(7)New+Social+Entrepreneurs+ +Part+2+ +Section+2

NON-PROFIT ENTERPRISE AND THE GLOBAL ECONOMY ✦ 273

Introduction

Both the strengths and weaknesses ofnon-profits are lodged in the name:

Community-Based Organization. By defini-tion, Community-Based Organizations(CBOs) are non-profit corporations workingto improve a given community, neighbor-hood, or other geographic area. CBOs may

also direct their efforts toward target popu-lations, as opposed to physical areas, but agrassroots, building by building, block byblock, or population by population orienta-tion remains the central focus of manycommunity development non-profits activein the nineties.

It is logical that these groups are calledCBOs. In many cases, they were founded byarea activists working to build local infra-structures from which to address neighbor-hood problems: drug abuse, homelessness,unemployment, the lack of quality afford-able housing, and any number of otherscourges which contribute to making largeareas of our nation places where people livebehind locked doors, don’t allow their chil-dren to play outside, become trapped incycles of poverty, and live in very real fearfor their lives. While it is presently popularto malign the work of non-profits (regard-less of what success they do achieve againstwithering odds), it cannot be argued theydon’t play a significant role in America’sinner cities and throughout the country.The ability of non-profits to serve as islandsof refuge in the midst of poverty, to provideresidents with services and programs whichact as launching pads for the creation ofbetter lives and healed neighborhoods, tolend a voice to those who most often gounheard—these are, perhaps, the greateststrengths of Community-BasedOrganizations.

When it comes to engaging in business

UNDERSTANDINGTHE WORLD, THEREGION AND THEPROSPECTS FORNON-PROFITENTERPRISE IN THENEW CENTURY

Non-Profit Enterprise and the Global Economy

development activities, however, thesestrengths can easily turn into significantweaknesses. Historically, non-profit busi-nesses have failed for a variety of reasons,but mainly because of their inability to trulyunderstand the difference between themind-set and practice of managing an effec-tive non-profit organization versus that ofoperating a thriving business. Non-profitorganizations of the past have not under-stood how to operate with reference toboth; they have not known how to manageagainst the “double bottom-line” of socialand financial measures.

New Social Entrepreneurs: The Success,Challenge and Lessons of Non-Profit EnterpriseCreation documents the experience of thosewho seek to blend the two approaches toachieve the common goal of expandingeconomic opportunity for homeless andlow-income individuals. In this book thereader will find discussions of accountingapproaches, evaluation strategies, thedynamic tension found in the pursuit of the“double bottom-line,” and many otherissues of concern to the manager of a com-munity-based business enterprise. For themost part, however, these discussions, andmuch of the available literature, addressquestions internal to the organization andits managers. While local, neighborhoodmarket position or regional markets may betouched upon, most resources on non-prof-it business development do not address thechallenge of how to best position non-prof-it enterprise in the global economy.

While many are no doubt aware thatcommunity-based activities take placewithin a global market and world-wideeconomy, current organizational and con-ceptual limitations have prevented non-profit managers from cultivating a deeperunderstanding of the challenges presentedby a changing world economic order. Wemust understand at least something of thesteps non-profit managers must take notsimply to survive, but to move ahead andthrive in the future. New SocialEntrepreneurs must learn to identify oppor-tunities within their communities, as wellas thousands of miles away, which mayhelp expand their non-profit businesses,increase the number of local resident

hires/trainees, and successfully sellexpanded product lines, all within anincreasingly competitive international mar-ketplace. The non-profit is challenged toadopt the business equivalent of that wellknown exhortation, “Think Globally, ActLocally.”

This chapter will introduce the reader tothree aspects of global economic competi-tion as they relate to the practice of non-profit enterprise creation. The first is ageneral discussion of globalization andhow local enterprise should respond to it.The second is an assessment of the notionof “competitive advantage” and the poten-tial role of New Social Entrepreneurs. Andthe last is an evaluation of the factors thathave brought success to visionary corpora-tions presently thriving within the globalmarketplace, and how many of those sameelements are found within non-profit orga-nizations. The challenge is to learn to bringthose elements to the fore and to more suc-cessfully operate competitive, community-based enterprises that provide supportedtraining/employment opportunities andbring wages and capital into our communi-ties, back into the pockets and bankaccounts of our constituents.

Local Implications of aGlobal Economy: TheNon-Profit as WorldwidePlayer

Those seeking to understand the hugechanges taking place in the global econ-

omy will find a multitude of both “pop” andacademic books available from which tochoose. Two primary competing visionsare presented by Michael Porter and RobertReich. Porter’s work, and its relevance tocommunity enterprise creation, isaddressed later in this chapter. He focuseson the notion of competitive advantage asit is played out in regional “clusters” ofmutually supporting economic activity.Robert Reich, on the other hand, presents a

274 ✦ THE ROBERTS FOUNDATION: A PROGRESS REPORT

framework which rests upon the notion of a“global web of commerce” which respectsno national boundaries or identity. Thereader will benefit from further explorationof their writings, and of the latest work byStanford University Economist PaulKrugman, who has something of the repu-tation of an astute curmudgeon. He chal-lenges many of the assumptions and basicanalysis of the global economy’s “leadingthinkers” in his new book, Pop Internationalism.Together, these authors present usefultools for the non-profit manager attempt-ing to understand a changing global con-text.

However, one recently published bookwhich provides interesting insights into theeffect of globalization on local communitiesis World Class: Thriving Locally in the GlobalEconomy,1 by Rosabeth Moss Kanter,Professor of Business Administration at theHarvard Business School, author of numer-ous books, and former editor of the HarvardBusiness Review. In researching her latestbook, Kanter interviewed hundreds of peo-ple in a variety of settings. She sought toexplore such central questions as how theshifts in the operation of large corporationsaffect the lives of people and neighbor-hoods; what the concept of communitymeans in this shifting global arena; andhow those from all sectors of our societywho share a concern for our collectivefuture can work to assure we become the“masters, not victims, of change.”2

The answers to these questions are cen-tral to the future of many community-basedorganizations in general, and community-based enterprise in particular. Kanter’s dis-cussion calls for deeper evaluation by thoseconcerned with “community” in a time ofglobalization. This review will not outlineher entire thesis or findings, but ratherattempt to present several of her thoughtswhich are particularly relevant to non-profitbusiness enterprises.

Kanter begins her discussion by outlin-ing four broad processes presently drivingthe forces of globalization: mobility (theidea that capital, people, and ideas are con-stantly in motion and able to jump nationalborders, much less regions or neighbor-hoods), simultaneity (the fact that similar

and/or identical goods and services may befound in numerous places around the worldat the same time), bypass (which “impliesnumerous alternative routes to reach andserve customers”),3 and pluralism (thenotion that the old system based upon cen-ters of power and control, whether corpo-rate, political, or social, is increasinglybecoming decentralized).4

Traditional strategies of communityorganizing, advocacy, and neighborhooddevelopment become increasingly difficultto implement in a world with no walls,boundaries, or limits to the flow of capital,resources and personnel. Make no mis-take—this is not to say we are enteringsome glorious, global, free market worldwhere prices will be bid down for all or, onthe other hand, wages will go to the lowestbidder. A great many channels and limita-tions guide this flow of capital, people, andtalent; some will work to a community’sadvantage and some will not. It is to saythat for those engaged in the anti-povertymovement in the United States, for thosewho seek to expand economic opportuni-ties for the residents of their communities,there must first be an understanding thatthe playing field has significantly expandedand now includes a variety of players ourframeworks did not consider 20 or 30 yearsago.

Kanter addresses this issue directly andin language worth quoting at some length,because her distinction between the pro-ducer and customer mentality is critical forthe non-profit business manager to under-stand. In the past, many community-basedenterprises operated strictly within the“producer” mindset. The future, however,lies to a large degree in the non-profit man-ager’s ability to approach the businesscommunity as our potential customers aswell. With large corporations outsourcingmore and more formerly internalized opera-tions, the non-profit enterprise is uniquelypositioned to help meet their needs, retain-ing local entry level and training jobs in theprocess, which provide stepping stones tocareer paths for employees.

While Kanter’s comments may actuallyoffend some traditional ideologues, theyreflect an emerging understanding of cus-


1Rosabeth MossKanter, World Class:Thriving Locally in theGlobal Economy (NewYork: Simon &Schuster, 1995).Selected excerptsreprinted with the per-mission of Simon &Schuster. Copyright1995 by Rosabeth MossKanter.

2Kanter, pp. 12-13.

3Kanter, p. 45.

4Kanter, pp. 41-48.

tomer and producer relations of which thenon-profit community must be aware:

Among many now discredited ideas of theindustrial economy is the theory thatpower comes from control over themeans of production. In the globalinformation economy, power comesfrom influence over consumption. Asmobility and alternatives give cus-tomers more choices, power shifts fromthose producing goods and services tothose buying them... “Producer” logicdiffers from “customer” logic in funda-mental ways.

Producers think they are making products.Customers think they are buying ser-vices.

Producers want to maximize return on theresources they own. Customers careabout whether resources are applied fortheir benefit, not who owns them.

Producers worry about visible mistakes.Customers are lost because of invisiblemistakes.

Producers think their technologies createproducts. Customers think their needscreate products.

Producers organize for internal managerialconvenience. Customers want theirconvenience to come first.

Thinking like the customer requires compa-nies to develop an abundant stock ofthe three primary assets for global suc-cess:

➤ concepts—the guiding premises behindthe company’s work, including leading-edge ideas, designs or formulations forproducts or services that create value fortheir customers;

➤ competence—the ability to execute tothe highest quality standards, to runroutine production effectively, as ideasare translated into applications for cus-tomers; and

➤ connections—close relationships withpartners that can augment resources,join in creating still more value for cus-tomers, or simply open doors and widenhorizons.

Possession of these three C’s make compa-nies and people world class. They arethe basis for business excellence.

Unlike tangible assets tied to particularplaces—facilities, equipment, productinventory—these intangible resourcesare portable and fluid. They decline invalue rapidly if not replenished con-stantly. Therefore world class compa-nies are more entrepreneurial, continuouslyseeking even better concepts, investingin customer-driven innovation. They aremore learning oriented, searching for ideasand experience through informal inquis-itiveness as well as formal education,holding their staffs to a high perfor-mance standard, and investing in theirpeople’s knowledge and skills. And theyare more collaborative, valuing relation-ships and willing to work closely withother companies as their partners inachieving a common objective. (empha-sis in the original)5

The implication of these words for non-profit business managers is clear. Manynon-profit managers have, as a result oftheir own history in community and politi-cal organizing, developed significant skillsin forming collaborations and connectionswith other partners with whom they sharecommon goals. These skills can be put toeffective use in community/business part-nerships and joint venture projects.

Furthermore, non-profit managersincreasingly understand the need toimprove the competency of both theiremployees and themselves. This is reflect-ed in the increasing numbers of non-profitmanagers who are improving their skill lev-els by pursuing graduate degrees in busi-ness, and in their participation in othercontinuing education opportunities toimprove their ability to manage ever morecomplex business enterprises. This effortto improve non-profits’ management skillsis complemented by an evolving commit-ment to “work force development” as abroadly conceived strategy to enhance theskill base of community residents andthose entering the workforce for the firsttime. Such strategies target the creation ofa continuum of educational and training


5Kanter, p. 52.

opportunities provided through traditional,community-based non-profits, or in theenvironment of community colleges anduniversities, or even within corporate set-tings themselves.

Additional work is needed in theseareas of connections and competence, tobe sure, but the area that presents the mostsignificant barrier to non-profit enterprisesis that of concepts: the ability to consis-tently and aggressively pursue ideas whichwill create value for the customer. Oftenwhen a non-profit organization interestedin engaging in some sort of enterprise activ-ity approaches a corporation, it is not withan eye toward the needs of that corpora-tion, but in terms of what the corporationcan do for the non-profit.

For example, the non-profit approach isfrequently “we need access to your trainingequipment” or “please give us one (justone!) of your set-aside contracts” or “pleasecommit to hiring 20 of our program gradu-ates.” This approach has provided the non-profit community with table scraps in thepast—a few jobs here, a commitment to apossible community project there. But ifthe non-profit community is serious aboutits interest in creating meaningful trainingopportunities with living wages, if we trulywant to be at the table instead of at thedoor trying to get into the board rooms,then we must reconceptualize our under-standing of the value we bring to the corpo-rations, and the standards to which we willhold ourselves in the pursuit of a meaning-ful, full-equity relationship with the busi-ness community.

Too many non-profit managers appearcontent with achieving some degree of mar-ginal success, but do not aggressively pur-sue the ultimate success that may be withintheir reach. While there are exceptions,non-profit business managers usuallyignore the market mandates to maintainfocus on constantly improving performance.It is not so much a question of whether thebusiness community actually achieves thelevels of performance to which it lays claim(critics have wondered whether businessesactually achieve their alleged success rates),but of why so many non-profit managers donot embrace even the most basic concepts

of managerial excellence or the non-profitequivalent of a customer orientation uponwhich such excellence must rest.

Perhaps this is because non-profitenterprises have experienced such failure inthe past that any degree of success todayseems adequate. Regardless, our inabilityto operate under the same concepts ofquality, pursuit of market share, and con-cern for customer satisfaction (in this case,that of our corporate partner) remains a sig-nificant barrier to our success as complete-ly competent managers and suppliers withwhom business may enjoy regular, reliablecommercial relationships.

Take as an example of this inability tooperate at the level of “concept” presentedby Kanter, an incident which occurred fol-lowing a meeting between representativesof a major bank in the San Francisco BayArea and the managers of several commu-nity-based enterprises. The question offinancial competence had been raised inthe meeting and the issue of managerialperformance and financial competence wasdebated by the group afterward. The non-profit managers and the director of theHomeless Economic Development Fundengaged in a lengthy discussion regardingthe use of fiscal ratios to evaluate perfor-mance of non-profit enterprises. Whilemost of the managers discussed the impor-tance of being able to “speak that language”when meeting with bank representatives(maybe even speaking it better than theydid, i.e., knowing our business better thanthe bankers), one manager objected to theneed to develop more sophisticated finan-cial controls and measures of their enter-prise activities, saying, “We know ourfinancial ratio: it is to sell as much productas we can.” Such a comment reflects anunderstanding of quality standards which issatisfied with the norm, rather than withhow to discover new ways to exceed thenorm. To a certain extent, for non-profitenterprises to succeed, we must succeedcompletely—and that means no allowancefor mediocrity in the commitment to maxi-mizing value for either customers, formerlyhomeless personnel, or non-profit enter-prises as a whole.

These issues of concept, competence,


If we trulywant to be at

the tableinstead of at

the door tryingto get into theboard rooms,then we must

reconceptualizeour

understandingof the value we

bring tocorporations,

and thestandards towhich we willhold ourselvesin the pursuit

of ameaningful,full-equityrelationship

with thebusiness

community.

and connection become critical when onerealizes that the potential of non-profitenterprises to remain competitive is tieddirectly to the capacity to create and sus-tain these partnerships with the corporatecommunity. In a recent conversation withthe director of a large, non-profit homehealth care organization, the point wasmade that while the non-profit had beenvery successful in establishing itself in sev-eral local markets, the industry’s consolida-tion toward managed care meant thedominant HMOs were consolidating theirhome health care service contracts by part-nering with a few major, nationally posi-tioned home health care providerorganizations—inevitably, for-profit enti-

ties. While non-profit practitioners may beable to survive in small, localized nichemarkets, if they are to truly flourish theymust negotiate outsourcing contracts withthese HMOs at a scale and competencewhich adequately meets the needs of theHMOs for home health care services.Anything less will mean decreasing marketrelevance for non-profits and potentiallylost employment opportunities for theirworkers.

What this all means is that the non-profit community does not have to engagein net new job creation or compete directlywith huge, for-profit businesses. For exam-ple, in the above scenario, we are not advo-cating the non-profit attempt to “take on”the HMOs. But focus must be aggresivelypursued on excelling at areas of expertise

and making non-profit enterprises centralto the needs of customers, whether thatcustomer is the person buying a scoop ofice cream at a local store, the corporationacross the bay with which an outsourcingcontract is maintained, a national providerof health services, or the broker importing anon-profit’s finished product into foreignmarkets.

It may sound fanciful, but it’s true: if thenon-profit entrepreneur is successful inmanaging her enterprise in a way that bene-fits her economic network and its actors,she will find herself part of an interlockingweb of opportunity which will allow her tomaximize job creation and training possi-bilities. This commitment to being solidlymarket directed is critical to positioning ofnon-profit enterprises in the global econo-my, for as economic structures and rela-tionships shift, non-profits must bepositioned to secure the place at the dealtable they deserve—not by virtue of politi-cal force alone, but because their productsand services are second to none.

If the non-profit entrepreneur is goingto achieve significance, it will come onlythrough holding his managers and employ-ees to internationally competitive stan-dards. Whether it is securing ISO-9000manufacturing certification or simply com-manding the lead in a given area of serviceactivity, non-profits must strive to achievegreater levels of managerial and opera-tional competence, and to promote thatcompetence at home and abroad.

Why bother to make this effort toachieve excellence if the decision-makingprocess takes place far away from the localcommunity or if fewer purchasing decisionsthemselves will be made? How can non-profit entrepreneurs even hope to competein a global playing field that supports fewercompetitors? The answer is that thoseactivities which will remain present indomestic markets form perfect spring-boards for non-profit enterprise develop-ment. Again, we quote from Kanter’sobservations:

Companies increasingly contractout for ancillary labor-intensive servicesonce performed in-house. Outsourcing


It may sound fanciful, but it’s true: if the non-profit entrepreneur is successful in managing

her enterprise in a way that benefits hereconomic network and its actors, she will find

herself part of an interlocking web ofopportunity which will allow her to maximize

job creation and training possibilities.

occurs primarily in low value-added,labor-intensive jobs and services thatremain local purchases while otherhigh-ticket purchases are globalized.Low value-added services are out-sourced and performed locally, whereashigh value-added purchases of bothgoods (such as manufacturing compo-nents) and services (large contracts forconsulting or advertising) come fromnational or international suppliers morelikely to be outside the region than in it.For 42 representative Boston-area com-panies, the most commonly outsourcedactivities are food services, payroll,cleaning services, building mainte-nance, incoming and outgoing mail,security, local transportation, travelarrangements, public relations, childcare, training, technical writing, andprinting. Manufacturing companies arealso outsourcing parts of the produc-tion process to cut costs: metal fabrica-tion, painting, die cutting, and evenassembly.6

Naturally, some will rightly point out thatthis is precisely the problem with globalizingdomestic economies: that all that will be left“on shore” will be low-wage, low-skilled jobs.These concerns are valid and should beaddressed, but we must not ignore the factthat for many non-profit organizations andtheir potential trainees/employees, the ser-vice-based and light-manufacturing busi-nesses outlined above are well-suited tonon-profit enterprise creation efforts. Someof these activities (such as assembly andlight-manufacturing, which are increasinglyoutsourced) represent significant employ-ment opportunities for homeless and chron-ically unemployed Americans. Meeting theneeds of corporations for such services pro-vides a perfect foundation upon which non-profit entrepreneurs may build futurebusinesses.

It would be naive to ignore or downplaythe negative impact these global economicchanges may have on significant segmentsof America’s workforce. That is not ourdesire or intent. However, this document isconcerned with emerging opportunitiesand potential for enterprises operated by

non-profit organizations to provide trainingand employment opportunities for home-less and very low-income individuals. Inthat light, it cannot be denied that there areindeed potentially positive prospects forestablishing such businesses in the midstof this transition. Obviously, such effortsshould not be pursued at the expense ofalready existing businesses or well-payingjobs. However, if history is any indication,many of these positions will not be deemed“worthy” by the mainstream workforce.Rather than lose these jobs to off -shoreoperations, efforts should be made to har-ness them as employment opportunitiesfor those working their way into the main-stream.

Furthermore, Kanter, Reich and, in fact,most players in the emerging movement in“workforce development,” point out that jobsecurity will not be found with individualemployers, but with the ability of employ-ees to remain competitive in the labor mar-ket. Indeed, much of the current discussionregarding economic development has shift-ed from a popular emphasis on the promiseof non-profits managing for-profit enter-prises, to the goal of creating educationaland training opportunities across a contin-uum of levels which may be accessed byindividuals seeking to improve their skillbase and expand their marketability in anincreasingly tight job market. It is our posi-tion that in addition to managing educa-tional and certain training organizations,the non-profit community is uniquely posi-tioned to manage such investments inhuman capital through the operation ofnon-profit enterprises which meet the localneeds of business while simultaneouslyproviding transitional employment to thoseon the margins of the labor pool.

In describing a situation faced by theGillette Corporation, but shared by manypotential employers, Kanter states that“[o]ne big problem department managersfaced initially was worker computer andnumeric literacy. Longtime Gilletteemployees and new hires alike took trainingprograms for the sophisticated, computer-ized work systems and measurements tech-niques that would come with Sensortechnology. People were comfortable with


6Kanter, p. 150.

an entirely visible operation; now the oper-ator’s job is one where the product andprocess are machine controlled and not vis-ible—for instance, 13 laser welds in a mil-lisecond for a single part and 150 parts perminute... So Gillette stepped back to teachcomputer language and math classes in theplant.”7 Again, working with the businesscommunity to create in-house training andskills development programs is a naturalrole for non-profit organizations seeking toretain existing jobs, create new positions,and generate revenue to help support othercommunity activities within their charitablemission.

This process of change and potentialevolution is inevitable, and will not be easy.The worldwide forces already in motion aretoo powerful; while they will not be turnedback, they must be managed and directedto the best advantage possible for those onthe margin of the economic mainstream.The New Social Entrepreneur can see howin many ways she is the linchpin betweenthe old world order and the emerging glob-al economy. As Kanter observes, the chal-lenge for local communities is notglobalization, but rather how to respond toattempts to isolate our communities fromthe realities of a shifting world economy.The issues for local leadership quicklyemerge as envy, loss of control, affronts tosense of pride, scapegoating, stereotypingothers, and peer group pressure to supportthe local agenda at all costs.8

As the needs of local communities forinstitutions to serve as “glue” grows, busi-ness and government will increasingly beforced to validate the true value brought tothis equation by the non-profit organiza-tion and its community-based enterprises.Non-profits are often the only civic struc-tures wherein these social needs are fullymet, explored and built upon. Though theform and staffing will no doubt change sig-nificantly from what we know today, theneed will remain constant. As CBOs con-tinue to move to fill this void, those in thebusiness community who have historicallyviewed them with suspicion will increasing-ly be forced to acknowledge non-profits’contributions to making our society morewhole, healthy, and, ultimately, competitive

on the world scene. If we are to remainviable in the new economy we must all worktogether at local, regional, national, andglobal levels. We must identify ourstrengths as communities and build uponthose talents.

In the next section we will address waysof building upon the competitive advantageof our inner cities and the non-profit enter-prises active in our nation’s neighborhoods.

Our CompetitiveAdvantage: The Non-Profit Underdog

The individuals who make up our coun-try’s community economic development

and social service organizations under-stand, perhaps too well, the implications ofthe changes taking place around them.They see jobs leaving their neighborhoodsfor other regions or, even worse, nationsmiles away from their constituencies. Theyobserve the debates taking place inWashington, DC, and clearly see theimpending cutbacks and declining politicalsupport for their traditional approach toaddressing human service and communityneeds. Yet, at the same time, many mem-bers of the non-profit community find it dif-ficult to realize what real economic powerthey do have, what potential lies withintheir reach which could be mobilized totheir own advantage and for the benefit ofpeople seemingly locked in poverty. Whileno one would debate that many inner cityneighborhoods and low-income peopleenter the competitive marketplace at somesignificant disadvantage, many feel thatchange will come not by focusing on thosedeficits, but on the attributes also presentin these individuals and their neighbor-hoods.

Michael Porter is the nation’s leader inunderstanding the dynamics of competitiveadvantage. His book, The CompetitiveAdvantage of Nations, was the culmination ofmany years research into the nature of com-petition and the factors that bring a country


7Kanter, p. 69.

8Kanter, pp. 108-144.

or corporation economic success in anincreasingly difficult international businessenvironment. His writings are used exten-sively in business schools across the coun-try, and corporations use his models toevaluate how to develop the best strategiesfor improving market share and increaseprofits. Harvard Business Review Reprint#90211, a summary of the basic analyticalframework presented in his book, serves asa concise introduction to the fundamentalsof his approach and should be requiredreading for non-profit managers studyingissues of competitive advantage in marketsat all levels.

Recently, Porter has turned his attentionto America’s low-income communities andin June 1994 published “The CompetitiveAdvantage of the Inner City,” as well as anarticle of the same title published in theMay/June 1995 issue of the HBR.9 Since hefirst published his assessments on the com-petitive advantage of the inner city, Porterhas caused something of a stir in the com-munity development field. Many practition-ers have criticized his work, in whole or inpart, and have found themselves in a“defensive” posture with regard to their ownefforts and outcomes. Initial responses tohis article were published in the July-August1995 issue of HBR. And the launch of hisInitiative for a Competitive Inner City10 hasresulted in further controversy.

It is not the intent of this paper to enterinto a full-blown critique of Dr. Porter’sanalysis, but rather to focus upon its impli-cations for managers of non-profit businessenterprises. The reader is referred to theJournal of Black Political Economy (Atlanta,Georgia) for a comprehensive presentationof the broader issues raised by Porter, aswell as a more up-to-date presentation ofhis latest thinking based in part upon thefeedback he has received and the actualexperience of the Initiative over its first twoyears of operation. In a 1996 issue, theJournal will present Porter’s most recentthoughts, as well as an array of responsesto his “model.” The following analysis willbe based upon both his paper and subse-quent HBR article, both of which are builtupon by Porter in his submission to theJBPE. Our goal is to evaluate the implica-

tions of Porter’s analysis for new socialentrepreneurs, and to respond to theextremely limited role envisioned by himfor non-profit mangers.

Let us make no mistake about it—Porter is an ardent believer in the power offree enterprise to turn around third worldeconomies, whether domestic or overseas.He states,

We believe a sustainable economicbase in inner cities will only come aboutthe same way that it has elsewhere—through private, for-profit initiativesand investment based on economicself-interest and true competitiveadvantage—not through artificialinducements, charity, or governmentmandates. The central task, then, is toidentify the unique existing and poten-tial competitive advantages of innercities which can translate into genuinelyprofitable businesses that have thepotential not only to serve the localcommunity but also to “export” outsideit. The inner city must become an inte-gral part of the regional and nationaleconomy, rather than an island sur-rounded by it.11

As presented below, Porter believes theeffective model for turning around low-income areas uses the tools of businessand economics to create not simply a “busi-ness-friendly” environment, but one whichmobilizes its resources most effectively tomaximize the impact of those resourcesand talents within the free market.

His position is that previous models ofeconomic development have not adequate-ly exploited these resources and, perhapsmore importantly, have been based uponassumptions of how economic expansion iscreated which at times have contradictedbasic tenets of free enterprise. He dividespast strategies of community economicdevelopment into six types:

➠ real estate (which “sees the develop-ment of commercial and industrial realestate projects in the inner city as dri-ving economic development”);

➠ location incentive (which “seeks to use


9While many of Porter’swritings will be of inter-est to the non-profitmanager, this presenta-tion makes primary useof “The CompetitiveAdvantage of the InnerCity,” a paper pub-lished in June 1994,revised in November ofthat year. Excerpts areused with permissionof the author; however,Dr. Porter requests thatthose interested in hiswritings review theJournal of BlackPolitical Economy forhis latest work.

10The ICIC is a non-profit, intermediaryorganization attempt-ing to implementPorter’s recommendedapproach in Boston,Baltimore, andOakland.

11Porter, p. 2.

tax and job credits, sales tax relief, andother financial inducements to attractbusiness”);

➠ social conscience/philanthropy (a mod-el “based on exhorting firms and indi-viduals to support the inner cityeconomy through giving money, locat-ing facilities, purchasing inputs andproducts, and providing economicopportunities, although they wouldotherwise not do so”);

➠ mandate model (which makes “use ofgovernment mandates, minority set-asides, and other minority preferencesto foster economic development”);

➠ community entrepreneurship (that“seeks to revitalize the inner city by cre-ating many small businesses (ormicroenterprises) owned and operatedby inner city residents themselves”);

➠ migration model (which “rests on thepremise that the other models will fail.Jobs will never be created in sufficientnumbers in inner cities, but are plenti-ful in the suburbs, where blue collarmanufacturing and service jobs areincreasingly concentrated...”).12

The Porter Model ForInner City EconomicDevelopment

Porter then presents his model, whichappears in sharp contrast to the others

he has described. It is economic, asopposed to social, in its orientation. Itrelies upon the private, not the public ornon-profit, sector. It seeks to create gen-uinely profitable enterprises instead of sub-sidized ones and positions theseenterprises as “export-oriented” instead ofneighborhood focused. And it “engagesskilled and experienced minorities inwealth creation,” rather than relying uponan incentive based upon a “social servicemotivation.”13

To understand the basic premise of amodel based upon competitive advantage,one must first understand the centralassumption of competitive advantage itself:that it is specialized. “Competitivenessemerges out of unique local conditions, andoccurs in business where a region can createareas of distinctive specialization.”14 Theseareas of distinctive specialization form“clusters” of economic opportunity aroundwhich core businesses gather and to whichother, support businesses contribute. Thisprocess is dynamic. In Porter’s words,

Competitive advantage cannot bestatic; it rests on the capacity of firmsbased in a particular location to contin-ually improve and innovate. If firms pro-duce the same products, using the samemethods, and targeted at the same mar-ket segments as those based elsewhere,they will be vulnerable to lower-costlocations or firms with greater resourcesand scale. Successful competitors,then, are those that can address needsthat have been poorly served by othersor perceive new market segments, whilehaving the motivation to continuallyimprove their products and processes...The competitive success of a locationdoes not normally arise in isolated com-panies, but in clusters of firms in thesame industry or linked togetherthrough customer, supplier, or otherrelationships. Clusters represent a criti-cal mass of skill, information, relation-ships, and infrastructure relating to aparticular field in a location thatbecome self reinforcing.15

Based upon his model of competitiveadvantage, Porter presents the followingfour elements central to the competitiveadvantage of inner city communities. Portersubmits these elements as the foundationof “advantages” upon which any communi-ty economic development strategy must bebased:

➠ Physical Location. “There is the view bysome that advances in transportationand communication have eliminatedthe importance of location. However,


12Porter, pp. 4-10.13Porter, p. 10.14Porter, p. 11.15Porter, p. 12.

the evidence makes it clear that proximi-ty remains a critical advantage in manytypes of industries. Indeed, the increas-ing importance of regionalized clusters,and the growing acceptance of conceptssuch as just-in-time delivery, high cus-tomer service, and close partneringbetween suppliers and customers, aremaking proximity arguably more impor-tant than before. ... Inner city areas maybe able to lure back activities of firmsbased in the region that have been out-sourced to faraway locations such asKorea or Mexico. The logistical, admin-istrative, supplier access, training, andabsenteeism costs of such locations areoften high, and go far to offset wage dif-ferentials with moderate-waged innercity residents in those businesses andactivities where proximity is valuable.”16

➠ Demand conditions. “The most obviousopportunity is in serving the immenseinner city market. Even though averageincomes are relatively low, high popula-tion density translates into substantialpurchasing power and a large market. ...[T]he needs of the inner city marketremain poorly served at a time whenmost other areas are saturated, espe-cially in retailing, financial services, andpersonal services. In Los Angeles...retail penetration per resident in theinner city is 35% of the rest of the city insupermarkets, 40% in departmentstores, and 51% in hobby, toy and gamestores. The result of this underpenetra-tion is profit and growth opportunities.... The major opportunity comes notonly from the size of the market butfrom its character... Inner city communi-ties have distinctive needs—many ofwhich are unmet—for a wide array ofproducts and services... Firms based inthe inner city should have a uniqueability to understand these needs andaddress them... The creation of tailoredretailing concepts in areas such as food,clothing, pharmacy, toys, books, andrestaurants would, in turn, create majoropportunities for manufacturers of spe-cialized products catering to inner cityand other minority consumers...

Companies that get started withfocused strategies can broaden theirfocus over time as their skills andresources grow.”17

➠ Access to regional clusters. “[C]ompeti-tive clusters in the surrounding areacreate two types of potential advan-tages. The first is for business forma-tion. Proximity to highly competitivenearby industries can be a major com-petitive advantage in providing sup-plies, components, and supportingservices to multiple, nearby cus-tomers... Inner city firms can also drawon the presence of competitive firms intheir region to compete in downstreamproducts and services.”18

➠ Human resources. “[H]uman resourceadvantages...arise today in the innercity in several forms. First, inner cityworkers are often more motivated andmore loyal... Second,...most legitimateinner city entrepreneurship has beendirected at community activism and theprovision of social services... Behind thecreation and building of these organiza-tions is a whole cadre of minority entre-preneurs who have responded tointense local demand for social servicesand funding opportunities provided bygovernment, foundations, and privatesector sponsors. The challenge is toredirect some of this talent and energytowards building for-profit businessesand creating wealth.” Third is the“...large and growing pool of talentedminority managers, many of whom havebeen trained at the nation’s leadingbusiness schools...”19

While Porter focuses on those elementshe feels are the strengths of inner cityareas, he is not unrealistic about those fac-tors which inhibit economic growth andongoing community health. In particular,the major disadvantages of inner city neigh-borhoods cited by Porter are:

➠ Land (which, while available, is oftennot in appropriate parcels for develop-ment);


16Porter, pp. 16-17.

17Porter, pp. 18-21.18Porter, p. 22.19Porter, pp. 22-23.

➠ Building costs (often significantly high-er due to “logistics, restrictive zoning,architectural codes, permitting, inspec-tions, negotiating with communitygroups, and government required unioncontracts and minority set-asides”);

➠ Other non-wage costs of doing business(such as “water, other utilities, worker’scompensation, health care, property,unemployment, liability insurance, per-mitting and other fees, real estate andother taxes, OSHA compliance, neigh-borhood hiring requirements, and “link-age” payments...”);

➠ Security and crime concerns;

➠ Infrastructure problems (which inhibitthe flow of goods and people);

➠ Poor employee skills and a lack of train-ing opportunities for managers todevelop skills; and

➠ Lack of available capital to supportbusiness expansion.20

Finally, Porter cites bad attitudes asalso serving to block new business develop-ment in the inner city. He feels individualworkers have a negative approach to work,community leaders too often reinforcethose bad attitudes by viewing corpora-tions as a negative presence in their com-munities, and local companies, havingrelied upon government subsidy and pref-erential programs for so long, have becomeopposed to operating with true reference tothe real needs of the marketplace.

Based on his analysis and model forcompetitive advantage, Porter presentsthese recommendations for government,community-based organizations and busi-ness:

GOVERNMENT SHOULD:

➣ Direct resources to those areas with thegreatest economic need;

➣ Increase the economic value of the innercity as a business location;

➣ Deliver economic development pro-grams and services through private sec-tor, mainstream institutions instead ofthrough new, special purpose or socialservice institutions;

➣ Align the incentives in government pro-grams with true economic performance;and

➣ Mobilize the private sector.

COMMUNITY-BASED ORGANIZATIONS

SHOULD:

➣ Continue to focus on social service andhousing issues, where their uniqueexpertise lies;

➣ Create a hospitable environment forbusiness: work to change communityand workforce attitudes help improvepublic services assist with job referrals

➣ Facilitate development of commercialspace integral to residential housingsites; and

➣ Avoid direct investment and involve-ment in businesses.

OUTSIDE BUSINESS AND INNER CITY

COMPANIES SHOULD:

➣ Treat the inner city as a distinct market;

➣ Tailor product mix and operating prac-tices to unique community needs;

➣ Develop strong ties with the local com-munity;

➣ Consider separate subdivisions or busi-ness units for urban operations;

➣ Move beyond philanthropic support ofsocial service organizations to strategic,business-to business support for innercity companies;

➣ Create business linkages with inner cityfirms in similar clusters;

➣ Participate in developing inner city-focused cluster-based training programsand hire from them;


20Porter, pp. 25, 30-32.

➣ Focus strategies around unique compet-itive advantages;

➣ Upgrade management sophistication;

➣ Join and participate in trade groups andindustry associations; and

➣ Forge relationships and linkages withappropriate regional clusters.21

Reflections on the PorterModel From thePerspective of the NewSocial Entrepreneur

Since the audience for this documentconsists primarily of those with an

interest in the New Social Entrepreneurs,we will not address Porter’s advice to gov-ernment and business sectors, restrictingour observations instead to the implica-tions of his recommendations for the non-profit community. In addition, we will notcritique Porter’s framework in general, leav-ing that to the sources cited above, but willrespond specifically to his proposed role fornon-profit organizations.

At the start of our discussion we mustclearly state that the non-profit communityshould take seriously the economic analy-sis and vision presented by Porter as well ashis advice to businesses interested in locat-ing in the inner city. If the reader has anyinterest in seriously engaging in communi-ty-based business development, he wouldbenefit greatly from a closer reading ofPorter’s work and its implications for entre-preneurs, whether social or traditional.While not a cookie-cutter model for non-profits, the basic business tenets aresound. Porter’s framework for analyzing theattributes and weaknesses of any enter-prise, while not definitive, can be extremelyuseful in understanding how one is posi-tioned in the broader market. New SocialEntrepreneurs can learn from this analysisand, as with all business tools, shouldmodify it to accommodate their own situa-

tion in order to make full use of Porter’soriginal model for evaluating competitiveadvantage.

Having said that, Porter’s assessment ofthe future capacity of the non-profit sectorto participate in driving the economic agen-da of the inner city is seriously flawed.Many of us are critical of the non-profitcommunity’s track record in economicdevelopment. And Porter is correct in stat-ing that “[w]hile there have been a handfulof notable CBO business development suc-cesses, there have been many more fail-ures. The vast majority of CBOs lack theskills, attitudes, and incentives to advise,lend to or directly operate businesses.” Heis wrong, however, in concluding that,“[e]ven though many CBOs were able tomaster low-income housing development,investing in building their capability totackle for-profit business development isunlikely to be successful or the best use oftheir or society’s scarce resources.”22

Before addressing this conclusion, itshould be acknowledged that Porter is notknown as a champion of the non-profit sec-tor and has only recently seemed to viewnon-profits in any sort of a positive light. Inan article copyrighted by the WashingtonPost Writers Group (1994), Neal Peirce asks,“But what about the existing network ofcommunity-based development promoters,especially the nation’s some 2,000 commu-nity development corporations with theirstellar record in quality low-income hous-ing?... Porter started out disparaging CDCs,identifying them with local activists whoviscerally oppose major business develop-ment... But after viewing actual neighbor-hoods and talking with...prime CDCadvocates...Porter’s started to comearound. He now respects CDCs’ formidabledeal-making skills to put complex housingdeals together. He still believes most CDCsshould leave the big commercial projects todevelopers and qualified entrepreneurs.”

If Porter is “starting to come around,” itwould be hard to tell from some of his otherwritings. In an article copyrighted by theGoldhirsh Group and published in Inc.Magazine’s The State of Small Business—1995,Porter presents the basic elements of hismodel for the revitalization of the inner city


21Porter, pp. 35-43.

22Porter, p. 39.

and does not even bother to include any ref-erence to the role of community organiza-tions, save that they should “work toimprove the business climate in the innercity. They might, for instance, create refer-ral networks to help companies screenpotential employees, help educate thecommunity to the needs of business, andfacilitate commercial site development.”23

And this in an article which spans 12pages... It will be of great interest to seehow Porter’s future writings reflect hisincreasing exposure to non-profit managersand their ventures.

To back up his assessment of the non-profit sector’s poor potential to successfullyoperate business enterprises, Porter sub-mits these three main criticisms:

➠ Staffing costs are too high to hire eco-nomic development staff for all the non-profit organizations that might desirethem;

➠ “CBOs, when they think about economicdevelopment, naturally tend to focus onsmall retail and service businesses thatare often owned by neighborhood resi-dents...however, the community entre-preneurship model must besupplemented with major focus onmore substantial companies, especiallythose that ‘export’ goods and ser-vices;”24

➠ And “[t]here are inevitable short-termtensions between economic develop-ment and social needs... Given thatmost CBOs have their roots in socialactivism and in meeting the socialneeds of their neighborhoods, we areskeptical that most CBOs will put profitahead of their traditional mission.Turning down local residents in favor ofbetter-qualified outside entrepreneurs,supporting dismissals of poorly per-forming workers, and approving largesalaries to successful entrepreneurs andmanagers—to cite just a few exam-ples—are inevitable choices that mostCBOs will be unlikely to make.”25

The following narrative will address

each of his concerns; however, to appreci-ate the present state of the community eco-nomic development field and Porter’scritique of it, one must first understandsomething of its history. While otherresources are available to provide a morecomprehensive overview, for this discus-sion it is important to know that most com-munity development corporations nowactive across the nation have their roots inthe early War On Poverty programs and thepublicly-funded efforts which followed.Many of these programs included businesscreation strategies that, once public dollarswere withdrawn, collapsed—in no smallpart because their managers were more ori-ented to meeting the needs of the publicgrant system than that of the markets with-in which they operated. As public fundingfor these efforts decreased, and the com-munity development corporations them-selves began to develop better track recordsin other areas of activity, non-profit man-agers redirected their efforts away fromenterprise creation and toward the replace-ment of affordable housing stock lost bylow-income neighborhoods as a result ofurban renewal (referred to by many as“urban removal”) and the gentrification ofinner-city communities. Private foundationdollars, though significantly more scarcethan those available from public sources,also supported these efforts.

Porter admits that the non-profit sectorhas evolved significant expertise in the areaof affordable housing development, butdoes not appear to appreciate that thisexpertise did not simply materialize, butresulted from years of capacity buildingsupported by public and private funding.The past two decades have seen the cre-ation of a complex infrastructure made upof “intermediary” organizations, such as theLocal Initiatives Support Corporation, theDevelopment/Training Institute, and theEnterprise Foundation, to name a few,which work with local community develop-ment organizations to augment the capaci-ty of these groups to successfully blend acomplex variety of public and privatefinancing instruments to underwrite thecost of drafting, building, and maintainingthe thousands of units of affordable hous-


23Inc. Magazine, TheState Of Small Business— 1995, p. 113.

24Porter, p. 39.

25Porter, p. 39.

ing now found in low-income areas fromcoast to coast.

It should also be noted that affordablehousing of the nineties shares virtuallynothing in common with the public housingefforts of the sixties and seventies. It iswell-designed, supportive of families andchildren, and well-managed by non-profitorganizations, which overall maintain theirproperties in better shape than the privatesector landlords next door. One may onlyconclude that the success of non-profitaffordable housing developers is by design,not default.

The failure of non-profit business enter-prise creation, on the other hand, has oftenbeen by default. While national training

and intermediary efforts are expanding, onthe whole non-profit enterprise practition-ers have never benefited from the sametype of focused, concerted capacity-build-ing strategies which have lead to success inthe housing arena. The non-profit businesssector’s failure can also be attributed toissues including the poor training of enter-prise managers, a lack of market orienta-tion, and a basic inability to operate undera “double bottom-line,” echoing the criti-cisms Porter rightly makes of the field.

What Porter does not see, however, per-haps because he does not work with theseorganizations on a daily basis, is the seachange now taking place in the area of non-profit business development. As docu-

mented in this report and others across thecountry, non-profit organizations inincreasing numbers are launching and suc-cessfully managing for-profit business ven-tures with a market orientation never beforeseen in this nation. These initiatives takeheed of past failures, yet are realizing newachievements today and will continue to doso in the years to come as they expand inresponse to emerging opportunities inlocal, regional, and international markets.

This book is in many ways the initial“first-person” documentation of our experi-ence. In it we see the program and financialrecord of those who seek to pursue busi-ness enterprise development with referenceto community needs. In assessing our cur-rent experience, a number of pointsbecome clear in relation to Porter’s assess-ments of the field.

Six Responses To Porter

FIRST, Porter is correct in one observationof non-profit business development: It

is foolish in the extreme for anyone,whether non-profit manager, public policymaker or academic, to claim that the solu-tion to the lack of jobs in the inner city is fornon-profits to run businesses. There is noway the non-profit community can replacethe jobs lost due to restructuring of theAmerican economy and the abandonmentof the inner city by mainstream businessesresponding to changing markets. If we areto see any significant job creation, it willcome only through the effective functioningof market forces as opportunities are creat-ed and businesses act to capture thoseopportunities. The ultimate engine for jobcreation will be housed in the business—and not in the non-profit—community.

Having said that, we must acknowledgethat there nevertheless remains a large gapbetween the needs of the business commu-nity for employees and the employmentcapacity of homeless and inner city resi-dents. This gap will not be filled by tradi-tional businesses for the same reason they


Non-profit organizations in increasingnumbers are launching and successfully

managing for-profit business ventures with amarket orientation never before seen in thisnation. These initiatives take heed of past

failures, yet are realizing new achievementstoday and will continue to do so in the years to

come.

have not met the challenge to date: name-ly, they must maintain their commitment toa positive financial bottom-line above andbeyond any social commitments. They arenot educational institutions, training cen-ters or treatment programs. They are exclu-sively for-profit businesses and should betreated as such.

However, when it comes to homelessand very low-income Americans, many whowork with people on the margins ofAmerican economic life have found thatgetting a formerly homeless person a job isoften not as significant a problem as help-ing them keep it. While some would arguethat the only challenge to finding a job isgetting out of the house to get one, othersof us must face the fact that individualswho have not worked for years or have nev-

er held full-time employment must oftenlearn the basic skills of how to contribute toa work setting. This is not some “bleedingheart” cop-out. This is the conclusion ofbusiness people themselves.

In his Wall Street Journal op-ed piece enti-tled, “The Poor? I Hire Them!,” RichardBarclay, Vice President of BarclayEnterprises, states that in his experience“...[f]or the lower-echelon, unskilled posi-tions, companies don’t need ‘trained’ appli-cants nearly as much as they need people

of character. I can train a person to disas-semble a phone; I can’t train her to not geta bad attitude when she discovers thatshe’s expected to come to work every daywhen the rest of us are there. I can train aworker to properly handle a PC board; Ican’t train him to show up to work sober orto respect authority.”26 The New SocialEntrepreneur can teach formerly homelessand very low-income individuals the basicsof work readiness. However, basic workskills cannot be taught exclusively in aclassroom. They are best developed in theworkplace as one learns how to take super-vision, how to improve on production andservice systems, and how to operate as aneffective, contributing employee in the con-text of a real business environment—notjust in a training classroom or computer lit-eracy program.

Filling this gap between unemploymentand employability is precisely the role thenon-profit community is called upon toplay. Through the creation of enterprisesproviding meaningful employment oppor-tunities, some of which will be permanent,non-profits are developing particular exper-tise at providing individuals with transi-tional employment wherein they work for areal, market-based wage, develop anemployment history, and are then referredto openings in mainstream, traditionalbusinesses. This is not “coddling” or “shel-tering” individuals from the market.

This discussion of transitional employ-ment opportunities does not assume thatthe lack of “soft” and “hard” skills is the solebarrier to employment. Clearly a variety ofsocial, racial, individual, educational, his-toric, and other issues keep extremely poorpeople out of the economic mainstream.Regardless, transitional employment doesplay a critical role in providing homelessand other historically marginalized individ-uals with the real skills and confidenceneeded to successfully compete for andretain a job in today’s economy. Due to itsexclusive and rightful emphasis on profit,the business community—as presentlyconstituted—cannot afford to perform thistask. While there are emerging numbers offor-profit businesses which attempt to pur-sue profit with reference to social needs,


While some would argue that the onlychallenge to finding a job is getting out of thehouse to get one, others of us must face the

fact that individuals who have not worked foryears or have never held full-time employment

must often learn the basic skills of how tocontribute to a work setting. This is not some

“bleeding heart” cop-out. This is theconclusion of business people themselves.

26Richard Barclay, “ThePoor? I Hire Them,”Wall Street Journal, May24, 1995.

the mainstream business community onthe whole can not be said to actively pursuethe “double bottom-line” of profitabilityand community service. And due to theirability to meet the double bottom-line,non-profit organizations are uniquely posi-tioned to take on this task.

SECOND, over the last decade, in pocketshere and there, we have seen the emer-gence of a new type of manager. This indi-vidual comes from two worlds—the worldsof business and non-profit management—but lives in neither. There are growing num-bers of non-profit managers who know howto operate an effective social service organi-zation. More than anyone besides theclients themselves, these people under-stand the limits of a traditional, human ser-vices approach to the problems of the innercity, namely that you can’t “serve” peopleout of poverty. These are the managerswho, with limited start-up capital, havelaunched small businesses in communitiesof need. They run cafes, laundromats, land-scaping businesses, recycling ventures, andtemporary placement enterprises. No, theyare not changing the face of poverty as weknow it and they are not replacing jobs lostoverseas. But they are proving to them-selves and others that small businessdevelopment can provide part of the answerto the problems confronted in low-incomecommunities. What some may consider the“scary” part is that they are returning toschool, at night and over weekends, todevelop advanced skills in business man-agement and finance. These newly mintedMBAs (but street-hardened social workersand program directors, nevertheless!) arereturning to their communities to buildmany of the small businesses upon whichneighborhoods rely, and they are employ-ing many who have not held a job in years.

This new wave of social workers isincreasingly augmented by others who jointhem directly from the business communi-ty. As growing numbers of people who hadsought their fortune in large corporationsdecide to take on a community challenge,they come to non-profit organizations withsolid business skills and the experiencenecessary to help show others the way.

These are not well-meaning idealists har-boring unrealistic dreams, but are the typewho have contributed to the success ofmany of America’s leading corporations.And now they are contributing to the dou-ble bottom-line in neighborhoods that arein dire need of their skills. These two typesof individuals join together in a powerfulcombination of human capital whichincreasingly turns the odds in favor of non-profit, business success.

Porter argues that there are not thefinancial resources available to appropri-ately compensate these managers.Naturally, if one seeks a salary and benefitpackage comparable with the for-profit sec-tor, it is probably not a wise move to seekemployment in the field of communitydevelopment. However, many profession-als who could command top dollar in theprivate, for-profit sector find the salariesoffered by non-profits adequate to theircompensation requirements. And forincreasing numbers of formerly for-profitmanagers, they come to their non-profitpractice with some type of “nest egg” fromtheir prior employment to support whatthey may feel are their long-term needs forincome security. In the final analysis, ourexperience is that not every non-profit musthire and retain a top caliber business man-ager. Each region seems to have a relativelysmall number of organizations which mightrequire managers salaried at levels of$50,000 and above. While it may not makesense for “everyone to get one,” it mostassuredly makes sense for some of our lim-ited resources to be directed to this use toretain appropriate talent to achieve non-profit enterprise objectives.

THIRD, many of the community-basedenterprises launched in prior years havebeen “place-based” businesses—a localrestaurant or service venture targetingextremely small, often low-income neigh-borhood markets. Such efforts often foundthey could not generate enough business tokeep their doors open. Increasingly, thesuccessful enterprises of the New SocialEntrepreneurs are not tied to a single geo-graphic community, but create employmentopportunities for a given population, which


may then happen to reside in a targetedneighborhood.

Consider Rubicon Building & Groundsmaintenance venture operated by a home-less agency based in Richmond, California.Home to many working and middle-classfamilies, Richmond is also well known as alow-income community with the crime anddrug abuse one often finds in such areas.Rubicon bids on contracts throughout theSan Francisco Bay Area, sending self-super-vised work crews miles away from its homebase in the East Bay. Rubicon is one of thebest employers in Richmond, providingwages ranging from $9 to just over $20 perhour, and generated nearly $3 million ingross revenues in 1995.

Or consider Larkin Business Ventures,an enterprise development effort providingtraining and employment to “at risk” youth.LBV spent 11 months searching for the rightlocation for its Ben & Jerry’s Partnershopbefore deciding on a site in the MarinaDistrict of San Francisco, a neighborhood ofin-line skaters and young professionals.LBV is now one of only two Partnershopsnationally that consistently operate in theblack.

And, of course, there is the SanFrancisco City Store which recently openedfor business on Pier 39, a major tourist des-tination near Fisherman’s Wharf. The storesells surplus City of San Francisco memora-bilia ranging from parking meters to munic-ipal bonds issued in the early years of thiscentury to bricks from Lombard Street (the“crookedest street in the world”). The CityStore is run by a small non-profit providinghousing and support services to formerlyhomeless men and women and acceptsreferrals for transitional employment froma number of non-profits in the City.

These are just a few examples of thebusinesses which bring wages and capitalto a segment of our community that typical-ly has few employment options, all thewhile maintaining their commitment totheir charitable, community-oriented mis-sions. However, none of these enterpriseshas made the mistake of tying its businessactivity to a single locale.

FOURTH, in addition to freeing itself from

strict geographic constraints which maylimit success, the modern communityenterprise exploits opportunities to expandinto new markets outside its region and,increasingly, beyond our borders. PioneerHuman Services of Seattle, a $25 millionenterprise-based homeless organizationwhich receives virtually no foundation orgovernment grants, operates a wholesalefood distribution enterprise active in fivestates west of the Mississippi. In addition,Pioneer’s sheet metal fabrication division isISO-9000-certified, allowing it to bid onprojects worldwide. San Francisco’s AsianNeighborhood Design ships residential fur-niture to transitional housing programs,group homes, and institutional living cen-ters across the country and is currentlyexpanding production capacity to the east-ern United States through community part-nerships. The Santa Cruz Homeless GardenProject (an organic garden run by and withhomeless people which produces top-qual-ity dried flower wreaths and other arrange-ments) and the San Francisco City Storeare, through the HEDF, both exploringexport arrangements to ship product forsale in Japan. As these enterprises takeroot they increasingly operate with refer-ence to the market potential of our worldand not our ghettos.

FIFTH, the development of these andother enterprises is not without considera-tion of the past failures of non-profits whichburdened community enterprises with amultitude of goals and objectives, only oneof which was to function as a sound busi-ness. Today’s community-based business-es are just that: businesses. Of course thereis a tension between the social and finan-cial goals of the enterprise; that’s whatmakes it a non-profit enterprise! But to saynon-profit managers are somehow unableto operate within the dynamic tension pre-sented by the “double bottom-line” of fiscaland social accountability is simply wrong.Too many enterprises are doing it and toomany formerly homeless people are findingsupported employment in such ventures todeny the validity of their experience.Naturally there are exceptions; however,increasingly the rule of thumb is that if you


26 For a discussion ofissues related to per-ceived conflict andcompetition betweenthe for- and non-profitbusiness communities,the reader is referred tothe chapter of this doc-ument titled, “TheCompetitive(Dis)Advantage of Non-Profit Enterprise.”

are out of business you will have no jobsand no training, whereas if you err on theside of prudent business management, youwill be laying the foundation for evengreater job creation in the future.

SIXTH, a main drawback to the tradition-al approach to non-profit business devel-opment has been the idea that there is oneway to approach economic opportunity forindividuals and communities out of themainstream. Government and private fun-ders have often sought to identify “themodel” for business creation in the same

way there is “a model” for affordable hous-ing or child care services. Porter falls intothis same trap by arguing for his own mod-el—a seventh model we may now add to hislist.

In reality, though, innovation comesfrom the fringe—from those who stand atthe edge and can, from that perspective,see new connections to the whole, or con-ceive of new applications of emerging tech-nologies and structures. It is precisely from“trying everything at once” that the new dis-coveries and best practices emerge. This isthe tradition of creativity and innovation inwhich our economic success as a nation isgrounded. To sterilize and compartmental-ize this process not only contradicts thatexperience, but extinguishes the very firewhich continually forges the creation of our

communities’ common future of economicsuccess.

There can be no “lighthouse model,” nosingle approach. There is only the anarchyof the market within which individual entre-preneurs (both social and traditional) seeopportunities and risk failure to pursuethem. Part of the failure of the past is root-ed in the assumption that a model con-ceived in Washington or Boston orSacramento can simply be implementedelsewhere. Markets don’t work that wayand community-based business creationcertainly won’t either.

Each of the various models (and adozen other approaches not labeled assuch) hold some element of truth. The suc-cessful New Social Entrepreneur keepsthem in a toolbox and pulls them out whenappropriate. She is bound less by ideologyor conceptual frameworks than by whatworks in a given community’s environmentor market. New Social Entrepreneurs arenot bound by the self-righteousness ofmany of those who have claimed to “speakfor the poor”and are equally unimpressedby the bold arrogance of some of thosewithin the business community who, hav-ing fled the inner city thirty years ago, nowconclude they know exactly how it shouldbe rebuilt today. New Social Entrepreneursseek out and build upon relationships withinnovators such as Porter and others fromthe ranks of business, while at the sametime assisting non-profit organizations tobecome active in taking control of their owneconomics and the economics of their pro-gram participants. They are fully commit-ted to the goal of economic self-determination for both individuals andCBOs. They will work with virtually anyone(Left, Right or Center; Social Worker orBusiness Person) able to move the agendaforward toward the realization of its ulti-mate potential. And as such, they are trulythe New Social Entrepreneurs.

Before moving on to our next area, it isimportant to close our discussion of com-petitive advantage and Porter’s assessmentof non-profit enterprise by recognizing onefinal point: In many ways, what Porter iden-tifies as the elements of a new model foreconomic development are not that at all.


The bus has left the station and we arealready traveling to a time and place when

non-profits can and will increasingly operatecommunity-based ventures that are both

market oriented and responsive to the needs ofmarginalized people who require supportedemployment opportunities and career paths

out of the ghetto.

What he presents is the actual evolutionaryexperience of those presently engaged inthe practice of social entrepreneurship. Hecalls for a model that creates wealth, isbased upon the operation of profitablebusinesses, positions those businesseswith an export orientation within a regionaleconomy, builds upon the talents of localentrepreneurs and mainstream, private (inour case, non-profit) organizations, andseeks to champion the power of a market-based approach to confronting poverty andunemployment.27 This “new model” isalready being practiced by non-profit man-agers, especially over the past five years.

Porter is advocating a paradigm shift, amuch overused term that implies a com-pletely new understanding of place, poten-tial, and practice on the part of those whoare moving on an economic agenda withina social context. His model of where weshould move the debate on communitydevelopment is based, quite simply, on theknowledge and practice of those who havespent years struggling to make marketswork to the advantage of our society’s mar-ginalized members. What he has conclud-ed from research, others are learning fromexperience. Together the two create a pow-erful praxis which promises to become asynthesis of the conceptual and practiceframeworks which will guide much of theanti-poverty agenda in the new century.

Yes, Porter’s economic analysis isessentially sound, and community-basedbusiness people can no doubt learn fromhis observations. But the bus has left thestation and we are already traveling to atime and place when non-profits can andwill increasingly operate community-basedventures that are both market oriented andresponsive to the needs of marginalizedpeople who require supported employmentopportunities and career paths out of theghetto. In this new conceptual and prac-tice framework, non-profit managers mustdevelop a greatly sophisticated under-standing of capital, its costs and move-ments within and, largely thus far, out ofour communities of concern. The non-prof-it manager of the 21st century must be flu-ent in two languages: First, she must speakfinance (with the ability to work the num-

bers, understand capital costs and interestrates as payments for risk); second, shemust complement her numeric fluency witha conceptual fluency and vision whichunderstands not simply how commerce cre-ates systems of exchange, but how thesesystems, operating across communities,regions and, ultimately, the world, may bechanneled toward the fulfillment of local,human needs.

For the present Porter’s challengeremains: Do the social managers of todayhave the capacity to be effective, market-directed social enterprise managers oftomorrow? The final section of this chapterwill argue that non-profit managers are notonly capable of success at such a task, butare uniquely positioned to excel in thoseareas which make for excellence in themanagement of visionary business enter-prises.

Built to Last: The Non-Profit Enterprise asVisionary Corporation

If non-profit organizations engaged inbusiness development have learned one

thing, it is that the establishment of asocial purpose enterprise will foreverchange the basic organizational structure ofthe sponsoring non-profit entity. Starting asmall business is not a casual undertaking.When asked what single lesson he wouldprovide those considering small businessdevelopment, the executive director of onesuch enterprise responded, “I would tellpeople that if they like their current staff,board and program design, they should notdo it, because in the course of the past fiveyears we have almost completely turnedover our board, many of our staff havemoved on to exclusively social serviceopportunities, and our general approach tohuman service delivery has evolved as weunderstood more about what we were actu-ally doing and why we are doing it.”

If non-profits are to successfully man-


27Harvard BusinessReview, May-June 1995,Reprint Number 95310.

age these ventures, they will do so only bycontinually revisiting who they are, howtheir enterprise activities contribute to thefulfillment of their mission, and how theywill remain true to their community pur-pose while operating within the realities ofthe market. Some would say this task ofbalancing organizational change and con-flicting values is impossible. Others wouldmore correctly observe that non-profits thatundertake such a path have a great deal incommon with businesses which have goneon to become the world leaders in a widevariety of economic sectors. And it is thissecond perspective we will address in ourclosing discussion of how non-profit enter-prises must position themselves for the21st Century.

ARE NON-PROFITS “BUILT TO LAST?”

Many non-profit managers feel they havelittle in common with their for-profit coun-terparts. They operate with limitedresources, are paid less, and attempt toachieve goals which must be evaluated inqualitative, as well as quantitative, terms.While this attitude is highly debatable, inmany ways non-profit entrepreneurs arecharting a new course in the creation ofsocial purpose ventures and therefore mustlearn from whatever guides are available.The most obvious strategy is to examinethe factors that make for success in the tra-ditional business world and then see whatlessons there may be for those who wouldre-direct business efforts for the achieve-ment of community goals.

The question of what makes for a suc-cessful business enterprise is analyzed byevery business school, reflected on by everyCEO, and debated by every board of direc-tors. Obvious elements of any answer arecompetent management, good stewardshipof resources, high quality standards,aggressive product pricing, a customer ori-entation, and a number of other factorswhich may be easily recited by any businessstudent, much less successful entrepreneur.However, in evaluating how non-profitsmay learn from this body of knowledge, wemust first assume that the non-profit has a

commitment to those values. While themerits of the points listed above may beargued individually, few would deny theyare the elemental building blocks for abasic level of effective organizational opera-tion and are pursued by any manager withsome degree of skill and functional intelli-gence.

Less clear are the elements of the reallyoutstanding business enterprise. If we aregoing to support a movement in the non-profit community to create what many havecalled “hybrid” organizations, we mustfocus not only upon the most basic ele-ments of success, but on the broader, moresignificant factors which make for the trulyinnovative, growing, and ultimately mostsuccessful enterprise. If we set our sightsupon the average, we will be doomed tomediocrity. If we are going to break themold and attempt to blend two seeminglycontradictory types of organization, weshould, as we used to say in church school,“sin boldly, if at all.” What, then, makes forthe difference between a good corporationand an excellent one? How do non-profitmanagers and their organizations measureup? And do non-profits have the potential,by following the “best practice” of such out-standing corporations, to position them-selves not simply to survive into the newcentury, but to excel and rise above the cur-rent parameters which limit them to the“appropriate” way to manage non-profit orfor-profit organizations?

In 1994 James Collins and Jerry Porras,both professors at Stanford UniversityGraduate School of Business and well-regarded advisors to leading corporations,published their book, Built To Last: SuccessfulHabits of Visionary Companies.28 Their findingswere the end result of a lengthy evaluationand reflection on what makes for success incorporate America. They evaluated 36 cor-porations, reviewing reams of material andsupporting documentation. Their findingsmake for excellent reading and discussion,and are an important addition to the libraryof any non-profit manager. For the purpos-es of our discussion, however, five of theirfindings in particular stand out as meaning-ful for non-profit managers growing emerg-ing social purpose businesses.


28James C. Collins andJerry I. Porras, Built ToLast: SuccessfulHabits of VisionaryCompanies, (New York:HarperBusiness/HarperCollins, 1994).Selected excerpts fromBuilt to Last, Copyright(c) 1994 by James C.Collins and Jerry I.Porras. Reprinted bypermission ofHarperCollinsPublishers, Inc.

First, Collins and Porras observe that inmany cases what became the visionarycompany of today often started as the failedeffort of yesterday. While it is easy tobelieve that today’s visionary corporationshave always been successful, they wereoften developed without the benefit of sig-nificant early success. In the words of theauthors:

[W]e found a negative correlationbetween early entrepreneurial successand becoming a highly visionary com-pany. The long race goes to the tor-toise, not the hare...the evidencesuggests that it might be better to notobsess on finding a great idea before

launching a company. Why? Becausethe great-idea approach shifts yourattention away from seeing the compa-ny as your ultimate creation...we had toreject the great idea or brilliant strategyexplanation of corporate success andconsider a new view. We had to put ona different lens and look at the worldbackward. We had to shift from seeingthe company as a vehicle for the prod-ucts to seeing the products as a vehiclefor the company. We had to embracethe crucial difference between timetelling and clock building.29

It’s tempting to observe that given thetrack record of failure in the arena of non-profit enterprise creation efforts, theremust be a huge number of visionary organi-zations poised to spring forth!

In truth, the experience of many BayArea organizations has been that their earlydifficulties managing revenue-generatingventures provided them time to learn thepractice, make contacts, understand thelimitations of their employees and man-agers, and cultivate a more sophisticatedunderstanding of the task before them.This period of slow growth and misfires alsoprovided them the time required to buildthe organizational foundation needed forfuture success. Over the past five years,during which many of these enterpriseshave been formed, the thinking has movedfrom that of “time telling” to “clock build-ing.” This shift is reflected in an increase innot only the number of successfullylaunched enterprises, but in their continu-ing success and solid prospects for achiev-ing near-term profitability.

The second significant finding fromwhich non-profit managers may learn isthat the process of building a successfulcorporation rests less on specific steps tak-en and objectives achieved, than on trans-formations made and horizons broadened.Again, from Built To Last,

One of the most important steps youcan take in building a visionary companyis not an action, but a shift in perspec-tive... We’re doing nothing less than ask-ing you to make a shift in thinking asfundamental as those that preceded theNewtonian revolution, the Darwinianrevolution, and the founding of theUnited States...we’re asking you to seethe success of visionary companies—atleast in part—as coming from underlyingprocesses and fundamental dynamicsembedded in the organization and notprimarily the result of a single great ideaor some great, all-knowing, godlikevisionary who made great decisions, hadgreat charisma, and led with greatauthority. If you’re involved in buildingand managing a company, we’re askingyou to think less in terms of being a bril-


The New Social Entrepreneurs’ commitmentto the double bottom-line of both financial and

social outcomes is perhaps their greateststrength. It forces them to live within a

dynamic tension which understands the falsenature of such choices and creates a higher

order set of skills that fosters more competentand effective management in the long-run.

29Collins and Porras,p. 28.

liant product visionary or seeking thepersonality characteristics of charismaticleadership, and to think more in terms ofbeing an organizational visionary andbuilding the characteristics of a vision-ary company.30

This finding is especially relevant fornon-profit enterprise creation. Many non-profits approach this process with the beliefthey have only to find the right product,business, or service, hire the perfect man-ager and they will be able to build futuresuccess around that winning combination.They often do not realize true success hap-pens the other way around.

In the case of Larkin Business Ventures,initial conversations among the board,staff, and clients focused not upon whattype of business should be launched, buton whether and why any business shouldbe undertaken. They sought their commit-ment to “clock building” first in order not tofall into the trap of “time telling.” Thesediscussions went so far as to call for a com-plete redrafting of their corporate missionwhich, following months of discussion anddebate, came to clearly state that the com-mitment of the organization was to the cre-ation of value and that “value” would becreated through its work with individuals incrisis and its operation of social purposeenterprises. LBV spent over two years inplanning and design before finally launch-ing three separate enterprises all framedaround various aspects of ice cream sales.In their first quarter of operation they creat-ed 27 positions for formerly homeless and“at-risk” youth, as well as closing their firsteight months of operation with only a mod-est loss against significant first-year sales.In the following months they have contin-ued to grow, are scheduled to open theirsecond franchise site by June 1996, andhave a very promising future. None of theirefforts would have met with the successthey have, however, had the organizationand its members not taken the time to ade-quately reflect on the “visionary” aspects oftheir task, namely their commitment to thecreation of value.

A third finding of Collins and Porras

speaks directly to the question of whethernon-profits have the capacity to make the“tough decisions” when they find a conflictbetween their social mission and theirfinancial responsibilities. In truth, the NewSocial Entrepreneurs’ commitment to thedouble bottom-line of both financial andsocial outcomes is perhaps their greateststrength. It forces them to live within adynamic tension which understands thefalse nature of such choices and creates ahigher order set of skills that fosters morecompetent and effective management inthe long-run. Again, the authors state,

Visionary corporations do notoppress themselves with what we callthe “Tyranny of the OR”—the rationalview that cannot easily accept paradox,that cannot live with two seemingly con-tradictory forces or ideas at the sametime. The “Tyranny of the OR” pushespeople to believe that things must beeither A OR B, but not both... Instead ofbeing oppressed by the “Tyranny of theOR,” highly visionary companies liberatethemselves with the “Genius of theAND”—the ability to embrace bothextremes of a number of dimensions atthe same time. Instead of choosingbetween A OR B, they figure out a way tohave both A AND B... We are not talkingabout mere balance here. “Balance”implies going to the midpoint, fifty-fifty,half and half. A visionary company does-n’t seek balance between short-term andlong-term, for example. It seeks to dovery well in the short-term and very wellin the long-term. A visionary companydoesn’t simply balance between ideal-ism and profitability; it seeks to be high-ly idealistic and profitable... [A] highlyvisionary company doesn’t want toblend yin and yang into a gray, indistin-guishable circle that is neither highly yinor yang; it aims to be distinctly yin anddistinctly yang—both at the same time,all the time.

Irrational? Perhaps. Rare? Yes.Difficult? Absolutely. But as F. ScottFitzgerald pointed out, “The test of afirst-rate intelligence is the ability tohold two opposed ideas in the mind at



the same time, and still retain the abili-ty to function.” This is exactly what thevisionary companies are able to do.31

What could be more irrational than thepractice of homeless economic develop-ment? In 1989, when we first started usingthe phrase to describe our efforts to expandeconomic opportunity for homeless peoplethrough the creation of community-basedbusinesses, many said it was an oxymoron-ic undertaking. Many felt that almost bydefinition, the two goals were not compati-ble. We felt they were. And today increas-ing numbers of non-profit managers andsocial workers are understanding not sim-ply the potential for such an approach, butthe actual need for it.

This is not to say one simply gets up one day anddecides to operate within this realm. It is a con-stant battle fought by managers andemployees on an almost daily basis, notwithout its costs to the organizations andtheir personnel. However, through thesedebates, through living in this tensionbetween the yin of profitability and the yangof a social mission, our organizations arestronger, more flexible, and increasinglymore successful as business enterprises.

This is particularly true when one con-siders the supposed conflicts between prof-it and social goals. It is clear that without aprofit there will be no jobs and no trainingopportunities. However, profit is simply ameasuring stick which both supports workand tracks progress. As Collins and Porrashave written, “Profitability is a necessarycondition for existence and a means tomore important ends, but it is not the endin itself for many of the visionary compa-nies. Profit is like oxygen, food, water andblood of the body; they are not the point oflife, but without them, there is no life...Visionary companies like Motorola don’tsee it as a choice between living to theirvalues or being pragmatic; they see it as achallenge to find pragmatic solutions andbehave consistent with their core values.”32

This is exactly the point and it is a frame-work within which non-profit businessmanagers are increasingly skilled at negoti-ating.

The final lesson we might take from the

work of Collins and Porras is in the mainte-nance of community values simultaneouswith the maintenance of a forward momen-tum to achieve our social/economic goals.They posit five methods used by the excep-tional corporation of which we should beaware:

BIG HAIRY AUDACIOUS GOALS: Commitment tochallenging, audacious—often risky—goals and projects toward which avisionary company channels its efforts(stimulates progress).

CULT-LIKE CULTURES: Great places to workonly for those who buy in to the coreideology; those who don’t fit with theideology are ejected like a virus (pre-serves the core).

TRY A LOT OF STUFF AND KEEP WHAT WORKS:High levels of action and experimenta-tion—often unplanned and undirect-ed—that produce new and unexpectedpaths of progress and enable visionarycompanies to mimic the biological evo-lution of species (stimulates progress).

HOME GROWN MANAGEMENT: Promotion fromwithin, bringing to senior levels onlythose who’ve spent significant timesteeped in the core ideology of the com-pany (preserves the core).

GOOD ENOUGH NEVER IS: A continual processof relentless self-improvement with theaim of doing better and better, foreverinto the future (stimulates progress).33

One can easily run down this list andsee the relevance of these methods for thenon-profit enterprise manager:

FIRST, BIG HAIRY AUDACIOUS GOALS: Thevery notion of non-profits operating andbuilding business ventures which are mar-ket-based and profitable is perhaps thehairiest, most audacious goal one mightimagine. It is exactly the audaciousness ofthe goal which keeps top talent involvedand draws heretofore mainstream businesspeople to non-profit enterprises. You thinkit’s hard to run a profitable business? Trydoing so with recovering substance abusersand homeless people to whom you’ve madethe commitment of a livable wage. Nowthat’s a challenge!


31Collins and Porras,pp. 56, 62.



SECOND, CULT-LIKE CULTURES: Cult-likemay be a bit strong to describe the environ-ment of today’s social purpose enterprise,but it’s true that those who cannot cut it orcan’t internalize the commitment to thedouble bottom-line, are quickly looking forother opportunities. There is some truth tothe “cult” label in that the connection feltbetween those pursuing this path may bor-der on cult-like. New Social Entrepreneursspeak a blended language of economic jus-tice and fiscal accountability which keepsmany others out. And share informationand support amongst the anointed whichhelps keep those who are committed to thecause within the loop of the “faith.” (Onevery real difference, however, is that thedress code is less prescriptive than in manycults!)

THIRD, TRY A LOT OF STUFF AND KEEP

WHAT WORKS: While not every social pur-pose enterprise starts this way, many of thebest have experimented with a number ofsmall-scale efforts before finding one whichfits the needs of the organization and itsdeveloped capacity. Just as “porcupine-on-a-stick” never quite found its market niche,we have had our share of failed “surethings.” However, the field is also witness-ing its share of successes which often risefrom the ashes of such experimentation.And for many non-profits, the cost of entryfor that experimentation is fairly modestand well worth the investment.

FOURTH, HOME GROWN MANAGEMENT:Many of the finest social purpose enterpris-es presently operating in the Bay Area aremanaged by former caseworkers or programdirectors. Certainly, as these venturesdevelop more complex needs, staff skillsare complemented by those of MBAs fromthe outside. The leadership and values ofthese entities, however, remains homegrown and closely nurtured. Almost everynon-profit maintains a strong commitmentto hiring from within; many of those cur-rently supervising others came from theranks of those workers and, in many cases,from the ranks of the homeless themselves.This commitment carries greater costs for

the organization, but it is also quite clearlya great strength and at the heart of thesocial enterprise’s charitable mission.

FIFTH, GOOD ENOUGH NEVER IS: If therewas ever a time when “close enough for rockand roll” was the operating mantra of thecommunity non-profit, it is long since gone.After nearly 15 years of uncertain govern-ment funding and annual cutbacks whichhave recently been accelerated, non-profitmanagers are increasingly sophisticated intheir ability to manage funds, stewardhuman capital, and move institutionalmountains. As our grassroots knowledge ofhow to “make do” becomes increasinglyhoned by hard-core skills in financial man-agement, our commitment to highquality/low cost services for residents inlow-income neighborhoods might naturallybe converted to a commitment to customeroriented services with significant valueadded. This commitment to self-improve-ment undergirds, in part, our desire to openour work up to public scrutiny through thisdocument. And it will make us truly com-petitive in the global markets in which weseek to grow in the coming decades.

In conclusion, Collins and Porras makethe point that visionary companies stimu-late evolutionary progress. “The word ‘evo-lutionary’ describes this type of progressbecause it closely resembles how organicspecies evolve and adapt to their naturalenvironments. Evolutionary progress dif-fers from [other] progress in two key ways.First, where Big Hairy Audacious Goalprogress involves clear and unambiguousgoals...evolutionary progress involvesambiguity... Second, whereas BHAGprogress involves bold discontinuousleaps, evolutionary progress usually beginswith small incremental steps or mutations,often in the form of quickly seizing unex-pected opportunities that eventually growinto major—and often unanticipated—strategic shifts...The real question to ask isnot ‘Is this practice good?’ but ‘Is this prac-tice appropriate for us—does it fit with ourideology and ambitions?’” 34



The Community-BasedEnterprise in the 21stCentury:Closing Thoughts

The New Social Entrepreneur is the prod-uct of a changing environment. For

years those in the business communitycomplained that social workers needed totake a “business perspective on things.” Asthe markets which have supported our workin the past have changed, as our own expe-rience has forced us to revisit our approach,we have emerged as new creatures, neitherfish nor fowl. We are the natural outgrowthof the policy decisions made in Washingtonand Sacramento. And we are the end resultof thirty years of efforts to address the per-sistence of poverty in our cities and ruralareas. We have survived by understandingnew relationships between old ideas. Weare creating the visionary community insti-tutions of tomorrow. We are built to last.

It is clear we cannot go back. Our com-munities are forever changed by the eco-nomic realities of globalization. The role ofthe non-profit, community-based organiza-tion must change as well. As Kanter cor-rectly observed, the future rests not withthose who would seek to hold back the tide,but with those who would act to channel its

waters. As Porter suggests, the inner city isnot without attributes and resources whichcan be mobilized in support of our efforts.While he does not share our vision of therole non-profits might play in our changedworld, his tools for analyzing competitiveadvantage provide a useful framework with-in which non-profit enterprise managersmay assess their position relative to themarket and other competitors.

The real challenge is not how to pro-ceed, but rather whether we have the com-mitment and ability to successfully take onthe task before us. As Collins and Porras soclearly understand, the corporations thatwill take our society into the coming centu-ry are those with the vision and the organi-zational capacity to aggressively pursuewhat can be, as opposed to remaining fixat-ed on what was or appears to be our pre-sent circumstance. The non-profitcommunity is searching for tools to apply ina radically changed environment. The NewSocial Entrepreneurship will not end pover-ty, or radically increase the GDP, or signifi-cantly replace jobs already lost to othernations. It will, however, provide those onthe margins with routes into the main-stream. It will allow non-profits to practicewhat they preach and take control of theireconomic future. And it will allow thosewho were without hope to pursue their ver-sion of the American promise of justice andopportunity.



A truly representative sampling of the globalperspective would include a balanced pre-

sentation of the world’s diversity and regionalvariation. The following authors are simplythose who have come to the attention of our officein recent months. Their thoughts are includedin an effort to share their perspective with thereader and close our discussion of the “global”non-profit entrepreneur’s experience.

Writings from Japan, Canada andNew Zealand


BY NAOKI MORIKAWA

(Naoki Morikawa was born in Tokyo in 1961.After graduating with a degree in Economics fromRikkyo University in 1984, Mr. Morikawa was aproducer for television programs and special events.Currently a freelance journalist, he focuses his workon issues of homelessness, problems brought on bythe “pet boom,” employment difficulties for collegegraduates, problems faced by foreign workers, edu-cation problems, and other societal issues that liejust beneath the surface of our everyday lives. Inaddition to being a frequent contributor to numer-ous magazines, Mr. Morikawa is also the author ofThe Day You Become Homeless, Average Book,andThe True Colors of Gorgo 13 (all available in paper-back).2

When thinking about home-lessness, many Americansmay be unaware of theincreasing ranks of thehomeless in Japan. The

first question one must ask is, “About howmany homeless people are there nation-wide?” Unfortunately, even this most basicpiece of data is unavailable in Japan today.

Homelessness is handled on a local levelby prefecture, county, city, and town, andthe government just doesn’t seem to recog-nize homelessness as a problem to beaddressed nationally.

What exactly, then, is the situation?Signs of homelessness are evident in everymajor city in the country. Urban residentsare well aware that there are homeless peo-ple in their cities. The media have alsohighlighted “the homeless” from time totime since the early part of this decade.The faces of “those men” have appeared onthe national networks’ television programsand in the pages of magazines with nation-wide circulation. In short, a look at thehomeless situation in Japan today indicatesthat homelessness can be considered asocietal problem that has reached the levelof nationwide consciousness.

Thus, while homelessness continues toincrease, there is a discrepancy between“government awareness” and “publicawareness.” Let us take a look at the datapresently available. First, according to asurvey finally conducted in 1995 by Tokyoauthorities, the number of homeless per-sons living within Tokyo proper is believedto be approximately 3,300. In Osaka as of1993, there were 692 homeless people.Fukuoka City counted 169 people in 1993.This gives us a total of more than 4,000people in just the three largest Japanesecities. If we include cities where homeless-ness has been recognized for some time,such as Yokohama, Kobe (naturally, thisdoes not include the victims of the 1995earthquake, but rather those people whowork in the construction business andcamp out when they cannot find work;these people have been in the area for along time, and will be referred to as “streetpeople” from here on), Nagoya, and othersuch metropolitan areas, it is readily appar-ent that this number will be not in thethousands, but in the tens of thousands.

Let us also examine the data from theShinjuku* Ward Office, where the “home-lessness problem” is more pronouncedthan anywhere else in Tokyo. While many

A REPORT ON THEINCREASINGLYPREVALENT STATEOF HOMELESSNESSIN JAPAN1

1Translated from theoriginal Japanese byPolyglot International,San Francisco,California.

2 These documentsand Mr. Morikawa’sother publications maybe ordered throughTakashi Konuki,Sandokei Publishing,Kurihara Bldg., 4-48-13Honcho, Nakano-ku,Tokyo —164, Japan.

*TRANSLATOR’S NOTE:The largest train sta-tion in Japan, and ahub of Tokyo.

different types of people come to theWelfare Department for counseling, thegroup classified as those with “no perma-nent address” receives the most cases ofcounseling. Using this as an indicator, thetotal number of counseling cases for fiscal1990 (April 1990 to March 1991) was 1,322.There were 1,938 cases in 1991, 2,199 casesin 1992, and 3,708 cases in 1993; in 1994this number shot up to 31,315 cases.(Figures are as of January, 1995; this num-ber will likely increase further in theremaining two months of this fiscal year).

Incidentally, quite a few volunteergroups are active in the Shinjuku area,working to improve the lives and protectthe human rights of homeless people. Oneof the most typical of these groups, theShinjuku Federation, conducted an inde-pendent survey which found that more than850 people were homeless as of May, 1995.This number was only 310 when this groupwas first organized in February of 1994,meaning that the homeless population hasmore than doubled in a mere 15 months.

Having established that homelessnessexists in Japan, the second question oneasks is, “Why is the number of homelesspeople on the rise?” Again, this is anextremely basic question to which no onehas given a definitive answer. The reasonmost often cited is the bleak situation inthe wake of the bursting of the economicbubble. Clearly, the weak economy is thegreatest single contributing factor.However, there were also homeless peoplein the 1980s, when Japan’s economy wasbooming. Therefore, the economy alonecannot be blamed for this situation.

What, then, is the cause? We can onlyhypothesize. In Japan, however, no one iseven guessing. One hypothesis has beenproffered by a professor from TokyoUniversity at the behest of the Tokyo gov-ernment in 1995, but a proper sociologicalanalysis has yet to materialize. At any rate,I will offer my own personal hypothesis,which comprises the following four mainpoints:

JOB-LESS: This, of course, means a per-son is unemployed. In light of the econom-ic downturn, restructuring has begun here

in Japan as well, and many of the homelesshave been the victims of the resulting lay-offs.

Also, in the case of the Japanese home-less, a disproportionately large numberseek employment in construction work.According to the Shinjuku survey, the lastjob of more than half of the homeless wasin construction. The construction industryis declining along with everything else, andthe number of jobs in this field hasdropped. Furthermore, advances in build-ing materials and methods have reducedthe amount of labor required. In otherwords, technological advances mean not asmany workers are needed as in the past.

Moreover, physical strength is the keywhen it comes to this line of work. Workersabove the age of 50 almost never find work.This is not only the case with constructionwork; middle-aged workers are becomingexpendable in every field., We have seenthe birth of a trend whereby middle-agedemployees are laid off, a trend whereby var-ious types of work have become less laborintensive, and a trend whereby re-employ-ment is difficult. These trends constituteone of the causes for the rapid rise inhomelessness.

HOUSE-LESS: This is the literal sense of“homeless,” someone without a place tocall home. The price of land is exorbitant inJapan, and while it has dropped precipi-tously in these hard times, and the housingproblem is a cause for concern internation-ally, when it comes to an average citizenbuying a house, the prices are still unbe-lievably high by U.S. and European stan-dards.

If a person decides to rent, then thetime-honored customs of deposit moneyand rental fees that are unique to Japanbecome a problem.* If, for example, a per-son were to consider renting an apartmentfor ¥100,000 per month, the deposit andfees together would usually total ¥500,000to ¥600,000, which would be paid to thelandlord or his agent. Thus if you lose yourplace of residence or plan to rent one forthe first time, a house or apartmentbecomes an exceedingly expensive propo-sition in Japan.


* TRANSLATOR’S NOTE: Alump sum equal to 3 to6 months’ rent, muchof it nonrefundable, isrequired up front inJapan.

Another major factor is the change inconstruction practices in metropolitanareas. As mentioned above, the last job ofmost of the Japanese homeless was in con-struction, and when these workers land ajob, they live in a dormitory called a hanba[workmen’s temporary quarters] that isbuilt at the construction site. If they areable to land one job after another, they livein hanbas in various locations, but this isusually not the case. Even back in theboom days, these men needed a place tosleep when they were between jobs. Manyof them would go to temporary lodgingsknown colloquially as doyas [flophouses].This means that, unlike salaried employeesand entrepreneurs, the construction workernever had a fixed residence. Renting anapartment or the like was far too costly forthese men. Therefore, among those peoplecalled “homeless,” a considerable numberfeel that “it’s cheaper to live on the streetthan to go to a doya.”

So what is meant by “changes in con-struction practices in metropolitan areas”?There used to be countless “doya towns” inTokyo, consisting of blocks of eateries andshops that catered to the inhabitants of thedoyas, but these areas have become muchscarcer in recent years. In Japan, wherefamilies of salaried husbands make up thevast majority, urbanization is equated withlarge multi-unit housing, parks, and mod-ern shopping centers. This urbanizationmoved ahead by leaps and bounds duringthe boom period, resulting in the dying outof the doya towns that had been havens forpoor people.

There were always many people wholived on the street in the doya towns, but theresidents of the doya towns tolerated thesituation without much concern becausethey knew these people would leave assoon as they found work. When the samething happens in a neighborhood that hasbeen tidied up through urbanization and inwhich salaried employee families are over-whelmingly prevalent, the residents disdainsuch street people. The government beginsto get complaints, such as “these peopleare not good for the safety or education ofchildren,” “they scare me,” “there is no lawand order,” or “they’re dirty and they stink.”

The street people are inexorably driven outof the neighborhood, and find some placewhere they will be left alone. As a result,places such as the underground passage-ways at Shinjuku station are attractive tothese men. The number of homeless peo-ple grows one or two at a time, with home-less people congregating in limited spacesthrough the above process. This is anotherfactor behind the cries that “the homelesspopulation is exploding.”

FAMILY-LESS: I have read in books thatthere are entire families that are homelessin the United States. In Japan, however, themajority of homeless people are single.Even so, many of these people say that theyused to have a family. Almost none of themsay that they have been alone their entirelife. In other words, every one of these peo-ple have suffered the loss of home and fam-ily. Why?

Ever since the end of the war, thenuclear family has become more and morethe norm in Japan. Economic growth hascreated the philosophy that “our house issmall, but we live in splendor.” Today, fami-lies have separate rooms for each member,there is a television, and many young peo-ple have portable telephones and pagers.What does this mean? It means that whenpeople are at home, they don’t conversewith family members, but instead talk withoutside people on the telephone, watchtelevision, and immerse themselves in theworld of computer games. In the U.S. andEurope it seems that many people areunder the impression that in Asia andJapan, Confucian principles endure, andfamily ties are strong, but nothing could befurther from the truth. It sounds great tosay that everyone—the father, the mother,the husband, the wife, the children, thebrothers and sisters— is singing the praisesof their “freedom,” but put another way, thenotion that members have a responsibilityis waning even in the family.

Among the homeless people with whomI spoke, there were many elderly men whosaid that their wife asked for a divorce assoon as the children were raised and theoldest son had found work. One physicallyhandicapped man said, “Since my daughter



was old enough to have a job, I left home sothat I wouldn’t be a burden.” In otherwords, “home” and “family” in Japan havebecome nothing more than a machine forchildrearing. It is increasingly common fora family to disintegrate as soon as the chil-dren meet their goal of finding employ-ment. In a country such as Japan, if youshould happen to be beset by somethingnegative—say, becoming unemployed orfalling into debt—you can’t necessarilycount on help from your family.

At any rate, a growing number of peoplein Japan “don’t want to be a burden to any-one,” regardless of age or sex. There is atendency to think of someone who willleave you alone as a “good person,” in con-trast to someone who is so friendly thatthey intrude on the privacy of the family oranother person. It comes as no surprise,therefore, that a family whose ties havealready been weakened should disintegratewhen if feels the pressure of difficult eco-nomic times.

WELFARE-LESS: In January, 1996, a home-less roundup was conducted in the under-ground passageways around the west exitof Tokyo’s Shinjuku station, and a tempo-rary shelter was constructed to provide an“alternative” to sleeping in the subways.This shelter had a capacity of 200, corre-sponding to the number of homeless livingin the subway, and could be only utilized fortwo months—long enough, insistedGovernor Aoshima, for workers to deal onan individual basis with each homeless per-son who came into the shelter. However,only 77 people ended up entering the shel-ter; of these, only four or five succeeded infinding a job. The cost of this slapped-together construction was nearly 200 mil-lion yen.* With this amount of money, 200people could have been housed and fed foreight months.

Since 1994, similar limited-time shel-

ters have been built and then torn down inTokyo’s Oita ward. Here again, large sumsof money are used each time for construc-tion and operation. The Governor’s officesays that “opposition from residents” is thereason for the time limits on the facilities,but in Minato ward, where a facility wasrecently constructed, it was expresslypromised from the outset that “the facilitywill only be operated for two months, andafter that no more facilities related tohomeless care will be built in Minato ward.”This highlights the dilemma faced by thegovernment, which finds itself caughtbetween local residents who do not wanthomeless people in their area, and thehomeless themselves who demand thattheir human rights be observed.

At the present time, however, the gov-ernment is not providing a place for theexchange of opinions and discussion. All itis doing is haphazardly excluding people,putting time limits on facilities because of“opposition from residents,” and beingtightfisted with funds for assistance.Because of the piecemeal nature of thiswork, useless expenses are sucking up taxmoney, without yielding any results whatso-ever. This is the current state of Japanesewelfare. So far, Japan has not given rise toas many homeless as has America.However, in the near future, when the miser-able level of government welfare has its fulleffect, the problem will be worse than it is inAmerica. Upon this you may take my word.

The above is my own hypothesis. Insummary, I believe that economic factors(most significantly, the recession) are thegreatest contributor to the situation, butthe most direct cause of the increase inhomelessness is in the societal frameworkdescribed above. The economy has col-lapsed, there is no love in society, and thegovernment is not functioning; these arethe causes of the increase in homelessnessin Japan.

* TRANSLATOR’S NOTE:About $2,000,000.


BY PAUL BORN, ET AL

(Paul Born is the founding director of CODA—theCommunity Opportunities DevelopmentAssociation, located in Ontario, Canada—- a com-munity economic development organization operat-ing a variety of enterprise creation programs.)

T he Community OpportunitiesDevelopment Association(CODA) grew out of a commu-nity response to the deeprecession of the early 1980s.

With unemployment reaching 20% in thedistrict in 1984, the Cambridge LabourCouncil set up CODA’s predecessor, theUnemployment Help Centre (UHC). TheCentre’s activities brought together repre-sentatives from labour, business, govern-ment, churches, and the unemployed tosearch for solutions in the Cambridgeregion of Ontario. The Centre started aretraining and skills development programin 1986, implemented its Self-Employment

Program for social assistance recipients in1988, and two years later became theCommunity Opportunities DevelopmentAssociation in recognition of its expandedmandate. During the past ten years CODAhas developed a project-based CommunityEconomic Development (CED) approach tocreating real work for the underemployedand the long-term unemployed.

CODA views community economicdevelopment as a search for grassrootssolutions to persistent problems in thelocal economy. Simply put, CED meansbringing people together to plan the eco-nomic future of their own community.Partners in the CED process identify work-able community projects and then mobilizethe resources needed to create new jobsand new economic activity at the grassrootslevel. Project-based CED is premised onthe belief that projects focus energies andbring visions to life; it is a means to identi-fying and implementing projects. CODA fur-ther believes a project orientation is moreeffective in developing communities than aprocess orientation. Project-based CED isentrepreneurial and recognizes entrepre-neurs have little time for cumbersomeprocess. CODA’s approach to CED empha-sizes the development of small to medium-sized owners, worker, or community-managed wealth creation units which areaccountable to the community within whichthey operate. CODA itself is accountable tothe community through its board of direc-tors which has balanced representationfrom labour, business, professional andcommunity organizations as well as thepeople served by CODA’s programs. Itremains community-based by involvingalmost 1,000 volunteers, staff, partners,donors, and supporters in various aspectsof its work.

Capacity building involves developingsystems, values, and a philosophy appro-priate to and effective in achieving results;it also develops individuals’ and communi-ties’ ability to recognize opportunities.Currently CODA is involved in the followingactivities:

THE CANADIAN

PERSPECTIVE:THE COMMUNITY

OPPORTUNITIES

DEVELOPMENT

ASSOCIATION

➣ A neighbourhood community planningeffort;

➣ The creation of an Entrepreneur Store,providing various services to small,start-up businesses;

➣ The creation of its third loan fund capi-talized with Class A shares, fullysecured by the provincial government;

➣ The establishment of a Career ActionCentre which provides information,training, and seminars to individualsseeking to improve their skills andcareer strategies;

➣ The creation of social purpose business-es. The As You Like It Cafe and CateringKitchen trains up to 80 long-term socialassistance recipients (out of work overthree years) to enter the food industry.

➣ Going to Work, a welfare-to work-initia-tive which has helped 314 participantssecure employment, assisted 106 partic-ipants to create their own businesses,and resulted in savings of $2.2 million intaxpayer dollars on an investment of$1.3 million (a return of 63%). Theseresults are especially impressive whenone considers that, on average, Going toWork participants have been on socialassistance for two years and that only52% of them are high school graduates.

Canadian Issues

It is hard to say how economic issues fac-ing Canada play out differently than they

do in the United States, although we havefound that our ability to make independenteconomic decisions is influenced by ourdependence on the American economythrough trade and the need to borrow toservice our debt. More than 30% of everytax dollar in Canada goes to service ourdebt. When a federal or provincial govern-ment sets a budget, the acceptance of the

budget by U.S. credit rating agencies islooked to with great respect. Governmentsin Canada are therefore consumed withbringing the debt under control, affectingour ability to implement social policy.

One of Canadians’ great fears is thatCanada is becoming like the United States.Most of our social programs, like Medi-Care, Old Age Pension, and UnemploymentInsurance, are being revamped. The over-riding issue is that we simply can no longerafford to be the caring society for which wehave such a reputation.

CED in Canada has helped local com-munities take control of their own future.CED helps cities and towns to monitor theireconomic activity and is used as a vehicleto temper economic downturn.Government has actively promoted CED inrural communities in Canada but has pre-ferred traditional forms of economic devel-opment in urban areas.

Learning From the CODAExperience

CODA has recognized that healthy com-munities cannot rely on government

mega-projects, foreign ownership ofresources and production, and a lot of goodintentions. It is when the people of thecommunity plan, form partnerships, andimplement community-based projects thatwe will create an environment for respond-ing to rapid and ongoing change. We haverealized that as local economic develop-ment gains legitimacy (clout) and the peo-ple gain the understanding and skills todevelop local economic development(capacity), they can access the capitalrequired to implement local projects.

CODA believes that local economicdevelopment can be summed up as People,Planning, Partnerships, and Projects. Wealso believe that local economic develop-ment is achieved through Clout, Capacity,and Capital.


1. People

People are at the core of local economicdevelopment. People who want to create abetter future for themselves, their children,and their neighbors are much better atidentifying projects which will benefit theentire community than are organizations.CODA has adopted the raison d’être“People Creating Opportunities” to exem-plify this principle. We have always recog-nized that people, not organizations, effectpositive change.

People working together need leader-ship. We have recognized the leadershipand vision in our community. Communityleaders have a real love for their communityand have a vision to make things better.These leaders work collectively within thecommunity regardless whether they arerepresenting labor, businesses, politicalviewpoints, or a religious orientation. Theybelieve in the people of their communityand are typically result-oriented doers.

2. PLANNING

CODA has learned that planning isessentially a process by which to capturethe obvious. The obvious is most oftenfound through listening and being present.We have learned that the closer we are tothe real needs and hopes of members ofour community, and in particular the partic-ipants within CODA, the better chance wehave of understanding the obvious.Opportunities Planning brought together12 social assistance recipients and 12 com-munity/neighbourhood organizations. Inlistening to stories and working collectively,we developed a proposal that was so obvi-ous that it was the first one selected of 230proposals submitted to the provincial gov-ernment. After its first year this project hasmore than 100 individuals actively involvedin the ongoing management and imple-mentation of the project.

We have also recognized that planningis an ongoing process. We often sum thisup by saying, “We build the road as we trav-el.” This statement recognizes that innova-tion requires risk and trust. Communityinnovators recognize that solutions arewithin the collective, and that mutualreliance means we have many resources by

which to implement the obvious. We do notneed to know exactly how the road will bebuilt or where it will lead. Much moreimportant to us is that we know what wewant to accomplish and have the collectivecommitment and capacity to get there.

3. PARTNERSHIPS

Local economic development is proba-bly best summed up as a strategic partner-ship. Partnerships grow out of anunderstanding of a community’s limitationsand in the context of its strengths. It is onlyin knowing and accepting our weaknessesand strengths equally that we can partnereffectively. Effective partnerships are there-fore those which happen most naturally.Partnerships are developed to provide arealistic synergy for project development.CODA has 10 public sector partners and 20community partners which work strategical-ly and collectively to deliver projects.

4. PROJECTS

It is through projects that people, plan-ning and partnerships live. We believe pro-jects focus energies and bring visions tolife. CODA is a project-based communityeconomic development organization. Webelieve that process is purely a means toidentify and implement projects. We furtherbelieve that a project orientation is moreeffective in developing communities than aprocess orientation. A process orientationattempts to develop broad-based commu-nity ownership for a project before it isstarted. A project-based orientation bringspeople together to test project ideas and tomodify individual visions. Project-basedCED is entrepreneurial and recognizes indi-vidual leadership and vision. It further rec-ognizes that broad-based communityownership of local economic developmentis best fostered through those who are ben-efiting directly from the projects. We havelearned that community buy-in is bestachieved best when examples of CED are atwork in the community. Project-based CEDfurther recognizes that entrepreneurs aredoers and have little time for cumbersomeprocess.

CODA has learned that people, plan-ning, partnerships, and projects in them-


selves do not achieve the scale required formeaningful local economic development.It is through Clout, Capacity, and Capitalthat scale can be achieved.

5. CLOUT

A community must see local economicdevelopment as a legitimate form of wealthcreation. Traditionally, communities haveembraced government mega-projects, largemulti-national corporations, and otherlarge scale initiatives to create jobs. Wehave found this particularly true in south-western Ontario. Communities often seereal economic development as a new indus-trial park filled with large companies. Therole of many municipal business develop-ment departments has become to sellindustrial land.

If local economic development is toreceive the priority it requires and becomean effective economic development force,the importance of locally-owned and man-aged wealth creation units must beenhanced. This is best accomplished bysupporting the development of small busi-ness, co-operatives, and credit unions.Communities must have, as a first priority,growing local companies and organiza-tions. We must recognize that it is moredesirable to attract outside investment inthe community through creating a positivebusiness environment in which local com-panies can grow than by providing conces-sions and subsidies by which to attractinvestment.

6. CAPACITY

The skills required to achieve local eco-nomic development are not new. They arepractical skills which must be relearned.Effective local economic developers aregeneral specialists skilled in networking,planning, listening, organizing, and creativethinking. They are quick to learn, entrepre-neurial, and know how to make money.They have learned to know the communitythrough experience and a key interest in thepeople of the community and the issueswhich affect them. They are good at devel-oping and implementing projects and areexcellent problem solvers. Most important-ly, they have a positive attitude. CODA

brings together people with the above skillsto implement its projects. We have foundthe synergy of these individuals working forthe betterment of our community can be apowerful force in economic development.

7. CAPITAL

Money is central to effective communityeconomic development. It is not onlyessential for organizations like CODA butalso for the development of local projects.We have found that many local companiesare unable to access the capital requiredfrom traditional banks. There are also limit-ed vehicles by which to raise the requiredcapital for community economic develop-ment. CODA has started three loan funds: AMicro-Enterprise Loan Fund which pro-vides loans to low income entrepreneurs;an Innovation Loan Fund for social assis-tance recipients to overcome the barriersthey face to finding or creating work; and aFirst and Last Month’s Rent Fund to helppeople secure affordable shelter.

Within the next two years, CODAintends to develop a CommunityInvestment Share Corporation to assistexisting businesses and a Community BondCorporation to support community or work-er-owned companies.

Conclusion

CODA is a relatively young organizationwith only 11 years of experience. During

these 11 years we have learned that there isan alternative to traditional economicdevelopment. A community is healthier if itrelies on the people living in their commu-nity to create jobs. The communities weserve have for too long relied on foreign-owned branch plants to employ our citizens.Though CODA has relied heavily on govern-ment-supported projects to date, it is learn-ing to develop and implement projectswhich have broader community input. Theorganization, through the broad range ofskills of the people and partnerships withinit, has embarked on an exciting future. It is



our belief that CODA will have a meaningfulimpact on the economic development ofour community over the next 10 years.

It is our hope that CODA will work onbehalf of the many citizens of our commu-nity who are struggling to adjust to therapid restructuring of our economy. We willwork in tandem with traditional economicdevelopers with the goal of ensuring allmembers of our community have equalaccess to opportunity. We will continue toadvocate for local economic developmentas our community adjusts to the reality of aglobal economy.

CODA will strive over the next 10 years toensure that double digit unemploymentdoes not become systematic and thusacceptable. We believe through grassroots

local economic development there will besignificant opportunities for all members ofour community. CODA’s role in the overalleconomic development continuum will be toensure that our community, as part ofCanada, does not need to pay out millions ofdollars in social benefits to citizens unableto adjust to the new economy. It is our beliefthat we have developed a model which canharness the energy and visions of those onthe economic margins of our society.

CODA will continue to create opportu-nities by bringing together more people todevelop more partnerships and projects.We will ensure local economic develop-ment is a legitimate economic strategy bycreating more capacity and accessing morecapital in its development.

BY WARREN SNOW

(Warren Snow was a founding member of theKaitaia Community Business and EnvironmentCentre (CBEC) in Aukland, NZ, and currentlyserves as senior staff with a private family founda-tion supporting efforts at expanding local economicopportunity in New Zealand.)

This report discusses the role ofthe non-profit sector in the cre-ation of employment opportu-nities in New Zealand. Itbegins by outlining the changes

in New Zealand society brought about by

economic reforms and restructuring since1984, the impact of those changes at thecommunity level, and how one communityfought back and created jobs and opportu-nities for local people.

Background

In the early 1980s, a bold experiment wasembarked upon that changed New

Zealand forever. It was launched in 1984 bya new guard of right-leaning, free marketpoliticians within the new LabourGovernment. They challenged NewZealand’s complacency and satisfactionderived from the nation’s costly “cradle tothe grave” social welfare system. Within afew short, tumultuous years one of theworld’s most controlled, protected, and reg-ulated economies was reshaped and trans-formed into one that is among the world’sleast regulated, most competitive, andmarket directed. As market theory becamethe single determinant of all aspects ofpublic and private sector planning, no seg-

THE NEW ZEALANDEXPERIENCE

ment of New Zealand society was unaffect-ed. The process was even given the name“Rogernomics” after Roger Douglas, thethen-minister of finance and champion ofthe market reforms.

What happened over the next few yearsmay be viewed as either the unthinkable, oras a painful but necessary process thatsaved a nation from sure decline.Regardless of which is correct, the twoopinions represent diverging views of anation which receives international acclaimfor its vital competitive economy, on theone hand, but has the fastest growing gapbetween the wealthy and the poor on theother.

Before 1984, state trading activities(railways, telecommunication, airlines,insurance, television, shipping, road con-struction, radio, forests, ports, airports, andmore) handled 20% of the total investmentof NZ, and produced only 10% of the coun-try’s economic output. As a rule, they wereall hugely overstaffed, inefficient and oper-ated at a loss. Beginning in 1984 they wereturned into State Owned Enterprises—or“SOEs” —that had to make it in “the mar-ket.” They were set at arm’s length fromgovernment interference so they could actas normal businesses.

“Privatization”—the selling of state-owned enterprises to the private sector—was the next step, leading to the disposal oftelecommunications, television, railways,forestry, oil exploration, long distance pas-senger and freight services, shipping, air-lines, government printing, and even thePost Office Savings Bank and the Bank ofNew Zealand. Many passed to overseasownership, a much-debated issue now. Thetransfer from public to private ownershiphas continued until the present, with manylocal utility companies being privatized.

Big changes also occurred in the privatesector as takeovers and downsizingchanged the economic landscape. Withimport controls and taxes removed, compe-tition from cheap imported goods put pres-sure on whole industries, especially themost protected and inefficient. Many com-panies seized the opportunities presentedby deregulation. The freer commercial envi-ronment, along with innovation, good man-

agement, and new technology has enabledthem to take on overseas competitors in away previously not imagined possible.

Implications of TheseShifts for New Zealand’sSociety

The new economic environment, with the“brakes off,” so to speak, has created a

new elite of those who can decide whichschools to send their children to, pay forprivate health care, invest in property, thestock market and generally, as one bankextols, “seize the day.” Conversely, thereare the new poor, many of whom previouslyhad secure and comfortable lifestyles andnow find themselves economically margin-alized, squeezed into low socioeconomicareas where crime and fear are on theincrease and schools have few resources.

Everyone was affected in some way bythe market reforms, either by more oppor-tunity or through lower wages, higher rents,or lost jobs. In response, the phrase “trickledown effect” was often used by some politi-cians and free market exponents. Theybelieved that by creating opportunities foreconomic growth, wealth and opportunitywould eventually trickle down to those dis-advantaged by the reforms. Increasedimmigration led to more pressure onemployment and real estate markets andcame to be blamed for many of the coun-try’s woes. By the mid 1980s, unemploy-ment reached record and unacceptablelevels. It was highest amongst the indige-nous Maori people, who had traditionallyheld many of the jobs that were being elim-inated. Even skilled workers found them-selves applying to receive governmenthandouts alongside low-skilled people whowere the first victims of the reforms.



A Community Profile

The market reforms had huge effects onKaitaia, a small town in the far north of

New Zealand, where the restructuring ofmany large companies and governmentagencies or their relocation to larger cen-tres left many without work. Even feweropportunities were available for peoplewithout high school diplomas. A number ofsuccessful local companies were boughtout by national and international corpora-tions, or simply closed down to suit widercorporate objectives. Many who had previ-ously been secure in government or privatesector jobs became unemployed andincreasingly reliant on the state welfare sys-tem to meet their basic living requirements.Along with high unemployment cameincreases in crime, alcohol and drug abuse,gambling, and domestic violence. Themain new commercial growth areas were“unemployment accessories”: new pubsand liquor outlets, a booming marijuanaindustry, gambling venues, flourishing newvideo outlets and game parlours, and ahuge new social welfare office to dispensethe weekly social security payments.

At the same time, local businessescame under pressure from highly organizedchain stores and franchises providing lowerprices, more consistent quality, and newlevels of customer service. Ironically, localbusinesses that remained could often notattract employees, because wages were notas attractive as those being paid by welfare.

In 1989, a small committee of peopledecided to set up a company to developand operate businesses to create employ-ment for local people—but this time, thecompany would be owned and operated bythe community. Inspiration came from the“Community Business” concept which hadrecently been introduced to New Zealandby a group of Scots, as well as from an earlyNew Zealand tradition of cooperativelyowned business.

A Community Business is a “trading”organization owned and controlled by thecommunity through a member-elected vol-untary board of directors. Staff areemployed by the board to implement policy

and to run the day-to-day operations of thebusiness. Any profits are reinvested in fur-ther initiatives of community benefit or asincentives or bonuses for employees.

In 1988, the Kaitaia CommunityBusiness and Environment Centre (CBEC)was formed and within a short period wasoperating the following initiatives:

1. A comprehensive district-wide recyclingprogram on contract to local govern-ment, including a curbside collectionscheme, and subcontracts to operatesix garbage transfer stations and thelocal landfill.

2. A forest establishment business provid-ing planning, planting, and aftercaremanagement of forestry business,including a wholesale hardwoodforestry nursery.

3. A retail nursery offering a range of land-scaping services.

4. Managed workspace. CBEC manages alarge building complex, formerly ownedby the railway, and owns another sitewhere workspace is leased to local busi-nesses.

5. A general contracting business provid-ing a flexible labor hiring service thatcontracts to the local council and theprivate sector in the areas of town beau-tification, new developments, flood pro-tection, and management of the localpublic swimming pool.

6. Two 10-member “Conservation Corps”training programs funded by govern-ment and aimed at developing youththrough conservation activities.

7. A major habitat protection project pro-tecting a series of lakes adjacent to 90Mile Beach that have been seriouslydegraded through farming activities andthe stripping of natural vegetation.

By winning contracts that would other-wise have been won by companies fromoutside the area, CBEC has been able to

provide new opportunities for unemployedpeople to participate in the local economy.This in turn has raised the capacity, skilllevel, and confidence of people who other-wise would have been living on governmenthandouts. Moreover, CBEC managementpositions have been made available forgood local talent that would otherwise havehad to leave the area for other opportuni-ties.

By the early 1990s, CBEC provided workfor 50 full-time employees, a similar num-ber of part-time jobs and had become a sig-nificant player in the local economy. Longterm unemployed people were given thechance to prove their worth and grow intoresponsible management roles. The boardof directors was made up of local peoplefrom all walks of life including business,farming, and education, and also held seatsfor the unemployed. Local people offeringdiffering skills have been attracted to CBECfrom the outset, which has created amomentum and vitality arising from “asense that we are doing this for ourselvesand at the end of the day the profits go backto our community or into more jobs.” CBEChas in turn provided a platform for localenergy to act and intervene in the localeconomy.

Fundamental LessonsFrom CBEC

After six years of trading, CBEC is quite adifferent organization from the oppor-

tunistic, widely focused one it was at thebeginning. Management and decision-making skills have been learned out ofnecessity. Good business practice andcommercial imperatives have replaced theinitial raw idealism and desire to do some-thing good for the community. And hardbusiness decisions have had to be made tokeep the organization afloat.

This has put managers in the unenvi-able position of paying what are recognizedas low wages to some staff to remain com-petitive in some areas of operation. Some

in the community sector have criticized thispractice. It would be nice to pay more;however, not only are these people receiv-ing training and becoming more qualifiedfor jobs that may arise in the future, butthey benefit from the increased self esteemthat comes, especially in a small communi-ty, from being employed. And many staffpreviously on the dole have gone on to bet-ter paid work or self employment afterworking with CBEC.

Some of the key lessons learned follow:

➣ Board and paid staff have distinctlydifferent roles which should not beconfused.In CBEC’s case, the relationship

between the board and management hasalways been good. This is because theboard concerns itself with policy and man-agement, whereas the staff is responsiblefor implementation. Board members arenot at worksites on a daily basis telling staffwhat to do and not do. Instead they receivereports from management and addressproblems at monthly board meetings.

➣ Planning is critical.CBEC has an annual strategic planning

process that involves the board and keystaff. All members and staff may attend theannual meeting, and staff are encouragedto put ideas forward to improve the wholeorganization’s effectiveness.

➣ Hiring long-term unemployed peopleis costly.But someone has to do it. Any business

creating work for long-term unemployedpeople has costs that normal companies donot have. For CBEC, profit is measured bythe number of jobs created, not just in dol-lars generated. People who haven’t workedfor long periods, or ever, simply do not havegood work habits. For example, even withgovernment subsidies of up to 50%, previ-ously unemployed workers hired by CBECin some projects such as forestry could notmatch the work output of competing com-panies from out of town that operate with-out subsidy. This may mean the businesswill have insufficient funds for reinvestment



in plant, equipment, and new technologythat can keep it competitive. People willpick themselves up given the chance, butoften they still need to learn very basicskills before they can perform even the sim-plest of tasks at economical rates.

➣ Overfunding and underfunding willbring failure.Either way it’s the same. Groups provid-

ing training and creating jobs for previouslyunemployed people need support, but itmust be accurately targeted or it will causefailure. If there’s too much, inefficiency willbe built in. If there’s too little, projects willbe undercapitalized and will fail. It isimportant that funders understand thisconcept.

➣ It pays to support and work with localbusinesses.Perhaps the most important lesson

learned in Kaitaia is the value of workingalongside existing businesses and govern-ment structures. At first most were suspi-cious, but managers have found there isalways someone who understands whatthey are trying to achieve and is willing tohelp. CBEC has tried to create new oppor-tunities and not compete directly with localbusinesses. Local and even large out oftown corporations have used CBEC’s exper-tise in a number of areas rather thanemploy people directly themselves. Thishas resulted in a number of subcontracts inroad paving, waste management, forestry,

and landscaping.CBEC and other similar initiatives in

New Zealand have shown that the conceptof community-owned enterprise has a placein the economic development of areas withlarge numbers of economically marginalizedpeople. With the right support from industryand local or central government, manydevelopment opportunities can be jointventured with all stakeholders benefiting.

➣ Communities must organize to graspopportunities.There is a huge stream of contract and

employment opportunities in any commu-nity or neighborhood that are often takenby out-of-town companies, often using out-of-town employees. People with businessexperience can identify the opportunitiesand know how to take the right risks to getthe contracts that will provide the jobs. Astructure is also required that can act as aplatform to harness and focus the energy ofthe community to act in its own best inter-est. Although CBEC has social and envi-ronmental objectives, it has combinedthem with tough management and busi-ness objectives. As Cliff Colquhoun, thecurrent manager, says, “If you are going outthere to compete, you have to foot it on thesame basis as everyone else. Your workrate and reliability have to be even betterthan your competitors’, because comingfrom the community sector the worldexpects you to fail.”

THE NON-PROFIT FRANCHISE ✦ 313

Introduction

In recent years, non-profit organizationshave struggled to find new ways to

accomplish their missions. This search hasincluded efforts to develop the financialmeans to support agency operations in aclimate of uncertain philanthropic and gov-ernment support, as well as the develop-ment of innovative programs for a growingclient population. Many non-profits areexamining the option of forming businesspartnerships, which can range from classiccustomer/supplier relationships to forms of

strategic alliances in which the non-profitagency forms a long-term partnership witha for-profit company. This chapter will dis-cuss the Ben & Jerry’s Partnershop programas one example in which a corporation hassought to work with the non-profit commu-nity to expand economic opportunity.

Many corporations are involved inefforts to support worthwhile communitycauses. Traditional corporate philanthropyincludes “give aways,” sponsorships andfinancial contributions. Increasingly, how-ever, corporations are looking for ways inwhich they may have a more significant,long-term impact upon an issue or in a giv-en community. Efforts which meet thatgoal while also allowing the corporation tosell its product are becoming increasinglypopular. These strategic alliances may takedifferent forms in addition to the franchiseinitiative described below. One example iscorporate outsourcing to non-profits tomeet various service or production needs.Regardless of what form it takes, in manyways these approaches are the essence ofwhat it means to “do well by doing good.”The Ben & Jerry’s Partnershop programshould not be viewed as an isolated effort,but as the first step in what we hope will bean array of new corporate-community busi-ness partnerships to be created in comingyears.

It should be understood at the outsetthat this effort is part of a developmentalprocess for both Ben & Jerry’s and its non-profit partners. What is presented in thischapter is merely a snapshot of thatprocess. Ben & Jerry’s should also be com-

THE BEN & JERRY’S

PARTNERSHOP

PROGRAM:A STRATEGIC ALLIANCE

BETWEEN FOR-PROFIT AND

NON-PROFIT ORGANIZATIONS

The Non-Profit Franchise

mended for its commitment to providingNew Social Entrepreneurs with an opportu-nity to launch a Partnershop. It is hopedthat other corporations will learn from theirexperience and pursue their own profitable,community-based business ventures.

The Concept of StrategicAlliances

Non-profits are increasingly seeking toform alliances with individual corpora-

tions in the business community at thesame time that corporations are increasing-ly attempting to find more significant waysto contribute to communities. Strategicalliances may be seen as voluntary cooper-ative arrangements involving two or moreindependent organizations that agree towork together toward a common goal.Many organizations enter into differenttypes of voluntary arrangements with otherorganizations. For example:

➠ short-term contracting relationshipsbetween customers and suppliers;

➠ contracting of professional servicessuch as those provided by accountants,consultants, and attorneys; and

➠ contracting of support functions such asjanitorial service or food preparation.

Strategic alliances differ from thesetypes of inter-organizational arrangementsin their emphasis on the long-term, “strate-gic import” of the relationship.Organizations enter into strategic alliancesto better accomplish long-term goals andobjectives. In the case of the Ben & Jerry’sPartnershop program, the goals of the cor-poration were to pursue their social missionwhile the goals of the non-profits are to pro-vide employment and training opportuni-ties to their program participants. Strategicalliances also include agreements betweenorganizations to contribute resources,knowledge, or expertise in exchange for the

capabilities of another organization. Factors which make for successful

strategic alliances can be linked to thenotions of strategic fit, organizational fit,and perceived mutual benefit of the rela-tionship. Jemison and Sitkin (1986) definedstrategic fit as the degree to which a firmaugments or complements the other firm’sstrategy and, thus, makes identifiable con-tributions to financial and non-financialgoals. Organizational fit is defined as thematch between administrative practices,cultural practices, and personnel character-istics of the two firms. Perceived mutualbenefit can be defined as the degree towhich the two firms perceive the relation-ship to be beneficial to both parties.

The For-Profit/Non-ProfitAlliance

In 1986, Barragan & Freedland suggestedcommunity-based organizations might

benefit from joining the business franchisemovement.1 The authors specifically rec-ommended that restaurant franchisescould serve as a vehicle for providing eco-nomic support for the social mission ofthese community-based organizations. Ofcourse, this strategy of aligning with a for-profit enterprise through the franchisestructure is not limited to the restaurantindustry. It may work equally well with oth-er business sectors that function throughnetworks of franchise locations (for exam-ple, clothing outlets, automobilerepair/maintenance shops, specialty retailstores, etc.).

Regardless of the sector in which theorganizations operate, these types of work-ing relationships tend to be of long-termimportance to the accomplishment of thegoals of each organization. In other words,they may be viewed as strategic alliancerelationships. These arrangements posedifficulties as well as rewards for both orga-nizations. It is important to examine theissues that arise in these alliances so thatother businesses and agencies can under-


1 R.E. Barragan & M.Freedland, “RestaurantFranchises: AnotherCED Strategy!”Economic Development &Law Center Report, 16 (4)(Fall, 1986), 1-11.

stand the challenges of this type of programbefore committing to such a strategy.

In an effort to appreciate some of theintricacies of the franchise approach, weinvestigated a specific program of alliancescentered around Ben & Jerry’s Homemade,Inc. (Ben & Jerry’s), a for-profit companywith a strong commitment to serving asocial purpose. This investigation exploredthe Ben & Jerry’s initiative, known as thePartnershop Program, which has formedstrategic alliances with independent socialservice agencies in several communities asa means of accomplishing the social mis-sions of both organizations.

BACKGROUND

Ben & Jerry’s enjoys a reputation for highquality products, and is known for its sup-port and interest in social causes. Thecompany has evolved a network of fran-chise, retail outlets for the sale of its premi-um ice cream products. Over the past nineyears, the company has also used its fran-chise operations to support community-based social service agencies. Thisprogram was developed as part of an effortto implement the company’s mission state-ment which includes the goal of using itsbusiness operations as a vehicle for socialchange. The program has evolved over theyears as significant learnings have takenplace, but has always centered aroundgranting franchises to selected non-profitagencies for the purpose of supporting theirsocial missions through the employment oftheir clients. Community-based organiza-tions in cities from New York to SanFrancisco currently operate six Ben & Jerry’sscoop shop franchises—about five percentof the franchises in operation. As of thiswriting, one of the six has temporarilyclosed for relocation, and a second is plan-ning to exit the program due to a change intheir approach to their target population.Ben & Jerry’s is committed to expanding thePartnershop program.

The Partnershop initiative can be inter-preted as a series of strategic alliancesbetween a for-profit business corporationand several non-profit social agencies. The

strategic alliance approach offers an appro-priate framework for evaluating the pro-gram, predicting the challenges most likelyto be confronted, and making suggestionsfor improvement.

For this evaluation, interviews were con-ducted with corporate executives of Ben &Jerry’s who are intimately involved inaspects of the Partnershop program andwith representatives of five of the six com-munity-based organizations that arealliance partners. In addition, financialstatements, annual reports, and media cov-erage were reviewed to gain an overall pic-ture of how the program developed and isfunctioning.

ORIGIN AND MOTIVATIONS

Ben & Jerry’s operates under a formal mis-sion statement with three central goals:

1. producing a premium product;

2. successfully selling that productthrough retail outlets and franchise spe-cialty stores; and

3. using their business as a vehicle forimproving the social conditions of thecommunities in which they operate.

As stated above, Ben & Jerry’s franchiseactivities represent an extremely small partof their overall operation. And the origin ofthe Partnershop program is widely attrib-uted to the efforts of a single individual tocombine the social mission component ofthe corporate philosophy with the businesscomponent. Jeff Furman, a member of theboard of directors at Ben & Jerry’sHomemade, Inc., was assigned the task ofdeveloping the franchise program at Ben &Jerry’s. He first suggested the idea of work-ing with a non-profit agency to open a fran-chise shop in 1986. Furman reasoned thatthis arrangement would provide Ben &Jerry’s the knowledge and experience ofmanaging a franchise operation locationwhile also providing an opportunity for alocal community-based organization to ful-fill its goal of providing training to margin-


alized people. The proposal was adoptedthrough an agreement that Ben & Jerry’swould waive the normal franchise fee andwould provide the agency with expert prod-uct advice, training, and guidance on man-aging the shop. On their part, the agencywould raise financing for the operation,provide management and staffing, and han-dle day-to-day operations. The partiesstarted referring to this type of franchise asa Partnershop because it was perceived as ajoint venture between Ben & Jerry’s and thenon-profit agency.

The first Partnershop generated a greatdeal of publicity. Community-based orga-nizations in other cities heard of the ven-ture and approached Ben & Jerry’s with theirown Partnershop proposals. To paraphraseone corporate member, it wasn’t like therewas a strategy for a whole program, it wassimply that there was an opportunity thatlooked like a good marriage of the compa-ny’s mission to sell ice cream and be a posi-tive force in local communities. While theyhave moved to create a more formalizedselection process, their informal approachin some ways made it possible for them topursue the Partnershop initiative. If theyhad engaged in a serious evaluation of whatmight lie ahead of them, they may havedecided the risks were not worth the poten-tial rewards.

The non-profit social service agenciesparticipating in the Partnershop programare local, community-based organizationsseeking to provide employment opportuni-ties, job skills development, and education-al opportunities for marginalizedindividuals. Among the problemsaddressed by these agencies are homeless-ness, behavioral problems, and physical,emotional, and developmental disabilities.The agencies, which operate in large citiesand in small to mid-sized communities,serve distinct populations within their com-munities, ranging from single adults toteenagers.

Whereas Ben & Jerry’s may have initiallybeen fairly informal in its approach to itswork with non-profit franchisees, the moreeffective Partnershops have been the resultof tremendous effort and work on the partof the non-profits involved. As is described

in greater detail in the Larkin BusinessVentures case study, the launch of thePartnershop came about only after alengthy planning process made possiblethrough the support of the HEDF. Withoutthat investment in pre-development, thesuccess of the LBV experience would nodoubt be significantly more modest andtheir present prospects less bright.

The non-profits’ motivations for open-ing Partnershops seem to follow a few com-mon themes. Each organization saw theprogram as a vehicle for providing mean-ingful employment to their clients thatoffered clients the opportunity to work in acomfortable setting with a high qualityproduct line. As one respondent reported:“... we wanted to create the type of businessthat has a potential to send the messagethat you are good enough to sell premiumproducts. It had to be high quality, it had tobe something young people could engagewith, it had to be ‘cool’ to young people.”

Partnershop representatives stated thatthey were aware of Ben & Jerry’s reputationas an organization interested in social caus-es, and that this was a big attraction. Withthe exception of the initial Partnershop, thesocial service agencies stated they initiatedthe contact and made proposals to becomeparticipants in the program. It was theirexperience that Ben & Jerry’s was respond-ing to interested parties with worthy socialprograms, rather than actively seeking part-ners. For example, in 1994, Ben & Jerry’sreceived more than 2,000 requests fromnon-profits interested in launchingPartnershops; only two were selected fromthe pool.

Strategic Fit

The most important components of asuccessful alliance are the strategic fit

between the participating organizations,the level of cultural fit, and the degree towhich the separate organizations perceivethe alliance as mutually beneficial.

Strategic fit is usually the easiest com-


Whereas Ben& Jerry’s mayhave initiallybeen fairly

informal in itsapproach to itswork with non-

profitfranchisees,the moreeffective

Partnershopshave been the

result oftremendous

effort and workon the part ofthe non-profits

involved.

ponent to evaluate, and provides the mostobjective measures of success or failure. Inour analysis of the data, we looked at thedegree to which both parties were achievingtheir strategic goals. The program bringstogether organizations seeking to accom-plish two sets of common goals:

1. achieving a social mission; and

2. operating the shop in an economicallysuccessful manner.

The social mission component can beconsidered successful if the allianceenables the social agency to achieve itsmission to help its clientele and its com-munity, and if Ben & Jerry’s can use thescoop shops as vehicles for social action.The economic mission concerns the extentto which the franchise is able to successful-ly operate as an economic enterprise. Ben& Jerry’s and the individual social agencyboth have a stake in seeing that these dualgoals are achieved.

To assess the degree of success attainedin meeting the social mission componentthrough the program, we asked eachPartnershop executive how the alliancearrangement had helped their organizationaccomplish its social mission. Respondentsstated they have been able to put more oftheir clients to work, the work environmenthas led to improvements in the self esteemof their clients, and the work has improvedthe lives of their clients through increasedjob skills and experience. Respondentsmade the following comments:

➠ “One of the best things about the pro-gram is that the clients feel really proudthat they are working for a Ben & Jerry’sstore and serving a well-known, high-quality product.”

➠ “[I]t has given our clients an opportunityto advance, to earn some income, tobuild job skills, to progress from work-ing at our franchise location to workingin management positions.”

➠ “The program has given clients an oppor-tunity to excel at customer service.”

➠ “They are really proud that their pay-check comes from such a prestigiouscompany.”

In addition, respondents stated that thefranchise has given their agency a positivepublic image in their community. As onenoted;,“... it’s kind of a joke around herethat we manage 650 units of affordablehousing ... and what are we known for? Weare known for running an ice cream store.”

The consensus among the intervieweesis that the social missions of thePartnershop organizations are beingachieved. However, there is no formal pro-cedure in place for evaluating this compo-nent. Corporate executives at Ben & Jerry’sstate they are considering the developmentof a social mission audit report to evaluatewhether the Partnershops are achievingtheir social goals. It is recognized that it isvery difficult to approach this sensitiveissue, however, and the participation ofPartnershop management will be critical inthe development of successful evaluationprocedures.

The economic mission component hasbeen somewhat more problematic for someof the partners. The efficient running of asmall business is a difficult task under anycircumstance. According to Barragan &Freedland, nearly half of all small business-es do not survive past the fourth year due tofactors such as undercapitalization, inexpe-rienced management, and a lack of market-ing skills. Franchises generally offer ahigher success rate than stand-alone smallbusinesses because they can build uponthe public image of national chains andoften rely upon the franchiser for manage-ment training. The Partnershop programoffers the added benefit of intense mediacoverage of each new opening due to theunique nature of a collaboration between awell-known, for-profit corporation and alocal non-profit agency working on localproblems. Still, the program is predicatedon the expectation that each shop willoperate within the same parameters as thetypical for-profit franchise operation.

A review of a limited set of financialreports gathered from four of the sixalliance partners for the three most recent


quarters indicates they had poorer financialperformance than the average, for-profitfranchise. Because the sample size was sosmall, we could not perform an extensivefinancial analysis. Therefore, we chose tolook at a simple calculation of profitabilityto get an idea of how well the Partnershopswere meeting their economic mission.Profitability analysis is an attempt to quan-tify management’s effectiveness in usingthe resources, both human and capital, toearn a return on investment.

In general, it was found that thePartnershops do not achieve the same levelof profitability as for-profit franchises. Acloser examination revealed this findingmay be attributed to two key factors:

1. LOCATION: Critical to the success of anyretail operation is the location of thestore. One of the partners is located in asmall community that, according to itsmanagement, would not have ordinarilybeen chosen as a site for a franchisestore. The local population is too small

and business traffic too light to ade-quately support the operation, and thestore is not open during the winter. Thiswas a case where the good intentions ofBen & Jerry’s to help a worthy socialagency, and the enthusiasm of the socialagency for the program, appear to haveoutweighed fundamental business con-siderations. The result has been a storethat struggles financially to meet itsgoals.

2. PROGRAM FOCUS: The partners aredeeply concerned with providing assis-tance to their clientele. The result isthat in some instances employmentpractices are not linked solely to finan-cial and business considerations.Whereas a standard franchise operationmight lay off workers due to seasonalfluctuations in sales, the social serviceagencies appear to take extraordinarysteps to maintain employment levelseven at the cost of driving profitabilitybelow generally acceptable levels.

The importance of Partnershop financialperformance is reinforced by the commentsof Ben & Jerry’s executives and Partnershopmanagers. One corporate executive statedthe partners must succeed first as a busi-ness, which means selling product. Theyfelt that, in the early years of the program,basic business issues were sometimesoverlooked in opening Partnershops.

One of the significant lessons learnedfrom the program is that basic businessprinciples, such as the importance of loca-tion to the success of a retail operation, arejust as essential to the success of aPartnershop as they are to a traditionalfranchise store. The more recentPartnershops have been planned with theseconsiderations in mind. In addition tobeing well managed, they have good retaillocations and, as a consequence, are doingmuch better financially.

Several of the franchise managersagreed that basic business considerationswere essential to the success of theirPartnershop operations and found no con-flict between this position and their role asa non-profit organization. The Partnershoprole does place an additional workload onthe managers in such areas as training,work scheduling, and financial planning.Several of the Partnershop managers statedit was difficult to balance the social missiongoal with the economic goal, but theyadded that they were accustomed to man-aging to a bottom-line and understood theneed to live within their budgets.

Among the lessons to be derived fromthe Partnershop experience, with regard tostrategic fit, are the following key points:


One of the significant lessons learned from theprogram is that basic business principles, suchas the importance of location to the success ofa retail operation, are just as essential to the

success of a Partnershop as they are to atraditional franchise store.

➠ Basic business considerations, such aslocation, are just as important to thesuccess of non-profit alliances with for-profit companies as they are to anybusiness venture.

➠ The added publicity that accompaniesthe opening of a Partnershop is, poten-tially, a double-edged sword: it is pro-motes the new business, but also drawsclose scrutiny from the community. Animportant consideration is the potentialfor bad publicity if a Partnershop fails.The closing of a Partnershop due tofinancial problems may expose both thefor-profit company and the non-profitagency to harsh criticism.

➠ Operating in a competitive businessenvironment places significant opera-tional and planning demands on anyorganization, which it must address if itis to survive. Non-profit organizationsmust budget sufficient resources to cov-er the added costs of operating a socialpurpose enterprise and not underesti-mate the amount of time necessary forpredevelopment.

Organizational Fit

While strategic fit deals largely withmatters that can be evaluated in

advance (e.g., the business plan, the abilityto sell a product, or the attractiveness of aparticular social mission), organizational fitbetween the participating organizations(also referred to as cultural fit) is muchmore difficult to judge in advance. By orga-nizational fit, researchers mean the degreeto which the organizations can create com-mon understanding, share common goals,and communicate effectively. Whereas thelevel of strategic fit may be roughly deter-mined through specific data, organizationalfit involves the resolution of ambiguitiesand nuances to allow two organizations todevelop a common understanding and wayof working together. To do so, they must

know each other’s administrative practices,management styles, and communicationpractices. Because conflicts in these areasmay not become apparent until after analliance agreement has been made, theyoften bring significant tension to thealliance relationship. Many strategicalliances fail because the two parties can-not work effectively together to overcomedifferences in management style or reach acommon understanding of how to managethe business.

The Partnershop managers interviewedunanimously reported a good fit betweentheir organizations and what they perceivedto be the corporate culture of Ben & Jerry’swith regard to shared social values. Eachmanager felt positive about Ben & Jerry’semphasis on the role of social purpose intheir business. There is a widespread beliefamong the Partnershop respondents thattheir social mission is supported by Ben &Jerry’s. The corporate respondents alsomade it clear they feel a sense of sharedvalues and goals with each of the alliancepartners.

Shared values, however, are not the onlycomponent of organizational fit. Other fac-tors are management style, communicationstyle, and the basic assumptions underwhich the organization operates. It is high-ly unlikely that any strategic alliance will befree of some difficulties in these areas.

In conducting these interviews, we dis-covered an interesting discrepancy betweenthe Partnershop managers’ expectations ofBen & Jerry’s on one hand, and the Ben andJerry’s executives’ expectations of non-prof-it agencies on the other. This line of inquiryrevealed a conflict between how the non-profit partners desire to be viewed and howthey perceive they are viewed by some ofthe corporate executives at Ben & Jerry’s.The expectations held by several corporateexecutives at Ben & Jerry’s about the natureof non-profit agencies could be seen as apotential problem of organizational fit.Several of those executives interviewedbelieved they could not deal with the non-profit partners in the same manner theydealt with regular franchises because thealliance partners came from a differentmind-set. When asked if the alliance fran-


Shared values,however, arenot the onlycomponent oforganizational

fit. Otherfactors are

managementstyle,

communicationstyle, and the

basicassumptionsunder which

theorganization

operates.

chises were achieving the program’s busi-ness goals, one executive stated that he didnot feel that they should be held to thesame standards as regular franchisees. Inhis words, “... it’s like comparing apples andoranges.”

One company executive felt thatPartnershop managers resented that theyhad to pay attention to the bottom-line,which required them to change their mind-sets from operating as a non-profit.However, another corporate executive stat-ed that one of the biggest myths to be con-tended with within Ben & Jerry’s was theidea that non-profits can’t operate at a prof-it. This executive felt the biggest problemsconfronted by the Partnershop programwere centered around this lack of under-standing within Ben & Jerry’s of how thenon-profit sector operates. In point of fact,both executives are probably correct. Onthe whole, many non-profit managers havenot yet developed the ability to be “treatedlike everyone else.” Yet at the same time, ifthey hope to succeed as social entrepre-neurs they will have to learn to be treatedlike everyone else. Therefore, at the sametime the non-profit managers are having toadjust to their new roles, Ben & Jerry’s, as afor-profit corporation, is also having tolearn more about how non-profits are man-aged and help to meet their program goals.

Several of the Partnershop intervieweesmentioned they had expected Ben & Jerry’sto take a more active role in instructingthem in best business practices for theirfranchise operations. However, this may bebecause they would like more guidancewith regard to business issues. To para-phrase one Partnershop manager, Ben &Jerry’s is a big corporation and knows howto operate in a highly efficient, businesslikemanner and this is one of the attractions ofworking with Ben & Jerry’s, but it can alsocause some problems. Given that no othercorporation has attempted to launch asmany non-profit managed franchises, insome ways the “idea” capacity of Ben &Jerry’s outstrips its current ability to sup-port the needs of non-profit organizationsmanaging the Partnershops. Several of thealliance partners stated they found thecommunication from corporate offices to

be, at times, more casual than they expect-ed from a successful business, but they alsoappreciate that they can just pick up thephone and speak with anyone at Ben &Jerry’s when they have a problem.

These preconceived notions on the partof the non-profit managers that Ben &Jerry’s would function in a strict businessmanner, and on the part of the corporateofficers that non-profit managers would beunable to reach the same standards as afor-profit setting, seem to be the source ofwhatever limited friction exists between thealliance partners and Ben & Jerry’s. If notcorrected, this miscommunication betweenthe partners and corporate officers could bedamaging to the relationship. Clearly Ben& Jerry’s and the partners have differingassumptions of the nature of non-profitfranchises and are probably operatingunder inaccurate perceptions of each otherwhich may be mutually reinforcing.

Among the lessons to be derived fromthe Partnershop experience, with regard toorganizational fit, are the following keypoints:

➠ Shared values and missions can be pow-erful factors in forming alliances andmaking them successful.

➠ Misunderstandings due to preconcep-tions about the nature of an alliancepartner are difficult to avoid, and havethe potential for creating disharmoniesin the relationship.

➠ Unless addressed by the partners, mis-understandings about the nature ofeach other and/or the alliance can rein-force themselves.

Mutual Benefit

Astrategic alliance must benefit bothpartners or it will surely fail. It is clear

from the interview responses that the man-agers of the non-profit franchises and thecorporate staff at Ben & Jerry’s overwhelm-


ingly feel the alliance is of mutual benefit.When asked for their opinion about thebest thing they experienced from the part-nership, corporate members all agreed thesuccess stories of individuals helped by theprogram were the most important to them.A typical response was;,“... the most benefi-cial part has been the results of some of theprograms. We’ve seen people who normallyhaven’t been given the chance to succeedactually succeed in this environment.”

In addition, when asked how Ben &Jerry’s has benefited, executives referred tothe great publicity and good public rela-tions generated by the attention their cor-porate mission receives in the communityfollowing the opening of a franchise loca-tion with a Partnershop. This publicity hasthe potential of becoming a double-edgedsword, in that the failure of a Partnershopwould reflect poorly upon both the corpora-tion and the local non-profit. It cannot bedenied that Ben & Jerry’s receives a goodpublic relations boost from thePartnershop initiative; however, it is actual-ly a fairly high-risk strategy which othersmay have forgone in favor of more tradi-tional product promotions.

Ben & Jerry’s executives also noted theymanage to sell a lot of good ice creamthrough the stores. In light of the potentialfor the Partnershops to be viewed as “notreal” franchises, it is interesting to note thatcorporate staff do feel a significant amountof product is sold through thePartnershops. In comparing the first-yearperformance of Larkin Business Ventures,their first store’s performance has com-pared favorably with that of other for-profitstores. There is still a way to go, but it isclear the non-profit stores can succeed onbusiness terms if managed properly andwith the appropriate, business-like expecta-tions in place. And it is clear from theresponses of corporate personnel that thePartnershops are helping Ben & Jerry’s meetthe dual goals of selling high quality prod-uct and using their business as a vehicle forsocial change.

The managers of the Partnershopsreport they have also benefited in numer-ous ways:

1. They have been able to employ more oftheir clients;

2. Their association with a well-knownpublic company has eased their accep-tance in their local communities;

3. The relationship has provided socialenterprises with a level of credibilitythey would not otherwise have received.This has made it easier for some of themto establish credit lines with local banksand obtain financial backing for theirother projects;

4. The social service agency’s clients havehad very positive experiences workingwith a high quality product with anational reputation; and

5. The partners benefited from Ben &Jerry’s expertise in the ice cream busi-ness including advice on what inventoryto purchase; in addition, national namerecognition made local marketing mucheasier.

For a more in-depth discussion con-cerning the types of positions created andthe experience of the employees, the readeris referred to the Larkin Business Venturescase study and the chapter which presentsthe employee’s perspective on work in aPartnershop.

Conclusions

The collaboration between the for-profitenterprise and independent non-profits

represents a unique type of strategicalliance between a corporate entity andcommunity-based organizations. A suc-cessful alliance of this sort offers a possibleframework for collaboration between thefor-profit and non-profit worlds to achievecommon goals and enrich the community.

Though our investigation of this collabo-ration has revealed some challenges in therelationship, the problems do not appear to



threaten the program. As with most strate-gic alliances, the bulk of the problemsappear to be in the area of organizational fit.These problems stem from the partners’misunderstandings and misperceptions ofeach other, which can be overcome throughbetter communication and a process ofmutual education. It is clear the managersof the alliance franchises recognize the diffi-culties of running an operation in a mannerthat is responsive to the bottom-line. Theydo not profess to be experts at achievingthis objective, but they all understand itsimportance to the success of the programand are making it a priority.

At the same time, some executives atBen & Jerry’s appear to have a preconcep-tion that non-profit agencies are predis-posed to ignore bottom-lineconsiderations. As a result, they are con-cerned that the profitability levels of thePartnershops are lower than those of theirtraditional franchises.

These types of misunderstandings aretypical of strategic alliance situations, andrepresent one of the most difficult aspectsof successfully managing these businessforms. It is common for partners to developexpectations about their counterparts thatmay not be initially fulfilled. This suggeststhe need for greater communication andthe establishment of improved clarityaround the needs, goals, and objectives ofeach party.

It is clear the Ben & Jerry’s Partnershopprogram is not for everyone. It works bestwith agencies seeking to create entry-level,

service sector jobs for their clientele. Thecommunity-based organization must beprepared to work hard to make a businesssuccess of the Partnershop. Therefore, it isessential to determine whether or not theclients served by the agency, and theagency itself, are appropriate for this typeof strategy. In addition, with the exceptionof initial assistance in the decision-makingregarding the setup of the scoop shop, thePartnershop must be prepared to manageits business affairs on its own. For someagencies, this may be beyond their exper-tise; and yet, they would be ill-advised torely upon their corporate partner to run the“nuts and bolts” of their business. Finally,and most importantly, the Partnershopmust be an appropriate vehicle for meetingthe social goals of the organization. Withthese kinds of considerations, it is clear agreat deal of planning must go into anyprocess of becoming a Partnershop.

For those who are prepared to attend tothe bottom-line and are able to secure alocation with good retail potential, analliance with a viable for-profit such as Ben& Jerry’s may be an ideal choice for pursuingtheir social agenda. It is hoped more corpo-rations will follow the lead of those like Ben& Jerry’s and commit to improving localcommunities by organizing programs likethe Partnershop initiative. The strategicalliance model for such relationships canassist in identifying important issues beforeany agreements are signed, and for evaluat-ing the potential success of a new venture.

LEGAL CONSIDERATIONS ✦ 323

OVERVIEW

Anon-profit corporation, exempt fromfederal income tax under Internal

Revenue Code (IRC) Section 501(c)(3), mayengage in business venture activities eitherdirectly or through a controlled subsidiarycorporation. A business that is or willbecome a substantial activity must be relat-ed to the corporation’s exempt (charitableor educational) purposes, that is, the busi-ness must be conducted as a means toachieve a charitable or educational pur-pose. “Substantial” is typically defined asexceeding approximately 15% of the corpo-ration’s time or gross revenues.

If not related to achieving charitable oreducational purposes, the business mustbe conducted in a taxable (typically, for-profit) subsidiary. Otherwise, the corpora-

tion risks loss of its tax-exempt status. Thefact that the revenue generated is used tosupport the corporation’s other charitableor educational activities does not make thebusiness related. Profits, if any, from relat-ed businesses are not taxed. Profits fromunrelated businesses are taxed at normalcorporate income tax rates.

The income tax ramifications of under-taking a certain business within the corpo-ration are but one factor to be analyzed.Even though the corporation need not forma subsidiary to conduct the business, it mayfind it desirable to do so. A number of fac-tors, such as liability and financing, oftenmust be considered. No subsidiary shouldbe formed unless a clear, well thought-outreason exists.

Decisions concerning corporate struc-ture need to be reviewed as new circum-stances arise and as the corporation and itsbusiness develop. Although it may beappropriate to initially undertake a busi-ness within the corporation, as the busi-ness grows, its management or capitalneeds, or the potential liability it repre-sents, may necessitate transfer to a sub-sidiary.

A subsidiary corporation will be treatedfor tax, liability, and other purposes as aseparate legal entity, despite the parentnon-profit corporation’s control over thecomposition of the subsidiary’s board ofdirectors. However, certain precautionsmust be taken to ensure that the properbalance of separation and control are main-tained.

BUSINESS

DEVELOPMENT BY

CHARITABLE

ORGANIZATIONS:LEGAL STRUCTURE ISSUES

Legal Considerations of Non-ProfitEnterprise Development

These issues are discussed below ingreater detail, but still in general terms.The advice of an attorney should be soughtduring the planning for a new business.The attorney can conduct a board trainingon organizational structure options in lightof the specific business.

Too often, lacking this kind of informa-tion, non-profit corporations self-imposeconstraints which the law does not impose.The legal structure issues discussed hereare not roadblocks but tools to assist thecorporation in accomplishing its goals. If acorporation has developed a viable busi-ness opportunity, there are no legal struc-ture impediments to its accomplishment.

STEP ONE: REVIEW INCORPORATION

DOCUMENTS

Before undertaking a business within thenon-profit corporation, review its arti-

cles of incorporation, bylaws, tax exemp-tion application and determination letter,and other corporate documents such as itsmission statement.

Articles of Incorporation. Determinewhether the business activity is consistentwith the general or specific corporate pur-poses. For example, if a corporate purposeis to promote employment opportunitiesfor the disadvantaged poor, minorities,unemployed, and underemployed in thecommunity, then a business which willemploy a significant number of such per-sons is consistent with that purpose. Thus,it is generally not necessary to state thatbusiness operation is a specific purpose.Also, most purposes clauses have a generalcatch-all which permits the corporation toengage in any activities which further itscharitable or educational purposes, and aninsubstantial amount of activities which arenot in furtherance of these purposes.

If the business activity is not authorizedeven generally, amend the articles and senda copy of the amendment to the InternalRevenue Service (IRS) and correspondingstate tax agency with the corporation’s nextincome tax filing (IRS Form 990 and corre-sponding state tax form), or, if not filing,within four-and-a-half months after the

close of the corporation’s fiscal year.Include a letter describing the new purposeand business activity and why the corpora-tion considers them to be charitable oreducational.

Bylaws, Mission Statement, OtherInternal Documents. If the articles areamended, corresponding changes might beneeded in these internal documents. Also,review them for any statements inconsis-tent with the operation of a business, or toadd references to business activities whereappropriate. For example, if a standingbusiness development committee has beenformed, it may be necessary to add this tothe bylaws.

Send a copy of the bylaw amendmentsto the IRS and state tax agency with thenext income tax filing. The mission state-ment and other documents such as astrategic plan are internal to the corpora-tion and need not be sent.

Tax Exemption Application andDetermination Letter. Determine whetherthe business activity contradicts state-ments made in the application to theIRS/state tax agency or requirementsimposed in the determination letter fromthe IRS/state tax agency. For example, theapplication might state that the corpora-tion will never charge for its services. If thebusiness activity is inconsistent with theapplication, notify the IRS/state tax agencyof the new activity either by letter as part ofthe next income tax filing, or by rulingrequest.

A letter alerts the IRS to the businessactivity without seeking permission orobtaining approval. The letter shoulddescribe the business activity and why thecorporation considers it to be charitable oreducational. The IRS might disagree andrequire that the corporation cease the activi-ty or transfer it to a subsidiary, but is unlikelyto revoke the corporation’s exemption aslong as it gave notice of the activity. The cor-poration can also demonstrate its good faithbelief that the activity is charitable or educa-tional by obtaining an opinion concerningthe activity from its legal counsel.

A ruling request is necessary if the activ-ity is inconsistent with the requirements inthe determination letter, and is optional in


other circumstances. For the payment of afee, the ruling request seeks IRS agreementthat the activity will not jeopardize the cor-poration’s tax-exempt status. However, IRSapproval will be limited to the facts pre-sented in the request. If the businesschanges, the approval might not cover thechanged activities.

STEP TWO: DETERMINE WHETHER THE

BUSINESS IS RELATED OR UNRELATED

A business is related to the corpora-tion’s charitable or educational pur-

poses if conducted as a means toaccomplish those purposes and not primar-ily to provide additional funds. Considerthe nature and size of the business andwhether it is conducted on a scale consis-tent with charitable, rather than profit-mak-ing, purposes. Look at the fees charged andwhether goods or services are provided atless-than-cost to the poor, while chargingmore to those who can afford to pay more.Who is served by the business— the poor,other charitable corporations, the elderly,or other members of a charitable class— orthe general public? Ask whether the busi-ness operates in a typical commercial man-ner in competition with other privatebusinesses.

The following cases and IRS rulingsillustrate the application of these principles.

In Aid to Artisans, Inc. v. Commissioner, 71Tax Court 202 (1978), the corporation pur-chased and sold handicrafts from disadvan-taged craftspeople. Sales were made tomuseums and other non-profit shops andagencies. In determining that this businesswas related to the corporation’s charitablepurposes, the court emphasized (1) thebusiness alleviated economic deficienciesin communities of disadvantaged artisans,and (2) the crafts educated the public in theartistry, history, and cultural significance ofhandicrafts from these communities. Asimilar conclusion was reached inIndustrial Aid for the Blind v. Commissioner, 73T.C. 96 (1979), in which the corporation pur-chased products manufactured by blindindividuals and sold them to various pur-chasers.

In the preceding cases, the corpora-tion’s business was to find a market foritems produced by disadvantaged persons,so that those persons could better supportthemselves. In Rev. Rul. 75-472, 1975-2Cum. Bull. 208, the corporation directlyemployed disadvantaged persons in itsbusiness for the same reason, and the IRSconcluded that the business furthered char-itable purposes.

The business involved the productionand sale of furniture made by residents ofthe corporation’s halfway house for alco-holics. The house was operated for peoplewho needed a temporary home after receiv-ing short-term intensive care for alco-holism. The work at the furniture shop wastransitional employment, not occupationaltraining. It was meant to help the residentsdevelop regular work habits and a sense ofself-discipline and independence at a timewhen they were not able to cope emotional-ly with the outside pressures of the every-day world.

The workers were not expected to con-tinue working in the furniture shop beyondthe time when they attained a reasonabledegree of self-respect and reliability, andthus became able to secure regular employ-ment elsewhere. Residents usually stayedfrom six to nine months.

Similarly, in Rev. Rul. 73-128, 1973-1Cum. Bull. 222, the IRS determined that abusiness conducted for the primary pur-pose of providing skills training to the dis-advantaged was operated for charitablepurposes. In the ruling, the corporationwas formed to provide job training to non-skilled persons who were unable to findemployment or could not advance frompoorly paid employment due to inadequateeducation.

The corporation manufactured andcommercially sold toy products by trainingand employing residents of an economical-ly depressed community who were unem-ployed or underemployed. A few skilledpersons were hired as managers and train-ers; some of the management and adminis-trative staff were unskilled trainees. Thecorporation tried to place its trainees inpermanent positions in the community assoon as they were adequately trained.


This ruling stands in contrast to Rev.Rul. 73-127, 1973-1 Cum. Bull. 221, in whichthe IRS denied tax-exempt status to a cor-poration that operated a cut-price grocerystore in which a small portion (about fourpercent) of the earnings was allocated toprovide on-the-job training to the hard-core unemployed.

The store sold food to residents of apoverty area at prices substantially lowerthan those charged by competing grocerystores. The store was operated by an expe-rienced staff. Trainees were selected fromthe area, and on completion of the trainingwere expected to seek employment else-where in the retail food industry.

Although the training program wascharitable, the sale of food was not. Thesize of the food store operation was largerthan reasonably necessary to carry out thetraining program. The food sales, althoughat low prices, still produced a profit. Foodwas not distributed free to those who couldnot afford to pay, or at below cost to thosewho could not afford to pay more.Although the store was located in a povertycommunity, it was open to the general pub-lic.

Businesses related to charitable or edu-cational purposes may, but need not, beconducted within the corporation, with noincome tax on the net profits, if any.Businesses unrelated to these purposesbut an insubstantial part of the corpora-tion’s overall activities may, but need not,be conducted within the corporation;income tax must be paid on the net profits.The corporation jeopardizes its tax-exemptstatus if it conducts a substantial unrelatedbusiness. It should form a subsidiary tocarry out such a business.

The IRS and the courts have not defined“substantial.” A common rule of thumb isthat no more than 15% of the corporation’stime and gross revenues should be devotedto or be derived from the business.However, given the uncertainty of where theline will be drawn, and the risk of loss ofexempt status, most corporations decide toform a subsidiary for any unrelated busi-ness, no matter the size, at the time when itis certain that the business will become aregular ongoing activity.

Sometimes, a business will be related atits inception, but will change over time. Abusiness intended as a job training sitemay decide to retain its trainees and makethem permanent employees instead ofbringing in a new round of trainees. Thus, itis important to regularly review the busi-ness and the decision that it is related tocharitable or educational purposes.

A common misperception is that relat-ed businesses are “good” and unrelatedbusinesses are “bad.” The corporationshould not distort its business with jobtraining to make it related. There is nothingwrong with starting an unrelated business,making profits, and paying income tax.

STEP THREE: REVIEW OTHER FACTORS

REGARDING FORMATION OF

SUBSIDIARY,AND DETERMINE WHETHER

ADVISABLE

Although the business might not jeopar-dize the corporation’s tax-exempt sta-

tus, there may be other reasons to form asubsidiary. The major reasons are dis-cussed below. Not all of them might applyin a particular situation, and some thatapply should not be given equal weight.The corporation should carefully weigh theadvantages and disadvantages of forming asubsidiary before making its decision.

Liability. A subsidiary protects corpo-rate assets from the debts of the business,such as payments owed to suppliers orlenders, or from lawsuits brought by cus-tomers or former employees. Similarly, thebusiness is protected from the debts of theparent non-profit corporation.

Liability protection can be lost if thecorporation guarantees to pay certain debtsof the subsidiary, such as by co-signing aloan. The corporation would be liable up tothe amount of its guarantee. Protectioncan also be lost if the corporation under-capitalized a for-profit subsidiary, that is,did not provide it with sufficient capital tomeet its ordinary business needs. Insteadof providing too little funds, if the corpora-tion caused the subsidiary to transfer to the


The IRS andthe courts have

not defined“substantial.”

A common ruleof thumb is

that no morethan 15% of

thecorporation’s

time and grossrevenuesshould be

devoted to orbe derived fromthe business.

corporation so much funds that the sub-sidiary was unable to meet its obligations,liability protection again might be lost.

The most common cause of loss of lia-bility protection, however, is due to failureto observe the corporate formalitiesrequired of two separate corporations. If aclaimant can prove that the parent non-profit corporation and its subsidiary are nottwo separate entities, the parent may beliable for the claims brought against thesubsidiary.

To maintain its separate legal status,the subsidiary must have its own board ofdirectors with separate meetings and min-utes; separate books, records, and financialaccounts; and must use separate sta-tionery. The subsidiary can contract withthe parent corporation for staff, space, andother needs, and the parent corporationcan lend money to the subsidiary, withoutloss of liability protection, as long as thetransactions are reasonable and fair to bothcorporations at the time they are enteredinto.

Board overlap is possible. Generally,subsidiary board members should be cho-sen for their expertise, time availability, andsensitivity to the goals of the parent corpo-ration and the subsidiary’s business. It isadvisable to have some subsidiary directorswho are not also parent corporation direc-tors, especially to approve contractsbetween the corporations.

The minutes of the two boards of direc-tors should reflect that the subsidiary cor-poration board made the decisionsconcerning the day-to-day operations ofthe subsidiary and its business. The parentcorporation can request reports and expla-nations as to the activities of the subsidiaryand any deviance from its business plan,conditions imposed in a loan or otheragreement between the corporations, or inmeeting the goals established by the parentcorporation for the business. The parentcorporation can recommend that certainactions be taken or not taken. However, itshould not substitute itself for the sub-sidiary board and directly take thoseactions.

The parent corporation must be contentwith its indirect control over the subsidiary

through its power to select the board,remove board members and fill vacancies,approve the bylaws and any amendments,and approve any action that would adverse-ly affect its rights. It can also have its audi-tor perform the subsidiary’s audit, and itsattorney serve the subsidiary in a similarcapacity.

Since all businesses involve some risk,it would be reasonable to conclude that thecorporation should always form a sub-sidiary to operate a business venture.However, the cost of a subsidiary, both inmoney and time, can be significant.Instead, the corporation should evaluatethe risks associated with the business,determining which are insurable and whichare not. It should then estimate the magni-tude of the uninsured risk, and weigh thatalong with other relevant factors.

Board Capacity. Board members can-not guarantee that the business will be suc-cessful. If it fails, generally they are notliable for the debts of the business or theloss of invested assets. However, to be pro-tected, they must exercise reasonable carein managing the affairs of the business.Business decisions should be based oninformation which the ordinarily prudentperson would consider. Directors can relyon the reports of experts, but are notexcused from making an independentinquiry when reasonable and appropriate.

Perhaps not all of the non-profit corpo-ration’s board members are comfortablewith the time commitment and responsibil-ity involved in managing a business.Perhaps they do not have the businessexpertise necessary to provide guidance tothe business. The corporation could form acommittee to oversee the business, addnew members to its board, or request theresignation of certain board members.Alternatively, the corporation could form asubsidiary with its own specialized boardchosen by the parent corporation.

Unlike the board of a non-profit corpo-ration with multiple projects, the subsidiaryboard could have more focused meetingsand make more timely business decisions.It could attract knowledgeable people inthe business community who would not


have the time or inclination to serve on theparent corporation board.

Staff Capacity. The business mightrequire a manager with specialized busi-ness skills and an entrepreneurial attitudelacking among the non-profit corporationstaff. If an outsider must be hired to man-age the business, it might be more attrac-tive to offer a position as the president of anew subsidiary rather than that of a divisionor program manager in a larger non-profitcorporation.

To be competitive, the business mighthave to pay more for its staff than would bepermitted by the pay scales of the parentnon-profit corporation. A subsidiary canalso develop incentive compensation

plans, such as profit-sharing and bonuses,more easily than can the parent charitablecorporation. It might be easier to createthe subsidiary than to upset the existingcorporate culture. Also, staff of a subsidiarywill be devoted to making it succeed.Business staff in the non-profit corporationmight have to devote a portion of their timeto non-business venture matters.

On the other hand, subsidiary staffmight be hired sooner than needed; as aninternal division, many business start-upactivities might be performed by existingnon-profit corporation staff. Also, separatesubsidiary staff might feel alienated fromthe parent non-profit corporation, andresent its control.

If a subsidiary is formed, usually somestaff of the parent non-profit corporationwill devote a portion of their time to thesubsidiary. It is better for staff to beemployed by one corporation, rather thantwo, so that extra employment taxes andbookkeeping expenses are not incurred.Staff should be employed by the corpora-tion which uses the greater percentage oftheir time. The other corporation shouldpay the full cost of purchasing the remain-ing time from the employing corporation.

Funding and Financing. A subsidiarycorporation might be able to attract fundsnot available to the parent non-profit cor-poration. Some funders prefer to fund asubsidiary devoted to a single businesspurpose. Accounting for the expenditure oftheir funds is easier, and it is clearer thattheir funds are being devoted to the busi-ness. Operating within a parent non-profitcorporation, a business venture’s overheadcosts may be buried within the overall costsof the corporation, or business revenuesmight be used to subsidize non-businessoverhead.

Some funding/financing sources areonly available to for-profit corporations,such as the Small Business Administration,while others are available to non-profit cor-porations with specified and limited pur-poses. A subsidiary can meet theserequirements.

Some funding/financing sources havelimited experience with non-profit corpora-tions, and others have limited experiencewith for-profit corporations. For example,banks may not believe that a non-profit cor-poration can operate a sound business ven-ture. They understand and appreciate thefor-profit corporation form.

Although a for-profit subsidiary oftencannot directly receive foundation grantsand some government grants, the parentnon-profit corporation generally canreceive the funds and then either loan themto or invest them in the subsidiary.

A for-profit subsidiary can also attractprivate investors, who contribute capital tothe business in exchange for a portion ofthe ownership. Alternatively, the non-profitparent corporation or a non-profit sub-


Although a for-profit subsidiary often cannotdirectly receive foundation grants and somegovernment grants, the parent non-profit

corporation generally can receive the funds andthen either loan them to or invest them in the

subsidiary.

sidiary could form a joint venture (partner-ship) with investors. When it comes time tosell the business, it may be easier to sell asubsidiary than a portion of the non-profitcorporation.

Cost. In the short run, a subsidiary willincur incorporation expenses such as legalfees, government filing fees, and, if a for-profit subsidiary, securities law compliancefees. In the long run, the added cost is thetime necessary to maintain proper corpo-rate separation, such as separate taxreturns.

Community Image. A business operat-ed within the non-profit corporation mightpromote confusion of identity and purposewithin its low-income community, andresentment of “unfair competition” withinthe business community. A subsidiary, par-ticularly a for-profit subsidiary, might avoidthese problems. On the other hand, com-munity residents might not have the samepositive feelings toward a for-profit sub-sidiary as they do towards the parent non-profit corporation, which they know to beoperating for the good of the community.

Lobbying and Other RestrictedActivities. A charitable corporation is limit-ed by federal tax law in the amount of lob-bying it can undertake. A non-charitablesubsidiary would not be subject to thoselimitations, although other limitationsmight apply. On the other hand, theamount of permissible lobbying by a chari-table corporation increases as its revenuesand activities increase. By engaging in thebusiness without a subsidiary, the corpora-tion thus increases the amount of its per-missible lobbying.

Taxation. If the non-profit corpora-tion’s business is unrelated to its charitablepurposes, the first $1,000 in profits is nottaxed. In a for-profit subsidiary, the entireprofit would be taxed. Passive unrelatedincome (capital gains, interest, dividends,royalties, and real property rents) receivedby the non-profit corporation might not betaxed; in a for-profit subsidiary they wouldbe.

Under some circumstances, businessactivities could jeopardize a non-profit cor-poration’s public charity status. There aretwo types of IRC Section 501(c)(3) corpora-tion, the public charity and the privatefoundation. Public charity status is prefer-able. Private foundations are, in practice,ineligible for some grants, subject togreater administrative requirements, taxedon net investment income, and subject tostringent self-dealing, business holding,and other rules.

Public charities must receive a certainpercentage of their income from “public”sources. There are two numerical tests.IRC Section 509(a)(1) requires public sup-port at least equal to one-third of total sup-port, but permits as low as 10% in certaincircumstances. Related business income isnot counted as either public or total sup-port, and unrelated business income iscounted as non-public support. However, ifthe corporation receives most (approaching90%) of its support from related businessincome, it is classified as an IRC Section509(a)(2) corporation. This test requires atleast one-third public support, and doesnot permit a lesser percentage. Relatedbusiness income is included as public sup-port, but only up to the larger of $5,000 orone percent of total support from any onesource. Unrelated business income iscounted as non-public support.

Thus, a small non-profit corporationwith a substantial amount of related busi-ness income might not qualify for Section509(a)(1) status, and might not meet theone-third public support test of Section509(a)(2).

A subsidiary avoids this problem; itsincome is not counted when determiningwhether the parent non-profit corporationmeets the public charity requirements. Ifits business activities are charitable, thesubsidiary could qualify as a public charityunder IRC Section 509(a)(3), a non-numeri-cal test which requires that the subsidiarybe organized for the benefit of, to performthe functions of, or to carry out the purpos-es of the parent non-profit corporation.



STEP FOUR: IF YOU DECIDE TO FORM A

SUBSIDIARY, CHOOSE ITS LEGAL FORM

When the primary activity of the sub-sidiary is unrelated to charitable or

educational purposes, it must be a for-prof-it corporation or non-profit, taxable corpo-ration (see also the discussion of IRCSection 501(c)(4) below). The non-profit,taxable corporation is relatively rare, usedonly when a for-profit corporation wouldpresent a negative image or is prohibited bya funding source.

When the primary activity of the sub-sidiary is related to charitable or education-al purposes, it can be a non-profit, IRCSection 501(c)(3) tax-exempt corporation.However, if lobbying is intended as a sub-stantial part of its activities, an IRC Section501(c)(4) tax-exempt corporation should beconsidered.

A Section 501(c)(4) social welfare corpo-ration can engage in substantial lobbyingand can engage in certain business activi-ties which would be unrelated if carried outby a Section 501(c)(3) corporation. Forexample, a Section 501(c)(4) corporationcan assist individuals who are not low-income, minority, or otherwise disadvan-taged as long as the activity serves thecommon good and general welfare of thecommunity, such as the making of loans toprivate businesses to induce them to locatein a depressed community. A Section501(c)(4) corporation is not directly eligiblefor tax-deductible contributions and gov-ernment or foundation grants, which mustgo through the parent non-profit charitablecorporation.

The primary advantage of a non-profit,tax-exempt subsidiary over a for-profit ornon-profit, taxable corporation is itsexemption from income tax and possiblyfrom property, sales, or other taxes, licens-es, and fees. The tax-exempt corporationdoes not pay tax on net income from busi-nesses related to its exempt purposes. Onthe other hand, a for-profit or non-profit,taxable corporation pays tax on net income.It also pays tax on unrelated passiveincome, as described above; a tax-exemptsubsidiary might not be taxed on thisincome.

Certain other factors described above,such as image and funding source require-ments, might also have a bearing on thechoice between a non-profit and a for-profitsubsidiary.

For the non-profit corporation’s secondand subsequent businesses, there are addi-tional considerations as to legal structure.If the first business is unrelated and con-ducted within the non-profit corporation,one advantage of conducting a secondunrelated business within the same corpo-ration is the ability to offset for tax purpos-es the profits from one business with thelosses from the other. Of course, the otherfactors described above, such as liability,capacity, and funding source requirements,must also be considered.

If a subsidiary was formed for the firstbusiness, the second business could becarried out in the parent non-profit corpo-ration, in the same subsidiary, or in a newsubsidiary. A new subsidiary can be con-trolled either by the parent non-profit cor-poration or by the first subsidiary. Inaddition to the factors described above,some of the additional considerations arewhether gains and losses can and shouldbe offset, simplicity of structure, and theimportance to the parent non-profit corpo-ration of direct rather than indirect controlover a subsidiary’s activities.

CONCLUSION

Whether a non-profit corporation wouldbenefit from forming a subsidiary to

carry out a business venture depends onmany factors. There are advantages anddisadvantages, and the analysis can changeover time. An in-house venture saves thecost of a new corporation, and the non-profit corporation retains complete control.A subsidiary can protect the parent corpo-ration from legal liability, might benefit thebusiness through more focused effort, andmight attract new revenue. Before reachinga decision, a non-profit corporation shouldobtain expert legal and financial advice.

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