The Centre For Business Relationships,

Accountability, Sustainability and Society

WORKING PAPER SERIES No. 49

Social Enterprise in Disguise?

Towards Hybrid Forms of Voluntary
and Charitable Organisations in the UK

Celine Chew
 Social Enterprises in Disguise?
Towards Hybrid Forms of Voluntary and Charitable Organizations in the UK

Celine Chew

Abstract

This paper contributes to the organizational behaviour and strategic non-profit management
literatures by increasing our understanding into the link between emerging hybrid
organizational forms and charitable organizations that have established formalized social
enterprise activities. It adopts an interpretive approach to examine this link through the lenses
of four charitable organizations in the UK that have established hybrid forms of structure,
management and activities in pursuit of their social enterprise goals. A combination of social,
economic, legal and strategic positioning factors was found to influence the charitable
organizations’ decision to embark on formal social enterprise activities in the form of
Community Interest Companies to complement their public benefit work. Social enterprises
with charitable origins, as a special case of organizational hybrids, share common features
such as a means-end orientation towards their mission, a subservient governance mechanism
and a relatively weak strategic positioning, which are distinct from those of their parent
organizations. These differences create tensions in the operating culture and relationship
between the hybrid subsidiaries and their parent charities, which have implications for the
management and development of third sector social enterprises.

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 About the BRASS Centre

The ESRC Centre for Business Relationships, Accountability, Sustainability and

Society (BRASS) was the first ESRC Centre in Wales. It was established in 2001 with
a £3.1 million grant, and has very recently received its second phase funding of £4.8
million which will take it up to 2011. The Centre is a joint venture between the
University’s Schools of Business, City & Regional Planning and Law. It brings together
the three Schools’ existing research expertise on issues of sustainability, business
ethics, company law, corporate reporting and business communication.

The Centre started work in October 2001 under the leadership of Professor Ken
Peattie of the Business School, Professor Terry Marsden of the Department of City
and Regional Planning and Professor Bob Lee of the Law School. The Centre exists
to understand and promote the vital issues of sustainability, accountability and social
responsibility, through research into key business relationships.

Published by

The Centre for Business Relationships, Accountability, Sustainability & Society

(BRASS)
Cardiff University
55 Park Place
Cardiff CF10 3AT
United Kingdom
http://www.brass.cf.ac.uk

© BRASS Centre 2008

ISBNs 978-1-906644-10-9 (print)

978-1-906644-11-6 (web)

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Introduction

This paper contributes to the organizational behaviour and strategic non-profit management
literatures by increasing our understanding into the link between emerging hybrid
organizational forms and formalized social enterprise activities in charitable organizations.
Research and debate on the social enterprise movement among voluntary and charitable
organizations (VCOs) in the UK and Europe are intensifying, albeit still in their infancy.
Brandsen et al. (2005) argue that the traditional ‘ideal- typical’ characterization of VCOs is no
longer applicable. VCOs have developed hybrid organizational forms, characterized by
mixtures of ideal types, origins, bureaucracies and cultures as a response to external
environmental pressures from market and the state. Aiken (2006) suggests that different
evolutionary paths of social enterprises among third sector organizations arise due to
isomorphic pressures to adopt organizational characteristics akin to either market or the state
depending on their resource mix.

An impetus for the growth of social enterprise activities in the UK has arguably been the
current Labour Government’s efforts in shaping the role of charities and the wider non-profit
sector in a mixed economy of public service provision (Cabinet Office 1999; DTI 2002). This
has lead to the creation of a new legal organizational form - the Community Interest Company
(CIC)1 in 2005. This new legal organizational form is aimed at accommodating the emerging
social enterprise activities among VCOs and private sector organizations, in particular in
service provision with public bodies. However, these new organizational entrants have
exacerbated the shifting and blurring of boundaries between the voluntary and charitable,
public and private sectors. The professionalization and marketization of VCOs in an
increasingly competitive environment for raising funds (voluntary and statutory) and securing
service delivery contracts have blurred their distinctiveness (Chew 2006a, 2006b). The current
public policy trajectory has paved the way for more charities to deliver public services under
contracts from and in partnership with government (Strategy Unit 2002; HM Treasury 2002).
Charities are encouraged to undertake social enterprise activities, i.e. “trading with the public
body: undertaking specific activities in return for payment” (HM Treasury 2005, p. 19). Being
1
Community Interest Company (CIC) is explained in further detail in the sub-section: social enterprise in charitable organizations in the UK
in this paper.

3
more ‘businesslike’ and undertaking profit- making activities are increasingly encouraged in
charities as defining characteristics of being socially enterprising (DTI 2002). Although
undertaking trading activities by UK charities for profits is legally permitted under current
charity law, charities need to ensure that the financial and business risks associated with ‘non-
primary purpose trading’ 2 for profits do not adversely affect their ‘public benefit’ worth
3
(Charity Commission 2007; Charities Act 2006 ). Tension is thus emerging in charities
between the need to maintain a strong strategic position anchored in their charitable purposes,
preserving their core values and traditions, and being able to respond effectively to the
transient demands of their external environment (Chew and Osborne 2007, 2008a).

Despite the growing interest and debate on the social enterprise movement in VCOs, there is a
lack of empirical research into understanding the impact of social enterpreneurialization on
British charitable organizations and the effects hybrid organizational forms have on their
traditional core values and strategic positioning, in particular those that have adopted new
organizational forms in pursuit of their social enterprise activities. Hasenfeld and Gidron’s
(2005) four attributes of hybrid voluntary organizations suggest similarities between these
entities and ‘pure’ VCOs, e.g. being mission-critical to uphold core values, providing services
to the public or members that express their distinct values, promoting a collective identity,
and developing multiple purposes. However, little is researched about the differences between
sovereign charitable organizations and their hybrid social enterprise subsidiaries, and the
implications that could arise from their relationship. This paper aims to address these gaps. It
presents the initial findings of a study that explores the experiences of four case study
charitable organizations that have established the new legal entity, the CIC, in pursuit of their
social enterprise activities. It examines the key drivers that have influenced charitable
organizations in embarking on formalized social enterprise activities, and identifies

2
UK charity law categorizes charities’ trading activities as ‘primary purpose trading’ and ‘non-primary purpose trading’. The former
category is allowed if the activities contribute directly to the charity’s purpose/objects, while the latter activities are carried out in order to
raise additional funds for the charity rather than directly furthering the charity’s purpose. Profits earned from non-primary purpose trading of
charities are liable for corporate tax (or income tax for charitable trusts) (Charity Commission 2007).
3
The UK Charities Act 2006 was given Royal Assent on 7 November 2006. It updates earlier charity laws in terms of, and among other
things, the classification of charitable purposes, the legal duties of the Charity Commission, controls on public fund raising, and the
introduction of the Charitable Incorporated Organization (CIO). It expands the list of charitable purposes from four to twelv e, and requires
charities to demonstrate ‘public benefit’ in their activities instead of it being inherently assumed previously. Charities established in Scotland
have to satisfy a public benefit test under the Scottish Charities and Trustees Act 2005 (NCVO 2006).

4
implications of adopting hybrid organizational forms on the governance, management and
strategic positioning of CICs and their parent charities.

Following this introduction section, the paper reviews the relevant literature on hybrid
organizational forms and their emergence in third sector organizations in section two. Section
three provides an overview of the social enterprise movement in the UK and among charitable
organizations. The methodology utilized in this study is outlined in section four. Section five
highlights the key findings. The paper concludes with a discussion on the emerging themes
arising from this study and their implications for charitable organizations in public service
provision.

Hybridity and hybrid organizational forms

The terms ‘hybridity’ and ‘hybrid’ have biological and botanical origins. The Webster
Dictionary (1828, cited in Young 1995, p. 6) defines a hybrid as a ‘mongrel or mule; an
animal or pla nt, produced from a mixture of two species’. Darwin’s Origin of Species (1859)
argued that there are degrees of hybridity in biological species/varieties, which develop
according to the rules of natural selection. Unlike Darwin, Young (1995) suggests that the
process of hybridity is not a voluntary one. It implies both a deliberate attempt at disruption
(forcing of a single entity into two or more parts) and a forcing together of unlike living things
(making one from two distinct things) so that it is impossible to detect the hybrid nature of the
resultant entity from its origin. Conscious efforts are however needed to maintain the
distinctiveness of the hybrid entity, if not, it could revert to its original state (Young 1995,
p. 26).

Contemporary literature on organizational hybridity adopts the biological and physiological

metaphors to depict the various ways in which organizations transform themselves into
distinct new entities. However, the literature suggests no consensus in defining hybrid
organizations. There are different ways of conceptualizing hybrid organizational forms and
arrangements depending on the usage in different sectors, different organizations or the
degree of resource dependency (Minkoff 2002; Menard 2006). For instance, Culpan (1993, p.

5
35) suggests that hybrid organizations are ‘theoretical orphans’ because they are
simultaneously a single organizational arrangement and a product of sovereign organizations
that share a common purpose. Hybrids have also emerged due to intersectoral organizational
migration between the third, public and private sectors, e.g. when a non-profit organization
converts to a for-profit entity (Gunn 2004). They can also be formed when a combination of
different sectoral forms is created in one organization (Minkoff 2002), e.g. when a non-profit
social care organization or a public education agency is combined with a for-profit subsidiary.
In the public-private partnership literature, Perry and Rainey (1988) and Koppell (2003)
suggest that hybrid organizations are formal entities created by governments to address
specific public policy purposes, e.g. quasi- governmental agencies are owned in whole or part
by public or private sector organizations, but generate revenue from non-governmental
sources to sustain public services provision. Hybrids have also been conceptualized in the
strategic management literature as alternative organizational arrangements initiated by private
sector organizations (e.g. mergers, acquisitions and joint ventures) to expand the parent
organization’s resources and capabilities, or to bring about strategic renewal in the midst of
environmental opportunities (Borys and Jemison 1993). This latter conceptualization depicts
hybrid organizations as formal arrangements that use resources and governance structures
from more than one organizational form to further the parent organization’s strategic goals.
Other authors have conceptualized hybrid organizations as comprising units with different
service orientations, functional domains and clientele/users (e.g. Ruef 2000; Minkoff 2002).

Despite the variety of definitions offered in the various literatures, there is a thread of
commonality running through them - hybrid organizations are a combination of disparate
elements that represents modes of formal or informal adaptation to environmental uncertainty
(Minkoff 2002, p. 382). As a result of organizational migration there is dynamic overlap and
cooperation between the different sectors/sub-sectors for social, economic and political
purposes (Gunn 2004).

The process of organizational hybridization between market and the state is not a new
phenomenon. It began during the privatization era of public sector organizations in the 1970s,
and accelerated with the New Public Management reform initiatives in the 1990s. Some

6
authors (e.g. Wettenhall) argue that third sector organizations involved in public service
provision tend to demonstrate more hybrid- like characteristics because they occupy the
‘middle-ground’ along a continuum between ‘pure’ public sector organizations at one end and
private sector organizations at the other end (ibid, p. 64). However, the distinctive duality and
complexity of hybrid organizations make them difficult to analyze. They require a multi-
theoretical approach to investigate their creation, goals, boundaries, value creation and
maintenance (Culpan 1993). In the same vein, Kirkert (2001) argues that the hybridity of
voluntary sector organizations challenges the direct application of private sector management
strategies or public management theory to the management of third sector hybrids. Generic
organizational theories take insufficient account of the environmental and structural
differences between ‘ideal-typical’ organizational forms and hybrid organizations (ibid). The
study of new organizational forms would thus benefit from a more grounded research
approach to understand the motivations, patterns and variables that underpin their
development and sustainability (Daft and Lewin 1993). The present study aims to answer this
call by adopting an inductive and interpretive approach to explore the new hybrid
organizational forms emerging in the charitable sector.

Social enterprises as hybrid organizations

There have been various recent attempts by authors in the US, UK and Europe to define social
enterprise. However, the origin of social enterprises is less clear. Social enterprises, like
hybrid organizational forms, could emerge from different sectors such as private, public and
the charitable, voluntary and the wider non-profit sectors. Evers et al. (2002, cited in Bode et
al. 2004) and Evers (2004) argue that social enterprises should be viewed as ‘three-
dimensional’ hybrids, taking up elements of multiple goals and mixed resource structure from
three different spheres – market, state and civil society. The Roberts Foundation Homeless
Economic Development Fund in the US defines social enterprise as ‘a revenue generating
venture founded to create economic opportunities for very low income individuals, while
simultaneously operating with reference to the financial bottom- line’ (Virtue Ventures 2004).
The UK government’s definition suggests that a social enterprise is a business trading for a
social purpose whose surpluses are principally reinvested for that purpose or in the

7
community rather than established to maximize profits for shareholders and owners (DTI
2002).

Other authors have argued that social enterprises emerge predominantly from third sector
organizations (e.g. Borzaga and Defourny 2001; Spear 2001; Alter 2006; Nyssens 2006).
Defourny (2001) depicts third sector social enterprises as newly created independent entities
that are positioned at the crossroads of cooperatives and ‘pure’ non-profit organizations. They
demonstrate hybrid organizational features that distinguish them from strictly for-profit
businesses or predominately social purpose entities. These hybrid features include an
orientation towards producing goods and/or selling services but with an explicit aim of
benefiting the community, undertaking activities of significant economic risk but are directed
towards achieving a social objective, generating profits that are principally reinvested in
pursuit of their social mission, and an autonomous ownership that comprises of wider
stakeholder groups such as emplo yees, users, clients, local community groups and social
investors (Defourny 2004; Defourny and Nyssens 2006). Moreover, using social services
provision as an example, Evers (2005) argues that voluntary and community social enterprises
have emerged from the New Public Management era due to a process of hybridization
between third sector and public sector organizations as various types of public services,
governance mechanisms, networks and markets overlap and intertwine.

Despite the benefits claimed of social enterprise, there could be potential risks and tensions
arising from the hybridization process of third sector social enterprises. The impact of
heterogeneous (and often opposing) goals and accountability to a multiplicity of stakeholders
could result in a clash of operating culture, inequality and clientelism in these entities (Evers
2005). The process of hybridization occur along three key dimensions: plurality in goals,
governance mechanism and resources mix, which have reduced the distinctiveness of third
sector social enterprises in particular for those VCOs that provide public services under
governmental contracts (ibid, p. 745). Moreover, a heightened expectation by dominant
stakeholders (e.g. government funders) on third sector social enterprises to operate in a
businesslike and innovative manner to address social problems and/or to sustain public policy
objectives could raise unrealistic performance standards too early in their organizational

8
development. Spear et al. (2007) highlight that there is a tendency for third sector social
enterprises to emphasize structure and control in their governance mechanisms thereby
hampering entrepreneurial activities. Concerns have also been raised about the risk of
institutional isomorphism in social enterprise hybrids of VCOs that are heavily dependant on
governmental contracts and funding for their survival (e.g. Evers 2008; Bode et al. 2006).
Consequently, neither the traditional non-profit management approach nor the traditional for-
profit approach can adequately accommodate the operating culture of a social enterprise
hybrid, which Borchee (2006) argues is characterized by plurality in goals, a matrix-driven
planning strategy, an empowered decision-making process and a mean-end attitude towards
earned income.

Social enterprise in charitable organizations in the UK

Some forms of social enterprise have been operating in the UK third sector since the mid-
1800s, e.g. cooperatives and community enterprises that used their trading surpluses to
improve the economic situations of their members or disadvantaged neighbourhood groups
(Social Enterprise Coalition 2003). However, there remains no one agreed definition of social
enterprise in the UK despite its historical roots. There have been attempts to identify defined
groupings within the commonly accepted definition of social enterprise in the UK. For
instance, Lloyd (2003) identified distinct groupings of social enterprises that share common
features. They comprise a diverse range of organizational forms such as employee-owned
businesses, credit unions, cooperatives, development trusts, social firms, intermediate labour
market organization, community businesses and charities trading arms – each having
particular environmental and organizational distinctiveness. It is the latter group of social
enterprise that is the focus of this present study.

Several drivers have been cited as causes for the emergence of social enterprise activities
among charitable organizations in the UK, e.g. as a response by them to provide particular
types of public or quasi-public services due to market/state failures (Spear 2004) or a
redefinition of the role of these organizations due to the changing relationship between the
consumer, intermediate structures of civil society and the state (Defourny 2004). Social
enterprise has been hailed as a sustainable means by which charities and other voluntary

9
organizations could combine pursuance of their social purposes with business practices to
effect social change (Alter 2006). They have also been advocated as a vehicle to encourage
social innovation and entrepreneurial behaviour that are directed towards the attainment of
social/charitable goals (Boschee 2006; Nicholls and Cho 2006).

NCVO (2006) observes that social enterprise activities are increasingly driving the UK
voluntary and charitable sector economy since the early 2000s. Whilst voluntary income
(donations and grants) continues to define this sector, earned income (e.g. fees for services,
selling of goods) by charities had increased 46% from a decade ago. This growth contrasted
with a decrease of 9% and 39% in voluntary income and investment income respectively over
the same period (NCVO 2006, p. 65; NCVO 2007, p. 35). Greater economic uncertainty and
increasing competition for voluntary donations and statutory grants/contracts have contributed
to a challenging funding environment for charities in the new millennium. These external
factors have driven charities to increase their earned income and trading activities to generate
additional revenue to sustain their core charitable work (Chew 2006b; NCVO 2004b).

The UK government has arguably been a major driver for the growth of the social enterprise
movement among British VCOs in the new millennium. A governmental Social Enterprise
Strategy was launched in 2002 (DTI 2002). It identified legal, regulatory, financial and other
supporting initiatives at national and local levels to increase the entrepreneurial potential of
VCOs in the delivery of public services. A key milestone was the crea tion of the CIC in 2005.
It is a new legal organizational structure specially designed for charities and other
organizations in the UK that wish to undertake formalized social enterprise activities. A CIC
can be incorporated as one of three legal forms: a private company limited by shares, a private
company limited by guarantee or a public limited company. As a hybrid organization, the
CIC does not have charitable status but it can be a trading subsidiary of a parent charity.
Unlike a private sector organization, a CIC has special features (e.g. an ‘asset lock’, 4 a limit

4
The ‘asset lock’ of a CIC means that if the organization ceases to be a CIC, the remaining assets will be transferred in a way that ensures
that they continue to be retained for community benefit or charitable purposes rather than distributed to members/shareholders or investors.
A CIC can only cease operations by dissolution or by conversion to a charity (DTI 2005).

10
on dividends payable and the ‘community interest test’ 5) that ensure it uses its assets and
revenue for social purposes only (DTI 2004, 2005). At the same time, a CIC can gift-aid 6 any
profits that it generates back to the parent charity for favourable tax benefits. An independent
CIC regulator registers and monitors the activities of the CICs, and administers the
community interest test on them.

There were over 1,900 organizations registered as CICs as at June 2008 (Office of the
Regulator of CICs 2008) an increase of 60 per cent from 2007 (Third Sector 2007). However,
there is limited secondary data as to the number of UK charities have established formalized
social enterprise CICs and the factors that have influenced their decisions to do so due to a
lack of empirical research in this area.

Methodology

An inductive and interpretive research strategy was employed for this study. This approach is
appropriate due to the exploratory nature of the study, its ability to answer the research
questions and because of a lack of empirical research on the social enterpreneurialization of
charitable organizations. Qualitative and quantitative evidence were gathered from four
charitable organizations that have established CICs in order to answer the following
questions:

• What are factors that influence charitable organizations to formally establish social
enterprise activities in the form of the new CICs?
• How are their governance and operational structures similar or different from their
parent charities?
• What effects do the hybrid organizational forms have on the strategic positioning
of the CICs compared to their parent charities that have established formalized
social enterprise activities as their trading subsidiaries?

5
The ‘community interest test’ for CICs is administered by the CIC Regulator who has legal responsibility to confirm that the CIC will
pursue purposes beneficial to the community instead of a restricted group of beneficiaries. The test is whether a reasonable person could
consider the CIC’s activities to benefit the community (DTI 2005).
6
A CIC can gift-aid or donate the profits or surplus from its operating income to the parent charity; it can then claim back tax (rate at 25%
from April 2008) on the donated income from the UK Treasury.

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Using multiple case studies has enabled this study to uncover intimate evidence about a
particular phenomenon from the perspectives of different key actors within the organization
(Yin 2003), while facilitating theory building (Eisenhardt 1989). Due to a lack of publicly
available dataset of charities with CICs in the UK, a three-step approach was followed to
identify four case organizations specifically for this study. A potential list of ten CICs
registered between 2006 and 2007, and that were established as subsidiaries of registered
charities were firstly identified from the register of CICs with the help of the Office of the
Regulator of CICs. Secondary data about these ten CICs and their parent charities were next
gathered using the internet and/or company reports in order to shortlist those cases that were
contrasting in terms of origins, size (annual income and number of paid staff), type of services
delivered and funding mix, and that the CICs were established for social enterprise activities.
These selection criteria had enabled a comparison of findings across the case organizational
contexts while offering a degree of generalizability in the findings (Eisenhardt 1989). Finally,
six shortlisted organizations were invited via email to participate in the research, out of which
four were selected as the final case study organizations.

A case-study protocol and multiple data sources were used to provide data triangulation and
enhance the reliability and validity of findings (Denzin 1978; Yin 2003). The case study
protocol included guidelines on pre- interview communication with participants, use of pro-
formas for the semi-structured interviews, adherence to interview schedules to ensure
consistency in the structure of interviews and data collection. A total of 12 semi-structured
interviews were conducted with key organizational decision- makers (chairman/trustee, chief
executive, strategy directors and managers) in the charities and their CICs. Thematic analysis
of data within each case and analytic comparison of data across cases was conducted to unveil
similarities and differences in the evidence along key themes (Carson et al. 2001; Neuman
2006). At the same time, relevant organizational documents, such as corporate
plans/strategies, annual reports, promotional and communications materials were analyzed for
corroborating or contradictory evidence.

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Profile of the case study organizations
Pseudonyms YouthEnterprise, FaithCare, CultureSports and HealthTrading are used to denote
Case A, Case B, Case C and Case D respectively in order to ensure anonymity and
confidentiality of the case study organizations.

YouthEnterprise is a registered charity that is involved in community services for young

people aged 14 to 25 years in northeast England. It has been involved in social enterprise
activities since its inception in 2000 by providing a coffee bar and alternative education
programmes exclusively for disadvantaged young people in the local area. A CIC was
established as the charity’s wholly-owned trading subsidiary in April 2006 to deliver the
services of the charity, recruit and manage its 22 paid management and operational staff, and
to expand the commercial activities on behalf of the charity. A number of enterprising
projects have been initiated since the CIC was created, such as a social franchising scheme to
expand its coffee bar model to other neighhouring communities, facilities and venue hire, a
community scrap store and an online sales service. In 2006-07, the charity’s total revenue
was £486,000, while the CIC generated £385,000 in operating income, out of which all profits
were gift-aided to the parent charity.

FaithCare is a faith-based charitable trust set up in Wales in 1997. Its CIC was established in
March 2006 to deliver and manage all aspects of the charity’s social enterprise activities, and
to serve its charitable purpose of community development. The CIC’s responsibilities involve
managing the charity’s community centre, a coffee shop, a nursery, the hire of
rooms/facilities, and the employment contracts of 21 paid management and operational staff.
In 2006-07, the charity’s income was £255,000, while the CIC’s operating income was
£210,000. Nearly all its surplus was gift-aided back to the parent charity.

CultureSports is a registered charity set up in April 2007 by a local city council in Scotland to
deliver and promote its cultural and sports activities in the city. At the same time, it has set up
a CIC, which represents the charity’s wholly owned tradin g subsidiary. The CIC undertakes
all non-charitable and commercially orientated activities to generate alternative revenue
streams for the parent charity. The charity delivers a wide range of cultural and sports services
for the local council through a number of contractual agreements, while the CIC manages the

13
charity’s trading activities, such as its retail shops, venue hires, cafes and restaurants, and the
corporate sponsorships of major events. In its first year of operation in 2007-08, the charity’s
operating revenue was £68 million, while the CIC generated an income of just under
£600,000, out of which all profits were gift-aided back to the parent charity.

HealthTrading was established in 2001as a charitable organization of a public sector hospital

trust in the West Midlands to coordinate the fundraising and grant making activities on behalf
of the hospital. The hospital has since become a foundation trust (a for-profit organization) in
mid 2007. The charity pays a service fee to the hospital in a fund raising agreement for the use
of the hospital’s fundraising team in return for achieving specified fundraising targets. In
December 2006, the charity set up a CIC as its wholly owned trading subsidiary to facilitate
the development of its commercial activities for the benefit of both the charity and the
hospital trust. In 2006-07, the charity generated £3 million in voluntary donations, which was
allocated to capital projects and research educational need[s of the hospital. At the time of this
research the first year performance targets of the CIC were still in the process of being
developed.

Key findings

This section presents the key findings from the cross-case analysis, which attempts to answer
the three research questions established for this research.

Factors influencing formalized social enterprise activities

The first research question asks what drivers have influenced charities in embarking on social
enterprise activities and adopting a formal organizational entity for these activities. Tab le 1
summarizes the findings on the relationship between the case study organizations’ social,
economic, legal and strategic positioning rationale, which were initiated by internal or
external influences. A combination of internal and external factors had influenced the
charities in adopting formalized social enterprise activities in the form of the CIC.

14
[i] Meshing of social and economic objectives
A common assertion by researchers is that the motivation of VCOs undertaking social
enterprise activities stems from two primary forces – social and economic (Vidal 2005; Alter
2006). This present study has found empirical evidence to support this assertion. All the
interviewees in case study organizations claimed that their charities have undertaken varying
degrees of ‘enterprising’ activities before the CICs were created. However, establishing a CIC
for their social enterprise efforts epitomized the charity leaders’ readiness to formally
embrace social enterprise in a way that would benefit their charities’ missions in an
economically sustainable way.

“Our vision has been to run our activities sustainably so that the coffee shop pays for itself, the nursery
pays for itself and hiring of the church centre pays for itself. The separation of the charity’s activities
and its social enterprise trading activities in the CIC would enable the church trust to continue
providing its services for the good of the community in a sustainable way” (Charity Chairman –
FaithCare)

15
 Table 1 Drivers for the emergence of formalized social enterprise activities in UK charitable
Organizations

Orientation Internal Drivers External Drivers

Social * Charity’s mission - focus on public * Changing expectations from consumers,

benefit for beneficiaries and the wider
community.
* Ethos and core values – to remain
independent from state and private sector.
Economic * Funding strategy – diversify income
sources to include more commercial/trading
revenue and other investment income.
* Financial/Investment Strategy - reduce
reliance on donations and grants (voluntary
or state provided).
* Sustainable charitable and social
enterprise operations.
Legal * Protection for charity trustees and CIC’s
(social enterprise) Board of Director – need
to have separate entities for charity services
and its commercial/trading activities.
* Preservation of public/charity assets.
* Tax avoidance on profits from trading.
Strategic * Need to restructure to refocus on
positioning charitable mission and service delivery.
* Strengthen the charity’s strategic position
and distinctiveness – by separating its social
enterprise activities, which are subservient
to the charity’s mission and its strategic
position.
* Need to adapt to increasing competitive
funding environment and to take advantage
of new policy and legal developments for
social enterprises.
funders and state on role of VCOs in
community/public service and their
accountability to funders/donors.
* Increasing competition for voluntary
donations and government grant/contracts.
* Government policies/funding initiatives to
encourage social enterprise in VCOs for
public service delivery and community
development.
* Timely introduction of new legal
organizational forms (CIC in 2005 and CIO
in 2008).
* CIC legal features are made for purpose to
encourage charities to increase
commercial/enterprising activities.
- asset lock
- profits reinvested in the parent charity
- limits on dividends
- tax claim from profits donated to the
parent charity
* Combination of external social, economic
and legal influences on the charity’s
strategic planning and positioning (as
summarized in the above drivers).

[ii] Timely introduction

The CIC organizational model has also provided a timely, albeit only available, formal legal
structure at the time of this research for charities to organize their social enterprise activities.
The CIC’s ‘made for purpose’ features, such as its asset lock and the limits on dividends for
investors, have widen the revenue streams for the parent charities through non-charitable and

16
commercial means, while ensuring that these enterprising activities benefited the parent
charity directly.

“The opportunity for us to restructure came because the CIC structure was there. It was made for
purpose and seems to fit with what we wanted to do, which was to trade legally and tax efficiently, but
at the same time make it entirely transparent that our commercial activities are for the benefit of the
charity and not for a n individual” (Charity Chief Executive – HealthTrading)

“When the government created the CIC as a legal form for charities who wish to do more social
enterprise activities, we too advantage of this introduction to restructure our church and its charitable
and trading activities. Took advantage of the introduction of the CIC structure in 2005 to restructure its
church, charitable and trading activities. Our solicitors advised us that this was the best way to go
forward especially when the CIC has special legal features to protect the trust’s assets and the legal
liabilities of the trustees and directors” (CIC Manager – FaithCare)

[iii] Strengthening strategic position

Establishing a formalized social enterprise entity does not imply that the charities were not
previously creative or innovative. It suggests that the charity’s trustees have made a conscious
strategic decision to adapt to an increasingly competitive and challenging external fundraising
environment, whilst taking advantage of a timely public policy development for social
enterprise among VCOs, as elaborated by a case study interviewee below:

“We had looked at other legal options. We could have used a traditional trading subsidiary company
rather than a CIC. However, from a strategic point of view, we needed to demonstrate to the public the
purpose of setting up this CIC, which supports the charitable objectives. It was about investing in
community-based activities in more enterprising ways that had at the heart benefits for the public. It
was very much about establishing and reinforcing public confidence in the cultural and sports activities
of the council, which are now delivered by the charity” (Charity Director – CultureSports)

Interestingly, all interviewees were in agreement that the public benefit test for their charity
and the community test for the CIC’s social enterprise work were crucial to strengthening the
parent charity’s reputation and strategic position, as illustrated by the quotation below:

17
 “For a small charitable organization like ours, we rely on our growing reputation of providing
innovative social enterprise solutions. This helps us to position ourselves as making a difference to
young people in the community” (Charity Chief Executive – YouthEnterprise)

Emerging organizational hybridity in charities with formal social enterprise activities

The second research question deals with the issue of organizational hybridity emerging in
charities that have established formal social enterprise activities. Table 2 compares the key
organizational features of the charities before and after they formalized their social enterprise
activities in their respective CICs. The four case organizations have adopted the CIC structure
to carry out a range of trading activities on behalf of their parent charities. The findings
collectively reveal the emerging hybrid nature of social enterprises with charitable origins.
Four key themes have emerged from the cross-case analysis, which are explained as follows:

[i] Strategic relationship between charitable mission and social enterprise activities
The case studies have uncovered a distinctive synergistic relationship between the parent
charity’s mission and that of its social enterprise activities. The roles and key activities of the
parent charity and its CIC were clearly defined and distinctly different, yet one depended on
the other for their existence and survival. Alter (2006, p. 206) argues that income generation
and social mission are ‘intertwined like DNA in a social enterprise, yet they are not always
equal partners’. The relationship between the charity and its CIC was therefore more complex
and extends beyond resource dependency (Pfeffer and Salancik 1978).

18
 Table 2 Key elements of organizational hybridity in charities with social enterprise activities

Key elements of Before formal social enterprise After formal social enterprise
organizational hybridity activities established in CIC activities established in CIC

Organization of social Organized internally in the * Organized as a separate entity

enterprise activities and
relationship with the charity
Organizational governance
and key decision makers
Services delivered/offered
Main sources of income
Profit/surplus distribution
charity or embedded as the same
entity.
Charity’s board of trustees and
the chief executive. Hierarchical
decision-making.
Focused on charity’s mission
and objectives.
Narrow range – mainly from
grants (government and
voluntary) and donations.
Limited and retained within
charity.
usually as the parent charity’s
wholly-owned trading subsidiary
* Contractual agreements
between parent charity and CIC
to undertake non-charitable
activities or as a
trading/fundraising arm.
Charity’s board of trustees and
CIC’s board of directors.
Interdependent decision-making.
Expanded to include different
types of services/projects that
are directed towards serving the
charity’s objectives.
Expanded range – grants,
donations, trading contracts,
selling services, fee-for services,
sponsorships and promotions
with other organizations
(private, public and other
sectors).
Generating commercial income
from trading operations is the
main role of the CIC, but profits
are gift-aided back to charity.

The previous section has highlighted a meshing of internal and external factors influencing
the charities’ decision to formalized their social enterprise activities in the form of CICs.
Figure 1 shows the relationship between the CIC’s mission and that of its parent charity. The
unique circumstances in which the CICs were created by their parent charities demanded a
mission related orientation in the charities’ social enterprise activities. This orientation
suggests that the CICs had a means-end mission, that is, providing a vehicle to facilitate new
ways of generating income to help sustain the parent charity’s mission/cause. The CIC’s role
was therefore an integral part of the parent charity’s strategic development and not divorced
from it.

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 Figure 1 Relationship between mission of the parent charity and its social enterprise hybrid (CIC)

Mission Centric Mission Related Unrelated to Mission

(Parent Charity) (Social Enterprise CIC)

Charitable motive Means-end motive Profit motive

Social orientation Means-end orientation Economic orientation
Societal values Societal-market values Market values
Mission focus positioning Symbiotic positioning Differentiated positioning

(Adapted: Alter 2006:209)

Being mission related also allowed the CICs to expand their range of activities beyond those
legacy activities that were delegated to them by their parent charities. The CICs and their
parent charities were mutually dependent on each other during the CICs’ early development
years. For instance, physical and human resources were transferred in varying degrees from
the case study charities to their CICs under contractual agreements in return for increased
revenue from the CICs. In addition, some of the case study charities (e.g. YouthEnterprise
and FaithCare) had to provide financial grants to their CICs to meet their operational needs
during the early years of their development. This inter-organizational relationship suggests
that the parent charities could derive benefits from the ‘best of both worlds’ – public
recognition from their charitable status and economic gains from their social enterprise
activities. This symbiotic condition is illustrated in the following quotation:

“We set up commercial projects that are linked to the charity’s services, for example. charity coffee
bar, educational programmes and the scrap stores. We are trying to look strategically at how the
different services and projects can have synergies with the charity’s mission. We don’t want to have the
different things in silos. This is quite a difficult thing to do, but if we can manage this it will be very
beneficial to the both the charity and the CIC ” (CIC Chief Executive – YouthEnterprise)

20
In addition, there was evidence of a more complex tripartite relationship in some case studies
between the charity, its CIC and the main beneficiary. This was especially demonstrated in
charities that were set up by public sector organizations. For instance, a local city council and
a public hospital had established the charities in CultureSports and HealthTrading
respectively. In both of these cases, the main beneficiary and key stakeholder was a public
sector entity who retained ownership of the charity’s physical assets despite its independent
status. This tripartite relationship is highlighted in the two quotations below:

“Having the CIC allows us to be more commercial to generate income, which feeds back into the
charity for public services delivery. The aspirations in the long term is to reduce the level of public
subsidy from the council to the charity, while continuing to provide a range of cultural and sporting
activities for the benefit of the council and the wider communit” (Charity Director – CultureSports)

“The CIC is a trading subsidiary of the charity. It allows the public a mechanism for donating items for
the benefit of the hospital. They will be able to buy branded products of the hospital a nd be involved in
commercial partnerships with us knowing that all proceeds will be donated to the hospital”
(Charity Chief Executive –HealthTrading)

[ii] Organizational governance

Organizational governance refers to the control mechanisms and decision-making powers
within an organization (Bovaird and Löffler 2003). It is about setting and overseeing the
overall strategic direction of the organization, and controlling executive management actions
to satisfy the legal, regulatory and legitimate expectations by stakeholder interests beyond the
organization boundaries (The Cadbury Report 1992; CIPFA 1994; Rhodes 1996).

In all the case study organizations, a volunteer board of trustees governed the parent charity
while a separate board of directors managed the CIC’s activities. This governance mechanism
was established to avoid conflict of interest and ensure autonomy in decision-making. The
legal relationship between the parent charity and its CIC was often through contractual or
service agreements. However, in practice between a third to half of the CIC’s directors were
from the charity’s board of trustees. This arrangement had allowed the parent charity to
maintain an overarching control over the CIC’s strategic development while providing a
degree of flexibility to the CIC to grow its trading activities.

21
The interdependent relationship between the two boards reflected the legal and strategic
relationship between the CIC and its parent charity. The CIC was created by the parent charity
to undertake all non-charitable and commercially orientated activities on its behalf. Profits
generated from the CIC’s trading activities were donated to the parent charity. All the case
study interviewees acknowledged that the emerging relationship and the decision- making
powers between the parent charity and its CIC was a ‘work- in-progress’ at the time of this
study.

“It is important not to stifle innovation and flexibility of the social enterprise and its business. But the
trustees and directors would also need to ensure that the CIC has all the proper systems in place and
not to run before we can walk. At the end of the day, it is still about focusing on the objectives of the
charity that were set out at its inception. However big the CIC and its social enterprise activities
become, they will still be about serving the charity. We want to make sure that we’ve good
communication and transparency in both sides of our operations” (CharityChairman –
YouthEnterprise)

[iii] Diversifying income streams and increasing trading income

The case study interviewees felt that the fund raising environment for voluntary donations and
grants had become increasingly competitive in their charity sub -sectors. Investment income
was also an unreliable source of revenue due to the continuing fragile domestic and global
economies. The CICs had enabled the case study charities to increase their trading/other
enterprising activities, generate a greater proportion of earned income and contribute to the
financial sustainability of the parent organizations’ core charitable missions. However, some
of the CICs in the case studies (e.g. YouthEnterprise and FaithCare) were also involved in
direct delivery of their parent charities’ legacy services through contractual agreements.

“Our charity gets very limited grants from government so we need to develop other income streams to
sustain the charity’s operations, such as trading income, income from services that we provide and
investment income from investors. The CIC structure allows for these income sources to be developed
so that we can be less reliant on grants and donations”. (Charity Chairman – FaithCare)

“Our social enterprise activities have expanded over the years and we have developed new projects
after the CIC was set up. For example, we are now selling things all over the country using the Internet

22
 and we are expanding into other local areas by replicating our successful Coffee Bar model for young
people. This was a legacy project developed in the charity and was actually in the pipeline before the
CIC was set u”. (CIC Chief Executive – YouthEnterprise)

[iv] Key decision makers and cultural change

One distinct difference mentioned by interviewees was the decision- making culture of the
charity’s board of trustees compared to that of the CIC’s board of directors. These two groups
of key decision makers viewed their organizational issues from two contrasting lenses.

The more enterprising and business- like culture of the CICs’ boards of management was in
contrast to that of the charity truste es, who tended to be more conservative and risk adverse in
their strategic decisions. The reasons for this difference stemmed from the contrasting raison
d'être of the two organizations and the responsibilities of the two groups of organizational
leaders. The CICs were set up by their parent charities as trading entities. They could assume
a greater degree of business risk and generate profits from their trading/commercial activities,
which were constrained in their parent charities by charity laws.

In addition, members of the charity board of trustees tended to comprise of volunteers who
were mainly from the voluntary and public sectors. The CIC directors were appointed,
preferably the private sector, for their business management experience and expertise. The
difference in goal priority of the parent charities compared to their CICs was a key reason for
their contrasting governance structures and operating cultures as summed by an interviewee:

“The CIC board tends to be more business-orientated and promotes innovative thinking in the CIC
activities. Whereas the charity board is an overarching board and its views have a wider impact on
both the charity and its subsidiaries. The board of trustees’s reporting format and decision-making
process are orientated around structure and control. The trustees want to make sure that the
governance mechanisms in the CIC are in place and that control procedures are followed properly”
(CIC Director – CultureSports)

A notable tension that had emerged was the clash of culture between the more social-
orientated charity and a business/market-orientated CIC. There was a mixed reaction among
the interviewees about the extent to which this emerging tension could have a negative impact

23
on the traditional core values of the charity. Although all the interviewees agreed that this
tension was expected, half of them felt that there would be an inevitable erosion of the
charity’s voluntary ethos and charitable values as it embarked on formal social enterprise
activities. The core values of the charity should be maintained as a distinguishing feature of
VCOs, which is emphasized in the quotation below:

“There is potential for a clash of culture between the charity side of our organization and the business
side. Because of the way the CIC is structured you often get the business side becoming the stronger of
the two – but you need the board of trustees to ensure that there is a right balance between the
charitable side and the business side of our operations. But, the charitable side of the organization
should not be compromised as it defines who we are” (CIC Manager – YouthEnterprise)

At the same time, a majority of interviewees agreed that this tension could be managed
through effective governance mechanisms and active internal communication. They viewed
this tension as a positive way in which the hybrid nature of the CIC and its symbiotic
relationship with the parent charity evolved over time. However, a bigger challenge
mentioned by them was bringing about a mind-set change in internal stakeholders in adopting
a more enterprising organizational culture and in developing business skills in the charity staff
that had been transferred to the CIC from its parent charity.

“The key challenge is to develop our staff to think more commercially, and to broaden their marketing
and enterprise competences. We need to demonstrate to internal and external stakeholders that we are
not a former public sector organization pretending to be commercial. We are actually an organization
that recognized not just the importance of adopting this commercial-for-social purpose model but that
we have the ambition and desire to develop commercial activities to reinforce the identity of the
charitable organization as a whole” (Charity Director – CultureSports)

Strategic positioning and the influence of formalized social enterprise activities

The third research question explores the strategic positioning of charities that have embarked
on formal social enterprise activities. Chew’s studies (2005, 2006a, 2006b) on the strategic

24
positioning7 at the organizational level of British charities conclude that the core strategic
positions of charities are anchored in their charitable missions, which are highly resistant to
environmental change. Strategic positioning in charitable organizations has been found to be
an emergent process, and the resultant strategic position is embedded in the charity’s mission
helps to avoid mission drift (Chew 2005). Charities adopt either differentiation or focus
(niche) positioning as their core positioning strategy depending on their size, nature of
services delivered and degree of dependency on statutory income compared to voluntary
income. However, charities are able to adapt to external environmental changes by internally
restructuring their positioning dimensions, which are the distinctive ways in which they
differentiate from other charities/providers of similar service. This present study has found
evidence to support these earlier conclusions.

“We now have a mechanism in place where we won’t have mission drift in the charity or the CIC. One
of the reasons why we have adopted the CIC model was because of the legal linkage with the charity
and its mission. The charity’s mission and what it does is unique. Any assets and surpluses in the CIC
go back to the charity, as its parent organization” (Charity Chairman - YouthEnterprise)

However, this present study has also uncovered differences between the parent charities’
strategic positioning and that of their CICs. The parent cha rities have distinctive strategic
positionings, which shared some common features. For instance, smaller parent charities (e.g.
YouthEnterprise and FaithCare) demonstrated focus or niche positioning. They were very
focused on serving a particular target audience/main beneficiary in a particular geographic
area. At the same time, they were able to distinguish themselves by their quality of service,
innovative projects/services, and reputation in their locale.

Differentiation positioning was the dominant core positioning strategy of larger parent
charities (e.g. CultureSports and HealthTrading). They had a wider range of key target
audiences/beneficiaries compared to charities with focus positioning strategies. Their
positioning dimensions included their leadership expertise, wide range of services offered and
unique relationship with public sector agencies. Overall, the core aspects of the parent

7
This study adopts Chew’s (2005:4) conceptualization of strategic positioning at the organizational level as ‘a managerial decision process
of developing a positioning strategy that aims to effectively differentiate the organization from other providers of similar services’.

25
charities’ strategic positioning had remained unchanged after the creation of formalized social
enterprise activities in their CICs.

In contrast to their parent charities, the CICs tended to have weakly defined strategic
positions. Although they shared a common primary role, that is, to act as trading subsidiaries
to facilitate social enterprise activities for the ir parent charity, the CICs lacked distinctive core
positioning strategies and positioning dimensions of their own. Two plausible reasons are
proposed to explain this situation. First, and as explained earlier, the inherent resource
dependency of the CICs on their parent charities during the early years of their development
had resulted in a symbiotic relationship between the two entities. Second, the CICs in this
study were set up only during the past two years. Their strategic positions would require time
to be established.

There was also a mixed response from interviewees about the need for their CICs to develop
unique strategic positions. One third of interviewees felt that establishing the identity and
distinctive competences of the CIC was important for it to enhance its revenue-generating
role. However, two thirds of interviewees believed that their CIC’s strategic position should
be subservient to that of its parent charity. They suggested that underplaying the legal
relationship between the charity and its CIC in marketing communications to external
audiences was crucial to ensuring that the CIC did not develop a more distinctive position that
its parent charity. Moreover, in two of the case studies, namely CultureSports and
HealthTrading, tripartite relationships exist between the parent charity, the CIC and the main
beneficiary. This had compounded the difficulty in establishing a distinctive CIC strategic
positioning. This situation is exemplified in the quotation below.

“Because the CIC is set up to be the trading arm of the charity it is probably important that it doesn’t
develop a unique external identity in terms of donors’ perception. We also don’t promote the charity in
a vacuum or in isolation from the hospital, which is our major beneficiary. I think it is important that
people perceive that when they are supporting the activities of the CIC, which is supporting the charity,
that they are in actual fact supporting the hospital. They don’t need to know the internal relationship
between the CIC, the charity and the hospital. People give to the charity because they want to give to
the hospital and what it is doin”. (Strategic Development Director – CultureSports)

26
 Figure 2 depicts the relationship between organizational adaptation to external environmental
changes and strategic positioning. Hrebiniak and Joyce (1985) argue that the type of core
positioning strategy that organizations adopt and the way they adapt to their external
environment depend on the interplay between strategic choice and environmental
determinism. Organizational adaption is defined as the various ways in which organizations
respond to environmental change, such as through proactive and reactive behaviours (Miles
and Snow 1978) and the result of aligning organizational resources with environmental
conditions (Hrebiniak and Joyce 1985). Environmental determinism refers to the degree to
which organizations are able to respond proactively or react passively to external changes
(ibid). In other words, the reasons (why) an organization adapts to its external environment
influence the way (how) it adapts to those influences.

Figure 2 Organizational adaption and strategic positioning

High
III II (PARENT CHARITY)
Monopoly positioning Differentiation or focus positioning
Maximum choice Differentiated choice
Adaptation by design – prospector Adaptation within constraints -analyzer
Low resource dependency High resource dependency
STRATEGIC
CHOICE

IV (CIC– HYBRID SUBSIDIARY) I

Undifferentiated/unstable positioning Natural selection
Incremental choice Minimum choice
Adaptation by chance – reactor Limited adaptation - defender

Low Uncertain resource dependency Market-driven competition

Low ENVIRONMENTAL DETERMINISM High

(Adapted: Hrebiniak and Joyce 1985: 339)

27
Quadrants I and III in Figure 2 do not strictly apply to the charities or their CICs in this study.
This is because they would unlikely to be operating in a free market-driven competitive
environment that characterizes ‘pure’ for-profit organizations (Quadrant I). Moreover, being
inherently resource dependent on external parties, the parent charities and their CICs tended
to avoid monopolistic positioning strategies (Quadrant III) (Chew 2006a; Chew and Osborne
2008b).

According to Hrebiniak and Joyce (1985), organizations in Quadrant II operate in dynamic or

turbulent external environments and they face demanding exogenous factors, such as political
and regulatory controls, which could affect their strategic decision-making. Organizations in
this quadrant tend to be highly resource dependent on external parties for their survival.
However, they have relatively high strategic choices despite these external constraints
because of their ability to analyze their situations and position themselves strategically using
either focus or differentiation core positioning strategies to distinguish themselves from other
competing organizations (Porter 1980; Miles and Snow 1978). The parent charities in this
present study would fit into this quadrant. They operated in a highly regulated charitable
sector in terms of their governance, income generation and accountability to the charity
regulators for their public benefit worth. Despite these constraints, the charity leaders had
demonstrated strategic foresight and were able to develop distinctive strategic positions for
their organizations. These charities have adapted to their external environment, in particular,
by restructuring their resources and capabilities into a new entity (the CIC), and in so doing,
became pioneers in the development of formalized social enterprise among UK charitable
organizations.

In contrast, the CICs in this study would fit in quadrant IV in Figure 2. Organizations in this
quadrant are characterized by having relatively low strategic choice and low environmental
determinism. They adapt to their relatively benign external environment in a reactive manner
or through a process of ‘muddling through’ (Lindblom 1959; Hrebiniak and Joyce 1985). The
strategic positions of organizations in this quadrant tend to be undefined or weakly defined.
This unstable position would force them to seek mo vement to a more stable operating domain
(Porter 1980). They could do this by developing their internal capabilities and competences,

28
thereby taking advantage of environmental opportunities more proactively. As explained
earlier in this paper, the CICs’ weakly defined strategic positions were possibly due to their
embryonic stage of organizational development at the time of this study. Their intimate
relationship with the parent charities had provided them with a resource base upon which they
could develop their competences during this developmental stage.

However, this resource dependency could curtail the CICs’ strategic positioning
developmental efforts. For instance, the interviewees in FaithCare and HealthTrading have
stressed that their CICs’ distinctive identities should be subservient to those of the parent
organizations, and communicating the CICs’ strategic positions to external audiences should
be controlled. According to Hrebiniak and Joyce (1985), the weak strategic positions of
organizations in Quadrant IV (Figure 2) are unstable for strategic decision- making. Therefore,
CICs operating in this environment would need to establish more distinctive strategic
positions and to seek movement to other favourable conditions, such as in Quadrant II (Figure
2), in order to avoid mission drift. 8 This latter point will be discussed further in the next
section.

Implications of the findings

This paper started on the premise that VCOs in the UK are facing growing pressures to
diversify their income streams in order to sustain their social- centric missions in an
increasingly competitive environment. The findings have revealed efforts by British charities
to adapt to their operating environment by establishing formalized social enterprise activities
in the form of CICs. A combination of internal and external factors was found to motivate
charities in establishing their CICs as a means to complement their public benefit activities.
This study has also found evidence that the social enterprise subsidiaries of charitable
organizations shared common hybrid organizational features. However, there were distinct
differences in organizational features between the CICs and their parent charities, which have
implications for the management of these organizations in general, and their strategic
positioning specifically. This section offers six key themes arising from the findings and

8
Mission drift for charities means a loss of focus on their charitable purpose and prioritizing their activities for dominant funders instead of
serving their users/beneficiaries (Blackmore 2004; Charity Commission 2007; Chew and Osborne 2008b).

29
discusses their implications for the research and practice in social enterprise hybrids with
charitable origins.

First, this study has demonstrated that charities have adopted hybrid organizational forms (e.g.
the CICs) as a planned approach to support their social enterprise strategy in varying degrees
and to adapt to an increasingly competitive fundraising environment. Not all charitable
organizations in the UK have taken the decision to establish social enterprise CICs. This
finding confounds some authors’ assertion (e.g. Brandsen et al. 2005; Evers 2005) that the
emergence of third sector hybrid organizational forms is an inevitable development in the
evolution of VCOs. Charities in this study have made a conscious and voluntary strategic
choice to do so. They have weighed the benefits (e.g. increase in trading activities, growth in
earned income, safeguards to the charity assets and limits on profit distribution to
investors/shareholders) against the potential costs (e.g. clash of operating cultures and mission
drift) of this new organizational form on their sustainability in the longer term.

Menard (2006) argues that the main reasons for creating hybrid organizations by third sector
organizations are to invest in mutual dependence for resources and monitoring environmental
uncertainty. This study has found evidence to support this assertion. However, it has also
uncovered a complex combination of social, political, economic and strategic goals in social
enterprise hybrids of charities, which requires beyond businesslike approaches to manage
(Kirkert 2001). This means that the social enterprise CIC of a parent charity, as aptly
interp reted by one case study interviewee, is not just an economic device ‘to exploit the
charity’s assets and resources for commercial benefits but to enhance and preserve them’. The
governance and management approaches used in CICs would have to take into account not
only administrative and commercial issues but also their impact on the organizations’ social
values, cultures and political domains.

Second, this study has revealed that social enterprise CICs share common hybrid
organizational features, suc h as a means-end orientation towards their mission, a subservient
governance mechanism and a relatively weak strategic positioning, which are distinct from
those of their parent organizations. There were concerns raised by in the case studies that the

30
social enterprise role of the CICs could potentially become more prominent than the
charitable role of their parent charities. How should hybrid social enterprise of charitable
organizations be governed in order to secure cooperation with their parent charity and other
stakeholders without losing the advantage of decentralized decision- making? Interestingly,
this study has found that despite the autonomous decision-making responsibilities ascribed to
the CICs, the parent charities’ boards of trustees maintained an overarching control over their
CICs’strategic direction in practice. The charity trustees controlled the type of
services/trading activities that the CICs should develop in three of the four cases.

Several authors have suggested that external stakeholder representation, such as service users
and beneficiaries, is necessary for the legitimization of VCOs that are involved in public
services (e.g. Greer et al. 2003; Locke et al. 2003). CICs would therefore require governance
mechanisms that extend beyond contractual agreements and hierarchical structures in order to
appropriately reflect the interdependency between the social enterprise hybrid entity and the
parent charities but recognizing the hybrids’ independence as well.

Third, the strategic positioning of social enterprise hybrids of charitable organizations poses
particular challenges. Mission based positioning was evident in the parent charities in this
study. This form of strategic positioning has been found in other charitable organizations that
are involved in public service delivery in earlier studies (e.g. Chew 2006a, Frumkin and Kim
2001). It was suggested in Figure 2 in this paper that the parent charities in this study were
analyzers (Miles and Snow 1978). They tended to be cautious in their decision- making and
relied on a careful evaluation of potential organizational changes that could divert them from
their charitable missions. Their distinctive missions were embedded in strong charitable
values. The core strategic positions and key target beneficiaries of the parent charities have
remained relatively unchanged despite creating formal social enterprise subsidiaries.

However, the strategic positioning of the CICs was less defined. The web of symbiotic and
tripartite relationships between charities and their social enterprise activities has made the
process of establishing the distinctiveness of the CICs less explicit. Figure 2 also suggests that
CICs were reactors due to their lack of resources to take advantage of fortuitous

31
environmental opportunities (Miles and Snow 1978). This unstable condition reflected the
transient nature of the hybrid CICs’ developmental process where their missions, core values
and performance outcomes were still evolving and have yet to be crystallized. A potential risk
arising from this situation is mission drift in the CICs in their developmental years. Charity
leaders would therefore need to be aware of this possibility. However, the unique features of
the CICs (e.g. the asset lock and the community interest test) and its subservience to their
parent charities’ missions could help them avoid mission drift during the formative years of
their social enterprise endeavours.

Fourth, the case studies have surfaced a key challenge faced by the CICs in managing the
tensions arising from an emerging hybrid culture that were partly based on the legacy values
and practices of their parent charities and partly based on their new found enterprise and
economic priorities. Several authors (e.g. Borschee 2006) have highlighted the risk of culture
clash in the hybridization process in third sector social enterprises. Evers (2005: 743) suggests
that the hybridization of third sector social enterprises should be pursued as a ‘coping
strategy’. This means that the CIC leaders would need to be aware of the positive and dark
sides of establishing their corporate identity and core values, which are distinct from those of
their parent charities. At the same time, the charity leaders would need to balance their firm
custodian hold on the CICs by allowing their managers greater independence in building a
successful social enterprise subsidiary.

Fifth, there could be a potential risk of institutional isomorphism in CICs that have been
created by their parent charities predominantly as trading subsidiaries to expand their social
enterprise activities. Institutional isomorphism theory suggests that the greater the dependence
of an organization for resources and legitimacy on another entity, the greater the risk that the
dependent organization will change to become more similar to the resource-rich one
(DiMaggio and Powell 1983). Moreover, the more ambiguous the goals of an organization,
the greater the extent to which it will model other organizations that it perceives to be more
successful. VCOs adapt to their competitive external environment by establishing social
enterprise hybrids (Laville and Nyssens 2004). This hybridization process allows social
enterprise to resist institutional isomorphism because they possess a mixture of owner ship

32
(private, public and voluntary), multiple goals, stakeholders and sources of income, and non-
reliance on state or voluntary income.

The CICs in this study were created to provide a greater diversity of resources and capabilities
(financial, human and knowledge-based) to complement and supplement their parent
charities’ portfolio of competencies. The CICs were at an embryonic stage of development at
the time of this study. However, we could argue that, in practice, the risks of institutional
isomorphism for CICs are remote. The mutual dependency between the CICs and their parent
charities acted as an important buffer for the former to resist reverting to the latter. Moreover,
the modus operandi of the CICs, which had combined social and business-orient ated
approaches to achieve their organizational goals, could prevent them from morphing into the
likes of ‘pure’ private sector enterprises. Yet this study has found that CICs lacked distinctive
strategic positions that had made it difficult for them to effectively differentiate from other
social enterprises that provide similar services. Therefore, establishing strong strategic
positions that are built on their distinctive competences could play a crucial role in helping the
CICs avoid the tendency to model after other trading entities or even private sector firms that
they perceive to be successful in the longer term.

Finally, social enterprise and social entrepreneurship as definitive ways to initiate social
change and to solve major social problems ha ve been the rallying call of practitioners and
governments. Ashton (2007: 28) claims that the CIC offers ‘the best way for communities to
rediscover their heritage of self-sufficiency’ by unifying commercial opportunities and social
purpose. However, is establishing hybrid social enterprise in the form of a CIC the right
model for public service delivery or are there other organizational forms that could be more
appropriate? There were mixed views from the case studies on this point. The legal features of
the CIC were attractive and ‘made for purpose’, which could safeguard the charity’s assets
while allowing the CIC relative freedom to experiment on new enterprising services/ventures.
However, trading for a social purpose may not be appropriate for all types of public or
community services. It would seem that the social enterprise model as a credible means to

33
sustain social change could be less appropriate for certain types of services where the market
demand, generation of social value added and positive externalities 9 are limited (Spear 2004).

It is too early to draw definitive conclusions on this point in the absence of alternative legal
hybrid organizational forms for available to VCOs at the time of this study. What is needed is
a greater level of public awareness and education among VCOs about the contributions of
social enterprise and the role the CIC could play in public service delivery and social change
agendas (Third Sector 2006). This could be achieved through more concerted communication
strategies by social enterprises of VCOs themselves and through external parties who could
benefit from the growth of social enterprise in the UK, such as governmental agencies, the
CIC regulator and third sector coordinating bodies.

Conclusion

This paper has explored the experiences of and discussed the challenges faced by charitable
organizations that have established social enterprise hybrids in the form of CICs within the
wider voluntary and non-profit sector in the UK. The experiences of the case organizations in
this study suggest that a social enterprise hybrid with charitable origins is a special form of
hybrid organization that exhibit distinctiveness in its governance structure, organizational
features and strategic positioning when compared to its parent charities. These experiences
provide useful lessons for other charitable organizations and their stakeholders on the
potential benefits, risks and tensions that could arise in establishing hybrid entities to further
their social enterprise endeavour s.

The charitization of public sector organizations and new organizational forms emerging in
VCOs have led to increasing public confusion over what is meant by the voluntary and
charitable sector (Seddon 2007a, 2007b). The newly created CIC adds to the existing
bewildering array of organizational forms that have been characterized as social enterprises in
the extant literature. Consequently, the boundaries between the voluntary, public and private

9
Positive social externalities are defined here as the positive effects of the actions of one party on the well-being of another party, which are
not regulated by the economic price system (Preston 1993 cited in Laville and Nyssens 2004:315).

34
sectors will continue to blur as more charitable organizations with diverse origins embark on
social enterprise activities and adopt hybrid organizational forms, such as the CIC.

A lack of empirical studies on the hybridization of VCOs that have embarked on social
enterprise activities has necessitated the use of an exploratory and case study methodology for
this initial study. Future research could test the key themes arising from this initial study on a
wider sample of VCOs that have adopted the hybrid CIC organizational form in order to
enhance the validity of the initial findings. For this future research, it will be interesting to
include a quantitative mapping exercise on charities that have established formalized social
enterprise organizational forms compared to those that have not done so in order to develop a
typology of positioning strategies and their relationship with organizational adaptation.
Additionally, a replication study could be conducted in a few years’ time on the same case
study organizations that have participated in this present study. This longitudinal research
would allow for both an examination of how the hybrid organizational features of VCOs have
changed and a comparison of the strategic positioning between the parent charities and their
social enterprise hybrids over time.

35
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