29 Aug 2005  Research & Ideas

How Organizations Create Social Value

A study of smart practices by social and business organizations in Iberoamerica. Research by HBS professor James Austin, HBS senior researcher Ezequiel A. Reficco, and UNIANDES professor Roberto Gutiérrez.

 

A recent study on the factors that contribute to successful high-performance social enterprises finds a connection between enterprises that link economic value with social value.

This was the focus of a study presented at the colloquium, "The Social Enterprise Knowledge Network: Seeking Success in Social Enterprise," ending August 1. This two-year study was the second carried out by SEKN since it was founded in 2001 as a research partnership between HBS and leading business schools in Latin America and Spain. SEKN's research centered on smart practices by social and business organizations in Latin America and Spain.

For good governance you need some degree of overlap between governance and management.
— Ezequiel A. Reficco

This research will be published in Harvard's David Rockefeller Center for Latin American Studies book series through Harvard University Press.

The goal of the colloquium is to help leaders in businesses and society create social value for their communities, while in parallel strengthening their organizations.

The study centered on forty organizations—twenty NGOs (non-governmental organizations) and twenty corporations—deemed to be high performers in social enterprise (SE). Through interviews, field research, and comparative analysis, HBS professor James Austin, HBS senior researcher Ezequiel A. Reficco, UNIANDES professor Roberto Gutiérrez, and INCAE professor Enrique Ogliastri presented what the SEKN researchers found to be smart practices for organizations wanting to create social value.

The researchers stressed the importance of synergies between Economic Value (EV) and Social Value (SV), calling them "two sides of the same coin." By aligning EV and SV, both nonprofits and corporations can:

1. Improve operations.

  • Nonprofits can better focus on creating economic value by minimizing costs and maximizing efficiency.
  • Companies can bring social value into alignment with their core competencies, improving motivation, loyalty, skill development, and even product differentiation.

2. Consolidate relations with stakeholders.

  • For both nonprofits and corporations, a focus on EV and SV can enhance their reputation with consumers, government, and community. Corporations are seen as caring, and nonprofits are seen as efficient.

Comparing Nonprofits and Corporations

When comparing the social enterprise activities of nonprofits and companies, the researchers found that rich opportunities for mutual learning exist between the business world and nonprofits. They found that no matter what type of organization they were looking at, strategy and leadership were the two drivers that permeated smart practices across all organizations. Researchers then compared how they were handled in the nonprofit and corporate sectors.

Key elements of strategy were:

Initial Impetus. A nonprofit is founded in response to a problem; in the corporate world, social initiatives are often started because something has interfered with the business.

Focus. Nonprofits start with a sharp focus on a problem—a focus that over time broadens as related issues are addressed. (Sometimes a nonprofit's cause is broadened to appeal to a larger donor base.) By contrast, the focus of businesses involved in SE tend to sharpen over time as they home in on what they do best and become increasingly engaged in a specific issue.

Alignment. The nonprofit's challenge is to strengthen its economic value to match the efficacy of its social value. Corporations need to bring social value in line with their economic successes.

Planning. Researchers found a paradox here. Although planning is considered a core competency of corporations, nonprofits were often more effective in planning their social actions. This is a difference in degree rather than kind. Corporations are relatively recent entrants into the social arena and are still learning how to integrate it into their mainstream management practices.

Adaptation. This can be an important issue for businesses. Corporations need to decide whether their social enterprise efforts are driven out of the existing corporate structure or if they need to add a department or group dedicated to SE initiatives. Another option: Spin off a separate structure, such as a corporate foundation.

Key elements in leadership were:

Founders. Attendees expressed frustration over leadership and governance issues that stemmed from the fact that many nonprofits are started by a single person. Founders usually have their own ideas about what is important, and if your ideas deviate from theirs, you risk being ignored or even ostracized. The researchers pointed out that nonprofit organizations often become more agile and effective once the founder is succeeded.

Problem diagnosis. Corporations generally have less knowledge than do nonprofit groups about the social problem, so they experience more ramp-up time. In nonprofits, the founders often have technical expertise in the problem area and are able to do a more in-depth analysis.

Resource mobilization and institutionalization. When it comes to creating social value, businesses are able to mobilize internal resources more readily than are NGOs, but often have greater problems institutionalizing the social activities because they are adding a new dimension to something that already exists. Nonprofits, in contrast, start as social enterprises, with the explicit goal of creating social value, but they have to mobilize resources from external sources.

Leadership style. "For good governance you need continuity," said Reficco. "You need some degree of overlap between governance and management."

Smart operating practices

The research identified opportunities for mutual learning in areas such as value generation, problem diagnosis, motivation, and performance measurement. The SEKN group identified smart operating practices that help organizations implement successful strategies. Two important elements to get right are performance management and personnel, they said.

What creates superior performance management?

  1. Attention to outcomes.
  2. Focus on stakeholders. (Surveys, satisfaction. How do funders and community perceive what we do?)
  3. Reversing a weak culture of outcome.
  4. Wisdom comes with age; capitalize on experience.
  5. Get the board on board.
  6. Close alignment between strategy and mission.

How can organizations get the right people with the right skills to develop social value?

  1. The recruiting processes should be centered on personal values. Then, hold on to the good people. Corporations should integrate a social dimension in evaluations.
  2. Organizational learning must be promoted. Create bridges between individual and organizational learning. Many successful organizations use advisory boards as sources of critical skills.
  3. Excellence in management should be integrated with social sensitivity.

The future

A large percentage of people in Iberoamerica live in poverty. They have tried to improve their situation through government, civic society, and business philanthropy. But what if business could take this one step further? Companies could develop products for people that would also encourage development and bring more people into the market.

Through in-depth research, leadership colloquiums, and teaching initiatives, the Social Enterprise Knowledge Network generates and disseminates knowledge that will improve the ability of business leaders to engage successfully in the social sector.

For more information, see sekn.org/.

About the author

Manda Salls is a content developer for Baker Library.