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Learn how to use REDF's feasibility framework to diagnose internal inconsistencies and alignment between strategies and activities. Enhance your ability to identify and improve areas of misalignment within your social enterprise.
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Session objectives What the session will cover: • Brief overview of the REDF feasibility framework: our lens to judge the soundness and general alignment of prospective and active social enterprise businesses • Demonstrate how framework can be used as a tool to diagnose internal inconsistencies and alignment with organizational strategy • Focus will be on issues within the ops/org buckets – which include the day-to-day structures and activities affecting business and program • Will NOT cover all aspects of the framework or any single issue in great depth; can consider individual consultation or group webinar if sufficient interest in a given area Why is this important? • “Misalignment” between strategy and activities – i.e., when different components of the model aren’t optimally supporting one another, or aren’t tied to a key organizational objective – can create confusion, cloud organizational priorities, and lead to general underperformance • Understanding how activities should be optimally structured will helps social enterprises more clearly identify challenges and potential solutions • Organizational alignment facilitates communication to and improves the impressions among external stakeholders (e.g., funders) • Enhance your powers to diagnose problem areas! • Identification of key areas in which current activities could be strengthened • Identification how you might improve the activities that you’ve judged to be out of alignment with others or broader organizational objectives Intended takeaways and things to consider:
Agenda Session 1 (morning) • Introduction • Overview of REDF feasibility framework • Break • Mini case studies: you be the judge Session 2 (afternoon) • Modeling: diagnosing alignment within your social enterprise • 1:1 breakouts • Self-reflection and group discussion • Wrap-up
Agenda Session 1 (morning) • Introduction • Overview of REDF feasibility framework • Break • Mini case studies: you be the judge Session 2 (afternoon) • Modeling: diagnosing alignment within your social enterprise • 1:1 breakouts • Self-reflection and group discussion • Wrap-up
REDF feasibility framework (1/2) Market analysis* Operational analysis Mission and business objectives Financial analysis Organizational analysis *In each bucket, think of as “activities” for established social enterprises
REDF feasibility framework: key areas within each bucket (2/2) Market analysis* Operational analysis • Size • Growth • Competition • Customer segmentation and value proposition • Barriers to entry • Facilities and equipment • Procurement and material sourcing • IT/data systems (e.g., inventory mgmt, CRM) • Sales and distribution** • Pricing** • Legal structure Mission and business objectives • Other • E.g., employee scheduling, customer feedback) • People employed • Employee outcomes • Profitability • Other Financial analysis Organizational analysis • Staffing; roles and responsibilities • Recruiting and hiring • Startup costs • Cash flow • Breakeven point • Market penetration assessment • Forecasting • Statements/DBLs • Training and skill development • Target population exit pathways • Employee supports and client services • Other program design • E.g., supervision, performance review, job readiness, transportation, etc. *In each bucket, think of as “activities” for established social enterprises; **These areas certainly tie into market analysis, particularly with regard to customer segmentation and value proposition
Role play: glimpse into how these discussions look like in practice Brief background – organization goals: • Looking to launch new business line; aiming to achieve profitability in 3 years • Initial analysis done local remodeling market: appears to be growing and sizeable • Goal is to employ >100 previously incarcerated individuals by steady state
Market analysis: key questions to answer NOT EXHAUSTIVE
Financial analysis: key questions to answer NOT EXHAUSTIVE
Scenario: given findings from market and financial assessment, will this proposed business idea enable us to achieve our big goals? (1/2) Context: • A non-profit agency operating out of XYZ, CA is considering whether to launch an aging-in-place home remodeling business. The agency’s key objective is for the new business to employ at least 50 entry-level staff by its third year of operation. • The initial market assessment showed the aging-in-place home remodeling market to be $5M in this agency’s target geography. Further research determined that experts expect the market to grow 10% per year over the next three years. • Industry averages suggest a team of 2 entry-level staff can generate ~$100K per year in revenue. • There are several medium-sized companies already targeting this market, as well as a number of handyman-types. No existing company seems to hold more than 20% of the market, likely due to low barriers to entry. • Assuming the previous analysis is correct and current assumptions hold true for the foreseeable future, does it seem realistic that this agency will be able to employ 50 people by the third year of operations? • What additional information do you need to make a better judgment? Question:
Scenario: given findings from market and financial assessment, will this proposed business idea enable us to achieve our big goals? (2/2) Using revenue: • Pplemployed/revenue alignment: • Assuming one-year term-limit, need 25 teams of 2 to reach goal of 50 • 25 teams (2 per) * $100K = $2.5M – revenue target for employing that number of workers • Market growth over three years: • $5M * (1 + 10%)^3 = 5,000,000 * 1.331 = $6,655,000 • Can simplify and say: 10% of $5M = $500K; $500K * 3 years = $1.5M; $5M + $1.5M = $6.5M • Market share needed • $2.5M / $6.655M = ~38%; highest existing competitor at 20% • Increasing people employed per year? Consider implications if 6 month term limit instead of 1 year Using people employed slots: • Market size • Will be ~$6.5M in year 3 (see calculation above) • $6.5M = 65*100K; 65 teams of 2 means there are ~130 entry level jobs in the market • @ 12month term-limit: 50/130 = ~38% • @ 6month term-limit: 25/130 = ~20% • @ 3month term-limit: 13/130 = 10%
Operations analysis: key questions to answer NOT EXHAUSTIVE
Organizational analysis: key questions to answer NOT EXHAUSTIVE
Scenario: tying program design to mission objectives Context: • Based in Denver, CO, social enterprise ABC operates a small-scale manufacturing facility that specializes in order fulfillment, woodworking, and sewing. • ABC’s mission (and key objective) is to employ the “hardest to serve” among the its target population of at-risk youth and previously homeless individuals. • Most of ABC’s recruitment is done by word-of-mouth, as ABC doesn’t have any formal external referral partners. Candidates must submit a formal application to apply. • During the interview process, the hiring manager ensures that prospective employees meet one of their target population barriers (i.e., at-risk youth or prior homelessness), and then selects the candidate best qualified for the job. • Once hired, transitional employees are expected to stay at ABC for between 3 and 6 months, with 6 months being a hard term-limit. • Post-SE job retention figures are better than REDF portfolio averages. • Based on what little you know, does it seem ABC is meeting its objective of employing the “hardest to serve” among its target population? Why or why not? • What additional information might you ask for to make a better judgment? Question:
Mini-case 1: if the price is right… Context: • A social enterprise based out of Chicago, IL, employs young, at-risk mothers to produce candles. The social enterprise is wholly-owned by a non-profit parent agency. • Although post-social enterprise retention figures have been strong, the business has struggled to grow to a size where it can meet its organizational employment goals. The team is looking for ways to grow the business. • The social enterprise prides and markets themselves as selling “high-quality candles” at “very affordable prices.” A quick scan of competitor prices at same oz. showed: • Social enterprise: $7.00 • Target: $9.99 • Yankee Candle: $12.99 • The typical social enterprise customer only purchases from them once; it has been hard to generate repeat purchases. • What are the pros and cons of having a price point where the SE currently sits? • How might pricing factor into customer repeat purchases? • What other information or analysis would you recommend the SE conduct to resolve these issues (assume they have no data beyond what is listed here)? Question:
Mini-case 3: identifying the right people for the most critical roles Context: • Social enterprise ABC operates a general contracting business out of Orange County, CA. The social enterprise employs at-risk youth in entry-level roles, and looks to place individuals in construction jobs after a one-year transitional employment experience. • Although revenue has been increasing year/year for the last 5 years, the business has yet to have a profitable year, with last year being its worst on record. • Particularly problematic for ABC is its gross margin. While typical industry gross margins can range from 25%-50%, ABC has steadily been generating GMs of between 10-20%. This leaves it little room to generate a positive return. • Besides the SE Director, the business team at ABC comprises of: • 1 sales/bidder: • Role: in charge of finding new opportunities and submitting competitive bids • Experience: sales professional with 10+ years in tech/software industry • 2 supervisors: • Role: manage work-crews; accountable for any material or labor waste • Experience: both with 15+ years of contracting and supervision experience • From what you know, does ABC have the right people in the right roles? • For each of these positions, what background would a full-time employee ideally possess? Question:
Agenda Session 1 (morning) • Introduction • Overview of REDF feasibility framework • Break • Mini case studies: you be the judge Session 2 (afternoon) • Modeling: diagnosing alignment within your social enterprise • 1:1 breakouts • Self-reflection and group discussion • Wrap-up
Notes on various cases (1/3) Market analysis • Ppl employed/revenue alignment: • Assuming one-year term-limit, need 25 teams of 2 to reach goal of 50 • 25 teams (2 per) * $100K = $2.5M – revenue target for employing that number of workers • Market growth over three years: • $5M * (1 + 10%)^3 = 5,000,000 * 1.331 = $6,655,000 • Can simplify and say: 10% of $5M = $500K; $500K * 3 years = $1.5M; $5M + $1.5M = $6.5M • Market share needed • $2.5M / $6.655M = ~38%; highest existing competitor at 20% • Increasing people employed per year? Consider implications if 6 month term limit instead of 1 year “Tying program design to mission objectives” • Be specific with your target population definitions; how you think of “hardest-to-serve” (HTS) may be very different from how another agency (or funder) does • Typical characteristics of “hardest to serve” individuals (REDF view): • Severe barrier in at least one (often more than one) of the following areas: history of homelessness; history of incarceration; history of or current mental illness; opportunity youth; e.g.: • 50 year-old with no work history; spent last 30 years in prison for violent crime • 19 year-old who was recently an active shooter in a gang; dropped out of HS at 16 • 35 year-old single mother of 3 who has lived in homeless shelters for the last 15 years • Individuals requiring significant programmatic intervention (e.g., in training, supervision, work experience) before being ready to transition to unstructured environment • Pipeline into the SE needs to be aligned with target population • Application: requires some level of skill to locate, complete, follow-through, etc. • Referrals: can be from a variety of sources – e.g., shelters, Dept. of Corrections, etc. – with strong partnership, referral partner can help ensure the right folks are getting directed to the SE • Term limits need to be aligned with the target population • Is 3-6 months enough time to address HTS barriers? • Generally see lower retention figures (all else equal) for programs that serve HTS
Notes on various cases (3/3) Identifying the right people for critical roles • Strong ties to “key activities in business model” framework • Bidding: absolutely critical if want to target the right markets at the right bid point (while understanding direct costs) • Crew supervision: also critical; significant direct cost via materials and labor; stringent deadlines; safety issues, etc. • Seems like SE hired well for the supervisor roles; did it do the same with bidding? • Does sales experience in software translate to bidding in construction? Similar business models? • Software GMs ~80-90%, whereas construction GMs can be ~25% -- huge difference in direct costs • Sales targets typically tied to revenue; discounting to drive up sales very common, and not as big of a deal in software where GMs are high (i.e., rarely a risk you’ll discount to an unprofitable point) • Bidding has to factor in costs explicitly, and requires some understanding of crew performance (e.g., how much material does the crew waste?) • Understand key activities within key roles before hiring; be willing to make personnel changes as soon as you determine deficiencies aren’t trainable To incentivize or not to incentivize… • Pros of incentivizing // Cons of voluntary • Higher attendance; meaningful if skill-training/delivery is of utmost importance • Know staffing needs; can hire in advance (vs. highly variable attendance) • Monetary or other incentives can increase employee income; meaningful especially for those just re-entering workforce • More control/insight into gaps – more attendance leads to more constant monitoring; perhaps easier and faster to incorporate feedback into program/training model • Cons of incentivizing // Pros of voluntary • Higher cost – both in terms of staff salary (almost certainly would hire more staff for delivery) and in incentives given out • One-size-fits-all approach – employee population may have differing needs; voluntary allows employees to self-select right services • Incentivizing pre-existing behavior – would employees use services in the absence of incentives? • Inherent motivation vs. extrinsic motivation (i.e., what happens when incentives stop) • Training/simulating real-life skills – not all behavior is clearly incentivized in unstructured work environments
Customer interview guide: existing customers Product / Service Usage: • When did you start doing business with the organization? • How did you hear about the organization? • What other competitors were you evaluating when you chose to work with the organization? What made you select the organization over competing solutions? • How has your usage of the org’s products / services changed since you first started working together? • Incr, decr, purchased additional products / services, expanded use to new locations, etc. • How much variation is there in the total amount of the product or service you’re purchasing over the course of the year? What are the key drivers? • E.g. seasonal trends, changes in end-customer preferences, bulk purchases based on promos NPS / Key Purchasing Criteria: • On a scale of 1 to 10, how likely would you be to recommend the organization’s products or services to a friend or colleague? Why? • [Repeat question for other competing products or services the customer uses] • What are your key purchasing criteria (“KPCs”) for selecting a product / service from one company vs. another? • Price, quality, scale, speed, service, breadth of offerings, etc. • How would you rate organization X relative to the competition on your KPCs? • What do you like most about the organization? What is the organization’s biggest shortcoming? Outlook: • How do anticipate your usage of the organization’s products / services changing over the next 2 yrs? • How interested would you be in purchasing additional products / services from the organization if it offered new product lines or expanded to new geographies?
Customer interview guide: prospective customers Product / Service Usage: • How frequently do you purchase the product or service? Do you purchase from one provider or multiple? If multiple, how do you decide how much to purchase from each manufacturer? • How much variation is there in the total amount of the product or service you’re purchasing over the course of the year? What are the key drivers? • E.g. seasonal trends, changes in end-customer preferences, bulk purchases based on promos • How are sales contracts structured? One-time, short term, long-term? • How has your usage of the product or service changed over the past five years? How do you anticipate it will change over the next 5 years? Sales Process: • What is the sales process? • How long is the sales cycle? Days? Weeks? Months? • How do you evaluate vendors? Issue RPF, ongoing assessments from inbound calls, etc. • How often do you evaluate switching from your existing vendor to a new one? What is the reason for doing so (e.g. dissatisfaction with existing vendor, end of contract, shift in internal needs, etc) • Who are the key decision makers involved? Key Purchasing Criteria: • What are your key purchasing criteria (“KPCs”) for selecting a product or service from one company vs. another? • Price, quality, scale, speed, service, breadth of offerings, etc. • How would you rate organization X relative to the competition on your KPCs?
Customer analysis: key purchasing criteria Sample KPC Comb Chart Overview: • Collecting data on customer’s key purchasing criteria (“KPCs”) helps to determine: • What attributes (price, service, breadth of offerings, etc.) customers place the most value on when making a decision about what product / service to purchase • How customers rank the organization and it’s competitors on each attribute • Results can be used to understand what product / service attributes the organization should focus on improving or marketing to customers and to evaluate the organization’s strengths and weaknesses relative to competitors Data Collection Process: • Data can be collected via customer interviews (see “Key Purchasing Criteria” questions on customer interview guides) or through a short customer survey • Use the KPC Worksheet to enter customer responses and create “comb chart”
Common pricing strategies Market Penetration • Price determined by pricing slightly below prevailing market prices • If (P-VC)*Q<Operating and Fixed Costs, should not enter market or consider exiting if already in market • Most common for commodity products in mature markets with high price elasticity (e.g. demand changes dramatically with small changes in price) Contribution Margin • Determine price that maximizes total $ contribution margin for product [(P-VC)*Q] • Total business contribution margin needs to be > operating and fixed costs • Important to take into account relative contribution margins of different products • Most logical for businesses with fixed production capacity and the ability to produce a variety of different products (e.g. manufacturing) Value-Based • Determine price based on value to consumer without taking input costs into account • Frequently used for products that have value to customers that significantly above costs, strong brands, differentiated features, and limited alternatives (e.g. luxury goods, pharmaceuticals, required product add-ons) Cost-Plus • Determine price based on a pre-determined profit margin above all costs (direct, material, and overhead) • Commonly used for single buyer products produced to buyer’s specs (e.g. government contracts, large supplier agreements with single buyer) Variable / “Real-Time” • Price determined by real-time demand for the product or service • Used in markets with frequent and measurable demand fluctuations and low transaction costs for changing prices (e.g. auctions, trading markets, rental cars, hotels, retail)
Common pricing strategies: examples Market Penetration • Direct cost for ABC bookseller was $5.00, operating costs per book are ~$2.00 • Price for used novel is $9.99 from several retailers on Amazon • Price at $8.99 online to ensure lowest price result and sale at $2.99 profit Contribution Margin • XYZ manufacturing and packing process has production capacity of 1,000 units / day • Target a contribution margin of $1 / unit to cover overhead costs assuming operations are at full capacity • Produce products where 1) Market demand is >1,000 units / day and 2) Price – Variable Costs > $1 / unit (ideally make products that maximize P – VC) Value-Based • Customers value products made by XYZ because of the organization’s mission and outstanding product quality and taste • Prevailing prices for soup products are $1.49-$1.99 per box from large manufacturers; prices for premium products (e.g. organic, locally-sourced foods, etc.) are typically 2x; XYZ should price at $3.00-3.99 per box) Cost-Plus • Org A bidding for janitorial contract in business improvement district and determines that fully loaded costs per year (employee wages, supplies, overhead, etc.) is ~$58,000 and targets a profit margin for program expenses of 10% • Org A bids $63,800 ($58,000 +$5,800 profit) Variable / “Real-Time” • ABC is selling a rare book that the organization received via donation • Set up an online or in-person auction and market it to most relevant customers (e.g. customers who’ve purchased similar rare books before) in order to generate demand • Sell book to highest bidder
Drivers of increased or decreased pricing power Increased Pricing Power Decreased Pricing Power Product differentiation due to proprietary offering, higher product quality, brand strength, customer loyalty / satisfaction, etc. Emerging or growing market with strong customer demand Limited, low quality, or high cost competition in target market Limited price transparency (i.e. hard for customers to compare prices and purchase competitor’s products) High customer switching costs (i.e. significant time, effort, and money for a customer to replace product or service with one from a competitor) Commodity products or services (e.g. gas, milk, eggs, metals) Mature or declining market Full online and offline price transparency Low or no customer switching costs Large and sophisticated customers with significant purchasing power (e.g. Walmart, food / drug / mass retailers)
Price and product benchmarking example: WBP 10-bean soup mix WBP 10-Bean soup mix has higher headline price and price per serving than most comparable products on Walmart.com and limited differentiation, which likely contributes to low product sales rank; lower price or better marketing of org’s mission to help differentiate could help to increase sales
