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The role of human capital on the failure of social enterprises

As the Nobel Prize in chemistry (1904) William Ramsay mentioned the “Progress is made by trial and failure; the failures are generally a hundred times more numerous than the successes; yet they are usually left unchronicled.”

Unlike cases documenting best practices, cases examining organisational failure are not widely disseminated and analysed. According to Bruno and Leidecker (1988) one of the main problems in disseminating cases of failure may be attributed to the reluctance of founders to acknowledge and discuss the discontinuation of their enterprise. Thus, failure must be understood as an aspect of operating within a complex internal and external environment. It is also noteworthy that multiple advantages could be accrued if the founders look at the process of failure through a learning lens (Lindsley, Brass, & Thomas, 1995; Scott & Teasdale, 2012). In this sense, the discussion and analysis of failure has social and organizational advantages. On the one hand, the discussion is an opportunity for those who were lucky enough not to have experienced failure. On the other hand, an open discussion could add more value to the learning process introducing different insights and deepening the analysis of failures.

Bruno and Leidecker (1988) define failure as the condition in which a firm does not fulfil its responsibilities to its different stakeholders, namely the employees, suppliers, customers, the community as well as the shareholders.  Years later, Cannon and Edmondson briefly defined failure as a “deviation from expected and desired results” (2005, p. 300). For Shephard and Kuratko the project failure is defined as the “termination of a project due to the realization of unacceptably low performance as operationally defined by the key resource providers (as opposed to projects terminated for other reasons)” (2009, p. 452). In short, it can be said that failure is the termination of an activity that has fallen short of its goals although for some organizations failure is temporary and followed by a turnaround (Paton & Mordaunt, 2004).

In order to better understand and analyse the processes of failure it is important to determine their causes. In a business setting, failure is strongly correlated to the financial performance of an organisation, but the literature underlines the existence of multiple determinants as factors of failure. In aggregating various causes mentioned by different authors (Anheier, Helmut & Moulton, 1999; Arasti, Zandi, & Bahmani, 2014; Mellahi & Wilkinson, 2004), it could be stated that reasons of business failure may arise from external environment (e.g. market characteristics, competition, unexpected events) or from internal factors (e.g. poor corporate decision making, poor management, conflicts). While the external causes are often difficult to predict and are out of the control for managers, internal factors could be forecasted and monitored. Following this line of thought, Human capital is an internal factor, since it refers to “the knowledge, skills, competencies, and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being” (OECD, 2001, p. 18). Human capital is the stock of knowledge and skills, either innate or acquired, residing within individuals and developed through formal and/or informal learning as well as continuous experience (Becker, 1962, 1964; Schultz, 1961). According to Coleman (1988) Human capital acts as a resource, it is created through the changes in skills and capabilities of persons enabling them to act in new ways.

To avoid failure, organisations, including social enterprises, should be able to strategically plan their development and, consequently, enhance their efficiency and competitiveness. Throughout this process, organisations must also improve the professional structure through the embodiment of human resources with specific skills and competencies (Chaves & Sajardo-Moreno, 2004). Is important to underline  that social enterprises are located in-between two polar types of organisations, as mentioned by Dees (1998): “philanthropic” – closer to the social mission of the traditional third sector organizations, and “commercial” – closer to the profit and market oriented organizations. As mentioned by Teasdale the term “social enterprise means different things to different people across time and context” (2011, p. 16). For Lehner and Kansikas (2013) the social enterprise concept is characterized by an ambiguity, with multiple conceptualizations and a variety of frameworks portrayed from different disciplines and among diverse contexts. However, authors as Emerson and Twersky (1996) and Harding (2004) differentiate social enterprises according to different types of structures, namely the non-profit structures that are financially dependent upon the donations, grants and funds to achieve their social goals and, on the other hand, the for-profit and hybrids structures that balance the social mission with the self-sustain strategies, via revenue generation. Due to the great diversity beyond the social enterprise concept, the EMES European Research Network developed, through a theoretical and empirical basis, an approach to identify the so-called social enterprises in different countries. Furthermore, EMES acknowledged three sets of indicators with various dimensions revealing an “ideal-type” of social enterprise that “enables researchers to position themselves within the “galaxy” of social enterprises” (2012, p. 12)[1].

The goal of my research is to comprehend the role of human capital regarding the performance of social enterprises, considering both cases of success and failure – analysing the empirical evidences of three different metropolitan areas, namely Lille in France, Oporto in Portugal and Nelson Mandela Bay in South Africa. The intersection of three different countries does not aim to compare results, but to collect evidences about the interrelation of human capital and performance within different contexts and backgrounds. On the other hand, a comparative analysis will be held on both cases of failure and success, in order to understand and establish the variances on human capital, as well as to determine whether or not the human capital can be a determinant of failure.

Concluding, as referred by Mellahi and Wilkinson (2004), the individuals tend to overvalue internal factors in case of success and to highlight the external elements when describing failure. If social enterprises learn to identify and analyse failures and to learn from their insights, they would be able to reconstruct and create value from what was initially a negative result.

[1] The three indicators are: 1) Economic and entrepreneurial dimensions of social enterprises: A continuous activity producing goods and/or selling services; A significant level of economic risk; A minimum amount of paid work; 2) Social dimensions of social enterprises: Explicitly aim to benefit the community; An initiative launched by a group of citizens or civil society organisations; A limited profit distribution; 3) Participatory governance of social enterprises: A high degree of autonomy; A decision-making power not based on capital ownership; A participatory nature, which involves various parties affected by the activity.

 

References

Anheier, Helmut, K., & Moulton, L. (1999). Organizational Failures, Breakdowns, and Bankruptcies. In When Things Go Wrong: Organizational Failures and Breakdowns. Thousand Oaks, CA: Sage.

Arasti, Z., Zandi, F., & Bahmani, N. (2014). Business failure factors in Iranian SMEs: Do successful and unsuccessful entrepreneurs have different viewpoints? Journal of Global Entrepreneurship Research, 4(1), 1–14. doi:10.1186/s40497-014-0010-7

Becker, G. S. (1962). Investment in Human Capital: A Theoretical Analysis. The Journal of Political Economy, 70(5), 9–49.

Becker, G. S. (1964). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. New York: Columbia University Press.

Bruno, A. V, & Leidecker, J. K. (1988). Causes of new venture failure: 1960s vs. 1980s. Business Horizons, 31(6), 51–56. doi:10.1016/0007-6813(88)90024-9

Cannon, M. D., & Edmondson, A. C. (2005). Failing to learn and learning to fail (intelligently): How great organizations put failure to work to innovate and improve. Long Range Planning, 38(3), 299–319. doi:10.1016/j.lrp.2005.04.005

Chaves, R., & Sajardo-moreno, A. (2004). Social Economy Managers: Between Values and Entrenchment. Annals of Public and Cooperative Economics, 75(1), 139–161.

Coleman, J. (1988). Social Capital in the Creation of Human Capital. American Journal of Sociology, 94, S95–S120.

Dees, G. (1998). ENTERPRISING NONPROFITS. Harvard Business Review, 76(1), 54–67.

Defourny, J., & Nyssens, M. (2012). The EMES approach of social enterprise in a comparative perspective (No. WP NO. 12/03).

Emerson, J., & Twersky, F. (1996). New Social Entrepreneurs: The Success, Challenge and Lessons of Non-profit Enterprise Creation. San Francisco, CA: The Roberts Foundation Homeless Economic Fund.

Harding, R. (2004). Social Enterprises: The New Economic Engine. Business Strategy Review, 15(4), 39–49.

Lehner, O., & Kansikas, J. (2013). Pre-Paradigmatic Status of Social Entrepreneurship Research: A Systematic Literature Review. Journal of Social Entrepreneurship, 4(2), 1–21.

Lindsley, D., Brass, D., & Thomas, J. (1995). Efficacy-performance spirals: A multilevel perspective. Academy of Management Review, 20(3), 645–678.

Mellahi, K., & Wilkinson, A. (2004). Organizational Failure : A critique of recent research and a proposed integrative framework. International Journal of Management Reviews, 5-6(1), 21–41.

OECD. (2001). The Well-being of Nations – The role of Human and Social Capital. Paris.

Paton, R. A., & Mordaunt, J. (2004). What’s Different About Public and Non-Profit Turnaround. Public Money & Management, 24(4), 209–2016.

Schultz, T. (1961). Investment in Human Capital. The American Economic Review, 51(1), 1–17.

Scott, D., & Teasdale, S. (2012). Whose failure? Learning from the financial collapse of a social enterprise in “Steeltown.” Voluntary Sector Review, 3(2).

Shepherd, D. a., & Kuratko, D. F. (2009). The death of an innovative project: How grief recovery enhances learning. Business Horizons, 52(5), 451–458. doi:10.1016/j.bushor.2009.04.009

Teasdale, S. (2011). What’s in a name? Making sense of social enterprise discourses. Public Policy and Administration, 0(0), 1–22. doi:10.1177/0952076711401466

 

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Sandra Ramos is currently undertaking a Ph.D. in Management at the Human Capital Research Center of the Lille Catholic University, France. She holds a master degree on social economics by the Economic and Management School of Minho University, Portugal. Her research interests are in the field of social economy focusing particularly on the performance, growth and impact of social enterprises, both in Africa and Europe.

You can contact Sandra at sandra.ramos@univ-catholille.fr

About emesphdnetwork

EMES is a research network of established university research centres and individual researchers whose goal is to gradually build up a European corpus of theoretical and empirical knowledge, pluralistic in disciplines and methodology, around “Third Sector” issues.

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