Types of Social Enterprises Models

Types of Social Enterprises Models

The concept of ‘social enterprise’ is often understood differently by different people, mainly because it is an umbrella term which includes various business models. Cheng and Ludlow (2008) introduce a framework that outlines three models of social enterprises. Each of these types is different in the way through which its activities create financial and/or social returns. This framework is useful for investors and others in thinking about the consequences of certain investments/activities in both social and financial terms. The following three social enterprise models are mentioned:

1. PROFIT GENERATOR MODEL: within this business model, the activity itself is only focused on the financial returns, which can then be used - after having created the returns – to create social returns. In other words, the trading activity has no direct social impacts; only an indirect effect through using the financial returns to generate social impacts. Examples are: companies with a CSR program; trading subsidiaries of charitable organizations.
2. TRADE-OFF MODEL: Within this model a trade off is made between creating financial returns on the one hand and realizing social impact on the other hand. In this case, the trading activity will have a direct social impact, even without generating any financial returns. However, it is also possible that a risk-adjusted commercial rate of financial return is created. For example through the creation of both an acceptable financial return and social impact. Organizations within this model are able to attract commercial actors and create a social impact that is acceptable to its other stakeholders. Examples: fair trade organizations; microfinance companies; companies that hire disabled workers.
3. LOCK-STEP MODEL: Within this model, the trading activity always has a social impact. What is characteristic about this model is that the social impact of a certain trading activity moves parallel with the financial returns. Opportunities for this model exist even where financial returns are lower than the risk-adjusted commercial rates, where these returns will often increase during later stages of developments. For example, if there would be no market yet for renewable energy, a commercial rate cannot be created. Only when the market becomes mainstream, the company can generate risk-adjusted commercial rates of return. Examples: renewable energy companies; organic food companies; cooperatives.

Source: Cheng, P. and J. Ludlow (2008) “Three Models of Social Enterprises” Charities Aid Foundation Venturesome.

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		2 Jaap de Jonge Editor, Netherlands
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