Business/Program Integration

Social enterprises can be classified based on the level of integration between social programs and business activities.

Embedded Social Enterprises

Social programs and business activities are one and the same. Nonprofits create Embedded Social Enterprises expressly for programmatic purposes. The enterprise activities are "embedded" within the organization's operations and social programs, and are central to its mission. Social programs are self-financed through enterprise activities and thus, the embedded social enterprise also functions as a sustainable program strategy.

Due to their mission focus, most embedded social enterprises are usually structured as nonprofits to protect against mission drift, but may also be registered as for-profits depending on the legal environment.

The relationship between the business activities and the social programs are comprehensive: financial and social benefits are achieved simultaneously.

Embedded social enterprises are usually mission-centric; the business activities are central to the organization’s mission.

Embedded social enterprises are evident in operational models where:

social and economic activities are unified;
social mission is the central purpose to the business; and
the target population (clients) is integral to the model as direct recipients of social services (beneficiaries) and either the market (customers), employees or owners of the enterprise.

The following operational models often take the form of embedded social enterprise:

Equal Exchange, an example of Embedded Social Enterprise

Equal Exchange (EE) is a US-based fair trade coffee company legally structured as an employee-owned cooperative and an example of embedded social enterprise. Equal Exchange purchases coffee beans and cocoa directly from small democratically-run farmer cooperatives in developing countries at fair trade prices--a guaranteed minimum price regardless of how low commodities markets fall. Equal Exchange pays a fixed rate of $1.26 and $1.41 per pound for organic certified coffee in contrast to $0.45 and $0.60 per pound that buyers pay on the commodities market1
. The embedded nature of Equal Exchange's social programs is evidenced in its business activities.

Marketing strategy--the company uses educational marketing campaigns to raise awareness of the positive social impact purchasing fair trade coffee has on low income farmers. Equal Exchange's coffee packaging contains information regarding the social benefits of fair-trade purchasing.

Distribution channels--in addition to retail outlets, products are sold through interfaith organizations and nonprofits that educate their constituents about fair trade coffee; then retain a margin on each sale to support their social activities.

Quality products--Equal Exchange assists farmers with sustainable techniques to promote ecological-friendly cultivation of coffee. The results yield higher product quality, environmental conservation, and 85% certified organic fair trade coffee for consumers.

Social Impact--EE works with twenty-five trade partners, farmer cooperatives, in twelve countries, and achieves social impact in two significant ways: supplier credit and fair trade premiums.

Supplier credit--Most cooperative farmers in developing countries do not have access to bank financing, and those that do pay 25%-35% interest. The more available option is moneylenders, who charge up to 100% of the price of the loan. EE offers pre-harvest credit at interest rates of 8% to 9%, which enables farmers to produce high quality crops without losing margins on the sale of their products. In 2001 EE extended $700,000 in pre-harvest credit to 75% of farmers who requested loans.
Fair trade premiums have substantial impact on the economic security of farmers and their families, increasing disposable income for food, education, healthcare, housing, etc. EE pays farmers more than twice the going rate on the commodities markets. In 2002, EE paid $1.2 million in fair trade premiums to cooperative farmers. In a protracted commodity price slump, which has occurred in recent years, these premiums literally save thousands of lives by warding off starvation occurring in many coffee growing regions.

Financial strategy and viability--Its for-profit legal status notwithstanding, Equal Exchange's financial motives are viability, not profit; in 2002 the company had $10.4 million in sales, which translated into $1.2 million in above market premiums for cooperative farmers, and funded marketing activities that raised the awareness of tens of thousands of consumers who bought fair trade products. The dollar figures are a monetary representation of Equal Exchange's sustainable mission accomplishment.

Equal Exchange is a mission-centric social enterprise; its business decisions and activities are central to accomplishing its mission: "To build long-term trade partnerships that are economically just and environmentally sound, to foster mutually beneficial relations between farmers and consumers and to demonstrate through our success the viability of worker-owned cooperatives and fair trade."

1Statistics from 2002

Integrated Social Enterprises

Social programs overlap with business activities, often sharing costs and assets. Organizations create integrated social enterprises as a funding mechanism to support the nonprofit's operations and mission activities.

In many cases integrated social enterprises expand or enhance the organization’s mission enabling it to achieve greater social impact. Mission expansion may be achieved by commercializing the organization’s social services and selling them to a new fee-paying market; or by providing new services to existing clients. Integrated social enterprises leverage tangible and intangible assets, such as expertise, program methodology, relationships, brand, and infrastructure, as the basis from which to create their businesses.

The integrated social enterprise may be structured as a profit center or enterprise department within the nonprofit, or as separate entity.

The relationship between the business activities and the social programs are synergistic, adding value--financial and social--to one another.

Integrated social enterprises are often mission-related; their business activities are connected to the organization’s mission.

Integrated social enterprises are evident in operational models where:

social and economic activities overlap;
synergies exist between the social activities and the economic activities, such as cost-sharing, asset leveraging, enhancing systems and expanding or strengthening the mission;
the target population (clients) is a direct beneficiary of income earned from the social enterprise vis-à-vis the financing it provides to the social programs; clients may or may not be involved in the enterprise's operations as employees or customers.

The following operational models often take the form of integrated social enterprise:

Scojo India, an example of Integrated Social Enterprise

Scojo Foundation is health social enterprise specialized in eye care. Scojo's work is premised on the statistic that globally 80% of all people above the age of 35 suffer from presbyopia--blurry up close vision. In developing countries where optometry is a privilege of the middle income and wealthy, presbyopia can have a devastating affect on the productive activities of the poor, who typically have little access to eye care. Seamstresses, rug makers, weavers, mechanics, bookkeepers, automobile or bicycle repair people, hairdressers, and others with occupations that require up close vision can loose their livelihoods and their incomes if they suffer from presbyopia. Simple low-cost readymade reading glasses, or simple magnifiers, enable these people to continue to work.

Scojo Foundation founders began their program activities using a traditional nonprofit approach: distributing free readymade reading glasses to the target population in greatest need, the rural poor, but quickly learned that this model was not sustainable. In 2003, they launched Scojo India, an integrated social enterprise that operates in two distinct markets in Andhra Pradesh state: urban centers, targeting working and middle class customers; and rural markets, targeting poor and low income people. Although greater social need exists in India’s rural areas, and subsequently an opportunity to effect deeper social impact than in urban areas, Scojo’s business could not operate exclusively in rural markets without ongoing subsidy.

Characteristics of Scojo's urban market such as high population density, existing retail distribution, coupled with local purchasing power and product price elasticity indicate suitable conditions for a profitable ready-made eyeglass business. Scojo's rural market, on the other hand, has notoriously high costs to sell and distribute eyeglasses in sparsely populated areas to customers (target population) who lack the ability to pay. Therefore, Scojo India created a social enterprise that integrates its business activities. The urban market is the commercial side of the social enterprise's operations while the rural market is the social program side of the social enterprise.

Manufacturing--Products for both markets are manufactured in the same local nonprofit facility, and though style is differentiated in urban markets according to preferences, there is no difference in quality. Scojo transfers modern spectacle frame- and lens-making technology to its Indian partner, building local capacity to enable production of higher quality readymade glasses than are currently available in India. The production facility creates employment opportunities for local people.

Distribution and sales--Integration occurs at the level of the marketing function, but not in the sales activities. Scojo India set a total sales target of 266,760 low-cost readymade reading glasses in the first three years of operation (2003-2006); urban markets represent 75.4% of sales or 201,060 units and rural markets 19.6% or 52,200 units (government sales make up the remaining 5.1%). In urban areas Scojo uses teams of sales agents to sell readymade glasses to non-optical retail stores such as pharmacies, general stores, and bookstores. Sales agents are also dispatched in innovative mobile sales units, vans stocked with glasses, to bring reading glasses to local factories. Scojo India sells reading glasses to hospitals, health and microcredit NGOs, who channel the glasses through their existing network of community-based vision health workers or microentrepreneurs, making it possible for Scojo to penetrate the rural market. Scojo also sells reading glasses to the State Government for re-sale to their employees.

Financial strategy and viability--Scojo India uses a cross-subsidization strategy to achieve social objectives while achieving financial viability. Profits generated from urban sales subsidize price and distribution costs in rural areas where the need for affordable reading glasses is greatest. Glasses are priced at $2.50 for customers in rural areas and $5-$6 for customers in urban areas. Total projected revenue earned in urban markets in the first three years is $460,800 as opposed to $59,805 in rural markets (government represents $10,028). Scojo India projects annual net revenue of $74,532 for business expansion and social program subsidies, and 27.3% ending return on equity in FY 2006.

Social Impact--By year end 2006, more than 266,760 Indians who obtained reading glasses will have improved their productivity and functionality. In three years Scojo India will have created 356 employment opportunities, 327 of which for very low income individuals. As well, micro-entrepreneurs distributing reading glasses in rural areas will earn an average supplemental income of $144 per year, substantial in rural India. The inclusion of moderate income urban customers permits Scojo to expand its target population and reach more people who can benefit from reading glasses, while providing additional funding to serve rural clients sustainably.

Market development and exit strategy--distribution of reading glasses in India is controlled by eye care professionals who lack the financial motivation to sell readymade reading glasses to people from low economic classes. Scojo's aim is to develop the market for readymade reading glasses and replicate the channel shift that took place in the West over a decade ago during which readymade reading glasses became available without prescription in mass-market retail outlets, creating a $1 billion industry. Market development inevitably brings competition. Rather than a threat, this is an opportunity for Scojo to achieve sustainability by transferring its interests to a local social enterprise and to exit the market, and then invest in new markets where the need for readymade reading glasses still exists.

As with other models, the integrated social enterprise model is not straightforward, the degree of integration between the program and business activity in the operational model depends on its purpose--the extent to which the enterprise is used as a funding mechanism or program mechanism. Unlike many integrated social enterprises, Scojo India is a mission-centric example: "to create a sustainable eyeglass manufacturing and distribution operation that makes affordable, quality readymade reading glasses readily available to all low to moderate income individuals in India." Thus, integration of Scojo India's social program and business activities is high. IONA Senior Services is and example of a mission-related social enterprise where less integration occurs between business and social activities.

[Source: Information provided by Yale School of Management and Goldman Sachs Foundation: Partnership on Nonprofit Ventures 2003; Scojo Business Plan Executive Summary]

External Social Enterprises

Social programs are distinct from business activities. Nonprofits create external social enterprises to fund their social services and/or operating costs.

The enterprise's activities are "external" from the organization’s operations, but support its social programs through supplementary financing. External social enterprises generally do not benefit from leveraging, cost sharing or program synergies, therefore to serve their purpose, they must be profitable.

External social enterprise may be structured within the parent organization as a profit center, or separately as a nonprofit or for-profit subsidiary. Legal status is often a function of the regulatory environment in which the external social enterprise operates, or a requirement to access capital, (i.e. loans or equity investments). External social enterprises registered as for-profit entities are subject to local tax laws.

The relationship between the business activities and social programs is supportive, providing unrestricted funding to the nonprofit parent organization

External social enterprises are often unrelated to mission; their business activities are not required to advance the organization's mission other than by generating income for the its social programs or overhead.

An external social enterprise generates economic value to support social value creation.

External social enterprises are evident in operational models where:

economic and social activities are linked via their nonprofit ownership and funding relationship;
motivation for economic activities is as a funding mechanism for social activities;
the target population (clients) is a direct beneficiary of income earned from the social enterprise vis-a-vis financing the parent organization, but are infrequently involved in enterprise operations.

The Organizational Support Model often take the form of external social enterprise.

Council of Community Clinics, an example of External Social Enterprise

Council of Community Clinics (CCC) is a San Diego-based nonprofit membership organization comprised of community clinics serving poor, largely Mexican and Central American populations in the region. CCC's mission is to "serve the growing number of uninsured by reducing cost, improving quality of care, and strengthening the capacity of community health centers to improve community health," which it accomplishes through three linked but separate entities: two nonprofits and one for profit subsidiary--an external social enterprise.

CCC's primarily social activities are advocacy, working to change laws to protect at-risk populations and strengthen the health safety net for uninsured and underinsured people. Under the umbrella of CCC is another nonprofit, Community Clinic Health Network (CCHN), which provides technical assistance services to build capacity of community clinics in several areas of healthcare and management. The third structure is a for-profit, Council Connections, a wholly owned for-profit subsidiary of CCC.

Founded in 1996, Council Connections (CC) is a group purchasing business that buys pharmaceuticals, office supplies, medical surgical supplies, and laboratory services in bulk at a volume-based discounted prices, then sells them to community clinics at a slight mark-up, yet substantially cheaper than retail prices. Council Connections business activities are separate from its social programs, and in other than one customer segment, "member" health clinics, there is little overlap with CC's nonprofit parent, Council of Community Clinics. After-tax profit from the group purchasing business provides a significant revenue stream to both nonprofits, CCC and CCHN. The clinics realize substantial savings, which helps to lower their costs, and allocate those savings to their social programs.

Market--In the beginning, the group purchasing business sold its products exclusively to CCC’s members, a relatively small market of a few hundred community clinics in the state of California. As a social enterprise, Council Connections soon realized that it could better serve its customers and increase its profitability by reaching untapped markets. By 2001, of its 691 customers in the State of California, 364 (52.7%) were member community health clinics, and 327 (47.3%) were nonmembers clinics. Entering the nonmember market segment made it possible for CC’s service to benefit more community clinics. The plan is to expand Council Connections' business nationally via the Internet to generate more dollars for clinical services to the uninsured and underinsured.

Financial viability--Income has climbed steadily since Council Connections' first year. In 2001 Council Connections had total sales of $14,370,000, and after tax revenues of $951,566, to reinvest in business growth and social investments in its nonprofit parent. This figure is up 54% from 1997 sales of $6,622,183, and revenue of $531,489 for the same year. Council Connections new online sales business expects revenues to reach $2,500,000 within 5 years.

Social Impact--Council Connections contributed $332,935 in 2001 to CCC and CCHN’s social programs, which translated into subsidies of $207,935 to member clinics, enabling community health clinics to render more discounted and free services to the uninsured and underinsured poor. Seventy-five thousand dollars was used to offset the cost of shared services and $50,000 for technical assistance. In the same year, CC’s member clinics saved a total of $7,650,803 on medical and pharmaceutical supplies and services, allowing clinics to spend those savings on social interests.

Council Connections' primary purpose is to provide funding to its nonprofit parent organization CCC, and nonprofit subsidiary, CCHN. Council Connections secondary purpose is to provide valuable service at reduced costs to its customers, community clinics. Council Connections is an unusual example of a mission-related external social enterprise, it mission states: "support the commitment and mission of community health centers to improve community health by delivering high quality, cost effective patient care through the provision of technical assistance to improve purchasing and inventory systems; reduce costs of products and services; move towards automation, best practices and standardization."