Entries in Business Model Innovation (7)
- Investment funding’s acceptance of “Social” as a viable type of business
- Business Modeling – social vs. regular
Venture capitalists have traditionally funded for-profit businesses with a strong focus on ROI – Return on Investment vs. ROIm – Return on Impact (ROIm will be a forthcoming blog post). To most, the two ROIs are either incompatible or irrelevant. Foundations and other philanthropies have traditionally funded non-profits with a strong focus on the ROIm. Slowly investors are realizing this is an artificial distinction.
- No matter what your business, if it’s not having an impact on the customer in a way that delights the customer, you won’t need to worry for long – thank you Darwinism.
- The number of investors focused on maximizing both ROI and ROIm is increasing. For instance, FSG and New Profit come to mind, with returns some ‘regular’ VCs would love. Accelerators for social enterprises are helping fledging ventures sustainably scale, such as the SE Greenhouse.
- The assumption that you have to be a non-profit to ‘do good’ is slowly becoming arcane. While there are good reasons for some companies to remain non-profits, there is no reason that a socially-impact minded business cannot be for-profit. The corporate designation B-Corp allows a company to blend doing well and doing good in a for-profit structure. Examples include Method Products, Patagonia, Ben & Jerry’s and two of my favorites, Runa and Susty Party.
As an early adopter and co-creator of Alex Osterwalder’s Business Model Canvas (BMC), I use it the most. A Social Business Model Canvas had been created specifically for social ventures, and there is a lot of value to looking at a business from this perspective. The reason I prefer the BMC is its flexibility. You can change the labels on the boxes and use colors to highlight differences. The BMC impels you to think about the sustainability of the business and the compelling value to the customer in a way traditional social businesses haven’t – as a real live business that has to compete for customers’ attention and resources just like everything else – including two of the biggest competitors – “Doing Nothing” and “Good Enough”. Take a look at a canvas for Pencils of Promise. Instead of Revenue, the box is labeled Outcomes & Outputs. Outputs are things like revenue and profit. Outcomes are the difference you make for your customers – the real value you are delivering for them. In the case of Pencils for Promise, both are important – if they are not having the impact they want – changing lives, educating kids, then what are they doing? Doesn't this also apply to any business - ultimately?
While the Social Business Model Canvas has a box for surplus – what you are doing with what’s left over, I posit that’s a question every company has to answer. Any business hopefully has a surplus – at least eventually. If some of that surplus is not reinvested in the company to support, enhance, add to their compelling value proposition, then the shareholders won’t be getting anything back either. Perhaps a social business will choose to reinvest all of it’s surplus directly into the business while a for-profit may choose to give dividends, but that’s not a hard and fast rule for either type of company. Reinvesting a surplus can be in all sorts of resources – equipment, material and perhaps most importantly, people.
This is not an either/or issue – it’s an ‘and’. Hopefully, over time, the distinctions between social and ‘regular’ businesses can fade, because I truly believe, any business of any sort that doesn’t focus on it’s impact on its customers, communities and the world, on it’s ROIm eventually won’t have any ROI anyway.
I believe the distinction between social and non-social business is a false dichotomy. And yet, it’s one we continually want to make. We talk about “social businesses” — those that are mission-led and focused on creating positive social change — and “non-social businesses” — those that focus on revenue and profit. Social entrepreneurs launching ventures may ask themselves if their business models need to be different. Does pursuing a social purpose require something unique to describe and structure your business?
As someone who works with a variety of organizations in my roles as strategy and innovation consultant, venture capitalist, professor, and mentor, this question intrigues to me. To answer it, I evaluated a few years worth of business models created and implemented by clients (usually established, mature businesses), invested companies (early stage), entrepreneurs I’ve mentored, and college students starting new ventures. The results? I found that both social and non-social businesses focused on making sure revenues were greater than costs, either through selling something, raising money or getting grants. The differences were more along traditional business characteristics: virtual vs. physical product or service, B2B vs. B2C, etc.
That said, this initial evidence showed that social businesses focus more on achieving a positive impact in each of the nine business model elements — value proposition, customer segment, channels, relationships, key partners, key activities, key resources, costs and revenues — as well as the whole model. Many of the non-social businesses in my sample also focused on the impact of each element and interestingly, they are very successful businesses (might there be a correlation?).
All businesses are social. All companies have people as customers, employees, and suppliers. At some point, in deciding which supplier to use, in engaging your workforce, and in getting your product into users’ hands, relationships with people matter. Improving these their experiences always improves the outcome for your company.
If a business isn’t providing valuable, meaningful solutions to real customers’ problems or delivering outcomes that both make a positive difference in the customers’ lives and support the company’s mission, the business won’t have to worry about profits or outputs for long. The market has a way of taking care of that.
The historical division between social and non-social business and “purpose” vs. “profits” is artificial and antiquated. Almost exactly two years ago, Michael Porter and Mark Kramer called for a new definition of capitalism — “shared value” — to unify this false choice. I think this is how Adam Smith envisioned capitalism; we just redefined it to serve our purposes. In fact, our financial crisis in part stems from non-social businesses divorcing impact from profit and the outcome will haunt us for a long time.
To further test what I had learned, I turned to business model guru and friend, Alex Osterwalder (I’ve used his Business Model Canvas since 2009 because I believe it’s one of the best methodologies out there). He has vast experience creating business models all over the globe, in almost every industry sector, and he came to the same conclusion: There is no significant difference in the business models themselves. In fact, we agreed that for-profit social businesses are a powerful way to increase impact. For instance, Sun Edison’s business model demonstrates that increasing impact doesn’t decrease profitability. One of Alex’s favorite businesses, PeePoople, is implementing a similar model to provide basic personal sanitation to the 2.6 billion people who don’t have it today. As Alex says, “The most amazing business models are those where profit and impact live in harmony. Business models can be designed where impact doesn’t diminish revenues or profit and vice versa.”
Does this answer the question about needing something different for a social business? I think so and the answer is clearly no. It’s time we stop talking about “social” vs. “non-social” and encourage all entrepreneurs to focus on impact in every element of the business model as well as the whole. We read about companies, like Patagonia, Virgin, Cemex, who profitably and purposefully balance doing well and doing good. If they do it, why can’t you?
There are also some quiet, under the radar companies, like 6th generation family-held Menasha Corp. in Wisconsin’s Fox Valley. The 164-year-old corrugated packaging firm has over $1B in revenue. Despite being in a commodity-driven market, it has experienced seven consecutive years of remarkable growth, even during the recession. Menasha’s plants use heat from the corrugators to warm the buildings; they’ve reduced water usage while increasing production; their culture is collaborative; and their people are active in their communities, serving on school boards, supporting art and music, and having plain old fun in the Muscatine Great River Days boat races. The result is synergistic growth of a company and its communities.
By focusing on each individual business model element and the model’s overall impact to create outputs that support sustainable outcomes, perhaps our social entrepreneurs can help society break down this tired, man-made wall between social and non-social businesses.
This post originally appeared in Harvard Business Review's Scaling Social Impact series.
This week's post is by Andy Posner, Co-Founder & Executive Director of Capital Good Fund (CGF), a non-profit microfinance organization targeting the root causes of poverty through innovative micro-loans and personal financial coaching. In a world filled with Pay-Day lenders that ruin lives, CGF is starting to making a difference by innovating the basic business model. Maybe you can help!
Go into any low-income neighborhood in America and you are almost certain to come face-to-face with a cabal of bright neon signs and welcoming storefronts proclaiming fast cash, no credit required. This is the brick-and-mortar infrastructure of a $100 billion/year industry—check cashers, pawn shops, payday lenders, refund anticipation lenders, rent-to-own stores and other sub-prime lenders—that profits handsomely off the backs of the poor. As the Co-Founder & Executive Director of Capital Good Fund (CGF), a non-profit based in Providence, RI that uses financial services to tackle poverty, I am all-to-aware of the damage these companies do to the fabric of communities and the families that reside therein. Take, for instance, payday lenders: a study by the Insight Center for Community Economic Development found that in 2011 “the burden of repaying [payday loans] resulted in $774 million in lost consumer spending and 14,000 job losses.”
Traditional economic theory dictates that market forces should spawn more affordable alternatives, but they haven’t. America’s poor are forced to choose between the 260% payday loan and mainstream financial products and services from which they are often excluded due to poor credit. Few for-profit alternatives exist because small, risky loans aren’t highly profitable if they aren’t accompanied by high interest rates, and few non-profit alternatives have scaled because of the limits of philanthropic dollars.
Recognizing that this paradigm is untenable, at CGF we are using business model and other innovation to scale a solution that is affordable and financially viable for us as an organization. From the outset we knew that our solution had to compete with existing options in terms of ease-of-use, customer service and turnaround time; we also knew that our model had to be about more than just making loans and collecting loan payments—we needed a way to obviate the need for expense financial products to begin with.
In order to meet these requirements, it became clear that having a physical presence in the communities we serve would be critical, but expensive. To solve that, we are partnering with a local non-profit, within whose office we will house a loan officer. After running the numbers, we have a realistic target: the program will be self-sufficient if we can close 240 loans per loan officer per year while maintaining a repayment rate of 93% (and charging 36% APR). Of course, we have to acknowledge two things: first, that people don’t wake up in the morning and say “Boy, I wonder if there’s a non-profit alternative to the local payday lender,” and second, that the established players have a lot of marketing clout. With that in mind, we are running an aggressive advertising campaign, from billboard ads and bus shelters to flyers, community presentations and door-to-door visits. In concert with that, we are working to ensure that it takes no more than two days to go from loan application to loan closing—slightly longer than with the predatory firms, but still within reason. Finally, we require that every borrower also avail him or herself of at least one session of individualized Financial Coaching, focusing on budgeting, managing debt and opening a bank account so that they have the tools the need to achieve financial success. Already, our average clients saves $1,100 / year thanks to our program, and we have disbursed over 340 loans to low-income families.
Taken together, these program components—a community storefront, an affordable, customer friendly product and an aggressive marketing campaigned married to Financial Coaching—have the potential to, at scale, put the predatory financial services industry out of business. Of course, lending and Coaching alone aren’t enough to cover all the costs of running each of these ‘micro-branches,’ so we need to explore alternative streams of revenue. Grant funding, to be sure, is an option, but an unreliable one at that. We don’t yet have all the answers, but we are considering a few possibilities. For instance, suppose we were to partner with a forward-thinking, ethical grocery store chain and turn our micro-branches into micro grocery stores. This would address several issues: healthy, affordable food is notoriously hard to come by in low-income neighborhoods; the more products and services sold at our branch, the more we come to be seen as a community hub; and we can earn a percentage of sales, thereby increasing our earned income.
What I want to emphasize is the importance of thinking out-of-the box, for on the one hand, the for-profit mentality says it isn’t worth doing if the profits won’t be large, and on the other, the non-profit mind doesn’t want to do it without grant funding. By thinking hard about our customer’s needs, understanding our competition, and thinking creatively about how to solve an endemic problem that takes a drain on our country on both the macro and micro-economic scale, we are building something that can truly make a difference. It’s time for us to finally put poverty out of business for good.
In 2009, I was privileged to co-create an awesome book, Business Model Generation, with Alex Osterwalder and Yves Pigneur. Co-creating the book with Alex was an amazing experience, created some lasting friendships with other co-creators, and of course Alex. After Angela Dunn's monthly twitter-chat, #ideachat, I decided to ask Alex what made him decide to do co-create this book:
Why did you decide to co-create Business Model Generation?
Several managers and consultants around the world were already using the content of my doctoral dissertation because I put it online. Yves, my former PhD supervisor, and I thought it would be great to involve these practitioners and their experience to evaluate our content and make the book more relevant. It would allow us to test each and every one of our ideas with practitioners immediately. Co-creation helped us assure we were on track in creating a useful book.
Of course we could only do this because we decided to self-publish at the expense of the comfort of the infrastructure of a publishing house.
How did you decide whom to invite?
I wrote a blogpost and anybody who paid our “entry fee” was able to join. Each member would become part of our so-called “Book Hub”, get access to content, be able to give feedback, and they would have their name in the book. The fee was first USD$24 and we raised it gradually to USD$243 to keep the community exclusive. We tested the limits.
How did you manage all the ideas and comments you received?
We posted our content continuously as so-called “book chunks”. These were raw and undersigned pieces of content. For each chunk we started a discussion thread and answered almost every comment personally. The comments helped us create better content. Sometimes we specifically asked people about their experience or about their opinion. For example, it took some iteration to get members of the Book Hub behind a title for the book.
What tools did you use to help with the project?
I customized a Ning.com platform – an online website to create communities. We had to do everything ourselves, since no publisher offered a platform to do this back then.
How did you decide which ideas to use?
We selected content and ideas based on the strength of the argument or the relevance of the experience. We already did research on business models for 10 years, so it was easy for us to weed out pure opinion. I believe every co-creation project needs an experienced core team that makes final content decisions.
Was most of the input valuable or was there a lot of “noise”?
Well, even when it was “noise”, it was usually a good indicator that our ideas were not clear enough or our arguments too weak. Very little content was useless. Of course some of the co-authors were more experienced than others and their comments were naturally more relevant. However, since we wanted to create an inclusive book we carefully listened to every single comment in order to sense what people were concerned about, what they wanted (or needed) to learn, and to learn how we could best convey our ideas.
What were the benefits of co-creating the book?
- It forces you to make every idea you write about relevant. Feedback is immediate, which makes you vulnerable as an author in the short term, but the long-term benefits outweighs this: it forces you to do your best for every piece of content you submit to co-creators.
- We could immediately test what would or would not work/resonate with our audience.
- Co-authors brought in a lot of experience and good comments that guided us throughout the writing process.
- The 470 co-authors became a powerful global sales force, because each and every one of them had their name in the book, contributed to it, and believed in the final outcome.
- It helped us pre-finance the expensive design and production of the book, since we managed the whole publishing process from A-Z on our own with a core-team of 5 people.
What were the limitations or obstacles, if any?
Co-creation is much more work than writing somewhere in a hidden corner and then publishing your content. However, the benefits outweigh the costs.
It was hard, hard, hard, to set-up everything ourselves and do something totally new and different. We were running the project on a shoestring budget, but aimed at creating a global management bestseller.
Nobody believed this could work: Two no-name authors who wanted to create a visual management bestseller and get people to pay to help him or her write the book. People thought we were crazy. All of them probably thought we were totally naïve.
Now publishers are studying our project to learn how they can set-up co-creation platforms for authors who want to go down a similar path.
What did you learn from the experience?
You need to be naïve enough to do things differently. No big publishing house would have allowed us to co-create a fully designed, four color business book in landscape format – because it was contrary to the publishing industry logic. However, we thought of Business Model Generation as a product, not just a book – similar to Apple products.
Our goal was to create the same kind of “unboxing experience” you have when you buy Apple products. This obviously meant breaking with most of the rules of traditional business book publishing. That’s exactly why it became a bestseller. Yves and I created a book on business models that we would have loved to buy ourselves. Since nobody had done it, we did it ourselves.
Would you do it again? And if so, what would you do differently?
We made countless errors on the way, but they were not foreseeable, since we created something totally new. We needed to make the mistakes to learn and iterated.
However, our biggest mistake was not sticking to our plan A of using Fulfillment by Amazon to distribute the book. We wanted to save the margins and went for plan B, which was partnering with a Dutch direct mailing company. That was a painful experience that I really wouldn’t want to live through again. After switching back to Plan A we got back on track again. After a couple of months of proving the success of the book we sold the publishing rights to Wiley – a big publishing house – in order to get physical distribution as well. Now it’s Wiley’s best selling international book.
What advice would you give someone who was thinking of co-creating/co-reviewing?
Don’t look at it as a pure marketing stunt, because it’s trendy to do co-creation. Ask yourself how the process of co-creation can help you craft a better product. Also, be aware that it’s much, much more work to co-create.