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Inside the Tensions of Hybrid Organizations: Pursuing Social and Commercial Goals Julie Battilana Harvard Business School June 2017

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Inside the Tensions of Hybrid Organizations: Pursuing Social and Commercial Goals

Julie Battilana Harvard Business School

June 2017

What do these organizations have in common?

Bolivian Microfinance Institution Belgian Education Nonprofit American Bakery

Hybrid organizations pursue a social mission while sustaining operations through commercial activity

•  They are neither typical corporations nor typical charities.

•  These organizations—often referred to as social enterprises—combine aspects of both charity and business forms at their core.

–  If they lose sight of their social mission, they fail.

–  If they do not generate enough revenues to sustain their operations, they fail.

The rise of hybrids

•  Though the term ‘social enterprise’ only appeared in the 1980s, examples of hybrid organizations have existed for many more years (Cornforth, 2004; Paton, 2003, Schneiberg et al., 2008; Schneiberg, 2011).

–  Including cooperatives and credit unions!

•  They are increasingly widespread across sectors and countries (Battilana, Lee, Walker & Dorsey, 2012; Hoffman, Gullo, & Haigh, 2012).

•  In May 2017, the Global Impact Investing Network published its annual survey, with 209 investors reporting:

–  $114 billion managed in impact investing assets in 2016 –  $22.1 billion committed in nearly 8,000 impact investing deals in

2016

A story of hope and disillusion?

•  Hybrids offer a promising fourth way of organizing.

However… •  The ecosystem around them is still organized around the typical for-profit

and not-for-profit categories, which poses legal and funding challenges.

•  They have been criticized for mission drift, i.e., prioritizing financial gains at the expense of their social mission, making them unable to maintain their hybridity (e.g., Minkoff & Powell, 2006; Weisbrod, 2004).

Microfinance organizations

Mission drift threatens hybrids’ raison d’être

•  Selznick (1957: 134) warned of the “cult of efficiency” that leaders need to transcend to “[create] a social organism capable of fulfilling [its] mission.”

•  The joint pursuit of social and commercial goals may entail internal conflicts of identity as well as internal conflicts over resource allocation.

•  Organizations also tend to comply more readily with demands from external constituents on whom they depend for key resources.

Core tension

How can hybrid organizations successfully pursue both social and commercial goals?

Organizational culture

•  Organizational culture is the set of shared values and norms of behavior, i.e., the shared beliefs about how people ought to behave and accomplish the work, that characterize an organization.

•  Hybrids face the special challenge of building an organizational culture committed to both a social mission and effective operations.

Hybrids that can create and nurture such a culture are able to successfully and sustainably pursue both social and commercial

goals.

Achieving organizational alignment •  Competencies/ Skills

•  Demography •  Knowledge

•  Group Process

Achieving organizational alignment

•  Work that the organization must do

•  Work flows/processes

Achieving organizational alignment

•  Demography •  Competencies/Skills

•  Knowledge

Achieving organizational alignment

•  Organization Design •  Performance Management

Systems •  Information systems

•  Human Resource Management Systems

•  Control Systems

Achieving organizational alignment

Whom to hire and how to socialize them into the desired culture?

•  Study 1:

Building and sustaining hybrid organizations: The case of commercial microfinance organizations

•  Study 2:

Harnessing productive tensions in hybrid organizations: The case of work integration social enterprises

•  Study 3:

Scaling…and playing with fire: The case of a cooperative bank acquiring a commercial one

Key takeaways

•  Hybrids may adopt an integrated approach, blending social and commercial aspects on every dimension of their operations.

•  Hybrids may also adopt a differentiated approach, assigning responsibility for the pursuit of social and commercial goals to distinct groups.

–  Spaces of negotiation are arenas of interaction that allow all staff members to discuss and agree on how to handle the daily trade-offs they face across social and commercial activities.

–  Spaces of negotiation play a critical role in maintaining a productive tension when hybrids adopt a differentiated approach.

Study 1: Building and sustaining hybrid organizations

•  Microfinance organizations aim to help poor entrepreneurs who lack

access to banking and related services by providing loans to them.

•  Battilana and Dorado (2010) conducted a comparative (qualitative and longitudinal) study of two commercial microfinance organizations, BancoSol and Los Andes.

Findings

BancoSol Los Andes

Hiring Hiring social workers and bankers

Hiring recent university graduates

Focusing organization members’attention on the end pursued by the organization

Focusing organization members’attention on the tasks at hand

Socialization - Tasks - Incentives - Training

Is the integrated model the hybrid ideal?

Study 2: Harnessing productive tensions in hybrids

•  Focus on hybrids facing acute sustainability challenges, i.e., those that serve distinct groups of customers and beneficiaries (Battilana et al., 2015):

-  Because they depend mostly on customers for financial resources, these hybrids are at risk of favoring their demands over the ones of often resource-poor beneficiaries.

-  Neglecting their beneficiaries would cause social enterprises to fail to achieve their social mission, ultimately putting into question their very raison d’être.

Can these hybrid organizations avoid mission drift?

The case of work integration social enterprises (WISEs)

•  WISEs exist throughout the world (Cooney, 2011).

•  The social mission of WISEs is sustained financially by the stream of revenues generated by the sale of goods and services to customers.

•  WISEs’ beneficiaries are different from the customers who purchase the goods and services they produce.

Typical day at Juratri

Production activities Social training activities

Mixed research methods

•  Quantitative data: –  Survey data collected by National Federation of WISEs in France

between 2003 and 2007 (641 establishment-year observations with complete information).

•  Qualitative data: –  In-depth case studies of two WISES in our sample.

Findings: Paradox of social imprinting

Social Imprinting Social Performance

Productivity

+

Findings: Paradox of social imprinting

Social Imprinting Social Performance

Productivity

+

+

Findings: Paradox of social imprinting

Social Imprinting Social Performance

Productivity

+

- +

Mitigating the effect of social imprinting on productivity

•  Spaces of negotiation are arenas of interaction that allow all staff members to discuss and agree on how to handle the daily trade-offs they face across social and commercial activities.

•  Spaces of negotiation are created through a combination of mandatory meetings and formal processes (including work plan scheduling and beneficiaries’ performance appraisal).

•  They did not make tensions disappear; rather they helped maintain a productive tension between social counselors and production supervisors.

Study 3: Scaling…and playing with fire

•  Increasing demand for their services has led hybrids to scale in a number of sectors, such as microfinance (Wry & Zhao, 2016) and work integration (Pache & Santos, 2013).

•  While some hybrids scale through internal growth, others scale through external acquisitions (Seelos & Mair, 2017).

•  When growing externally, hybrids need to decide whether to acquire: –  Hybrids like them –  Typical nonprofits –  Typical for-profits

Some hybrid organizations are acquiring for-profit companies to scale their social impact

•  Cooperative banks—established to serve customer-members’ interests and support local community social and economic development while operating profitably—are acquiring commercial banks to gain market share around the globe (Alois, 2015; Fonteyne, 2007).

•  A number of large hybrid organizations in other industries, such as Groupe SOS in the sector of healthcare in France (Battilana, Dessain, & Lenhardt, forthcoming), are also acquiring for-profit entities.

External growth is likely to strain hybrids

•  Values differences stand as obstacles to the integration of the organizations and to reaping integration benefits.

•  All hybrid organizations are at risk of losing sight of their social mission over time as they strive for survival and efficiency (see Battilana, Besharov, & Mitzinneck, 2017; Battilana & Lee, 2014).

•  With external growth, if the newly acquired entity is set up to maximize profit, the bias toward commercial goals over the hybrid organization’s concurrent social mission is likely to deepen.

Can cooperative banks play with fire without burning themselves?

How can a cooperative bank sustain the joint pursuit of social and commercial goals when growing through external acquisition of a typical for-profit bank?

An inductive qualitative study of CoopBank

This longitudinal, qualitative study examines how CoopBank tried to

maintain its joint pursuit of social and commercial goals between 2002 and

2010 (Bacq, Battilana, & Bovais, 2017).

CoopBank began in the 1890s in Europe to support

local socioeconomic development through

financing agriculture and providing loans to

financially excluded small-scale farmers.

In the 1980s, CoopBank became the first generalist banking service provider in

the country, offering banking, financial, and

insurance services, while continuing to serve

customer-members and support local socio-

economic development.

In CoopBank almost doubled the size of its

workforce after acquiring FinBank in

2003.

1890

1980

2003

In 2001, to access more capital, CoopBank issued

an IPO of 46% of the stocks of its central organizational body,

CoopBank Inc.

2001

Structure of CoopBank

CoopBank Inc.

Subsidiaries Corporate Functions

Collegial Bodies

Sub Committees

Plenary Assembly

Own 54% of the capital share

39 Regional Cooperatives

President + General Director

Three key groups of actors

•  Two main groups have decision-making rights at CoopBank: the 39 general directors of cooperatives, who oversee the local-level retail banking operations, and the 39 presidents of cooperatives, who chair the cooperatives’ board of directors.

•  Each month these 78 decision-makers gather for a plenary assembly, during which they decide on important organizational matters.

•  Senior executives of CoopBank Inc. in charge of the core business activities of retail banking do not have voting rights but can propose discussion topics and submit proposals for decision-makers to discuss and subsequently decide upon.

Phase 1: Joint pursuit of social and commercial goals, 2002-2003

Socialized into : •  Dual values •  Collegial decision-

making •  “Idea generator” role

Reinforces socialization

Socialized into : •  Dual values •  Collegial decision-

making •  Different roles:

Directors—champions of commercial goals Presidents—champions of social goals

Submit proposals

DECISION OUTCOME: Projects that fit both social and commercial demands are adopted;

Others are not

Reinforces socialization

Core Business

Unsocialized into : •  Dual values •  Collegial decision-

making •  Any particular role

NON-PARTICIPANTS IN SPACES OF NEGOTIATION

Senior Executives of CoopBank Inc. in charge of

non-core business

Non-Core Business Submit proposals

PARTICIPANTS IN SPACES OF NEGOTIATION

Senior Executives of CoopBank Inc. in charge of

core business

DECISION-MAKERS IN SPACES OF NEGOTIATION

Directors & Presidents

2002-2003: Functioning of spaces of negotiation before FinBank acquisition

•  Scope: all retail banking activities

•  Decision-making process:

Ø  Iterative Ø  Collegial (equal and

consensus-driven) •  Decision-making

criteria: Ø  Decisions must account

for both social and commercial demands

SPACES OF NEGOTIATION

Phase 2: Influx of new employees and subsequent partial organizational paralysis, 2004-2007

Headcount at CoopBank, 2002-2010

Socialized into : •  Dual values •  Collegial decision-making •  “Idea generator” role

Reinforces socialization

Socialized into :

•  Dual values •  Collegial decision-making •  Different roles:

Directors—champions of commercial goals Presidents—champions of social goals

Submit proposals

Reinforces socialization

Core Business

Not socialized into : •  Dual values •  Collegial decision-

making •  Any particular role

NON-PARTICIPANTS IN SPACES OF NEGOTIATION

Senior Executives of CoopBank Inc. in charge

of non-core business

Non-Core Business Submit proposals

DECISION OUTCOMES:

Projects that fit both social and

commercial demands are

adopted Projects (HR & mutualism) proposed by presidents and directors are accepted

Projects proposed by senior executives of CoopBank Inc. are rejected: NO MORE BUSINESS DECISIONS

PARTICIPANTS IN SPACES OF NEGOTIATION

Senior Executives of CoopBank Inc. in charge of core business

DECISION-MAKERS IN SPACES OF NEGOTIATION

Directors & Presidents

2004-2007: Partial organizational analysis and mission drift after FinBank acquisition

•  Scope: OUT-OF-DATE CONTENT

•  Decision-making process:

Ø  Iterative Ø  Collegial (equal and

consensus-driven) •  Decision-making

criteria: Decisions must account for both social and commercial demands

SPACES OF NEGOTIATION

+14,750 unsocialized employees

X2.5

+51,600 unsocialized employees

X 5

FinBank Massive influx of unsocialized employees and executives

Phase 3: Rebalancing of social and commercial goals, 2008-2010

The revealing effect of the crisis

•  Far from being a bank different from all others, CoopBank was engaged in subprime mortgage derivatives and was thus significantly affected by the crisis.

•  Because of these toxic investments, CoopBank lost €6 billion, and the cooperatives had to recapitalize their public company.

•  The “moral shock” (Jasper, 1998) led to intense emotional reactions that triggered action to rebalance social and commercial goals.

Socialized into : •  Dual values •  Collegial decision-making •  “Idea generator” role

• Scope: ALL business activities • Decision-making process: Ø Iterative Ø Collegial (equal and consensus-

driven) • Decision-making criteria: Ø Decisions must account for both

social and commercial demands

Reinforces socialization

PARTICIPANTS IN SPACES OF NEGOTIATION

Senior Executives of CoopBank Inc. in charge of all business activities

Socialized into :

•  Dual values •  Collegial decision-making •  Different roles:

Directors—champions of commercial goals Presidents—champions of social goals

SPACES OF NEGOTIATION

Submit proposals

Reinforces socialization

Submit proposals

DECISION OUTCOME: Projects that fit both social and commercial demands

are adopted; Others are not

More inclusive scope: All business activities

2008-2010: Rebalancing social and commercial goals

DECISION-MAKERS IN SPACES OF NEGOTIATION

Directors & Presidents

Implications

Comparison across phases suggests conditions for spaces of negotiation to function effectively and ensure the joint pursuit of social and commercial goals:

•  They must be populated with actors socialized into social and commercial values as well as collegial decision-making.

•  Participants in the spaces of negotiation must play different roles, including idea generators, champions of social goals, and champions of commercial goals.

•  The decision-making process must be iterative and collegial.

•  The content of these spaces of negotiation must be updated to reflect the actual scope of the organization’s activities.

Achieving organizational alignment