Local Economic Systems Session 3 Applying the theory to a hypothetical eco-social enterprise Tim Crabtree Focus of session 3 •Students will be asked to choose and describe a local food enterprise – this can be real or hypothetical – and describe the key purpose of the organisation. •Next look at the services, in terms of outputs (goods & services) and outcomes (economic, social, environmental) •They will then be asked to describe the key operations of the enterprise and the way in which those operations will be managed. •Students will explore how outputs will get to consumers, through marketing and distribution. •Next they will describe the key inputs required. •They will then explore how waste will be eliminated or recycled. •Tomorrow, students will explore opportunities for collaboration with other local food initiatives. Understanding inputs: the key building blocks Social Capital, e.g. networks & legal format Human Capital, e.g. staff & volunteers Physical Capital, e.g. buildings & equipment Natural Capital, e.g. land, water, sunlight Financial Capital, e.g. grants, loans, reserves Food “operations” Food “services” TRANSFORMATION INPUTS OUTPUTS Two types of food system “Linear” food systems Even larger agri-business Even larger processors Even larger retailers & caterers Over-use of natural capital Consumers “Circular” food systems Waste Operations: Primary Production – Processing – Distribution – Marketing – Retail / Food service Inputs Waste Consumption Operations: Inputs: Waste Recycling Consumers Natural Physical Social Human Financial Financial Investment Co-production & Provision of Social Capital Primary Production Processing Distribution Retail/Food service Marketing Core Purpose Video: Growing Well •Question – what is the core purpose of this eco-social enterprise? Growing Well •Core purpose: • •Growing Well’s mission is to promote mental well-being and organic horticulture through being a successful, inspirational, community-focused social enterprise. From outputs to outcomes Social Capital, e.g. networks & legal format Human Capital, e.g. staff & volunteers Physical Capital, e.g. buildings & equipment Natural Capital, e.g. land, water, sunlight Financial Capital, e.g. grants, loans, reserves Food “operations” Food “services” TRANSFORMATION INPUTS OUTPUTS Outcomes OUTCOMES Customers In any system, identifying the purpose or goal is critical •“A system isn’t just any old collection of things. A system is an interconnected set of elements that is coherently organised in a way that achieves something………… •a system must consist of three kinds of things: elements, interconnections, and a function or purpose.” According to Meadows “the least obvious part of the system, its function or purpose, is often the most crucial determinant of the system’s behaviour.” Mainstream view of firms •Core purpose is to maximise profits for shareholders • •Financial considerations more important than social or environmental considerations • •Fine in theory, but…… Earth Graphs 2 Drivers of Global Change From: Steffen et. al 2004 Earth Graphs 1 Metrics of Global Change From: Steffen et. al 2004 CO2 climate species Thinking about core purpose What’s outside the model, what’s inside? What’s outside? •Conventional theory focuses on: –Operations –Marketing •Inputs are outside the model: –Except providers of financial capital (owners / investors) •Customers are outside the model •Externalities, e.g. waste & pollution outside the model “Conventional” theory of the firm What’s outside? The Enterprise Economic impacts e.g. unfair labour conditions Environmental impacts e.g. climate change Social impacts e.g. rising levels of obesity In the social economy: •The way we utilise inputs becomes part of the model •The way we operate is part of the model •Customers can become part of the model •Creating low input, low pollution, low waste processes becomes part of the model What’s inside? •Conventional theory & practice: • –that self-interest, profit-maximisation and growth (of a company and its market share) is in the best interests of society – –It will lead to a the best outcomes for everyone What’s inside? •In the social economy, enterprises seek to define different purposes •They seek a “triple bottom line”: •Economic outcomes, e.g. they must cover their costs, while also providing fair returns to key stakeholders •Social outcomes, e.g. they may employ people disadvantaged in the labour market •Environmental outcomes, e.g. they will seek to reduce their environmental “footprint” What’s inside? •Social economy organisations have different members: •Conventional enterprises limited to owners / investors •Social economy organisations may have different members: –Staff –Customers –Suppliers –Investors (but returns limited) In any system, identifying the purpose or goal is critical •“A system isn’t just any old collection of things. A system is an interconnected set of elements that is coherently organised in a way that achieves something………… •a system must consist of three kinds of things: elements, interconnections, and a function or purpose.” According to Meadows “the least obvious part of the system, its function or purpose, is often the most crucial determinant of the system’s behaviour.” Maximum public benefit Maximum private benefit E.g. World Wide Fund for Nature Charity E.g. British American Tobacco Share company The economic spectrum Maximum public benefit Maximum private benefit Charity Share company The “grey area” in the middle of the spectrum is where social economy organisations operate No trading revenue Trading revenue & grants Potentially sustainable: 50%+ trading revenue Breakeven – all revenue from trading Profitable – surplus not distributed Profit distributing – socially driven/ mutual Profit maximising Charities/vol orgs Revenue generating social enterprises Socially driven business “Trad-itional” business High social return High financial return Waitrose Co-op Group Whole Food Markets Green & Blacks (Cadburys) Rachels Dairy Local Food Links Dorset Farmers’ Markets Somerset Local Food Direct West Dorset Food & Land Trust Dorset Food & Health Trust Somerset Community Food Projects Network Over-arching Paradigm E.G. Nature is a stock of resources to be converted to human purposes The market is the ideal organising mechanism for everything Money measures value (people who are paid less are worth less) Growth is good Self-interest is good Paradigm The goals of a system E.G. To grow, to increase market share, to bring the world more & more under the control of the corporation Paradigm Goals Rules e.g. The world trade system, with rules designed by Corporations (no information flow, no feedback. success to the successful loops ) Common characteristics of eco-social enterprises Exercise •For your enterprise, you will need to start with the purpose or goal Exercise •Now describe 3 outcomes: –Economic –Social –Environmental The proposed outputs (goods & services) of the organisation: •What outputs will you produce? • •How do these relate to the proposed outcomes? Customers – the market for your enterprise •How could customers be brought into your enterprise? •E.g. Local Food Links: •Parents, schools and older people could become members •They could provide investment (equity) •They could provide volunteer assistance •They could sit on the board or committees Exercise 3 •Who are your customers? •How can they become part of the enterprise? –Should they be members? –Could they provide; •Human capital? •Social capital? •Financial capital? What is it? UK Mosaic Groups Mosaic UK Established by Experian, Mosaic UK is the consumer classification of the United Kingdom: * Provides an accurate understanding of the demographics, lifestyles and behaviour of all individuals and households in the UK * Uses a variety of data sources and is continuously updated * Mosaic UK classifies consumers in the United Kingdom into one of 67 types and 15 groups Experian.com www.experian.co.uk Well known barriers The well known barriers of perceived expense and inconvenience were mentioned. There is also an underlying perceived ‘effort’ and ‘hassle factor’ when shopping for local food. * Difficult to visit if working and means you have to be organised Opening hours/ frequency * Seasonality means that you can’t get things all year round Limited choice/ selection 95355030 cross.jpg * People seek a one stop shop with everything under one roof Not a one stop shop * Perceived to be expensive in comparison to supermarkets Perceived expense “The cost, that was the big one...Too expensive for most people.” (Crediton, Lapsed) * Difficult to get to without a vehicle and can be hard to find and park Location/ signage and parking * Some outlets are cash only - people have to visit a cash point first Payment Accessibility in store * People are put off going to farmers’ markets if it is raining Weather * Shops can be small and cramped and surfaces uneven “The cost of parking and the cost of travelling to your destination. The petrol costs and everything, and just generally having to travel around.” (Knaresborough, Potential) “Some of the shops you can only pay cash, which can be really inconvenient.” (Current, Bristol) Lack of trust is a big barrier Local food outlets are seen as a ‘risk’ as people don’t know what to expect. Subconsciously shoppers look for cues that reassure them and build trust. Introducing these cues into local food outlets will work in their favour. * Refund policies and procedures for dealing with complaints reassure customers. Unlike supermarkets, these are not always clear Refunds * While provenance is a key motivator when shopping for local food, many question whether it is actually organic Organic 95355030 cross.jpg * Shoppers expect sell by dates and cooking instructions. When this is not available it is off putting and impacts on trust Poor product labelling * Shoppers question whether local food outlets have the same food safety standards as supermarkets Food safety standards * Poor quality produce left on display is off putting and makes people further question the food safety standards Poor quality produce “Are the farm shops’ standards as stringent as the supermarket standards? Are they regulated?” (Tunbridge Wells, Potential) “There can be poor quality produce left on display. ...they don’t look as appealing to buy.” (Current, Bristol) * With just one supplier, the lack of competition means a monopoly Lack of competition Impact of the Recession * A rationale that the longer the food lasts, the less wastage Shopping habits had changed due to the recession. Greater attention to shelf life & use-by dates Greater meal planning Bulk buy essentials Reduction in ‘treats’ or luxury items Reduction in organic produce Increase in supermarket shopping * Organic seen as expensive with the real health benefits unclear * Only buying what was necessary and planning ‘weekly menus * Cutting back on non-essential foods, such as biscuits and crisps * Visiting wholesalers to ‘stock up’ on certain essential items * Supermarkets favoured over smaller local shops http://bgnentrepreneur.net/wp-content/uploads/2009/01/recession-in-uk1.jpg http://www.goodtoknow.co.uk/imageBank/cache/n/Nutrition-quiz-pic_14.5K.jpg_e_73d1d5236a676223e137df 8d9124a841.jpg http://3.bp.blogspot.com/-dE0W_otGQP4/TiXFkVf8uYI/AAAAAAAABxo/P_nmyrZaugE/s1600/IMG_8144.JPG http://www.nextgenerationfood.com/media/media-news/news-thumb/100528/us_organic_food.jpg http://www.tutor2u.net/blog/images/uploads/blog-supermarket1.jpg * Less impulse buying when in store (e.g. gifts for kids) Trading down on brands Looking for offers Decline in impulse buying * BOGOFs/ bargains dominating shopping trolleys (only if needed!) * Cutting back or switching to ‘cheaper’ brands/ alternatives Operations •Exercise 4: •Describe the operations of the organisation Land & natural resources Buildings & equipment Financial capital Human capital Output 3 Operations Output 2 Output 1 Operations Operations Social capital Inputs • Barriers to developing supply Human Capital Natural Capital Physical Capital Financial Capital Leadership & management skills. Absence of incentive structures for entrepreneurs. Community / volunteer engagement has a cost. High cost of all land & limited availability in urban areas. Access to suitable premises can be difficult – “food hubs” could be one solution. Cultural barriers: lack of entrepreneurship or understanding of legal structures & types of finance. Cost barriers: difficult to pay market rates. Social / Organisational Capital Choice of organisational structure & governance. Big Society fatigue…… ICT could be powerful tool, but cost / skills barriers. Discussion •If a local food enterprise in the Czech Republic wishes to access any of the 5 capitals, what barriers might they face? Exercise 5: Social Capital •Start with the RULES of the organisation – the constitution or governing document which sets out the legal structure •E.g. –Foundation –Company –Co-operative •Define the MEMBERSHIP Consumer aspirations Producer aspirations Trusteeship aspirations Investor aspirations Stakeholders may have divergent aspirations What do stakeholders have in common? Key stakeholders and their motivations •Paid workers •Service users (inc. volunteers) •Commissioners, e.g. NHS & L.A.’s •Landlord: Forestry Commissioner as tenant and Crown Estate as free-holder Exercise 6: Financial capital •Who will provide this? –Grants? –Loans? –Equity? •What rights do they get? 3 types of finance •Grants – these do not require a financial return. However, they do require the recipient organisation to demonstrate the social or environmental return that is being created. • •Loans (or debt finance) require interest payments and the repayment of the amount borrowed (i.e. it is investment with the expectation of repayment of the principle sum as well as regular interest payments). • •Equity is investment in exchange for a stake in the organisation, in the form of shares. This stake usually entitles shareholders to a share of the profits of the organisation, or interest payments once a certain level of earnings has been achieved. • Key principle 1: Different types of finance might be appropriate at different stages of development Key principle 2: rights to control •Grants do not confer any rights, beyond the contractual obligations that a grant may entail. • •Loans carry with them an obligation to repay, but no other rights • •Equity can carry voting rights, income rights and/or a claim on the assets of the organisation. • •Equity has therefore proved to be problematic for organisations in the social economy (including charities, social enterprises and co-operatives ) Key principle 2: rights to control Rights to vote at general meeting Rights to net surplus Rights to the net value of the assets Democratic rights Property rights Income rights Key principle 3: equity can be important in the early stages of development •Loans are marked on the organisation’s balance sheet as a liability and they usually require security e.g. a building or demonstrable income streams. • •Loans may not be attractive in a situation where the organisation is trying to develop new projects or income streams because it will take time for these to generate financial returns. • •Unlike a loan, investors providing equity finance are effectively sharing the risk with the organisation and are likely to defer any expectation of a financial return for some time. Equity is treated as an asset on the organisation’s balance sheet. Exercise 7: Natural capital •What natural capital will you require: –Resources –Sinks –Services Exercise 8: Physical capital •What is required? –Buildings –Equipment –ICT –etc Exercise 9: Human capital •What will your enterprise require? –Staff? –Volunteers? –Trainees/apprentices? –People disadvantaged in the labour market? –Board members? And finally: creating a “circular”, sustainable enterprise •Exercise 10: •Think about pollution, waste and resource conservation •How could you address this? sketch section 150dpi bubble diagrams 150dpi The potential for collaboration – building sustainable food systems •Tomorrow we will look at the potential for partnerships, collaboration and secondary structures •These can help create stronger local food systems