Difference between Social and Traditional Business Models

Introduction

Social business models are considered as a new innovation to the way organisations do business in the 21st century. These models to some extent contradict to the traditional business models, as the aim of latter is to primarily provide financial returns to shareholders. However, social business models have been conceptualised on the idea and rationale of contributing substantially to the community, and are built with the vision of achieving a social objective (Donaldson et al, 2011). A social objective in this term may refer to socially responsible objectives which are aimed at improving the lives of individuals living within a community. Yunus and Weber (2010) for example, state that this could include setting up infrastructures and facilities and ensuring that individuals have an appropriate standard of living. However, the social responsibility of the social business model, seems to go one step further, which is to structure its business according to its social objective aim, which is in contrast to traditional business models that structure their businesses according to their core value offering, and only after profits have been made, would they now contribute a portion to their CSR objective. This essay is going to assess the business models adopted by social businesses, and compare them against traditional business models to ascertain whether, and to what extent, they are different from one another (1).

Grameen Veolia Water Ltd is a water company that builds and operates water production and treatment plans in several poor villages in Bangladesh. It is a joint venture between a multinational corporation and local healthcare company which required an upfront investment of eight hundred thousand dollars. Their main aim is to develop projects in five villages, where the company would produce and deliver drinking water, which would then be sold at the factory location for a profit (Yunus Centre, 2009). In essence, the company’s business model was to identify a social problem – drinking water, and invest in infrastructure that would enable the company to meet the demand in the region. The water is being paid for, which enables the company to cover its investments. According to Yunus and Weber (2010), the profits from this investment are re-invested back into the business and enable the company to expand its operations and further assist in solving the problem of water shortage in several other regions.

The business model adopted by Grameen Veolia Water Ltd in Bangladesh can be considered as a social business model because it has a non-dividend, non-loss policy as depicted by Yunus and Weber (2010), which initially conceptualised the social business model. However, by comparing it against a similar business, it would be easy to identify to which extent they are similar, or different from the traditional business models. Thames Water is the UK’s largest water and wastewater Services Company which supplies millions of houses across London and 2.6 billion litres of tap water daily. Its primary business model, as seen from its website, is to build the relevant infrastructure required to pump millions of litres into London homes daily, and send them a monthly or quarterly bill. Basically, when reviewing both businesses, it seems that their models fit the same pattern, which is to build relevant infrastructures required to deliver water to customers. Grameen Veolia accomplishes that by delivering at the factory gate to individuals, whilst Thames Water accomplishes it by pumping into millions of London homes. The main question here is to determine if both models are different or the same lies in the definition of a business model itself.

Chesbrough and Rosenbloom (2000) stated that the term business models, whilst frequently used to illustrate different strategies and functions within an organisation is not always explicitly defined. Authors offer a definition by KMLab, a consulting firm, which defines business models as “a description of how [a] company intends to create value in the market place. Business models include the unique combination of products, services, images and distributions that a particular company carries forward. It also includes the underlying organisation of people and the operational infrastructure that they use to accomplish their work”. (2). Also, Magretta (2002) describes a business model as the method of doing business in which an organisation sustains itself and generates revenues by specifying its position in the value chain. From all these definitions states that a business model describes how an organisation utilises its resources in order to generate revenues. Several business models exist, and they are usually distinct based on the industry within which they operate. Linder and Cantrell (2000) for example, in their Accenture publication state that business models differ based on their unifying concept, and include price models, convenience models, experience models, channel models, and trust models, all of which define how a company does business and generates revenue. Even though they do not specify exactly what a traditional or social business model entails, the term business model is unique amongst both terms and therefore it is safe to assume that every other business model, apart from the “social business model” – is a traditional business model.

Furthermore, in trying to ease the commonly held confusion about what actually constitutes a business model, Linder and Cantrell (2000) outlined the components of a business model, which in essence entail the various factors that constitute any business model. These components seek to further explain the fact that a business model is limited to the process in which a business creates value for its shareholders and generates revenues. Referring back to the water businesses that have been outlined earlier, it is clear that both entities create value by making water accessible. Thames Water manages the problem by creating the relevant infrastructure, and pumping millions of water into households daily, while Grameen Veolia has accomplished that by selling it directly to individuals. This could only be achieved due to the level of infrastructure available that makes it possible for the company to achieve this feat. It is probably only in developed countries that a central system is in place that makes it possible for water to be pumped into millions of households which might not be the case in developing countries. They may not have the relevant infrastructure, especially in remote towns in Bangladesh where Grameen Veolia has chosen to operate. However, this presents a viable business opportunity. If a company were established in these locations that offered a low cost approach to getting clean fresh water, then it would succeed. This follows on from a similar strategy adopted by Wal-Mart in the 1950’s when it chose to focus on remote towns where there was little infrastructure which has created difficult barriers to entry for competitors. Even though Sam Walton’s (Wal-Mart’s founder) goal was not inherently social, by targeting these markets and offering them value – everyday low prices on big brands, they managed to achieve astronomical success. According to Therefore, socially, Grameen Veolia may be accomplishing a social objective, and in the process, providing a poor society with affordable water, but they are investing private money into this feat, and consequently making profit out of this investment, which inherently, according to the definition of a business model, is a traditional business. The only difference between this model and that of Thames Water in the UK is the availability of infrastructure, which has made theirs more appropriate for their environment.

Since this essay has now established that the basic business model of both the traditional business and the social business are the same, the next step is to identify their major differences and ascertain whether that constitutes to the deviation from the traditional business model. According to Yunus and Weber (2010), the key characteristics of a social business are for the business objective to overcome poverty; attain financial and economic sustainability, return back the initial investment capital of investors; retain profit in the business for expansion and improvement; environmental consciousness; and market wage alongside better than standard working conditions for the workforce. However, based on Linder and Cantrell’s (2000) discussion on the constituents of a business model, alongside other definitions used in this study, it seems that these characteristics do not constitute the definition of a business model, but more like the CSR policy of an organisation. According to Kotler and Lee (2005), “corporate social responsibility is a commitment to improve community well-being through discretionary business practices and contribution of corporate resources”. By the use of the term discretionary, Kotler and Lee disregard companies that are obligated to act socially because of the law, or because it is ethical or moral and therefore expected. It defines businesses that choose to do good for their community based on internal policies. Therefore, based on this definition, it seems that social business models, as defined by Yunus and Weber (2010), may inherent identify (3) traditional business models that have a CSR policy centred on targeting the community.

Furthermore, their investor reimbursement model, which specifies a non-dividend, non-loss policy, in which the investor gets back only what they invested is essentially only a policy and in no way affects their business model of delivering value to customers and increasing revenue. Even though this model may deter investors that seek a return on their invested capital, it could also attract investors such as Google for example, who have a CSR initiative, and may view it as a method of diversifying their portfolio with a social investment. Therefore, based on these arguments, it seems that the major factors that distinguish a social business model, from that of a traditional business, are the CSR initiatives and the investor models, which are seemingly only company policies that have minimal effect on how companies create value and increase revenue.

The minimal effect that these policies have on creating value, could however define how they distinguish themselves from competitors – if any, and appeal to customers, employees and investors (Petit and Yunus, 2010). For instance, if there were two companies operating within the same market, offering the same goods and adopting the same model – one of which was a social business and the other a more traditional business, the social business may gain more traction and popularity from more ethically conscious and socially responsible customers. This argument is based on CSR theories of Kotler and Lee (2005), which depict that an organisation’s CSR policies could assist it its competitive advantage, especially in the sort of customers and employees it could attract.

This essay has reviewed the business models of two water companies, with the aim of identifying their underlying business structure, and determining whether and to what extent, the social business model of a Bangladeshi water company differs from the traditional business model of a UK water company. Our analyses show that business models of both companies are ideally traditional business models, but they have been adapted to fit the particular environment within which they operate. However, the core aspects of a business model, which are the value creation for customers and increasing profits, apply to both organisations. Therefore, based on the arguments set out in this paper and the discussion of both business models, it appears that the social business models are only a mere re-invention of the traditional business models, in that they seek to create customer value and generate profit. However, their core difference lies in their CSR and investor models, which is centred majorly on improving a social factor. This model is ideal from a social perspective as it actively combines a traditional model, with a non-for- profit agenda. It can be therefore concluded that social business model would give any aspiring business an advantage over its competitors especially in generic industries, as some customers, employees and investors may be attracted to its social goals and objectives.

Reference List

Baker, M. J. (2011) Why ‘Social Business’Social Business, Vol. 1 (1), pp. 1 – 15.

Chesbrough, H. and Rosenbloom, R. S. (2000). The role of the business model in capturing value from innovation: Evidence from Xerox Corporations’ technology spinoff companies, Harvard Business Review Working Paper.

Donaldson, C., Baker, R., and Cheater, F. (2011) Social business, health and well-being, Social Business, Vol. 1(1), pp. 17 – 35

Kotler, P., and Lee, N. (2005). Corporate social responsibility: doing the most good for your company and your cause, John Wiley and Sons, 307 pages

Linder, J. and Cantrell, S. (2000) Changing Business Models: Surveying the Landscape. Accenture Institute for Change. May 24, 2000.

Magretta, J. (2002). Why business models matter. Harvard Business Review.

Petit, P. U., and Yunus, M. (2010) Creating a New Citilization through Social Entrepreneurship, Transaction Publishers, pp. 170.

Thames Water (2010) Our business, http://www.thameswater.co.uk/cps/rde/xchg/corp/hs.xsl/825.htm

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Yunus Centre (2009) Grameen Veolia Water Ltd – Background, http://www.muhammadyunus.org/Social-Business/grameen-veolia-water-ltd/,

[Accessed: 27/04/10

Yunus, M., and Weber, K. (2010) Building Social Business: The New Kind of Capitalism That Serves Humanity’s Most Pressing Needs, Public Affairs, 226 pages