) work revealed that fair trade buyers have various approaches in buying products from producers. Some buyers use social mission driven approach to purchase products; products are purchased based on social, ecological and placed-based. Some social enterprises purchase their products fundamentally based on quality. Others have shifted the core social value of social enterprises into Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey,ISBN: 978-1-922069-54-2 commercially market driven enterprises by purchasing only products that are competitive in the markets. 3. Conclusion As an initial foray into what promises to be an extensive area of inquiry, this paper focuses on only the poor as stakeholders in social businesses, whether as owners or consumers, specified. It holds back attempting an analysis on other, which may well be a future area of research, expanding to examine the role of other primary stakeholders in poverty alleviation from a business model perspective. These possible subjects of primary stakeholder-focused research include government, investors and business partners, vendors and suppliers, customers and end-users, and groups or individuals that play a watchdog role, for example the Green Movement, or represent stakeholder interests such as Fairtrade International. Such further examination is certain to accelerate the understanding of how relevant stakeholders in social enterprise sector play drive or deter poverty alleviation. 4. Limitations and Future Research The operations of social enterprises are often more complex than what frameworks are able to capture. As such there is a high likelihood that this study will find a number of hybrids, with perhaps one or more business model dominant, but carrying within it, recognizable elements of others. This study therefore, will step away from exploring mixed business models. While this is a limitation to this study, it helps open the door to future research on hybrid or mixed social business models and their impact on poverty alleviation. The key aim of this paper, therefore, is to place the first marker on what might be a path to a clearer and informed understanding of determinants of poverty alleviation arising out of the way social business is structured and conducted. The practical action that this paper aims to propose in improving performance of social enterprises as catalysts of poverty reduction, remains at this stage, confined to a conceptual level, but this may not diminish the value of the discussion on business models as a jumping board for empirical study that involves an appropriate sample of key social business stakeholders. 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