Profitability and Social Entrepreneurship - Literature review Example

Profitability & Social Entrepreneurship This paper examines the role of innovation in business. It identifies that innovation and profitability are primary needs for businesses around the world. It goes on to analyse the social needs of society and how attempts have been made to solve them by governments. It then moves on to identify the need for social entrepreneurship. It then tries to justify the role of social entrepreneurship in modern business and its role in management decisions Keywords: Innovation, Social Entrepreneurship, Profitability, Corporate Social Responsibility. Innovation and Business Historically, innovation is thought of as the basis of business (Audretsch, 2009: 2). Bessant & Tidd (2011: 8) classify the process of innovation into two main categories. The first category is invention and the second is improvement. When something is invented that solves a genuine problem in the society, it is presented to the public to help them solve their needs. However, the normal mode through which this is done, is to get people to part with some consideration in order to use newly invented things to solve their problems. This therefore calls for the formation of a legally recognized business to act as an entity to monitor and manage the process of presenting the invented material to the public. This is done through the commercialization of the idea which involves exchange of economic consideration. As time goes on and a business gets competitors and new trends come up, there is the need for the creation of new products and processes to prevent the death of an organization. Bessant & Tidd (2011: 27) therefore recommend that a business needs a blend of structured and emergent systems to manage innovation. This can be done by generating new ideas, selecting good ones and implementing them. Drucker (2007: 19) states that the word entrepreneur is a French word attributed to J. B. Say who coined the definition in the year 1800. It is interesting to note that the French Revolution had occurred a few years earlier. The main cause of the French Revolution was the fact that France, which was then an absolute monarchy was ruled by a class of people who had mismanaged the economy and had created a system whereby the ruling elite controlled everything to the detriment of the masses. The advent of the French Revolution brought about a trend whereby the masses sought to get equal opportunities and also use the principles of science that came with the Enlightenment in Europe to create the best possible economic system (Martinson, 2006: 137). Says definition of entrepreneurship is described by Drucker as shifting economic resources out of an area of lower productivity into an area of higher productivity and greater yield (Drucker, 2007: 19) This suggests that innovation has to do with efficient and effective use of resources for both the producer and for the consumer. For the producer, there is the need to find the best methods of providing the best products for consumers. Consumers also seek to get the best of products on the market. Innovation is therefore a very important element for the establishment and survival of businesses. Funding Innovation However, innovation is not easy in organisations. Innovation involves a lot of capital to fund research in a structured system (Neff, 2003: 76). Neff (2003: 78) does an analysis of two businesses that produce the same product. There is a constant pressure on both of them to offer their clients the best products and this means they will have to find ways and means of producing goods and services. The issue here is that research and innovation is based on a high degree of uncertainty. However, these two businesses will have to find ways of going through these uncertainties to deliver better quality products to remain ahead of the other. They will therefore need to find ways of funding their research and development system otherwise, they will have to settle for serious risks relating to their survival. Businesses go through four main stages; seed, start-up, early growth and expansion (UN Economic Commission for Europe, 2009: 62). At the seed and start-up stages, a business has a negative cash flow. Most traditional sources of finance will not want to provide money for any of business to fund research and development at these stages of their growth. Marver (1986: 473) states that “fear and greed have always ruled the stock markets”. This therefore means that most companies at the earlier stages of their establishments would have to fall on other sources of funding, otherwise they would never get established. Venture capitalists are amongst the few funding sources available for most start-up businesses. This is because they have the capacity to identify the most promising business ventures and develop efficient systems to reduce the risks inherent in start-up businesses they choose to fund (Greco & Shabi, 2008: 7). Lamoreaux et al (2009: 3) identify that the nature of financing available in a country affects the nature of technology and trends in innovation in the country. It is therefore important for businesses to have enough money to fund innovation. Without that, there will be limited innovation in a given nation and products available on the market would be of a lower quality and this would affect development on an aggregate level. Internally, businesses need sufficient money to be able to fund innovation and remain in existence. Without this, most businesses will cease to exist after a short while. What happens to Excess Funds? However, there is an interesting question about the future of a business after it has been able to find ways of building sustainable innovation systems. In other words, what happens when a business puts in place structures that will ensure that it remains profitable into the foreseeable future? Should the owners continue to accumulate wealth without thinking of other things? Hunter & Morris (2010: 2) analyses this question by saying that in the 21st Century, businesses go through four main phases. These phases are early stage/venturing, development and growth, transformation and social enterprise. At the first phase, a business either invents of finds an innovative way of presenting a solution to the needs of some members of the public in return for financial rewards. This is done by establishing a legal entity to run the intended business objectives to people in the society who are to pay a given amount of money in return for the service. When the business is established, the managers will have to continue delivering the products or service. This is done through the use of innovative systems and techniques to identify opportunities and then make the best out of them. When the business gets established, there is the need for the managers and staff to find ways of remaining in business into the future. This is done by gaining strategic grounds through the consolidation of competitive advantage (Porter, 2008: 6). After it becomes clear that the business as accumulated sufficient wealth to remain profitable into the future, the business then moves to consider giving back to society. This is the stage Hunter & Morris describe as the social enterprise phase. Social Solutions Public services have always been needed in the society. Beassant & Tidd (2011: 6) state that public needs like healthcare, education and social security affect the quality of life of millions of people in the society. There has always been the need for nations to to have such services and activities to enrich the lives of its people (Adis, 2008: 7). In medieval times, taxation systems were developed to help in the provision of social services for the entire community (Martinson, 2006: 56). In places where the government failed to support the provision of social services to the masses, there were revolutions and other forms of unrests that led to the need for equality (Martinson, 2006: 56). The principle of states providing welfare services has been a primary element of governance in modern times. After 1945, the world split into two distinct systems: the Communist East and the Capitalist West (Houghton, 2003: 2). Nations that came under the influence of the Communist East were ruled by a socialist model where every economic activity in the state was nationalised and used for the welfare of the members of the state. These nations were primarily nations that had the welfare of the masses at hand. In capitalist nations though, individuals were allowed to start their own businesses and run them to generate profits. However, governments in these nations had to intervene to ensure that the masses were able to get some level of social solutions in terms of education, healthcare and public infrastructure through regulation and other governmental influences. This effort by the state was strongly complemented by charitable organisations, opposition parties and pressure groups that sought to get businesses and the powerful to give some fair treatment to the larger society (Frances & Cuskelly, 2008: 4). After the collapse of the Soviet Union in 1991, which was attributed to the inefficiency and waste inherent in a purely socialist model of government the world moved to the Third Wave of Democracy (Houghton, 2003: 4). Democracy and equal opportunities became common throughout the world. This supported capitalism and internationalisation. This led to structures that supported massive growth in the private sector not only in the nation a company operated in other nations as well. However, the growth of economies was complemented in the growth of advocacy groups that sought sustainability in environmental and social issues (Wustenhagen et al, 2009: 1). These groups demanded that rich businesses give cognisance to all stakeholders including future generations in their operations and also give back to the masses and the society from which they made their wealth (Freeman, 1994: 412). Social Enterprise Social entrepreneurship is strongly linked to the activists, NGOs, policymakers, international institutions and corporations which address a range of social issues in innovative and creative ways (Nicholls, 2006: 30). In other words, social entrepreneurship has to do with the demands made by groups and organisations that seek to incorporate social concerns into the activities of a business. Social entrepreneurship therefore encourages businesses to consider social matters that are relevant to the larger society in their operations. Social entrepreneurship forces businesses to consider important and pressing issues in the society in their operations and the accumulation of wealth (Berndt, 2002: 159). This is because businesses make wealth by taking from the wider society. It is therefore vital for the business to look back to the society and give back to the society through various forms. Social entrepreneurship therefore forces organisations to be more responsive to their interaction in the larger society and make them more responsible in their activities. Social entrepreneurs use inside and outside oriented tactics to ensure that businesses remain socially responsible (Bornstein & Davis, 2010: 44). Social entrepreneurs and lobby groups in that category therefore uses methods to convince businesses from the outside and get them to do what is right. They also use direct methods of providing services that ensures that management do the right thing in terms of social responsiveness and responsibility. Internally, social entrepreneurship forces an organisation to come up with sound management practices that enables it to draw the balance between innovation/commercialisation and the genuine needs of the society (Munoz, 2010: 77). Kotler famously calls these drivers of sound management practices corporate social responsibility (Kotler & Lee, 2005: 4). Social entrepreneurship therefore forces a business to change to accommodate new trends in the society (Light, 2008: 204). Corporate social responsibilities forces management to think holistically by considering the genuine needs of all the parties that they come in contact with during their operations. This therefore means that social entrepreneurship forces a business to make new combinations that ensures that the business operates in a socially acceptable way at all levels (Fayolle & Matlay, 2010: 144). Durieux & Stebbins (2010: 47) identify that social entrepreneurship enables a business to act in a way that improves its image, justifies its mission and objectives and give back to the society. In other words, when a business operates with regards to genuine pressures in the society, it gets some level of sympathy and respect from the members of the general public. Also, it helps the business to prove to the world that it is not only interested in making profits but also doing something cogent to help make the world a better place. Additionally, social entrepreneurship helps a business to share its wealth with the aspects of the wider society that genuinely needs some kind of help. Through social entrepreneurship, the business helps the society to remain economically and socially healthy to ensure that the people would always remain safe to continue patronising the business products and services into the future. There are pressing social needs like the need for physical health which include housing, food and cloths as well as individual needs for survival that will always exist in every society (Gunn, 2010: 31). This is because there are various sectors in the economy that have been neglected for a very long time (Perrini, 2006: 188). Some of these problems are genuine problems that are caused by the lack of innovation and funds for the public sector and charitable organisations that might have good intentions of supporting these groups of people in the society (Doherty & Thompson, 2010: 361). Through social entrepreneurship, a business can identify these genuine needs and make reasonable attempts to support the state and relevant authorities charged with these activities to deliver the best of results to areas that are neglected. Social entrepreneurship therefore has a role in enabling a business to deliver its social obligation of giving something to the society that made it what it is. Conclusion Innovation is central to all businesses around the globe. Invention gives the impetus for business in the commercial sense. Innovation is what keeps the business going. Both invention and innovation are based on research which demands a lot of funding. Thus a business has a primary objective of remaining innovative to survive and this means finding money to pay for research and operational costs. Changes in the larger society has made it quite difficult for governments to provide all the welfare needs of all people. There is therefore activism and awareness on the need for highly profitable organisations to give back to the society through social entrepreneurship. Social entrepreneurship helps businesses to justify their existence, improve their image and give back to the society they operate in. It enables organisations to serve all their stakeholder needs and re-define their strategies to cover a larger scope of the society. 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