Social Innovation Business Models
A business model is defined as “a coherent framework that takes technolo- gical characteristics and potentials as inputs and converts them through customers and markets into economic outputs. The business model is con- ceived as a focusing device that mediates between technology development and economic value creation” (Chesbrough & Rosenbloom, 2002). The core function of a business model is hence threefold: to create, deliver, and capture value. It does so by converting choices about value propositions, markets, and customers into value and accompanying those choices with an organizational structure that can then capture/monetize the value cre- ated (Smith, Binns, & Tushman, 2010). According toTeece (2010), “a good business model: yields value propositions that are compelling to customers;
achieves advantageous cost and risk structures and enables significant value capture by the business that generates and delivers [the] products and services.” Business models and their use as a source of innovation rose to importance at the advent of technological advances as the economy chan- ged from being solely based on tangible products (Teece, 2010) to allowing for the hypothesis that intangible products can be real outputs. In fact, as Teece (2010) continues, one-sided markets and perfect competition aren’t pictures of what actually happens today: intangible products are in fact [everywhere], two-sided markets are common and customers don’t just want products; they want solutions to their perceived needs.
Likewise, in the public service sector, new needs are emerging along with growing societal challenges, like the ageing population, migration, youth unemployment, rising levels of NEETs and climate changes. The former
“one-size-fits-all” approach is no longer appropriate, nor adequate for the public sector, as a profound understanding of end users calls for a redesign of services capable of responding to variegated needs through complex and varied service delivery. Third-sector organizations are hence called upon even further to fill in the gap between market and state failure. Finding the right business model, able to generate economic value and maintain and increase social value is crucial for the long-term success and impact of these ventures; an exercise that defines when, how, and where to add value to the organization’s chain of activities (Chesbrough, 2006;Zott & Amit, 2009).
In this chapter, we take stock of 25 business case studies and 32 biogra- phies conducted within the SIMPACT research framework. Our research highlights the economic underpinnings of social innovation and their
underlying business models. The longitudinal approach has enabled us to identify the characteristic and dimensions of different business models and provide a typology of social innovation business models. Empirical evi- dence was confronted with different theoretical bases and constructs with the objective of clarifying the role of actors and organizations and their coevolution throughout different stages of the social innovation cycle. We equally adopted a qualitative approach by using several data sources to explore the degree of embeddedness of business cases over time. The longi- tudinal and qualitative desk research approaches provide a better compre- hension of the path building characteristics of social innovation within different social, spatial, and economic contexts (Denzin & Lincoln, 1994;
Strauss & Corbin, 1990). The research draws and compares examples through collection and comparison of data from different sources: scientific and nonscientific publications, interviews, biographies, and websites. The use of multiple sources helps explore the multiplicity of contexts and accounts for complex situations thus providing a broader perspective of social achievement. Finally, the use of a process of reverse engineering to uncover the business models behind the cases facilitated the creation of a typology for different social innovation business models. Reverse engineer- ing is the application of tools and processes used to study new business ventures in comparison with existing ones. As such, it sheds further light on the broad characteristics of social business models and their value crea- tion mechanisms. The evidence coming from the cases were analyzed within a new business model and clustered to identify a typology of business models of social innovations.
Creating and Capturing Social Value
Strengthened by the crisis and public austerity (Aiken, 2010), third-sector organizations whose primary source of revenue depended on public funding, private funding, or a combination of these are re-evaluating their business models to accommodate for earned-income strategies (and in fact become more business-like (Chew, 2005, 2006; Nicholls & Cho, 2006). Having a social mission hence no longer insulates a social innovator from the forces of the market and competition (Nee, 2015). Where previously, mission drift was a risk commonly faced by organizations that had to balance commis- sioner or donor objectives with their own social mission, this is emerging more and more as organizations hybridize as a consequence of integrating commercial activities (Skelcher & Smith, 2015). This is widely confirmed by 321 Social Innovation Business Models
the results of our empirical research, where we discovered that hybridity is a transversal characteristic of the majority of the SIs analyzed. Created in a backdrop of conflicting strategies emanating from tensions arising from their social mission and their need to remain financially stable, SI business models are complex (Skelcher & Smith, 2015) as they try to manage the tensions and create a system in which the transactions for economic and social value are complementary.
Consequently and contrary to other forms of innovation, social innova- tions are often characterized by a divergence in allocation of costs, use, and benefit. Where typically the subject who pays for the innovation, uses it and benefits from it, in social innovations, this is often not the case as often those who pay for the SI (welfare systems, donors, customers) may not use it and may not benefit from it (or at least not directly). At times, the custo- mer and beneficiary may align in a single figure who both pays and benefits from the solutioneven if at below-market prices that are often compen- sated by government subsidies or other forms of grants or donations.
While at other times, they don’t align and the organization targets two or three distinct segments: a nonpaying beneficiary, a paying customer, and/or a donor/funder. Multiple value propositions are thus needed in social inno- vations to target each segment with the aim of producing and capturing value to reach their intended social impact: for beneficiaries (to produce social value and at times capture economic value), for customers (to pro- vide social value and capture economic value), and for donors/funders (to provide/produce social value and gain financial support). As we’ll see below, this leads social innovations to adopt multiactor business models (Box 1).
Box 1. Progetto QUID.
Progetto QUID, which means a “project for something more,” is an Italian profit-generating social cooperative, providing employment to at-risk women, while offering an environmental solution for fashion brands, salvaging their scrap material and unsold stock to create new, stylish clothes.
Progetto QUID is an example of an SI that demonstrates a divergence in cost, use and benefit. The solution benefits the women who gain employment, while the cost is borne by the paying customers.
Our research sample included a broad range of social innovations in dif- ferent phases, the vast majority of which, however, faced the dual need to create social impact and earned income, while only the minority was fully grant-funded. Thus, for the lion share, a significant change was introduced to the standard nonprofit model: the focus or rather the need to generate both social value and commercial value, either in a single transaction or in multiple transactions. As a result (and as mentioned above), social innova- tions often have various targets (beneficiaries, customers, donors) and thus multiple value propositions, quite similar to what you would find in multi- sided business models for example, Skype, social media sites, match- making sites, etc. Similar to multisided business models, social innovations deal with multiple customer segments as they are dealing with multiple actors, meaning that value may be monetized from different customers.
This consequently leads to tailored value propositions for each customer segment: users and customers, oras more commonly defined in mission- driven organizationsbeneficiaries and paying customers.
Furthermore, in multisided businesses, value isn’t captured from the direct use and benefit of the service by the end users (who typically benefit of the service free of cost); instead, multisided businesses capture value through a derivative currency. In cases like Facebook and Google, user attention is the derivative currency that drives the core value proposition to its paying customers. Likewise, in SIs, economic value is captured through a derivative currency: social value. However, unlike traditional business models, value is created not only by satisfying customer demand but also in the process and delivery of the value (e.g., what kind of resources are used, how they deliver their services, etc.). Take, for example, Progetto QUID introduced above: the social value is generated not only through the final output, the clothes, but also in the process through the employment of abused women. Social value thus becomes the derivative asset generating value for the financing supporters (paying customers, donors, investors) and in-kind supporters (partners, volunteers, etc.) of the social innovation.
In other words, the social value is what allows the social innovation to create a unique offer and differentiate itself from its competitors. However, if social and environmental values become mainstreamed, SIs will have to find ways to create competitive advantage to differentiate themselves in the market for features that go beyond the social mission. SI business models are thus multiactor in which value is generated both in the process and in the output. Mission-driven organizations should search to create win-win business models in which both the generation of social value and commer- cial value are mutually relevant in order to be successful (Box 2).
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Delivering Value
The creative way in which social innovations source, employ, and combine resources to manage the tensions owing to their dual objective to create social and economic value is perhaps their most interesting feature and the cornerstone of their strategic development: a process which is characterized by finding strategies and interventions that allow them to transform anta- gonistic elements (assets and logics) into complementarities.
An important aspect of strategic management literature is based on Wernerfelt’s (1984) resource-based view of the firm in which competitive advantage is derived from the differing value and nonsubstitutability of resources and on the effective bundling and leveraging of complementary assets (Hockerts, 2015). Hockerts (2015) defines antagonistic assets as
“resource combinations that a priori make the commercialization or mar- keting of a product or service more difficult.” Hence, the challenge as observed in our cases is finding a way to generate profit from given assets rather than to acquire the right resources to generate the most profit. The business model is thus constructed on the social mission, which is based on the beneficiary. While for-profit companies view these assets (in our case vulnerables) as elements that hinder them from achieving their primary goal of profit maximization, social innovators transform this obstacle into an opportunity: finding complementarity to unlock the value stored in these untapped resources (Box 3).
Hockerts (2015)furthermore defined five different strategies that can be employed by hybrid organizations to manage antagonistic assets: (1) to identify hidden complementarities; (2) develop new complementarities;
Box 2. Libera Terra.
Libera Terra is a network of profit-generating social cooperatives in Italy, employing vulnerable people to produce organic, ethical products on assets confiscated from the mafias. As in other examples of WISE (Work Integration Social Enterprises), in order to reach one of its social missions providing employment to the disadvantaged the solution must be economically viable and respond to market needs, which in Libera Terra’s case means that product sales must be a pri- mary objective as a means to accomplish its social goals, both in terms of employment of the disadvantaged and fighting against the mafias.
(3) eliminate the need for complementarities; (4) create a demand for anta- gonistic assets; and (5) use partnerships to achieve distribution complemen- tarities. In our research, we observed that the majority of our cases employed several of these strategies to carry out their solution and were furthermore constructed to accommodate for strategic governance models and stakeholder networks to cope with resource scarcity.
Our cases in fact show that organizations with a social mission cope with a structural lack of resources to a great extent, and that they are cap- able of drawing the most out of scarce inputs. As a result, SIs are usually built as frugal solutions. Mission-driven organizations hence continue to exist at a small-scale, in a sort of constant struggle for survival. They are often based on low overhead costs and do not reinvest much of their sur- plus in the growth of the innovation or in the same organization, preferring to devote it to reach immediate social impact. Also, they make use of sig- nificant quantities of unpaid labor, either because they rely on volunteers or because the initiators put in their own labor without receiving a salary, sometimes working at their mission-driven business while keeping their original work in another organization (Box 4).
Scarcity of resources also comes out in what we could define as “the aesthetics of SI,” where frugality emerges not only as an invisible ethical background, but also as a visible aesthetic character of the touch points of many of the analyzed SIs. The idea of bricolage, first introduced in the social field by the cultural anthropologist Claude Le´vi-Strauss, and sub- sequently applied to the behavior and resource management of enterprises byWeick (1993), Ciborra (2002), and others (Baker & Nelson, 2005), has already been utilized to provide an understanding of the culture, the struc- ture, and the behavior of mission-driven organizations. In particular, the
Box 3. Progetto QUID.
In Progetto QUID, the main beneficiaries are the abused women who thanks to the economic activities are able to find employment and start a new life. The social innovation combined two antagonistic assets, the marginalized women and the scrap material, to create a solution based on a value proposition that created a demand for the assets themselves, i.e. creating a value proposition for ethical customers who either support the social mission (the empowerment of abused women) or the ecologi- cal mission (zero waste and re-use) or both.
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concept has been used to explain their attitude particularly in the early phases of development to make use of resources and capacities that are at hand, refusing to be constrained by resource limitations. According to this perspective, “(…) the lack of resources pushes the social entrepreneur to use all available means to acquire unused or underused resources that are capable of being leveraged in a different way to create social value” (Di Domenico, Haugh, & Tracey, 2010, p. 699). In other words, mission-driven organizations primarily “utilize their governance and stakeholder networks to access and construct resources, and they deploy persuasive tactics to build legitimacy and financial sustainability” (Sunley & Pinch, 2012, p. 110).
The bricolage view has also been adopted to explain the limited use that social enterprises make of traditional financial instruments, which was con- firmed in our empirical research: “This view implies that it is not surprising
Box 4. Semi di Liberta` and Progetto QUID.
Semi di Liberta` (Seeds of Freedom) is a non-profit organization work- ing to socially re-integrate prisoners through work by placing them on a pathway of training and professionalization in order to break the circle of recidivism. Its initiator, Paolo Strano, experienced first-hand the pro- blems experienced by prisoners while working in prison, and came up with the idea of founding a microbrewery despite not having any knowl- edge of the sector. He simply evaluated the business growth trend and considered the possibility of involving inmates in training activities throughout the whole year thanks to the fact that beer, differently from wine, has a short and continuously repeatable manufacturing process.
Mr. Strano does not receive any salary from the association, establish- ing the SI as a volunteer in his spare time, while still being employed part time at Rome’s public health authority. Semi di Liberta was able to start up thanks to his personal network and quick and flexible atti- tude in the face of bureaucratic and organizational problems.
Progetto QUID was able to gain access to many of its resources thanks to personal contacts and networks. For example, the space where their workshop is based has been given to them on a free-of-use contract from a local entrepreneur. The grants they acquired were the product of relationships the founders had established in previous work experiences.
that social entrepreneurs are not seeking conventional business loans or equity finance, because they have instead adapted to working in resource poor environments by re-using redundant and social capital” (Sunley &
Pinch, 2012, p. 111). Here we must underline how the causeeffect rela- tionship can be easily inverted: social innovators are forced to cope with resource-scarcity because they do not use financial tools, but at the same time, they do not use financial tools because of their bricoleur attitude.
Sunley and Pinch discuss the lack of interest in traditional financial tools also in the perspective of evolutionary entrepreneurialism (Aldrich &
Martinez, 2001), which places a great interest on the relation between the entrepreneur and the environment in which he operates. Building on this theoretical body and on empirical research, Sunley and Pinch recognize that nascent social entrepreneurs tend to draw on their own savings to cope with the lack of financial assets.
With reference to this discussion, our empirical findings show a twofold situation. On the one hand, social innovators are not familiar with financial aspects nor are they confident in financial tools. They tend to give shape to frugal solutions and bootstrap on a lean budget with limited start-up capi- tal, often using their own savings and assets. In many of our cases, we observed that SIs were based on the self-financing of the entrepreneurs, and that initiators worked at their SIs without a salary, or with a very low salary, and sometimes for quite a long time.
Furthermore, if we place some of our attention on how SIs develop, some of the main findings from the SIMPACT cases contrast the model proposed by Murray, Caulier-Grice, and Mulgan (2010), and contradict the general value chain model described byHansen and Birkinshaw (2007) under which Murray et al.’s model can be positioned and classified.
Murray, Caulier-Grice, and Mulgan’s model describes the development of SI as a sequence of Prompts, Proposals, Prototyping, and Sustaining.
In reality, as discussed above, SI emerges in constrained contexts and develops as a frugal answer to a social problem. The resource scarcity in SIs usually results in the transformation of the initial idea into a frugal solution, made possible thanks to the collaboration of a small network of actors that share in the SI motivation. The concept of frugality in relation to SI, as already discussed, is a process in which social innovators exploit only the human resources, infrastructures, personal relations, and small subsidies that are available.
Contrary to the normal use of prototypes and proofs-of-concept, these frugal solutions are not meant to test and understand if the initial ideas work and are sustainable in the market; rather, frugal solutions are 327 Social Innovation Business Models