Competitive dynamics in the social sector — Part 1
The social sector exists because humans want to help each other out. We feel morally obliged to share our fortunes and we are compelled to reciprocate kindness. Cooperation, collaboration and selflessness are natural and essential ingredients of any social initiative.
One might therefore believe that competition doesn’t, or shouldn’t exist in the social sector — competition and cooperation are opposing forces. Still, we know it does exist in some form, and we also know that it’s not necessarily harmful (1). Competition for donation dollars or public awareness has been shown time and time again to improve the performance of social organisations. The problem is that the reigning confusion on the real benefits of one over the other makes strategic planning difficult for social organisations.
When building a business model, clarity on the market landscape is paramount for success (2). Competitive dynamics influence the partnerships an organisation forms, the opportunities it pursues and the capabilities it builds. Without a good understanding of other players and external circumstances, one can only guess, which always inevitably leads to suboptimal results. And whilst extensive research has been done on competition in for-profit markets, the principles derived from that research are moderately helpful if they are applied without modifying them for the social context.
To build a successful impact strategy, first the unique aspects of social sector dynamics need to be laid out clearly. Then business modelling principles and frameworks can be adjusted to that context and applied more accurately.
This article, part one, focuses on the first step: identifying the unique combination of forces in the social sector, and highlighting the differences with for-profit markets. A second part (to follow) will make the attempt to offer business modelling and strategising methods better suited for social impact initiatives.
When competition is beneficial: resource scarcity and informed choices
Whenever demand is limited (e.g. it is a scarce resource) and there are multiple suppliers in the market trying to satisfy that demand, competitive behaviour will emerge. This is deemed beneficial if customers have a good understanding of rival offers and are free to choose between them, because they will pick the one they like best, thus spurring suppliers to constantly innovate and improve. The result should be better and cheaper products, theoretically making the majority happy (3).
In for-profit capitalist markets, the two premises of resource scarcity and free choice are more or less true, strong and consistent; they are also supported by regulatory policies. Consequently, the expected benefits of competition appear.
Resource availability and choice in the social sector
Looking at the social sector, the setup is somewhat different. In terms of resources (meaning the amount of resources redistributed) availability is fluctuant, because demand is highly elastic. Theoretically, anyone in the income bracket of lower middle class and above has the capacity to donate. However, there is a very wide range of cultural, ethical and political factors that determine how much people reserve for their own needs and what is considered fair redistribution. Also, purchases are often not the either/or type: having made one donation does not necessarily reduce that customer’s appetite to make another. Both price point and volume of demand are harder to forecast than in the case of traditional products.
Customers also have more limits on their freedom of choice and access to information. Government grants towards social causes are made from tax money; choice there is limited to voting in the elections. Contribution to social services such as health and old age support are compulsory in most countries and the market is heavily regulated. Beyond tax duties, whilst all are free to donate to charities of their choice, or to purchase products from social enterprises, transparency on the use of that money can be quite low, reducing customers’ ability to make an informed choice.
It seems therefore that the forces of resource scarcity and informed choice that create an environment where competition is beneficial are weaker in the social sector, quite possibly reducing its positive impact.
When collaboration is beneficial: unique aspects of the social context
Social impact initiatives have certain features that explain the stronger push for collaboration, which are missing from or at least significantly weaker in the for-profit sector. Business modelling tools and frameworks developed for the for-profit sector devote less attention to these factors.
Shared goals
As the objective of any for-profit organisation is to make the most profit for its shareholders, two competing firms with two different sets of shareholders will always have rivalling interests. One succeeding will necessarily result in the other missing out.
This kind of win-lose dynamic is less prominent if the goal of an organisation is not focused on its owners’ benefits. Once the goal is external to the company, two or more businesses can have the same or very similar objectives, meaning if one succeeds, so does the other. For example, consider the Sustainable Development Goals, which many social organisations lifted into their mission statement. Goal number two is zero hunger. If suddenly a powerful new player emerged with a solution for world hunger, it is not logical for any of those organisations to turn against it or try to stop it from scaling.
Duplication is welcome
Rivalling for-profit companies are limited in cooperation by the desire to gain competitive advantage. If they collaborate on building a solution, they have to share the profits. Even worse, if they build it alone, but it gets duplicated, they quickly lose the edge they gained. Regulators have introduced intellectual property laws exactly to limit duplication as it de-incentivises investment in innovation.
In the social sector, advantage gained through secrecy is minimal*. Duplication amplifies impact, meaning that reproduction of successful products and services is welcome and encouraged. A good example to contrast the different approach of for-profit and social organisations to this question is pharmaceuticals. For-profit pharmaceutical companies prefer to keep innovations for themselves, whereas not for profits advocate for quick scaling and dissemination.
[*Discounting organisations with a for-profit model that donate their profits.]
Advocacy
Advocacy is key to social impact, as the most sustainable way to protect the vulnerable or the marginalised is to obtain and enforce legal protection. Advocacy requires wide societal support to be successful, making collaboration a key element towards achieving critical mass. Consequently, it is in the interest of not for profit organisations to strongly collaborate in their advocacy efforts.
For-profit organisations on the other hand are driven by self-interest, therefore the only type of joint advocacy they engage in is lobbying. Where the practice of lobbying is not common (this depends on political systems and traditions), business strategies related to cooperation for advocacy might be pushed in the background, leaving social organisations with little support on best practices.
Contextualisation
Finally, venturing into new markets always makes sense for a profit oriented organisation, as it needs to keep growing to survive. When a for profit business decides to expand in foreign markets, it will absorb the costs of contextualisation as a necessary evil towards having a bigger market share.
Social impact organisations on the other hand only aim to grow to grow their impact — they don’t aim to squeeze out previous incumbents from new markets to grow their profits. This means that if reach and impact can be increased faster through partnerships than by organic growth, it would make more sense for them to collaborate. While this happens organically in some cases, little is known about how much value is left on the table in terms of impact if collaboration options are not explored.
It is an important first step to recognise that forces pushing for cooperation and competition are both present in the social sector and in a somewhat different setup than in a for-profit environment. What frameworks do we consequently apply for sense-making and for strategising is the next question to tackle.
(1) SJ Fenton: THE TWO FACES OF COMPETITION: WHICH IS BEST FOR THE SOCIAL SERVICES SECTOR?
(2) S. Wardley — Chapter 1, introduction to Wardley maps — the reference is to the concept rather than the page
(3) Sloman, John, 1947: Principles of economics
