Strategy and Society

LEARNING OBJECTIVES

Studying this chapter should provide you with the knowledge to:

1. Explain the difference between economic and social value.
2. Use the value net to identify a social-value organization’s key stakeholders and use that model to discuss opportunities for and threats to value creation.
3. Explain how economic-value organizations can create value through activities known as corporate social responsibility.
4. Categorize the major focus areas of social entrepreneurship and the challenges unique to each focus.

Paul Newman (1925–2008) has been described as “the man with the most famous blue eyes in movie history.”1 His act- ing career began with a role in the Broadway play Picnic. His big break in film came in 1956, when he played boxer Rocky Gra- ziano in Somebody Up There Likes Me. His career took off, and Newman starred in a number of films, often playing characters with a serious rebellious streak. By 1980, Newman had made a series of hit movies and had been nominated for four Best Actor Academy Awards. He would win that award in 1987 for his role

as Fast Eddie Felson in The Color of Money. He would win the Academy’s prestigious Jean Hersholt Humanitarian Award in 1994 for his work in community activism and philanthropy.
Newman got a serious start in philanthropy during the Christmas season of 1980. Newman and his friend A. E. Hotchner bottled Paul’s homemade salad dressing in empty wine bottles and gave them away to friends and neighbors. When the recipi- ents returned hoping for refills, Newman and “Hoch” knew they had a high-quality, winning product. In 1982, Newman launched “Newman’s Own” salad dressing and formed a company of the same name. Pasta sauce came on the market in 1983, followed by a host of consumer products. As of 2018, the company offered products across a number of categories: salad dressings, BBQ sauce, candy, chocolate, cookies, olive oil and vinegar, pizza, salsa, sauces, coffee, and snacks, including popcorn.2 Newman’s Own competes against some of the world’s premiere food brand compa- nies, including Nestlé, Kraft-Heinz, and Conagra brands.
Newman’s Own produced high-quality products, but Paul Newman had bigger things in mind than just creating a business. Whenthe company’sfirst year profitsof $300,000 came in, Newman exclaimed “let’s give it all away to those who need it.” The company continues to donate 100 percent of profits to charity. Newman summed up his attitude about business and philanthropy by saying that his company engaged in “shameless exploitation in pursuit of the common good.” As of 2018, Newman’s Own had donated over half a billion dollars, $535 million, to charita- ble causes. The company transfers its profits to the Newman’s

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Own Foundation, which then distributes grants to charitable organizations working in four focus areas: encouraging philan- thropy, children, empowerment, and nutrition. One long-time recipient is The Hole in the Wall Gang Camp, a charity founded by Newman to provide children with illnesses a great summer camp experience.
When Newman passed away in late 2008, he transferred ownership of the company to the foundation. The goal was to continue model of 100 percent of profits in perpetuity; however, that arrangement ran afoul of an obscure provision of the US tax code that prohibited private foundations from owning com- panies. Paul had selected Bob Forrester to run Newman’s Own, and Forrester had five years, plus a five-year extension, to come up with a solution before the IRS hit the foundation with a mas- sive penalty. The solution Forrester settled on? Convincing the US Congress to change the tax law to create a new business form, the Philanthropic Enterprise, a company wholly owned by a founda- tion, which would receive 100 percent of the company’s profits to donate to charity.
Forrester needed all ten years. Forrester worked with several advisory firms to draft language that would create the new busi- ness entity and avoid the problems with foundation ownership

that Congress had prohibited in 1969. Forrester found individual members of Congress sympathetic to his cause, but he faced two significant hurdles. First, many in Congress were loath to pass legislation that only benefited one company. Forrester and his team spent years identifying a group of other companies, about two dozen in all, who had adopted the 100 percent of profits to charity model. Second, for many years, Congress had a hard time passing any legislation. It appeared for many years that Washington grid- lock would kill Newman’s dream.
On February 9, 2018, days after the Foundation announced it had given away $500 million dollars and just weeks before Forrester would have to begin a set of ownership changes, Congress included the Philanthropic Enterprise Act in a bipartisan budget deal. What had been dubbed as the “Newman’s Own Exemption” became law.3 Newman’s Own Foundation could continue its great work. Everyone breathed a sigh of relief, but attention soon turned to fostering the growth of other philanthropic enterprises. The foundation’s list of businesses that gave 100 percent of profits to charity continued to grow, and over time its members saw their own businesses, and charitable donations, grow. Newman’s Own looked to evangelize Paul Newman’s promise to “give it all away” to other companies and entrepreneurs.

This chapter discusses how strategy applies to social-value organizations. You’ll see that the tools of strategy, from industry and environmental analysis to the methods firms use to effec- tively implement strategy, can help social value organizations understand their operating envi- ronment. Models such as the five forces and the 7 S model can help a diverse set of organizations formulate and implement effective strategies even when an economic competitive advantage is not the main goal of the organization. The second section of the chapter introduces you to the emerging field of social entrepreneurship. Social entrepreneurs have a passion and clear mission to create social value and often combine the logic of business, sustainable profit mak- ing, and efficient operations with that passion to create new and innovative approaches to benefiting society.

Strategy and Social-Value Organizations

social entrepreneur An individual or organization that uses free-market principles and creates for-profit businesses with the goal of creating shared value.
shared value The simultaneous creation of economic value (for the business) and social value (for the larger community).
economic value The creation of income, wealth, and other economic outcomes for individuals and organizations.
social value Improvements in the noneconomic elements of individuals’ lives and community well-being.

Paul Newman and Bob Forrester represent a new type of individual working to advance social causes around the world: the social entrepreneur. Social entrepreneurs use free-market principles and create for-profit businesses with the goal of creating shared value, which is economic value for the business and social value for the larger community in which the business operates.4 Economic value focuses on the creation of income, wealth, and other economic outcomes for individuals and organizations. Social value, by contrast, concerns improvements in the noneconomic elements of individuals’ lives and community well-being. Social value includes minimizing negative conditions such as blight, oppression, pollution, and violence, as well as enabling positive outcomes such as education and literacy, mental and physical health, political voice and inclusion, and recreation and opportunities for self-expression.5
The notion of shared value means that organizations, and the communities in which they operate, can gain both types of value: improvements in both economic and social welfare. Profit and social welfare are not substitutes that managers have to trade off, but complements that reinforce each other. Business firms must bring in more revenue than they spend in costs; otherwise, they won’t survive. Political leaders and other social actors must improve the living conditions of their constituents, otherwise the politicians might not survive.

Creating economic value is critical, because the business of business is to make a profit. Smart managers, however, realize that creating social value may be a way to bring in more revenue or spend less on costs. Creating social value may increase revenue through increased customer loyalty, brand equity, and willingness to pay, or it may reduce costs through efficient supply chains and engaged, productive employees. Social value may be a source of strategic advantage.
Bob Forrester and other social entrepreneurs can use the tools of strategy to help them make a difference in the world. Indeed, a deeper look at Newman’s Own reveals an organization that intimately understands its markets, environment, and customer needs. The organization operates with a clear set of values and principles that underlie a unique set of valuable and difficult-to-imitate resources and capabilities to fight poverty. Even though Newman’s Own Foundation gives away money instead of making it, the organization uses all the tools of strategy you’ve learned about in this book.
While social entrepreneurs such as Forrester attempt to blend for-profit business principles and a social mission, many other organizations focus exclusively on creating social value. For example, the Bill & Melinda Gates Foundation “focuses on improving people’s health and giving them the chance to lift themselves out of hunger and extreme poverty.”6 The Gates Foundation works to give away money, not to earn it. Other social value organizations include the not-for profit healthcare sector: hospitals, nursing homes, hospice care, or other community-based health agencies. Social value organizations also include public and private universities and col- leges, secondary schools, faith-based organizations, many arts and community development organizations, and museums. A recent study found that more than one in ten US workers are employed in the not-for-profit sector, and that this sector of the economy continues to grow.7 As the social-value sector of the economy continues to develop, and as more for-profit organizations become concerned with the creation of social value, it makes sense to ask about the role of strategy in this sector.

The Tools of Strategy and the Creation of Social Value

You might think that a private university, a not-for-profit hospital, or a corporate foundation represents an organization so radically different from businesses such as Google, General Electric, or Disney that the tools that help these companies create competitive advantages just don’t apply. In one sense, you’re right: Social-value organizations don’t try to create unique and sustainable economic advantages. Social-value organizations work to create sustainable stakeholder advantage. That is, they hope to create organizations that consistently garner resources from or provide services to key stakeholders (e.g., donors, volunteers, students, or clients) that allow them to fulfill their social mission over time.8
Sometimes, these sustainable advantages result in a unique and different organization with inimitable resources, but other times this means becoming part of a sustainable and successful ecosystem, or group of related organizations targeting the same set of clients or social problems. Let’s consider how some of the tools we’ve discussed in previous chapters, and a new one, can help social value organizations create sustainable institutional advantages.

External Analysis and the Value Net
Consider, for a moment, your university. It competes, for example, in the market for students against other universities, public and private, but also against small liberal arts colleges, com- munity colleges, vocational schools, and the option of not going to school. Understanding the five forces that drive industry structure can help university leaders create and maintain a

sustainable stakeholder advantage The ability of an organization to consistently gather resources from, or provide services to, key stakeholders such as donors, volunteers, students, or clients.

FIGURE 14.1 The Value Net

value net A model of value creation that describes how an organization interacts with others in its environment to create value. The value net consists of four elements: customers, suppliers, competitors, and complementors.
customers Individuals or groups that purchase, or receive, the outputs of the organization.
suppliers Individuals, groups, or organizations that provide important inputs for the organization.
competitor An individual or organization that makes
customers value the organization’s output less because it offers its own product or service.
complementor An individual or organization that makes
customers value the organization’s output more because of its product or service.

sustainable stakeholder advantage. The categories in the Five Forces model can help university leaders plan and implement an effective strategy to “win” in the market for higher education as they interact with suppliers, such as high schools, customers such as parents and recruiters, the substitutes of community colleges and vocational training programs, and potential entrants such as for-profit universities or online-only universities.
In the five forces model, we usually think of stakeholders playing a single role in their interactions with the organization. Think for a moment about alumni, a group you hope to join, and how they interact with a university. Alumni supply donations and their children become potential students and potential tuition payers. They are also important customers when they attend events such as football games or symphony concerts. Or think about other universities. They may be competitors on the athletic field or in the hunt for donations, but if you look closely, you’ll see that your university often partners with its rivals to create synergies in areas such as library collections, coordinated course offerings, or joint research projects among faculty members. How can university leaders effectively think through these nuanced and complex relationships as they formulate and refine strategy?
Strategy scholars Adam Brandenburger and Barry Nalebuff created the value net model to help answer that question.9 Interestingly, Brandenburger works at Harvard and Nalebuff at Yale; they highlight the role of these universities as both competitors and complementors. Figure 14.1 displays the value net, and each of the four compass points is described next.
Each stakeholder plays one, or more, of four roles in the value net. Customers purchase, or receive, the outputs of the organization. Suppliers provide important inputs for the organization. A player is a competitor if customers value the organization’s output less when the competitive product is available. A cross-town university with a strong business school acts as a competitor because recruiters may perceive that it provides a better education and those recruiters devalue your degree. Conversely, that university plays the role of complementor when customers (such as recruiters) value an organization’s output more when that product is

available. That rival university may have a summer program in international studies that you participate in to make your business degree more valuable.
The value net helps social-value-focused organizations, for two reasons. First, most of the stakeholders they interact with play multiple roles, and second, treating a stakeholder as a “single-role player” can lead to poor decision making. Harvard and Yale compete vigorously for the best students and government grants, but they also complement each other through joint research and teaching collaborations, and by working together to strengthen the Ivy League athletic conference. If Harvard treats Yale as a pure competitor, it will forgo a number of opportunities to leverage Yale’s skill through collaboration. For example, researchers from both universities may team up to be more effective in receiving research grants from the National Science Foundation or National Institutes of Health.10

Internal Analysis: Resources and Capabilities
Cutting-edge healthcare organizations view the healthcare process in terms of factory produc- tion and have learned to look at their core “manufacturing” work to improve efficiency and effectiveness. Hospitals across the nation, and even the world, have begun adopting manufac- turing techniques such as lean manufacturing or Six Sigma quality programs to improve patient care.11 Using the value chain to understand how, when, and where social value gets created has helped hospitals create sustainable stakeholder advantages.
Successful social value organizations build from a strong platform of clear values and priorities to develop a set of resources and capabilities that result in value creating activities. Utah-based Intermountain Health Care, for example, looks to its core values of account- ability, excellence, and mutual respect to build nationally recognized competence in evidence-based medicine that has led to dramatic improvements in patient care and health outcomes.12

Cost Leadership, Differentiation, and Innovative Strategies
It’s hard to imagine Harvard or Yale competing as a low-cost provider, but all private universi- ties face immense pressure to compete on price, at least within their peer group. Many dedicate significant fundraising energy and parts of their endowment to lower student costs through scholarships and other aid. Some private universities such as Stanford University in engineering

Strategy in Practice
Detroit Mercy Law School—Creating Unique Value Development, became dean in 2002. He jumped at the chance to
for Students become dean at such a small, obscure school because “it’s the schools that are not as well known that are open to change.”
Of the 202 accredited law schools in the United States, Detroit’s He spent the next several years building a unique curriculum Mercy College of Law ranked somewhere close to the bottom of the designed to help Mercy graduates prepare for and understand the list. In fact, U.S. News & World Report ranked the school 184th a few actual work lawyers did every day, as opposed to the theory-heavy years ago, and law school admission websites offer similar rank- curriculum found at top law schools. Gordon recruited attorneys ings.13 What would entice a student to apply to Mercy over Harvard, at the country’s most prominent firms, such as the legendary corporate Stanford, Yale, Duke, or Michigan? Part of the answer lies in Mercy’s law firm Skappen Arps, to help design and teach this new unusual access to top law firms as first jobs for its graduates. The curriculum. Students received a solid, practice-oriented education school, one of six law schools in the state, boasts that the managing and, most importantly, they got face time with key players at partners of one-third of Detroit’s largest law firms hail from Detroit the nation’s premier law practices. That face time often ended in Mercy College of Law, more than double its expected contribution.14 internship—and eventually job—offers for talented Mercy students. Mercy owes its success to former dean Mark Gordon and his Mercy targets students who might not be able to attend a top-tier innovative program to attract the biggest law firms to recruit at law school and creates real value for them by providing a very prac- Mercy.15 Gordon, a graduate of Harvard Law and alum of a major tical legal education. A recent survey ranked Mercy in the Top 25
New York law firm and the US Department of Housing and Urban Law Schools in the Midwestern region.16

and design, or Babson College in business entrepreneurship, choose to compete by continually innovating and updating their curriculum. Many private colleges and universities attract students through differentiating to create some type of unique value. The 302 faith-based colleges in the United States represent one differentiation strategy: building a curriculum based on a unique set of moral values. The first Strategy in Practice feature describes a private college that seeks to create unique value for its students.

Corporate Strategy and Alliances
Fundacion Paraguaya’s agreement to purchase and run the San Francisco Agricultural School represented a form of corporate diversification as the organization entered a new product market. The school allowed the organization to exploit its skill in providing programs and interventions to help individuals, in this case youth, escape poverty. The school significantly expanded Fundacion Paraguaya’s resources and capabilities; indeed, the organization had to learn how to administer a traditional educational curriculum and incorporate a new set of concepts and skills to help students become entrepreneurs. Both Fundacion Paraguaya and the SFAS use alliances to increase their impact. Fundacion Paraguaya joined forces in 2007 with Vision Spring,17 which provides low-cost eye exams and sells reading glasses to people in the developing world. Its innovative sales model uses local entrepreneurs to perform exams and distribute glasses. The Vision Spring “optical shop in a backpack” concept allowed Fundacion Paraguaya to supplement its micro-credit activities and bring better vision to rural Paraguayans.

corporate social responsibility Activities of companies designed to further some social objective that lies beyond the direct economic interests of the organization.

Implementation and Governance
Perhaps the greatest difference between an economic-value and social-value focused organization comes in the area of governance. As we’ve explained throughout this book, the shareholders of the firm represent either the primary or an important beneficiary of the outputs of economic-value organizations. The focus on shareholder value provides managers with a clear decision rule to guide their actions.18 Social-value organizations, however, do not answer to shareholders but instead answer to multiple powerful stakeholder groups. Universities must answer to students and families for the quality of the curriculum, faculty members for the caliber of research support, donors for the efficient and effective use of resources, and boards of trustees or local governments for their role in the larger community.
Because of the outsized role of stakeholders, governance issues play an important role in the strategic management of social value organizations. Organizational leaders and community members take special care to create a board that provides the organization with expert advice, legitimacy among multiple community stakeholders, and an active sensitivity to the needs and concerns of those groups.19 Alignment between the organization and its multiple stake- holder audiences proves to be a constant challenge for social-value organizations. Models like the McKinsey 7 S framework can help strategic managers create and maintain effective alignment, just as they can for business firms. Similarly, the models of change we introduced in Chapter 12 apply to the challenges these organizations face when contemplating the need for strategic change.
In this section, we’ve considered how the tools of strategy can help managers and leaders of organizations whose primary purpose is the creation of social value. We have offered a simplistic view of the organizational world as having a group whose purpose is the creation of social value and another group, businesses, working to create economic value. That simplistic picture might have been true many decades ago, but the changing and increasingly complex real world in which we live means that all organizations must focus some energy on creating economic and social value. In the next section, we’ll introduce you to two ways that business firms work to create social value: corporate social responsibility (CSR) and social entrepreneurship.

Strategy and Social Change
Economic-value creating organizations and businesses face increasing pressure to prove that their activities benefit more than merely their shareholders or direct stakeholders.20 Increasingly, members of the larger society want to know that businesses create social, not merely economic, value. Business leaders have taken two approaches to meet these demands: They have incorporated demands for corporate social responsibility (CSR) into their existing operations or they have tried new and innovative solutions to help solve society’s most intractable problems. In this section, we’ll focus on CSR; in the next section, we’ll look at a group of new and innovative models known collectively as social entrepreneurship.

Corporate Social Responsibility (CSR)
The term corporate social responsibility refers to activities that companies engage in that are designed to further some social objective and that lie beyond the direct economic interests of the firm.21 CSR is closely connected to the logic of the stakeholder model of corporate governance we discussed in Chapter 13. Firms have several obligations they must meet in order to survive, obligations that can be arranged in a pyramid to highlight their interdependence.22 Figure 14.2 shows this pyramid and the four fundamental social responsibilities of business. First among these is a firm’s economic responsibility. Unless the firm produces profitable products and becomes a sustainable and ongoing contributor in society, all its other responsibilities fade away. To survive, a firm must meet its economic obligations, but to thrive and grow, the firm must meet both its legal and ethical obligations. Legal responsibility means that man- agers and all those who make up the firm obey the written and codified laws of the countries in which they operate. The obligation of ethical responsibility binds managers and others to obey the unwritten but powerful ethical standards, norms, and values that underlie social life. The fourth obligation of the firm appears as an obligation only if we view the firm as an active member and contributing citizen of the communities in which it operates. Philanthropic responsibility implies that a firm has an obligation to give back in some way and contribute to strengthening the fabric of its local communities, as well as the larger society. The ways a firm meets its first three obligations are clear and straightforward: Businesses make profits, obey the law, and conform to ethical standards. A firm can fill its philanthropic responsibilities in
many ways, and managers enjoy substantial discretion about how to fulfill those obligations.
Philanthropy means to act in a way that promotes the good or well-being of others in the form of a gift.23 Firms engage in traditional philanthropy when they make donations of money, employee time, or products or services to local community organizations. If you attend

economic responsibility A firm’s obligation to generate economic profits.
legal responsibility A firm’s obligation to obey the written and codified laws of the countries in which it operates.
ethical responsibility A firm’s obligation to abide by the unwritten ethical standards, norms, and values of the communities in which it operates.
philanthropic responsibility A firm’s obligation to contribute to the enhancement of the
communities in which it operates.
philanthropy Gifts that promote the good or well-being of others.

FIGURE 14.2 A Firm’s Social Obligations

cash donation A monetary gift as one organization transfers money to a recipient group.
in-kind donation Philanthropy accomplished as one organization transfers product, employee
time, or other services to a recipient group.

social entrepreneurship The use of innovative organizations and business models to create social value.

symphony concerts, operas, or other art and cultural events, you’ll often see a list of corporate sponsors. Some of these contributions are direct cash donations; others are not. When a business allows its employees to work for a day with pay for a local United Way agency, for example, it’s also making a philanthropic donation, but it’s an in-kind donation of services. After Hurricane Katrina hit New Orleans and the Gulf Coast, Walmart donated 1,500 truckloads of relief supplies to affected residents—another type of in-kind donation.24

CSR and Firm Performance
Stakeholders want to know about a firm’s commitments to the larger society in which it operates, and they want more than just feel-good stories about a few of the firm’s activities. The Global Reporting Initiative (GRI) provides firms and stakeholders with an objective way to assess a firm’s social performance. The GRI was founded in Boston in 1997 by a group of business activists concerned about how businesses performed in relation to the natural environ- ment.25 The first version of the GRI guidelines appeared in 2000.
The GRI has developed a set of reporting guidelines firms use to produce an annual report, much like the 10K filing that US firms provide for their shareholders. The GRI standards cover many areas of a firm’s performance, including economic impacts for shareholders, stake- holders, and communities.
The GRI guidelines also cover a firm’s environmental performance along dimensions including energy use, biodiversity protection, and levels of emissions and waste. The social category of the GRI report holds firms accountable for their labor practices, compliance with human rights standards and goals, contributions to local communities, and the production of safe and responsible products. More than 95 percent of the world’s largest companies regularly create and publish sustainability reports based on the GRI guidelines.26
CSR activities work for the benefit of society and its many stakeholder groups without the goal of creating profits for the firm, but a lively debate centers on the question of whether firms do well when they do good.27 Do firms profit from their CSR activities?28 What does the evidence say? In one very comprehensive review of more than 100 research studies, the evidence comes out decidedly mixed.29 In a little more than half of the studies, CSR seemed to improve financial performance, but in a little less than half, CSR either had no effect or seemed to decrease earnings.
Recent research suggests that CSR activities help preserve a company’s resource base when things go wrong. These researchers believe that the positive reputation for creating social value through CSR acts like an insurance policy that protects the underlying economic value of the firm when accidents or other negative events occur.30 Several academic studies suggest that CSR might have an insurance-like effect that preserves shareholder value.31
CSR, when done thoughtfully, creates value for the societies in which firms operate. Some- times, however, the traditional tools of CSR, such as philanthropy, involvement in particular social issues, or direct stakeholder initiatives, prove ill-suited to attack some of society’s most vexing and intractable problems, such as the fight against global poverty. In these instances, companies or individuals often create innovative and entrepreneurial approaches to these problems and fall under the rubric of social entrepreneurship.

Social Entrepreneurship
Martin Burt, founder of the micro-credit organization Fundacion Paraguaya, can be described as a social entrepreneur. Social entrepreneurship uses innovative organizations and business models to create social value.32 Social value is created in two ways: first, by reducing social harms, and second, by increasing the level of social benefits. Fundacion Paraguaya enhances social value in both ways because each student who graduates from the San Francisco School has the skills to eliminate poverty in her own life, and she takes her skills and training to other communities to build better farms and help develop and improve the Paraguayan economy.

Social entrepreneurs may or may not use business models and market principles to solve social problems. The activity is entrepreneurial in the sense that social entrepreneurs look for and implement new and innovative approaches in their organizations. Social entrepreneurs may come from any field, including the government, faith-based organizations, large corporations, and even traditional entrepreneurial ventures. The challenges of using new and innovative models mean that many of these organizations must use market principles and business logic in order to survive. Finding philanthropic donors or government grant makers willing to bet on untried models often proves to be a very difficult task. For example, Burt realized that in order to meet the school’s goals, it had to become a financially self-sustaining business. Similarly, Vision Spring incorporates a direct selling model into its objective of eliminating vision problems among the poor.

Types of Social Entrepreneurship
Whether they employ market principles or rely on traditional philanthropy, social entrepreneurs create value in one of three ways: They attempt to build capacity, they sell products or services, or they drive institutional change.33 Capacity building entails transferring the ability to effectively perform tasks from one organization to another. Fundacion Paraguaya builds capacity in its students through the transfer of knowledge and skill through the San Francisco school experience.
Most social entrepreneurial ventures that build capacity rely on education and training as a key element of their business model. Products and services are usually custom-designed or tailor-made for the market niche the entrepreneurs hope to influence. Social entrepreneurs have to solve problems of logistics and distribution, but also packaging, pricing, and marketing. Learning how to design, price, and deliver goods and services often necessitates new business models. Hindustan Lever, the Indian subsidiary of Unilever, implemented a business model that brought its products to women in rural communities while providing income opportunities for its local salespeople, women from the local communities where products would be sold.34 Our Strategy in Practice features highlight two socially entrepreneurial organizations working to bring change through new products and services.
The final type of social entrepreneurship is institutional change, which means that entrepreneurs strive to change the way people and groups think about problems, and they work to create or change social institutions—from government policies to social values and norms. Institutional change agents typically focus on large-scale social problems that have proven difficult for governments or other social actors to solve. Ohio-based Cardinal Health Foundation, for example, provides funding for a number of social entrepreneurs fighting the scourge of prescription drug abuse. Cardinal does not build capacity, nor does it sell a product or service, but rather, it works to create change within the healthcare sector as a whole.

institutional change When entrepreneurs strive to change the way people and groups think about problems and they work to create or change social institutions—from government policies to social values
and norms.
capacity building The transfer of skills and abilities from one organization to another.

Strategy in Practice

Community Enterprise Solutions and communities reduce the harms of open-fire cooking and provide a much healthier environment. CES wanted to hire local
Greg Van Kirk spent the early days of his career as a rising star in entrepreneurs to take the stove into outlying communities and
the investment banking world.35 After reading a biography of sell them. The price of the stove meant that most entrepreneurs Muhammad Yunus, Van Kirk decided to change careers. “I had just could not afford to purchase stoves and hold them in inventory turned 30 and knew I wanted to work in economic development, prior to sales.
but I knew nothing about the field. I joined the Peace Corps to gain CES developed a pioneering new model, micro-consignment,
grassroots experience.”36 Van Kirk worked in Guatemala among indi- to solve this problem. CES consigns, or lends, the stove to the viduals and communities trapped in a cycle of poverty and despair. entrepreneur, who then repays CES for each unit sold. The micro- At the end of his Peace Corps stint, Van Kirk joined with George consignment model fueled the sales of stoves because it solved the “Bucky” Glickley to form Community Enterprise Solutions, or CES. cash flow problem for entrepreneurs and shifted the inventory risk Their first product was a concrete woodstove that local resi- to CES. The micro-consignment model worked well enough that dents could use to replace cooking over an open fire. When used CES now offers its partners a number of different products on con- indoors, open-fire cooking creates a number of health risks for signment and the organization is now exporting the model to other
adults and children. The stove would help individuals, families, Latin American countries.

Strategy in Practice
Kinder, Lydenberg, and Domini, and the Creation Domini began researching the topic of social investing and
of Socially Responsible Investing37 published a book on the subject in 1986. Her publisher happened to
be working on another book by a former playwright turned corpo-
Social investors choose which stocks, bonds, or funds to purchase rate social activist, Steve Lydenberg. The two became friends and based largely on the social performance of a particular company. colleagues when Lydenberg entered the investing world, working Social investing became popular in the 1970s as more people began for Franklin Research, one of the first companies to have its own to see that the values they supported in principle often disagreed social investing group. Lydenberg and Domini faced skeptical and with the way they allocated their investment dollars. In 1971, the often hostile colleagues and bosses who believed that anything first socially responsible mutual fund, the PAX World Fund, began that screened out potential investments based on social criteria trading. The fund was founded by two Methodist ministers who would sacrifice financial performance. Socially responsible invest- answered a parishioner’s call for mutual funds that excluded weaping, they believed, would come only at the cost of a lower finan- ons makers. Would it be possible to induce investors to purchase cial return.
on positive social criteria, such as a company like Ben & Jerry’s that In 1989, Lydenberg and Domini, working in concert with was committed to local development? That question motivated Domini’s then-husband Peter Kinder, decided to test that assumption Amy Domini and her colleagues to develop an innovative financial . They developed the Domini 400 stock index, a group of com- product: a mutual fund composed of companies engaged in positive panies that closely tracked the S&P 500 but contained companies social behaviors, not merely those that avoided certain activities. with a clear social conscience. Looking backward, they discovered When Domini began her career as a stockbroker at the Boston that the Domini 400 actually outperformed the S&P 500 through the
firm of Anthony-Tucker in 1975, the options for socially responsible 1980s. So they formed a firm to create and market a socially responsible investing were very limited. Domini found that many of her clients mutual fund to other investors. Today, Domini Social Invest- wanted their investment portfolio to reflect their values, but had ments has more than $1.6 billion under management.39
little way to do so. She recalls: As a part of creating the fund, Kinder and Lydenberg did extensive research to rate companies on their social performance. The
I found myself being questioned by clients saying, “Why rankings became a valuable investment tool that the firm of Kinder, would you show me this? My father died of lung cancer,” Lydenberg, and Domini sold throughout the investment community or “Why would you show me that? I would never consider . For many years, the KLD database provided the most reli- that.” I was feeling that it would be a good self-defensive able and objective ratings of the social performance of more than move to ask people first if there was something they 2,000 companies. The firm’s data have been the source material would not want to invest in. Lo and behold, virtually for a number of academic studies looking at corporate social per- everybody had something. So I realized that I had to learn for mance in addition to providing valuable advice to institutional more about this. But when I started looking around, there and retail investors for over two decades. KLD was acquired by Risk was very little on the subject.38 Metrics in 2009 and is now a part of the MSCI group of companies.

social bricoleur A social entrepreneur who creates something new through the combination of diverse and different elements.

social constructor A social entrepreneur who builds something that did not exist before.

Skills of Social Entrepreneurs
The different value creation strategies for social entrepreneurship each require a unique set of organizational skills and leadership abilities. Figure 14.3 matches the three types of social entrepreneurship with its corresponding leadership skill set.40 Organizations focused on capacity building need a leader who is a social bricoleur, one who can successfully bricolage, a French word that means creating something by combining diverse and different elements, into a new setting. Martin Burt, for example, combined the traditional Paraguayan curriculum with proven agricultural education techniques and supplemented these with knowledge about how to train entrepreneurs from his Junior Achievement programs. He then mixed these together in the unique physical setting of the school, its land, and stores that provided him with important pieces of physical and social infrastructure.
Social entrepreneurship that focuses on bringing new, social-value products or services to markets requires the skills of a social constructor. Constructors build something new and innovative that did not exist before. Nobel Laureate Muhammad Yunus founded the Grameen Bank—the world’s first successful micro-credit organization—through such an innovation. Yunus discovered that the poor Bangladeshi basket weavers he passed on the way to work each day earned a fraction of the selling price of their goods because they had to finance their raw materials through an intermediary. The intermediary captured most of the value of the

Focus on SE Activities Role of Social Entrepreneur/Leader
Examples
Capacity Building Social bricoleur: combines Highlander Research and Edu-
existing resources to focus cation Center (USA): adult edu-
value creation cation for community problem
solving in Appalachia
BRAC (Bangladesh): organizes
and trains poor communities
to create economic and social
development
Products/Services Social constructor: develops Grameen Bank (Bangladesh,
new models, products, or worldwide): developed unique
services model for delivery/repayment of
micro-credit
Unilever (India): Project Shakti
uses rural women to sell hygiene
products. Improves local health
and incomes
Institutional Change Social engineers: agitates for change, designs more effective social systems Bono (Ireland): becomes a voice for worldwide poverty alleviation
Nelson Mandela (South Africa): reconciliation commissions allow wounds from apart-
heid to heal

FIGURE 14.3 Types of Social Entrepreneurship

products and left the women in a state of perpetual poverty. Yunus’ social innovation was not merely the lending of very small amounts to these women, but rather, in lending the money to groups of women who would assume responsibility for the loan and ensure repayment. Women’s incomes increased through the Grameen loan program.41
Finally, social entrepreneurial organizations working to create larger, institutional changes succeed when led by a social engineer. Engineers design and then create more effective social systems to create large-scale change. Phillip Joanus, an advertising executive, founded the Partnership for a Drug-Free America in the early 1980s (now Drugfree.org) to combat rampant drug abuse.42 His initial efforts didn’t bricolage a diverse set of resources to fight drug abuse, nor did he develop a new or innovative product. He used the traditional tools of advertising to help individuals and communities fight the scourge of illegal drugs. What he really did, however, was get people to view the problem in a new way. In other words, he changed the most fundamental social institution of all: the collective mindset and attitude about the type of problem drug abuse represented. Joanus helped his advertising industry colleagues—and others in society—see drug abuse as a business and not just a social problem.

Challenges in Social Entrepreneurship
Social entrepreneurship seems to be gaining a foothold as an accepted way to combat many social problems. High-profile social figures such as Jeff Skoll, the first president of eBay and the Skoll Foundation, encourage and reward social entrepreneurship.43 Established foundations like the Schwab Foundation for Social Entrepreneurship also lend credibility to the growing movement through similar programs. Many colleges and universities now have centers, institutes, and even majors devoted to advancing social entrepreneurship.
If you want to become involved in social entrepreneurship, there are a number of ways to do so. There is likely to be an organization on your campus that has social entrepreneurship as a charter. Or, if you conduct a quick Google search on “social entrepreneurship” or “organizations

social engineer A social entrepreneur who designs and creates new social systems to create large-scale change.

base of the pyramid
(BoP) Describes those living in conditions of extreme poverty around the world, usually defined as those who earn less than
$2 per day.

hybrid organization An organization pursuing more than a single goal; each goal has equal importance.

with a social agenda,” you should be able to identify a number of varied opportunities for social entrepreneurship. In spite of all the momentum, however, serious challenges remain that may limit the potential of social entrepreneurship to create the large-scale social change its advocates hope for.
First, social entrepreneurs often work in difficult, unstable, and harsh conditions, particularly those working at the base of the economic pyramid to help the world’s poor.44 The base of the pyramid (BoP) describes those living in conditions of extreme poverty around the world, usually defined as those who earn less than $2 per day. BoP environments usually feature harsh climates including excessive heat, cold, humidity, or desert conditions. Entrepreneurs face industries and markets with little physical infrastructure such as roads and bridges, and also few of the legal or regulatory institutions that we take for granted in the developed world. Courts may not exist to resolve business disputes, business registration may take a very long time, and the pervasive presence of corruption hinders progress in many cases. Sometimes entrepreneurs have to build their own infrastructure, physical or institutional, before their projects can succeed. For example, the Safe Water Network works to build water-treatment facilities in Africa in order to bring clean water to communities there.45
Second, social entrepreneurs who want to combine a for-profit model with a social mission face the difficulty of managing a hybrid organization. For example, TOMS is a for-profit shoe and eyewear retailer whose mission includes providing a pair of shoes to a needy person for every pair of shoes sold and helping restore a person’s eyesight with every pair of sunglasses purchased. You can see the TOMS model in action at http://www.toms.com/improving-lives. A hybrid organization is one with more than a single goal, and each goal has equal importance. Managers must make tough trade-offs between the broad and ideal social mission and the realities of generating positive cash flow. Making these trade-offs sometimes sacrifices one in the name of the other.46 For example, when Safe Water began selling water in Africa, the organization had to raise the price of each packet in order to cover its costs. That meant that some consumers would not be able to purchase the product. Finding employees or alliance partners who share all of the organization’s goals, and have the skills to contribute to both missions, often proves difficult. Most people have little experience and expertise in working for, or leading, hybrid organizations.
Many social entrepreneurs work tirelessly to bring their preferred solution to the poor, even if the poor do not want or need what the entrepreneur offers. Entrepreneurs must also be cautious about matching their promises with their capabilities. It does little good over the long term to promise capacity building that never materializes, or to have people invest in products or services that disappear shortly after they appear. Social entrepreneurs must continually work to provide sustainable solutions to the problems they tackle.
In this section, we’ve introduced you to a new and exciting way of creating social value: social entrepreneurship. There are a number of different ways that social entrepreneurs work. Time will tell whether this movement will succeed where others have failed. What we do know, however, is that many people, both young and old, are using the idea of social entrepreneurship to create economic value and social change in areas, or around issues, they care passionately about. A recent survey indicated that more than 12 million Americans hoped to include social entrepreneurship in their “second career” as they aged.47 In 2015, US-based impact investors—venture capital suppliers to the social sector—poured more than
$15 billion into social entrepreneurial ventures. That figure was expected to rise to almost
$18 billion in 2016.48
Finally, social entrepreneurs face real ethical issues and challenges in their work. Nelson Mandela was admired for his transformative work in South Africa; but he spent years in prison for what were considered at the time to be seditious views. Similarly, social engineers are often viewed as subversive in the existing society, sometimes with good reason. Social entrepreneurs also face the challenges of cultural imperialism when they bring products or services into new markets, or try to transplant institutions that work well in one culture to another one. Consider, for example, the challenge for local farmers trying to sell their crops at a profit if a nonprofit organization is giving away free grain.

Summary
• Social-value organizations such as not-for-profit hospitals, higher educational institutions, and many social service and civil society organizations work to improve social conditions for all. The traditional tools of strategy can help these organizations create sustain- able stakeholder advantage, and the value net model can be used to help these organizations understand the complex environments in which they operate. The value net has four elements:
Customers: Individuals or groups that purchase, or receive, the outputs of the organization.
Suppliers: Individuals, groups, or organizations that provide inputs for the organization.
Competitors: An individual or organization that makes customers value the organization’s output less because it offers its own product or service.

Complementors: An individual or organization that makes cus- tomers value the organization’s output more because of its product or service.
• Established organizations engage in corporate social responsibility (CSR) in ways that create beneficial social value for their stake- holders. A common form of social value from CSR comes through the practice of philanthropy by firms. A company’s GRI report summa- rizes the breadth and depth of its CSR activities.
• Sometimes firms and individuals create new and innovative approaches to creating social value and engage in social entrepre- neurship. These activities work to strengthen society by building capacity among some social group, bringing products and services to those who would not otherwise have them, or creating larger, institutional changes in society.

Key Terms

base of the pyramid (BoP) 260 capacity building 257
cash donation 256
competitor 252
complementor 252
corporate social responsibility 254 customers 252
economic responsibility 255
economic value 250

ethical responsibility 255
hybrid organization 260
in-kind donation 256
institutional change 257
legal responsibility 255
philanthropic responsibility 255
philanthropy 255
shared value 250
social bricoleur 258

social constructor 258
social engineer 259
social entrepreneur 250
social entrepreneurship 256
social value 250
suppliers 252
sustainable stakeholder advantage 251 value net 252

Review Questions

1. Define economic value and social value. Why do organizations tend to focus on the creation of one type of value, but not both?
2. What is corporate social responsibility? How can philanthropy add value to a company’s shareholders? Stakeholders?
3. Explain the three types of social entrepreneurship and give exam- ples of each type. When does each type of social entrepreneurship cre- ate lasting social value?
4. Do you believe that social entrepreneurship will be able to solve difficult problems at the base of the pyramid? Provide a logical and fact- based explanation to support your belief.

Application Exercises
Exercise 1: More learning about social value and entrepreneurship.

1. Identify a social-value organization near your university or community. Research this organization and try to interview one or more leaders of the organization. What is its strategy? How does it create social value for its stakeholders? How does it garner

the financial, human, and social capital needed to accomplish its work?
• For the organization you chose, draw a value net of its key stake- holders. Identify and discuss one simple relationship (a stake- holder who plays only one role) and one complex relationship

(a stakeholder who plays two or more roles in the value net). Describe the challenges that managers of these organizations face as they have more complex interactions with their stakeholders.

2. Identify a social entrepreneur you admire and learn more about this person’s career. Reach out to this person, or his or her organization, to learn more about the person’s goals, missions, strategies, and activ- ities. If the organization is located near you, spend a weekend volun- teering there. What can you learn from this person about how to start your own social venture? How could you become involved with this,

or another, organization and make a meaningful contribution as a college students?
Exercise 2: Understanding corporate social responsibility.

1. Choose a firm you may want to work for and that files a GRI report. Read the report and summarize the main CSR initiatives in which the company engages. How do its CSR actions create benefit for the company? For the community? What would you suggest that the company do differently?

References
1“Paul Newman Biography,” IMDb, https://www.imdb.com/name
/nm0000056/bio, accessed February 20, 2019.
2Information on the company’s history and products available at www.Newmansown.com.
3Rob Meiksins, “The Newman’s Own Philanthropic Exception Is Now Law—What Will the Consequences Be?,” Nonprofit Quarterly (March 30, 2018), https://nonprofitquarterly.org/2018/03/30/newmans-philanthropic
-exception-now-law-will-consequences/, accessed February 20, 2019.
4M. E. Porter and M. R. Kramer, “Creating Shared Value,” Harvard Business Review 89 (1/2) (February 2011): 62–77. For an extensive list of other definitions of social entrepreneurship, see J. Weerawardena and
G. S. Mort, “Investigating Social Entrepreneurship: A Multidimensional Model,” Journal of World Business 41 (1) (February 2006): 21–35; P. A. Dacin, M. T. Dacin, and M. Matear, “Social Entrepreneurship: Why We Don’t Need a New Theory and How We Move Forward from Here,” The Academy of Management Perspectives 24 (3) (August 1, 2010): 37–57; and J. C. Short, T. W. Moss, and G. T. Lumpkin, “Research in Social Entrepreneurship: Past Contributions and Future Opportunities,” Strategic Entrepreneurship Journal 3 (2) (2009): 161–194.
5See A. Sen, Development as Freedom (New York: Anchor Books, 2000). See also John Paul II, Centessimus Annus (Rome: Vatican Publishing House, 1991) for a discussion about the theological and religious underpinnings of social value.
6See the Bill & Melinda Gates Foundation Fact Sheet, available at http://www.gatesfoundation.org/Who-We-Are/General-Information
/Foundation-Factsheet.
7L. Salamon, S. W. Sokolowski, and S. L. Geller. “Holding the Front: Non-Profit Employment During a Decade of Turmoil,” Johns Hopkins University Center for Civil Society Studies (2011).
8We draw on the work of early institutional theorist Phillip Selznick to create this definition. See P. Selznick, Leadership in Administration: A Sociological Interpretation (Oakland: University of California Press, 1984). We also draw from P. Selznick, “Institutionalism ‘Old’ and ‘New,’” Administrative Science Quarterly 41 (2) (June 1, 1996): 270–277.
9A. Brandenburger and B. Nalebuff, Co-Opetition: 1. A Revolutionary Mindset That Combines Competition and Cooperation in the Mar- ketplace; 2. The Game Theory Strategy That’s Changing the Game of Business (New York: Doubleday, 1996).