Chapter 6

Developing a Social
Venture
Sustainability Model
Beugré C.

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 Chapter Objectives

1. Explain the concept of business model.

2. Describe the components of a business model.

3. Define the sustainability model of a social venture.

4. Explain the social business model canvas.

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 Defining a Business Model

• Before defining the concept of business model, it is important to understand

what a model is.

• Simply put, a model is a simplified description of a phenomenon.

• A model is a plan or diagram that’s used to make or describe something.
• The American Heritage Dictionary defines a model as a schematic
description of a system, theory or phenomenon; a small object, usually built
to scale, that represents in detail another, often larger object.

• The concept of business model is relatively new and there is currently no

agreement upon its formal definition.

• Generally speaking, the concept of business model is defined as the rationale

of how a company will create, deliver, and capture value.
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 Defining a Business Model
• The first part, creation, refers to the new product or service the new firm
intends to offer.
– Is the new product really new?
– Does it offer something of value to the customer?

• The second aspect concerns how to bring the product or service to the
customer and deals with processes.

• The third element of the definition deals with how the firm will generate
profit by providing the product or service.
– For an entrepreneur, it addresses the question of how the new venture will
generate profit by exploiting the opportunity.

• The business model can be conceived as the architecture of the value

creation, delivery, and capturing mechanisms.
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 Defining a Business Model

• A content analysis of 30 definitions of business model has led to the

identification of three general categories that are deemed important:
– economic,
– operational, and
– strategic.
• The economic component of a business model concerns how the firm will
generate revenue and make profits by exploiting the business opportunity.
– Decisions made at this level include revenue sources, pricing methodologies,
cost structures, potential margins, and expected volumes.
– This component reflects the conceptualization of the business model as a
statement of how a firm will make money and sustain its profit stream over time.
– It focuses on the revenue generating aspect of the venture.
– As such, revenue is used as a metric to gauge the effectiveness of the business
model. Hence, a successful business model will generate revenue, whereas a
failing business model will not generate revenue.

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 Defining a Business Model

• The operational component of the business model focuses on the internal

processes and design of infrastructure that enable the firm to create value.

– At this level, the entrepreneur is concerned with decisions related to

production and delivery methods, administrative processes, logistical
streams, and resource flows.

– This component includes the operationalization of the business model as a

system of activities and reflects the design of key interdependent systems
that create and sustain a competitive business.

– An activity in a focal firm’s business model can be viewed as the

engagement of human, physical, and/or capital resources of any party to
the business model to serve a specific purpose toward the fulfillment of the
overall objective.
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 Defining a Business Model

• The strategic component emphasizes the overall direction of the firm.

– It includes the firm’s market positioning, interactions across
organizational boundaries, and growth opportunities.

– This component is included in the conceptualization of the business

model as a concise representation of how an interrelated set of decision
variables in the areas of venture strategy, architecture, and economics is
addressed to create sustainable competitive advantage in defined markets.

– Here, the business model represents the totality of how a company selects
its customers, defines and differentiates its offerings, identifies the tasks it
will perform itself and those it will outsource, configures its resources,
goes to market, creates utility for customers, and captures profit.

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 Importance of a Business Model
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• When discussing the importance of business models, it is worth asking the
following three questions:
– Why does an entrepreneur need to build a business model?
– What is the purpose of a business model?
– Does having a business model enhance the efficiency and effectiveness of the
firm?

• Specifically, business models help companies focus their energy on what

matters most.

• A good business model yields value propositions that are compelling to

customers, achieves advantageous cost and risk structures, and enables
significant value captured by the business that generates and delivers
products and services.

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 Importance of a Business Model
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• According to Barringer and Ireland, having a clearly articulated business
model is important because it does the following:

1. Serves as an ongoing extension of feasibility analysis (a business model

continuously asks the question: does the business make sense?).

2. Focuses attention on how all the elements of a business fit together and
how they constitute a working whole.

3. Describes why the network of participants needed to make a business

idea viable is willing to work together.

4. Articulates a company’s core logic to all stakeholders, including its

employees.
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 Importance of a Business Model
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• Other authors have underscored the importance of the business model in
slightly different ways, although the core elements remain similar.
• For example, McGrath contends that:
1. Focusing on business models reinvigorates a view of firms as continuously
engaged with and adapting to changing customer values. Business models
that do not create value for customers do not create value for the firms that
seek to serve those customers either.
2. Business models often cannot be fully anticipated in advance. Rather, they
must be learned over time, which emphasizes the critical role of
experimentation in the discovery and development of new business models.
3. The business model construct encourages conversations which might identify
early warning signs of model weakness and prompt the search for new ones.
4. As business models themselves evolve and mature, adopting the notion
suggests a developing understanding that strategy itself is quite frequently
discovery-driven rather than planning-orientated.

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 Importance of a Business Model
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• A business model works as both a calculative and a narrative device.
• It allows entrepreneurs to explore a market and to bring their innovation, a
new product, a new venture and the network that supports it into existence.

• The business model encourages the entrepreneur to:

– conceptualize the venture as an interrelated set of strategic choices;

– seek complementary relationships among elements through unique

combinations;

– develop activity sets around a logical framework; and

– ensure consistency between elements of strategy, architecture, economics,

growth, and exit intentions.
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 Importance of a Business Model
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• A business model is important because it helps a venture to determine the
configuration of activities necessary to add value to the customer’s
experience while keeping the venture profitable.
• Understanding such configuration will help the entrepreneur to assess which
activities are necessary to increase value and which are peripheral.
• Despite its importance, a business model is not a cure-all.
– Technology can affect the delivery component and the cost side of the business
model.
– A business model can also be context-dependent.
– It can work perfectly in a given environment and fail in another environment.
– An illustrative example was Dell Computers’ direct business model which was
successful in the U.S but failed in China.
– This is because Chinese customers preferred to see the physical products before
buying them.

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 Business Model and Strategy

• The development of business models is closely related to strategy

formulation.
• Thus, it is important to explore the link between the two concepts.
• According to Porter, strategy is mainly about performing different activities
compared to the competition or performing similar activities better.
• The concept of business model includes operational effectiveness and
efficiency, which concerns the performance of several activities to create and
capture.
• As a consequence, a business model has elements of both operational
effectiveness and strategy.
• Whereas business models refer to the logic of the firm—that is, how it
operates, creates, and captures value for stakeholders in a competitive
marketplace—strategy is the plan to create a unique and valuable position
involving a distinctive set of activities.

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 Business Model and Strategy

• Table 6.2 illustrates a comparison between business model and strategy,

particularly product market strategy.
• It shows that a product market strategy differs from a business model mainly
through its focus on the positioning of the firm vis-à-vis its rivals
• While a business model does facilitate analysis, testing, and validation of a
firm’s strategic choices, it is not in itself a strategy.

• Although the concepts of business model and strategy are related, they
represent different levels of information that are useful for different purposes.
• For example, some authors see the business model as an interface between
business strategy and business processes.
• Business strategy explains how companies hope to do better than their rivals,
while business model describes how the pieces of a business all fit together.

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 Table 6.2 Business model and product market strategy
  Business model Product market strategy
 
Definition A structural template of how a focal firm transacts Pattern of managerial actions that
with customers, partners, and vendors. It captures explains how a firm achieves and
the pattern of the firm’s boundary-spanning maintains competitive advantage
connections with factor and product markets. through positioning in product
markets.
Main questions How to connect with factor and product markets? What positioning to adopt against
addressed Which parties to bring together to exploit a rivals?
business opportunity, and how to link them to the What kind of generic strategy to
focal firm to enable transactions (what exchange adopt (cost leadership and/or
mechanisms to adopt)? differentiation)?
What information or goods to exchange among When to enter the market?
the parties, and what resources and capabilities to What products to sell?
deploy to enable the exchanges? Which customers to serve?
How to control the transactions between the Which geographic markets to
parties, and what incentives to adopt for the address?
parties?
Unit of analysis Focal firm and its exchange partners. Firm
Focus Externally oriented: focus on firm’s exchanges with Internally/externally oriented: focus
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light of competition.
 Components of a Business Model

• As is true for the definition of business model, there is scant agreement on

the components of a business model.

• However, entrepreneurship authors have provided some hints about what

should be included in one, especially for new ventures.

• In their textbook, Gartner and Bellamy suggest the following four

components of a business model:
– revenue sources;
– cost structure and drivers;
– investment size; and
– critical success factors.

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 Table 6.3 The Four Components of a Business Model

Revenue Cost structure Investment Critical success

sources drivers size factors
 
All revenue The cost Amount and Elements that
streams a structure of a timing of have the greatest
particular business model investment to impact on the firm
business model (fixed, variable, produce positive becoming
will produce, and recurring, etc.), cash flow, profitable.
the source, size, relative including cash
significance, and importance, and required for
growth potential how it may start-up and
of each. change over working capital.
time.
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 Evolution Stages of a Business Model

• Morris and colleagues proposed the conceptualization of a business model

as a five stage process.
• In the process, a business model can take on a life of its own.

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 Social Venture Sustainability Models

• When discussing business models for social ventures, it could be more

appropriate to use the construct of sustainability model (or social business
model).
• The idea is to determine how a social venture will create value for the
beneficiaries and sustain itself over time to accomplish its social mission.
• Thus, it is important to address the following questions.
– How will the social venture sustain itself over time?
– Why does the social entrepreneur need to build his/her social venture
sustainability model?

• Because social needs are often enduring, they cannot be solved in one, two,
or even five years.
• The social venture must continue to address the same social needs—or
similar ones—over a long period of time.
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 Defining Social Venture Sustainability Models

• A Social Venture Sustainability Model can be defined as the process of

creating, delivering, and capturing value for all stakeholders involved in
the social venture.
• This definition is an extension of the definition of the business model.
• The social venture sustainability model helps answer the following question:
– How will the social venture remain sustainable while successfully
addressing a particular social need?
• The first element in SVSM is the specification of targeted stakeholders, and
the provision that the value proposition and constellation are not focused
solely on the customer, but are expanded to encompass all stakeholders.
• The second element is the definition of desired social profits through a
comprehensive ecosystem view, resulting in a social profit equation.
• The third element is that the economic profit equation targets only full
recovery of costs and capital, not financial profit maximization.
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 Comparing Business Models and Social Venture
Sustainability Models
• As discussed earlier, a business model helps to answer the question: how do I
make money doing this?
• The social venture sustainability model poses a different question in a different
context: how do I sustain this venture while solving a social problem?
• Muhammad Yunus and his colleagues, suggested in a 2010 article that social
business models should challenge conventional wisdom.
• The social business models of the three social ventures that they studied in the
article—Grameen Phone, Grameen Veolia, and Grameen Danone—are good
examples of this.
• Grameen Phone is a partnership between the Grameen Bank and Telenor, a
Norwegian telecommunications giant. A basic assumption was changed: instead
of owning a telephone handset, the new assumption was to rent it and use it when
needed.
• Similar revisions of basic assumptions occurred with Grameen Veolia and
Grameen Danone.
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 Comparing Business Models and Social Venture
Sustainability Models
• Yunus and his colleagues identify five lessons that one can learn from
social business models.
• The first is that social business models should challenge the prevailing
conventional wisdom.
• The second lesson consists of finding complementary partners. Because of
the complexity of social problems, building partnerships is an important
aspect of leveraging resources and expertise to create social value.
• The third lesson to learn is the necessity to undertake continuous
experimentation.
• The fourth lesson consists of favoring social profit-oriented shareholders.
In social ventures, the primary focus is on addressing a social issue.
• The fifth lesson is to specify social profit objectives clearly. This is
important because the social profits will be the yardsticks to measure the
social venture’s performance.

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 Conventional social business model versus social
business model for Telenor, Veolia, and Danone
Conventional business model Social business model
Grameen Value proposition Value constellation Value proposition Value constellation
Partner and
sector
Sale of a Monthly Construction of a Caller borrows a phone when Construction of a wireless
Telenor, package (phone plus air wireless network Sale needed and pays per minute network
telecoms time) to individual of package through Grameen ladies own the
customers retail outlets phones, buy discounted air
time in bulk and sell minutes to
users as needed
Maximum water quality Water treatment Water quality that meets WHO Construction of a simplified
Veolia, Distribution of water
SocialConventional
factoriesmodel
business
business model
with a (predominantly
high Standards (rather than water plant to recycle surface
Water through taps located level of technology, European or US standards)
in developed countries) water Construction of the water
inside people’s homes recycling and purifying Village water Fountains supply network towards the
services water Prepaid card Payments system fountains
New distribution channel for
isolated locations: rickshaws
driven by Grameen boys
High-end Products Centralized purchasing Low price Local supply of raw materials
Danone, Emphasis on Lifestyle and production Fulfilment of basic nutritional Local production Direct door-to
Dairy Strong brand name (economies of scale) needs door sales by Grameen ladies
through advertisements Logistics Towards Grameen brand image Limited storage by end
products distribution platforms consumers
Sales through food
retailers Storage by 6-23
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consumers
 Building Social Venture Sustainability Models

• Before we discuss the design of social venture sustainability

models, it is important to learn from business model design.

• Such understanding should pave the way for developing better

social venture sustainability models.

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 Designing a Business Model

• Designing good business models is part art and part science.

• As an art, it involves coordinating the different activities to add value for all
stakeholders.
• As a science, it requires a deep understanding of customer needs, which can
be acquired only through experience, learning, and listening.

• Zott and Amit, have proposed two sets of parameters that business model
designers must consider:
1. Design elements and
2. Design themes.

• The design elements refer to the conceptualization and configuration of the

business model.
• Design themes describe the sources of the model’s value creation.
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 Designing a Business Model

1. The design elements of a business model include:

– Content (what activities should be performed);
– Structure (how they should be linked and sequenced); and
– Governance (who should perform them and where).

2. Design themes include:

– Novelty: Adopt innovative content, structure or governance
– Lock-in: Building in elements to retain business model stakeholders
(Facebook: impediments to switch to competing social media platform)
– Complementarities: this occur whenever bundling activities within a
system provides more value than running activities separately
– Efficiency: Reorganize activities to reduce transaction costs

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 Designing a Social Venture’s Sustainability Model

• An interesting question raised by attempts to develop a social venture

sustainability model is: how do social enterprises generate income?
• Regardless of the form they take, social enterprises generate income from:
– those who receive the service;
– third parties with vested interests; and
– others who pay indirectly.
• In the case of commercial ventures Clayton Christensen and colleagues
proposed a four elements framework that can be useful:
– customer value proposition (CVP);
– profit formula;
– key resources; and
– key processes.
• This framework can easily apply to the design of social business models.

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 Designing a Social Venture’s Sustainability Model

• Research is currently under way to apply the concept of business model to

the social sector.

• New social venture sustainability models are needed because social

ventures operate in environments where infrastructure, governance,
politics, and technology in themselves are often problems to overcome.

• Even within social ventures, the concept of social business model may be
different.

• Purely social ventures that rely on donations and grants would have
sustainability models different from hybrid forms of social ventures.

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 Social Venture Sustainability Canvas

• The social venture sustainability canvas (or the social business canvas; see
Figure 6.2) is derived from the business model canvas and includes nine
key elements:
– Partners;
– Activities;
– Value proposition;
– Beneficiary or customer relationships;
– Beneficiary or customer segments;
– Resources;
– Channels;
– Cost structure; and
– Revenue stream.

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 Thank You

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