Group Case
Assignment
Social Entrepreneurs:
Correcting Market Failures
David Gliebe, Ziyu Zhang,
Yawen Fan, Jacqueline Kirila
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Executive Summary
The purpose of these cases is to show that nonprofit organizations focus on compassionate
capitalism by social entrepreneurs creating companies that help to better lives of those in
developing countries. The report was comprised of three nonprofit companies and their founders.
The major findings of this study indicate that nonprofit organizations are equally, if not more,
efficient than for-profit organizations:
“Compassionate Capitalism” is capitalism that benefits the people of poor nations and uses
the profits earned to raise capital for the company while emphasizing the use of low prices and
keeping high quality to force competition. Project impact, OneWorld Health and Benetech have
used external impacts such as competition, government, legality, macroeconomics, and the
environment to grow their companies. For-profit companies are discouraged from starting
because nonprofit companies correct market failure and create a more competitive market to
enter into. Stakeholders create culture, cash, community, and customers which are all aspects
that the three case studies entail. The mutual benefit of the stakeholders is that the industry has
self-sustaining jobs while the employees and the company benefit from making money and both
have the desire to give back to the community as a whole.
The benefits of being a nonprofit organization include outside investors which can create
financial strengths, tax exemption, and increased accountability. A for-profit company’s main
goal is to increase profit by creating market failures to control the market, focus on making profit
instead of social benefit, and raising capital by becoming self-sustaining.
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Social Entrepreneurs: Correcting Market Failures
The discussion between nonprofit and for-profit organizations shows many benefits toward
becoming a nonprofit organization as opposed to a for-profit organization. All three of the cases
in this reading demonstrate this notion of nonprofit organizations being more beneficial and
easier to manage than a for-profit one. Project Impact Inc., OneWorld Health, and Benetech are
the three organizations that were discussed in this case study. David Green, Victoria Hale, and
Jim Fruchterman are the entrepreneurs who started each of these companies, respectively. They
all are prime examples of how social entrepreneurs can better society while also producing
profits.
David Green, founder of Project Impact Inc., started what has been termed as
“Compassionate Capitalism” for the early 21st century. “Compassionate Capitalism” is, in the
most simplistic definition, using the economic business approach of capitalism to make money,
but doing it in a way that benefits the people of poorer nations. Instead of exploiting the poorest
nations, as some capitalists do, this different approach to capitalism gives poor nations the
products that were generally too expensive for them to afford before. Interestingly, the money
generated from this helps to make the compassionate companies self-sustaining in order to
continue to help out these nations. David Green manufactured and distributed affordable, yet
high-quality health care products along with services to patients in the developing world (2). He
wanted to help out the poor nations by giving them products of equal value as those that are
available to the rich nations. In order to make the products more affordable to the consumers, he
had to find new ways to make the products more affordable with advances in technology.
Project Impact’s values were built upon a multifaceted solution that is generally referred to as
“Compassionate Capitalism”. The key aspects of these multifaceted solutions are as follows:
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demystifying the cost structure, harnessing expert knowledge, implementing differential pricing,
building sustainability, and creating the competitive landscape (5). By demystifying the cost
structure, a manufacturer can better determine how much it takes to manufacture a product
because things do not cost that much to make as is generally thought by people (5). Green used a
technique that he called forensic cost accounting which is determining exactly how much it
would cost to make the products available on the market. To do this, the manufacturer needs to
harness expert knowledge in order to determine how best to manufacturer a product by
decreasing the cost and time it took to make products (6). Then, once the most efficient process
has been determined, the differential pricing was implemented. This process is based on the idea
of using multi-tiered pricing for the consumers. This concept works because some people cannot
afford to purchase the product and others can; bringing care to the broadest possible crosssection of the population in the developing world.
In order to have the company be self-sustaining, the company Green founded promoted local
self-reliance and independence in all its initiatives (7). However, in order to have these plans
enacted, there needs to be a competitive landscape that may or may not need to be created. Once
David Green proved that there was a profitable market available in poorer nations, other
companies followed suit. Thus, there was competition created so that capitalism could exist
while giving consumers the best products for the lowest prices (7). Because of all these strategies
that Green created and implemented, the poor nations could receive first class products for a
lower class price. This works very well, but could be unfair to some with the differential pricing.
The upper class people will be paying more for products than the lower class which, as a result,
could inadvertently cause the 3 main social classes to balance into a single class. The social
enterprise businesses affect the competitors in one major way; by distributing high-quality
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products for the lowest possible price, the nonprofit organizations force the competitors to lower
their prices and thus, find cheaper ways to produce the same quality product or risk losing
customers. However, the nonprofit organizations are affected by external factors in order to
achieve “compassionate capitalism”.
The strategies taken by the three nonprofit organizations are influenced by four external
factors. These four external impacts on the nonprofit organizations include competition,
government and legality, macroeconomics, and the environment. Project Impact Inc., OneWorld
Health and Benetech have created a more competitive market for other organizations to enter.
They set the price for the resources that reflect the true costs of production. Price enables the
nonprofit organizations to compete in the market and help correct the market failures because
for-profit organizations may not be able to reap the benefits of the research and development that
these nonprofit organizations invest in.
Nonprofit organizations demystify the cost structure so the local governments are able to
correct the market failure. The local governments are able to understand the costs of making the
product within the industries from nonprofit organizations. As a result, they can set up the price
ceilings and quality requirements to fulfill the regulations in the industry. Government
regulations help correct the market failure because for-profit organizations may not be able to set
prices higher than the production costs.
Nonprofit organizations improve the macroeconomics in developing countries. The increased
use of technology to the local industries not only helps them to know the technology, but will
also help to create more jobs and promote productivity. This will eventually help developing
countries to improve the local economy help correct the market failure. As a for-profit
organization, their profits might be reduced in the process of development of the local economy.
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Nonprofit organizations continue to make efforts to drive down costs, which have positive
impacts on the environment. They rely on donations for revenues and then spend the revenue to
do research. Consequently, they must reduce production costs to maintain the budget. Nonprofit
organizations support technology that promotes innovation to drive down production costs in the
industry. Furthermore, nonprofit organizations efficiently use energy and other resources to
become more environmentally friendly. A positive outlook toward the environment helps the
nonprofit organizations to drive down the costs and take an advantage in the market. The
strategies that nonprofit organizations enact and use help balance the market failures and break
the monopoly market the for-profit businesses try to maintain. The four external impacts
discourage for-profit businesses from serving the market without changing the current status quo.
These external impacts also affect the stakeholders of the organizations.
In business, there are two main parties of interest: shareholders and stakeholders. There
are four groups of stakeholders: employees, customers, financial stakeholders, and communities.
Stakeholders play an important role in contributing to the company/organization. For a big
organization, cash flow is like the blood in a body; it is in charge of operations and procedures.
David Green’s nonprofit organization, Aurolab, receives most of its profits from Seva
and Aravind Eye Hospital. By producing low-cost and high quality lenses, Aurolab received
most of the market share from third world countries. These generally impoverished people
actually became the main customers of Aurolab and help to make profits and expand the
organization. Green focused on looking for potential employees as well. “We work with
individuals who have been at the top of their game in a given industry,” said Green (6). These
talented experts assist Aurolab to decrease the cost and amount of time to develop new products
(6).
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Victoria Hale’s company, The Institute for World Health, receives many donations from
charitable foundations as well, such as Bill & Melinda Gates Foundation (9). At the beginning of
the organization the Indian government became the primary customer, which contributed
dramatically to the development of the young organization. Communities also make
contributions as well. Yale University and University of Washington were in charge of the backup research of an effective drug (11). However, Jim Fruchterman’s company, Benetech, is more
self-sustaining than the other two.
Financial stakeholders help the founders establish their organizations and expand while
communities make efforts to maintain and sustain the organization. Community members must
work for the organization in order for it to function. The scientists and experts hired by Aurolab
were paid a competitive wage and guaranteed a royalty stream on the products they produced
and developed (6). Aurolab even tried to attract more companies into this industry to benefit
these communities. This is due in large part to competition which is best for the consumer.
Even though there is a lot of good these nonprofit organizations achieve, there are
limitations as well. Benefits may include being exempt from taxes on income and corporate
property, eligibility for public and private grants, flexibility to structure the company, increased
competition, tax deductions for anyone that donates, and positive corporate social responsibility.
The structure of a nonprofit company is that it is a legal entity on its own apart from founders
and the personal interests of individuals that are associated. Nonprofit organizations aim to help
the community and serve people apart from themselves and can increase competition within their
industry because of their low prices and high quality products.
The dependency on public donations can also be a limitation. If there are not enough
investors, then the company has no way to get started or continue running. Once a nonprofit has
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declared an industry to compete in, it is hard to expand and usually cannot compete in other
industries. The limitations of making profits affect the nonprofit organizations because the only
option is to reinvest profit back into the company. Also, the costs of starting a nonprofit can be
high so the amount of investments or investors must also be high.
The culture and rewards system in a nonprofit company is usually better than in a forprofit company. Nonprofits put people first which is most important in the value system. Serving
others by making products or services more affordable is rewarding to the company and the
investors within it. The core values, business strategy, and connection between them make
nonprofits ethical. When a nonprofit starts to lose the connection between its goals and strategy,
they can fall into a for-profit category. While nonprofit organizations do not make profit, they
must still raise capital. It is harder to raise capital for a nonprofit company than a for-profit
because the investors are not promised profits on the investments that they make. The Bill &
Melinda Gates Foundation provided a budget to help develop cures for developing countries.
This research and medication was made possible by OneWorld Health, but the donated budget
was the reason that they could start to research and use the medications that were needed (9).
Nonprofit organizations have helped out so many people by using “compassionate
capitalism”. More good can still be done with these organizations, but it is inspiring many new
young entrepreneurs to use the same values since there are profits that can be made in these
markets.
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Works Cited
Phills, James, and Denend, Lyn. Social Entrepreneurs: Correcting Market Failures (A). Case
Study. Stanford: Graduate School of Business Stanford University, 2005. Web.