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Purpose of Research
How have social enterprises fared better than their for-profit rivals during the recession?
The economic recession has had a negative impact on the performance of most businesses in the UK. However, this appears not to be the case with social enterprises. During the recession, most social enterprises seem to be growing and have reaped more benefits as they seek to achieve their goals. Social investment has remained vibrant even in the face of the economic recession. Unlike the for–profit enterprises, social enterprises derive their capital and labour for philanthropic, government and commercial bodies. This means that social enterprises have a great pool, of investors as well as a greater capacity to attract talented and more skilled labour. Legal structures in the UK have been reformed in such a manner that they favour the social enterprises. This means that the social enterprises are less likely to suffer from corruption as the regulations have been made to ensure transparency in the running of social enterprises (Armstrong, 2010).
I chose this topic as a result of studying several articles about social enterprise in the newspapers which aroused my intellectual curiosity. In formulating a dissertation topic, I decided to focus on personally known social enterprises. I reviewed recent newspaper articles. I was able to find many cases about social enterprises in the UK. In essence, most of the articles focused on business prosperity during the recession (such as posting record profits). As I read, a trend emerged showing sustained growth and good long-term prospects for social enterprises compared to for-profit businesses. This rang particularly true especially for ‘mutuals’, or companies that have a profit-sharing scheme. For example, many stories this summer were about the Co-operative Bank and John Lewis. I read some more online about these two companies and their growth and looked at recent marketing campaigns. The question that came to my mind is: how are these two specific companies doing so well in a recession, when so many companies aren’t?
The UK is home to 62000 social enterprises with an annual turnover of £32 billion. This translates to about 5 per cent of the total number of businesses in the country. A whooping 56% percent of all social enterprises have recorded an increased turnover. On the other hand, another 20 percent has dropped their turnover since the recession begun. Only 28 percent of for-profit enterprises have had increased turnover. On the other hand, 43 percent of them had reduced turnover. This means that social enterprises apart from performing well in times of the recession, they are also facing a more certain and secure future. In terms of profit, social enterprises have been able to overcome the economic downturn. In this regard, more than two-thirds of them have been making profits during the recession while the other 16% have been breaking even (Datamonitor, 2011). This is significantly higher than what the for-profit enterprises have managed. The aim of my dissertation is to elaborate on the factors that have made mutuals more robust than their for-profit counterparts. However, this begs several questions that include the following:
What aspects of the way the businesses are run have made them more successful (if using profit as the measurement of success)?
Social enterprises have several distinct business practices that make them resistant to the economic recession. Firstly, social enterprises do not have a fixed operating model. Social enterprises use a strategy where they are highly differentiated with different and varied funding motivations. They are also focused on the achievement of social missions and the upholding of certain social values such as offering employment. Secondly, social enterprises have a relaxed and clear objectives and mission growths. Unlike for-profit businesses that stick to their growth missions even in the recession, the SEs are flexible, and most of them shelved their growth missions so as to increase their ability to resist the economic recession (Kolasa, Rubaszek & Taglioni 2010).
How have they continued to attract customers to their shops despite falling numbers of patrons during the recession?
Social enterprises have a largely positive image in the eyes of the public. This means that most people understand that doing business or buying stuff at an SE will help in advancing the social mission of the SE. This attraction is good PR for the SE, which means that donors and consumers are willing to help the company more than for a for-profit business. Secondly, the SE enjoys funding from various stakeholders. They also enjoy free labour from volunteers and well wishers. This means that they are also able to employ qualified personnel, as well as gain from discounts. The products and services offered by the SEs are thus likely to be of higher quality and at cheap prices given that the business is not interested in big profit margins as the case for profit-oriented businesses (Worth, 2012).
To what measurable extent has the recession impacted their business?
Notably, 56% of all social enterprises in the UK have recorded an increased turnover. In addition, another 20 percent has dropped their turnover since the recession begun. Only 28 percent of for-profit enterprises have had increased turnover while 43 percent of them have reduced. This means that, apart from performing well in times of the recession, social enterprises also face a certain and secure future. In terms of profit, the social enterprises have been able to overcome the economic downturn with more than two-thirds of them being able to make profits during the recession while the other 16% percent have been breaking even. This is significantly higher than what the for-profit enterprises have managed. This is not to say that all SE have not been negatively affected by the recession as some of them have been negatively affected. However, this is dependent on the industry in which the business operates. For example, the construction industry has been the most affected. While both the SEs and the for-profit enterprises have been negatively affected, the SEs have fared better (Hudson, 2012).
In a broader sense, are mutuals more competitive in their sector/industry by virtue of containing positive aspects falling into one of the questions above?
The positive appeal that Social enterprises have on the public is a great factor in their success. Being branded a social enterprise is indeed is a great way to improve the organization’s image. However, it is not possible to determine what the effect of being branded an SE may have on the business. This branding has both a positive and a negative effect. There are many customers who will want to buy goods from a social enterprise since they feel that, by doing business with them, there is a way of doing charity. However, Worth (2012) noted that being perceived as charity may not necessarily attract new customers. Some of the customers may associate the brand with poor and deficient service and thus avoid the services. For example, businesses that employ handicapped people are sometimes shunned away by citizens in the UK after they wrongly perceive the services offered to be below par.
To try and aim towards an answer to these questions, I have formulated the following objectives:
- To determine the business practices that are traditionally used by social enterprises in the UK
- To determine how the economic recession in the UK has impacted on the resourcing behaviour of social enterprises
- To determine what strategies for mitigating the economic recession have been adopted by Social enterprises in the UK
- To determine how business practices of social enterprises differ from those used by for-profit enterprises
- To determine how the mitigation strategies differ between social enterprises and for-profit businesses
It is envisioned that by adequately investigating these objectives and analysing the research conclusions, this dissertation will be able to give an answer to the research question.
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As far as ‘research setting’ is concerned, the literature review discussed below threw up several mutual that were mentioned frequently in newspaper articles and magazines. I have chosen two, in two separate sectors (and in fact two different types of enterprise). I believe these are suited to this dissertation: The John Lewis Partnership, and The Co-operative Bank. I chose these two for a few reasons:
- They are both well-known brands in their sectors (The John Lewis Partnership is involved mainly with food and non-food retail), and the Co-operative Bank, which is a personal banking institution within the Co-operative Group. Being well known means that information on the business would be easier to obtain.
- I have personal experience of using them both.
- Recent news articles have suggested that these two companies are doing better than the majority of their sectors. For example, the John Lewis Partnership has seen its turnover and net profit increase in a linear fashion from 2007/08 (£6.8 billion turnover £320.4 million net profit) to 2011/12 (£8.73 billion turnover, £358.8 million net profit). Similarly, the Co-op Bank saw applications for accounts increase by 25% over a single week in July 2012. At the same time, it acquired 632 branches of Lloyds.
The purpose of this paper is to understand how SEs in the UK performed as compared to for-profit businesses. To do this, we should also understand what makes a business to be classified as a social enterprise. Contrary to popular belief, a social enterprise is not an organization, but rather an activity. Organizations that engage in this activity are referred to as social enterprises. Defourny (2004) noted that SEs have the following characteristics:
- A high degree of autonomy
- Activities include paid work – even a minimal amount
- An explicit aim to benefit the community
- Decision-making power not based on capital ownership
In selecting the case studies, my paper used the following definition as a guideline:
- Generate more than 25 percent of its income from trading goods and services (earned income)
- Derive less than 75 percent of its turnover from grants or donations
- Have mainly social and environmental aims
- Not pay above 50 percent of trading profits or surpluses to owners or shareholders
- Principally reinvest its surpluses in the business or the community
Social enterprises will seldom lack resources to conduct their businesses. According to Morley (1968), social enterprises are always engaged in ambitious programs, and the financial problems are part of their operations. Later, Moizer & Tracey (2010) asserted that limited access to resources poses several threats to the survival of a social enterprise in the long term. The bottom line is that social enterprises will need resources in the fulfilment of their objectives. The lack of these resources as it is the case in times of economic recession requires adjustment on the part of the business.
The available literature on social enterprises indicates that, for social enterprises to survive in an economic recession, they embrace ‘social embeddedness’ in the social relations that the enterprises operate (Chell, 2007). Meyskens, Robb-Post, Stamp, Carsund and Reynolds (2010) developed a conceptual framework based on the resource-based perspective of the firm and the resource dependency theory whose purpose is to help us better understand how social, enterprises engage with other social factors. In his conclusion, the author noted that a proper mix of the relations by a social enterprise gives the business an opportunity to maximize its economic value. The inference here is that the external factors do not have much effect on social enterprises in times of recession. In this case, their performance is largely reliant on how the business relates the various social relations.
Meyskens, Robb-Post, Stamp, Carsund and Reynolds (2010) noted that the combination of these factors is important to the survival of a social enterprise. In most instances, these factors are not affected by the economic recession, which thus cautions the social enterprises. For small social enterprises, there are several alternative sources of finance. One of the measures is bootstrapping, which involves the acquiring of resources that are critical to the survival of a social enterprise, especially in times of economic downturns. Aldrich and Martinez (2001) talked of one such alternative, which is used for mitigating lack of finances. Ebben (2009) noted that a bootstrap responds with a social response to the economic environment. This can only happen when the business is seriously constrained.
Another aspect that has been researched is public perception of social enterprises. A report published by Simon and Mayo (2010) stated: “The associations of fairness and trust attached to a business being co-operative is high; compared with shareholder companies, co-operatives are viewed far more positively by the public” (Simon and Mayo, 2010, p. 3). However, it also states: “There are significantly higher public recognition and more understanding of the term co-operative than of ‘social enterprise” (Simon and Mayo, 2010, p. 3). The data in this report were generated from a large online YouGov survey conducted in 2010.
Since the global economic downturn of 2008, most businesses throughout the UK have seen a decline in revenues. However, as has been noted by many writers during my literature review, social enterprises have fared better than most. For example, a 2010 study published by the New Philanthropy Capital (Ógáin, 2011) stated:
“We found that the organisations in the sample [social enterprises] were 20% more likely to survive for five years than the average UK business, had very high average growth rates (17% annually) and reported continuous growth even during the recession. This is similar to previous studies, including the 2009 Social Enterprise Coalition study that showed that 56% of social enterprises reported an increase in turnover during the recession compared to 62% of charities who reported reductions in funding” (Ógáin, 2011, par. 4).
One reason for this proposed by the NPC is that social enterprises typically have a more diverse funding structure as compared to for-profit organisations and charitable organisations. A 2010 article by Martin (2010) noted that, “According to Society Media’s SE100 index, the top 100 social enterprises – companies which put all or part of their profits into a social or environmental cause – grew by almost 79% in the year to March 2010” (Martin, 2010, par. 1).
The literature thus far has demonstrated the following:
- Social enterprises are (in most cases) doing substantially better than their for-profit rivals
- The John Lewis Partnership has experienced growth that leads its respective retail sectors
- The Co-Operative Bank has suffered some heavy financial losses due to a (possibly temporary) lack of liquidity owing to bad corporate debts and the recent large takeover of over 600 Lloyd branches.
- Both companies continue to expand, although the Co-op’s strategy has more inherent risk and is an enormous and aggressive change over its current form.
- The UK public view co-operatives much more favourable than for-profit firms.
- Even in times of recession, customer loyalty will drive customers to the social enterprises as compared to the for-profit businesses.
This paper adopts a qualitative methodology as well as a case study design. There is little research on organisational behaviour in social enterprises that make case studies effective in conducting this research. The paper will analyse a number of small enterprises that qualify as social enterprises. These small firms will be selected from different economic sectors so as to get a detailed and clear picture. A total of five social enterprises operating in the UK was selected for purposes of this research.
The guiding principle is the research question itself. In this instance, and for the purposes of the dissertation, the research philosophy is primarily an interpretive approach. That is to say that this paper seeks to compare and contrast the many facts presented by data and the meaning that is drawn from these (Johnson and Christensen, 2010). This seems to be the most suitable philosophy for contrasting information from several different topics. Furthermore, given the scarcity of data on most organizations, this paper will choose an organization whose analysis reports are available at the Brookes University Library.
Data for this dissertation will be collected from secondary sources detailing the points set out in Section 1. Access to the secondary sources will be through the Brookes University Library that contains a number of excellent published and electronic resources. The validity of this research is expected to be solid as the research question chosen will give a comprehensive view of the topics covered (O’Donnell, 2004; Karnac, 2008; Stewart & Kamins, 1993). The synthesis of the findings of these different topics interpolated together should be useful to future researchers covering similar topics to this research question. The transparency of the data should be very high. In this case, there will be little influence from those within the case study companies leading to a biased view of the data by using a theoretical research strategy. In turn, this influences credibility of the expected results (Everard, Morris & Wilson, 2004; Remenyi, 1998; European Conference on Research Methodology for Business and Management Studies, Brown, & Remenyi, 2004; Ketchen & Bergh, 2004).
The potential limitations stem from the lack of interviews. This is in part due to personal lack of connections to individuals within the case study businesses, which is a large barrier to access. However, as discussed previously, this is advantageous when analysing the influence of a company’s business practices on their profits.
Ethical considerations are slightly minimised by the lack of interviews conducted for this dissertation. Within the proposed research strategy, maintaining neutrality and transparency in research (e.g. not choosing sources that could be considered to be biased, such as obvious public relations press releases and other articles-cum-advertising) is likely to be the largest ethical challenge faced by this author (Corey, Corey & Callanan, 2007; Corey, Corey & Callanan, 2011; Lo, O’Connell & National Research Council (U.S.) 2006).
The following timescale is proposed for the research:
|Finding relevant sources (using the library, online journals and newspaper articles). This should be more than sufficient to identify the resources that will be needed, and indeed useful||January – May|
|Analysing and comparing resources, coding them for common themes and determining if further research needs to be undertaken||May – July|
|Writing (much may be written during the coding and analysis phase, but this is set aside to complete the final draft)||July – September|
All of this should be more than ample to complete the dissertation on time as there are no foreseen obstacles that may arise. Literary sources are ample, and drawing conclusions from the analysis should not present any problems. This paper has sought to illustrate the relevance of this topic.
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