Building a Successful Social Venture draws on Eric Carlson's and James Koch's pioneering work with the Global Social Benefit Institute, cofounded by Koch at Santa Clara University's Miller Center for Social Entrepreneurship. Since 2003, over 200 Silicon Valley executives have mentored more than 800 aspiring social entrepreneurs at the GSBI. It is this unparalleled real-world foundation that truly sets the book apart. Early versions of the book were used in both undergraduate and MBA classes.
Part 1 of the book describes the assumptions that the GSBI model is based on: a bottom-up approach to social change, a focus on base-of-the-pyramid markets, and a specific approach to business planning developed by the GSBI. Part 2 presents the seven elements of the GSBI business planning process, and Part 3 lays out the keys to executing it. The book includes "Social Venture Snapshots" illustrating how different organizations have realized elements of the plan, as well as a wealth of checklists and exercises.
Social ventures hold enormous promise to solve some of the world's most intractable problems. This book offers a tested framework for students, social entrepreneurs, and field researchers who wish to learn more about the application of business principles and theories of change for advancing social progress and creating a more just world.
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Top-Down and Bottom-Up Theories of Social Progress
Pamela Hartigan began the 2012 Skoll World Forum with an eloquent recasting of a timeless nursery rhyme, lamenting our contemporary "Humpty Dumpty world." In this world, "a good many of the king's men are struggling to put Humpty back together again," she said. As you may recall, things do not quite work out for Mr. Dumpty.
Even so, Hartigan went on to herald a "phase of new thinking and experimentation" where a growing group of people "with imagination, commitment, persistence, and strong ethical fiber is working furiously to ensure that Humpty Dumpty's model is transformed and replaced with pathways that achieve economic and social justice and arrest the destruction of our planet." Far from leaving Humpty in a heap — or to the king's men to fix — Hartigan urged the forum to "seize this hugely important opportunity" and concluded with a provocative question: "How do we rewire our systems, our practices, and our mindsets so our story reflects a greater convergence rather than fragmentation of effort?"
In other words, how do we harness "the global movement of outrage on the part of ordinary citizens against an increasingly unfair and unsustainable society" and join it with "practical, creative, and committed social entrepreneurs" so that Humpty Dumpty is not simply recast the same as he was? For Hartigan, succeeding in this way is to ensure that when "our collective story is told, it will be about depicting the time that occurred when human ingenuity, empathy, and integrity rises to dominance together to address unprecedented threats."
Our world is awash in urgent environmental, human, and social challenges. Many of them — the scourge of global poverty, for instance — are interdependent, dynamic, and seemingly intractable. What we know about how to solve them is far from complete. Not only are these global challenges urgent, but their scale is also growing at rates that appear beyond the capacity of our institutions to adapt. Are governments, philanthropic groups, large companies, and the independent sector equipped for the job? Perhaps not as they are.
The conceptual foundations for this book are rooted in contexts of deep global poverty — contexts where scale matters. In the fifty years from 1962 to 2013, the world population grew from 3.2 billion to 7.1 billion, on a growth trajectory to reach 9.2 billion by 2050.2 Imagine our increasingly fragile planet tripling in population over the course of a single eighty-seven-year lifetime, from 1962 to 2050. Now visualize more than 95 percent of this growth concentrated in poor countries with accelerating rural to urban migrations. Imagine populations ballooning in cities like Beijing, Kolkata, and Mexico City, where millions of people are already choking in traffic congestion and air pollution, and where the combination of infrastructure and fiscal deficits renders governments incapable of meeting basic life-supporting necessities like safe water, sanitation, housing, education, and general public safety. In these contexts and others like them, the ability to develop solutions that can be replicated at scale is urgent.
Especially among refugees and youth trapped in generational poverty, it is little wonder that the world is experiencing unprecedented population migration from destitute rural areas to cities, and from the global south to the global north. Even so, the 2016 Social Progress Index, a major study of social well-being across 133 nations, illuminates what populations migrating in search of greater income opportunities will discover — namely, that geographic advantages in per capita income and human well-being are not synonymous. Just take a look at the United States. Ranked 5th in the world in GDP per capita, the United States ranks 27th out of 133 nations on the Social Progress Index for personal safety; 40th in access to basic knowledge, because too many kids are not in school; 36th in environmental quality due to green-house gas emissions, poor water quality, and threats to biodiversity; and 68th on health and wellness, despite outspending every nation in the world on its healthcare system. Over the past twenty-five years, U.S. gains in per capita income have become increasingly concentrated in the top 1 to 5 percent of the population. Median household incomes have stagnated, income inequality has grown, and the majority of citizens have not experienced improvements in quality of life. All of this contributes to nationalist instincts and pushback from citizens who see waves of immigrants as a source of downward pressure on working-class wages and competition for increasingly scarce opportunities to join the middle class.
In the United States, the poverty threshold for a family of four in 2015 was $24,257 per year, approximately $16.50 a day per person. In richer parts of the developing world, it is $4.00 a day per person. And, when purchasing power parity is taken into account, in extremely poor nations, it is $2.00 a day. At these income levels, the poor exist in a precarious state. Above these minimum thresholds, people may not appear in poverty counts, but they do not live in a world where, to paraphrase Nobel Prize–winning economist Amartya Sen, they have the freedom to make life choices that can significantly improve their hopes of a better future. With respect to the hope of achieving a middle-class standard of living, Thomas Piketty's work on global capitalism has painted a pessimistic picture documenting unprecedented increases in income inequality and declining upward mobility over the last thirty years.
Although in 2017 the eight richest people in the world owned more wealth than the 3.6 billion people in the bottom half of the world's population, increasing wealth disparity is not unique to developing countries. The Pew Research Center finds income inequality in the United States at the highest level since 1928. After accounting for taxes and income transfers like social security, the United States is second only to Chile in terms of having the highest level of inequality in the world. Moreover, wealth inequality is even greater than income inequality. In 2013, the highest-earning one-fifth of U.S. families earned 59.1 percent of all income and held 88.9 percent of all wealth. Similarly, in China and India, inequality — as measured by the Gini coefficient (which measures the statistical distribution of incomes) — grew substantially between 1990 and 2015, from 0.45 to 0.51 in India and from 0.33 to 0.53 in China. A Gini coefficient of 0 indicates that citizens shared equally in national income, whereas a coefficient of 1.0 indicates perfect inequality, with one person receiving 100 percent of all income. As elsewhere, the inability of India and China to develop and sustain a rising middle class imperils future growth and social stability.
GDP growth alone does not ensure social progress or improved well-being of citizens — both of which often depend on the shifting priorities of governmental bodies. Reflecting Amartya Sen's "development as freedom" philosophy, the Social Progress Imperative movement sees the world differently, as reflected in its Social Progress Index (SPI) in Figure 1.1. It posits a more complete assessment of national wealth — one that encompasses the capacity of a society to meet its citizens' basic human needs, enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential.
While an in-depth examination of poverty is beyond the scope of this book, overall evidence of effective top-down solutions for fostering a more just world — be it in the form of government programs to alleviate poverty or trickle-down economic prosperity — is weak. We turn next to a brief examination of this evidence through a review of alternative approaches for eliminating poverty.
Comparing Approaches to Poverty Reduction
Since the end of World War II and the formation of the United Nations, several efforts have been mounted worldwide to help eliminate or reduce poverty. These efforts can be divided into five categories:
1. Government programs: National governments use tax revenues or subsidies and, in some instances, foreign aid to fund or operate programs
2. Philanthropy: Wealthy individuals create private foundations, charities raise money to fund or operate programs, and corporate social responsibility (CSR) funds support community initiatives
3. Multinational corporations: Large corporations use their resources and organization to enter and serve markets with unmet needs
4. The informal economy: A parallel system of economic exchange that, in some instances, uses illegal methods to address problems
5. Social ventures: Small organizations (both nonprofit and for-profit) focus on reducing poverty in a specific market segment
Figure 1.2 compares these five approaches to poverty reduction. We will now briefly review the first four poverty reduction approaches. The remainder of the chapter lays the foundation for the advantages of the fifth category, social ventures.
Government and Philanthropy
Although some consider government programs or aid and philanthropy to be distinct approaches to economic development, they are grouped together here because each is based on the assumption that, with adequate resources or external incentives, social systems can be changed from the outside. In the case of government, this perspective encompasses trickle-down theories of economic development, or the belief that macropolicy to stimulate economic growth will have trickle-down benefits to the well-being of those at the lowest rungs of society. In the case of global philanthropy, belief systems encompass a variety of meta-theories — each reflecting alternative models of what constitutes social progress and how best to achieve it in the minds of benefactors and their foundation entities. In either instance, critical resources needed for achieving social progress are externally controlled at higher institutional levels by the gatekeepers to public or private wealth.
Many economists and politicians, from J. K. Galbraith to Ross Perot and Bernie Sanders, have criticized trickle-down economics as an inefficient way to tackle urgent social needs. However, as with noteworthy success stories from the world of foundations, macropolicy can contribute to economic prosperity across economic strata. When the government invests directly in creating businesses (e.g., manufacturing in China) or accelerating the development of industry clusters in concentrated urban regions, it can have a substantial impact on economic development. For example, in China, the poverty level has dropped from around 80 percent under communism to around 40 percent under government-sponsored capitalism. Similarly, where government acts to stimulate capital formation in emergent technologies (e.g., Defense Advanced Research Projects Agency [DARPA] and advances in computer networking in the United States), significant and widely shared economic benefits can result. Even so, about 14 percent of the U.S. population (about forty-six million people) still lives below the poverty level, and a poverty rate of 40 percent in China equates to five hundred million people. In fact, the socialist approach to economic policy in Sweden fares no better when it comes to eliminating poverty, with 25 percent of Swedish citizens living in poverty. While targeted government programs and philanthropic initiatives to address poverty or other unmet social needs can fill the gaps in broad-based macropolicy, both are subject to a number of execution risks, including lack of accountability, failure to foster innovation, mindless pursuit of "scale" or size in the presence of inefficiency, economic waste via bureaucratic intermediaries, and the absence of impact measurement or evidence of a return on investment. Social entrepreneurship can ameliorate these risks. In its emphasis on human agency and the development of innovative capacity from the bottom up, it complements the large-scale system-changing goals of governments and global philanthropy.
The Role of Multinational Corporations: C. K. Prahalad's Thesis
In the presence of global capitalism, business has a vital role to play in creating a more sustainable, just, and prosperous world for all people. In practice, the record is mixed. The UN Millennium Development Goals set a target of reducing the number of people living in extreme poverty by half between 1990 and 2015. Thanks in large measure to free trade, by 2015 the number of the world's seven billion inhabitants subsisting on less than $1.25 a day (the internationally accepted poverty threshold in 1990) had been reduced by half, to 1.1 billion. This definition of poverty, however, is socially constructed, and these subsistence levels of income are associated with fundamental gaps in access to the basic necessities of life — safe water and sanitation, nutrition, quality education, affordable healthcare, transportation, housing, and community safety. To paraphrase Thomas Hobbes, at these subsistence levels, life remains nasty, brutish, and short.
C. K. Prahalad's "Fortune at the Base of the Pyramid" thesis in 2004 posited an optimistic and hopeful view — one in which multinational companies envisioning the bottom four billion of the world's population as a market opportunity would become a wellspring of innovation devoted to serving the urgent unmet needs of humanity and eradicating global poverty. This thesis was challenged by Bill Davidow, founder and partner of Mohr, Davidow Ventures, at Santa Clara University's 2003 Conference "Networked World — Information Technology and Globalization" and later by Ted London in his book The Base of the Pyramid Promise: Building Businesses with Impact and Scale. For Davidow, corporate infrastructure is ill equipped to meet the challenging context and specific needs of the world's poor. London's research found that major business contributions beyond case studies and pilots to serve Base of the Pyramid needs have been scant. He posits that big companies have significant advantages in low-cost production and distribution as well as in capital efficiency because of their ability to achieve economies of scale. However, they have significant disadvantages when it comes to close-to-the-ground appreciations of the life circumstances of the poor, their needs, how to coinvent solutions with the poor, and how to overcome the daunting challenges of last-mile distribution in fragmented markets.
The Informal Economy
In the 1980s, a project begun at the University of California Berkeley defined the "informal economy" as the production and distribution of legal goods and services occurring beyond the purview of formal institutions. The project posited that the informal economy resulted from the cost of operating a business within the legal rules of an economy being greater than the costs of operating the same business illegally. This project also documented the size of the informal economy in several countries.
Around the same time, Hernando De Soto, using the same definition, documented the informal economy in three market sectors (housing, retail, and transport) in Peru. De Soto posited that the informal economy was still inefficient in providing goods and services because of the high costs of being "outside" the system. He argued that, to help the informal economy become both more efficient and part of the formal economy, simple laws governing business formation and operation were necessary.
Twenty years later, Prahalad defined "transaction governance capacity" as the system of rules that regulates and supports business formation. Prahalad, like De Soto, felt that the informal economy would continue unless government could ensure that transaction governance costs (the costs of formal rule-based transactions) in the formal economy were less than those costs in the informal economy.
The informal economy dwarfs the formal economy, and it exists as a social institution to fill a void. It is relationship based and has its own norms centered largely on trust and reciprocity. It involves exchange relationships that encompass barter and flexible payment arrangements — arrangements that accommodate the minimal savings and uneven cash flows of the poor. Unfortunately, there is no evidence that the informal economy actually reduces the poverty of its participants. Rather, it seems to be an economic system that accommodates poverty.
Theories of the informal economy are relevant to social entrepreneurs because, in many countries, that is where social ventures still operate. In some cases, social ventures may create a sustainable, scalable business in contexts where transaction governance capacity is low by focusing on how to reduce transaction costs (for example, through m-commerce or electronically mediated access to government services). These kinds of efforts can transform previously unstructured and inefficient markets, including those "subsistence economies" with impediments like a lack of infrastructure and the absence of rule of law for ventures that operate in these economies.(Continues…)
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Copyright © 2018 Eric Carlson and James Koch.
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Table of ContentsContents
Part I: Background
1. Top-Down and Bottom-Up Theories of Social Progress
2. The Market at the Base of the Pyramid
3. Paradigms for Social Venture Business Plans
Part II: Managing a Sustainable/Scalable Social Business
4. Mission, Opportunity, Strategies
5. The External Environment
6. The Target Market Segment
7. Operations and Value Chain
8. Organization and Human Resources
9. Business Model
10. Metrics and Accountability
Part III: Execution
11. Operating Plan
13. The Path Forward