McKinsey & Company

McKinsey on Society


Voices Social entrepreneurs

Social enterprise: It takes a network

Raj KumarDEVEX

Raj Kumar is cofounder and president of Devex, a social enterprise serving the international development, humanitarian aid, and global health communities. Founded in 2000, Devex serves a global community of 500,000 aid workers and 1,000 donor agencies, companies, and NGOs with news, business information, and recruitment services.

The popularity of social enterprise—business with a social mission—is surging. MBA courses on the subject are oversubscribed and the number of social enterprises is growing around the world. But it’s hard enough to start a successful business; founding a social enterprise that must compete in the marketplace and create social impact is an even taller order. That’s why few social enterprises have achieved substantial financial scale: decades after the first social enterprises were founded, there are few if any examples with revenues of $1 billion per year. For example, in annual revenue terms, Amul Dairy in India has just over $1 billion, BRAC in Bangladesh has $200+ million, and Grameen Bank, also in Bangladesh, has under $100 million. Perhaps there are a few other social enterprises in these leagues, but not many. By comparison, in India alone there are 124 traditional, profit-oriented businesses with over $1 billion in revenues.

There are two important realities of social enterprise that must be acknowledged at the outset. First, social enterprises are at a comparative disadvantage to business. At its core, this is because the social impact these enterprises are seeking entails cost. In some cases, this may be because social enterprises pick the most difficult, not the most lucrative, markets in which to work. And if they find a way to turn a profit, traditional businesses will come pouring in. For example, a social entrepreneur may begin by serving a difficult market, such as the rural poor, that big business has largely ignored. At first, the social enterprise may be able to provide the best, lowest-cost solution to its customers in that market, perhaps by investing “sweat equity.” But once the business grows and the model is proven, the transaction costs of market entry come down and competition is likely to arrive. Many of those competitors will be better funded. A case in point is the microfinance industry. In the most difficult markets, it is often social enterprises leading the way; as markets get more developed, commercial banks begin to dominate.

In addition, new competitors may not feel the same need to serve a social good. A social enterprise may make hiring from disadvantaged populations or producing environmentally-friendly products a priority. But these kinds of initiatives, which support a social mission, may lead to higher costs and put the social enterprise at a price disadvantage.

Second, it is difficult to have a social impact by yourself. Much of the impact that social enterprises achieve is the result of influencing others to follow their lead. When a social enterprise shows that a product can be produced using fair-trade policies or with less environmental impact, for example, it pushes businesses and consumers to expect new standards in the marketplace. The organic food, cosmetics, and renewable-energy industries are all examples of cases where social- enterprise pioneers have pushed big businesses to take up new social and environmental standards.

The result of these two factors—the comparative disadvantage of social enterprises against businesses and the fact that social impact happens more through influencing others than through direct action—suggest that social enterprises themselves are likely to remain relatively small in financial terms. Even the most business-oriented social enterprises will find it hard, and perhaps unnecessary, to grow into Fortune 500 companies.

Given that reality, how can social enterprises maximize their impact without having to achieve the financial scale that would make them major players in whole sectors of the economy? The answer lies in networks. Where one social enterprise may be limited in the impact it can have, a network of social enterprises can create opportunities for substantial financial scale and impact.

Those social enterprises that focus on the most difficult markets, often through bottom-of-the-pyramid business models, can use networks to share technology, jointly produce goods and services that meet tough environmental and social standards, and purchase fair-trade inputs as a group—effectively getting the value of a larger enterprise while remaining a focused social enterprise. This can help individual social enterprises to compete against bigger businesses that have lower cost structures due to economies of scale.

Social enterprises can also use networks to educate consumers and set market standards. Where meeting high environmental and labor standards may entail greater costs for social enterprises, through networks these groups can work together to educate consumers about the difference between their products and those offered (possibly at lower prices) by other businesses. In the United Kingdom, the Social Enterprise Mark is a brand used to identify social businesses so that consumers who want to support social and environmental goals know which products and services to favor. The mark also connects these social businesses to each other and to social-enterprise networks throughout the country.

Finally, networks can also be effective in lobbying government and regulatory agencies to create a social enterprise-friendly business environment. The business and NGOcommunities use networks (often called trade associations in these cases) for precisely this reason, influencing tax policies and regulations that benefit their form of organization. Social enterprises, given their relative small size, will have to work together if they hope to sway government to support them as a group distinct from traditional for-profit and non-profit enterprises.

There are many examples of social-enterprise networks, some still in their infancy, others much more developed, such as the annual Skoll World Forum. The important point is that those who wish to scale social impact would do well to focus on supporting robust networks—essentially the infrastructure of the social-enterprise industry—in addition to individual social entrepreneurs. In time, the social-enterprise community may find that measuring scale and impact at the network level (rather than at the level of the individual enterprise) is a more accurate measure of the true scale of social change and a better way for investors to gauge the return on their social investment.

E-mail alerts

Get our latest knowledge emailed to you

Follow us