Strategic Issues in Not-for-profit Organizations: Strategic Analysis and Choice

Peter Drucker says: Twenty years ago, management was a dirty word for those involved in non-profit organizations. It meant business and nonprofits prided themselves on being free of the taint of commercialism and above such sordid considerations as the bottom line. Now most of them have learned that nonprofits need management even more than business does, precisely because they lack the disciple of bottom line.

Some Major Facts from US (Early 2000s)

  • Employs over 25% of the U.S. workforce and own 15% of nation’s private wealth
  • US alone in addition to various federal state and local government agencies there are about
    • 10,000 not-for-profit hospitals and nursing homes(84% of all hospitals)
    • 4,600 colleges and universities
    • 100,000 private and public elementary & secondary schools
    • 350,000 churches and synagogues
    • many thousands of charities and service organizations

Nature of Not-for-profit Organizations

  1. Private Not-for-profit Corporations:
    • Hospitals
    • Private Colleges and Institutes
    • Organized Charities
    • Religious Clubs
    • Interest Groups
    • Unions
  2. Governmental Units or Agencies:
    • Welfare Units
    • Prisons
    • State Universities

Why Not-for-profit Organizations

Society desires certain goods and services – referred as public or collective goods that profit making firms can not or will not provide. People who might have paid for them also benefits and those who have not paid for it also benefits. Fohor uthaune kam, sarsafai ko kam, public security, general health, welfare activities, parks, public utility services, etc.

A private not-for-profit organization tends to receive benefits from society that a private profit-making firm can not obtain, certain benefits are:
1. Tax exemptions
2. Subsidies in services
3. Other facilities like Electricity at cheaper rate
4. Land given by Government etc.

Importance of Revenue Model

The feature that best differentiate not-for-profit organizations from each other as well as from profit-making corporations is their sources of revenue. The profit-making firms depends on revenues obtained from the sales of its goods and services to customer, who typically pay for the costs and expenses of providing the product or service plus profit. The Not-for-profit Organization in contrast, depends heavily on dues, assessments, or donations from its membership, or on funding from a sponsoring agency to pay for most of its expenses.

For an Example, We can see Old Age home as a non-profit-making organization. When a profit-making organization has complete focus on customer/consumer, because they are the main source of revenue. While in contrast, for non-profit-making organization, consumer are not the primary focus. Here, customers are not the payers. They get the service but they are not paying. The source of fund is somebody else, but not consumer. The somebody else can be donors, governments etc. Here, the strategic formulation is completely different.

Source of Not-for-profit Organization

Not just from clients receiving product or service, but also from people who do not even receive the services they subsidizing

  • Donation
  • Government Grants
  • Service Fee
  • Other get most of the revenue from members-unions

In this context, relationship between the service seeker and organization is different compared to profit-making organization

Patterns of influence on Strategic Decision Making

Type 1 : Private University (Like KU)– 70% fund coming from student fees (students’ desires likely to have stronger influence)

Type 2 : Public University (TU, Shankardev) – high volume contributed by Government (heavily influenced by fund provider)

Type 3 : Social Organizations (Old age homes) – Organizations where the service receipt does not pay at all (sponsor satisfaction is most important)

Profit-making organization will have to totally focus on the client’s needs , wants, and demands because they are the only sole supplier of the revenue.

Usefulness of Strategic Management Concepts and Techniques

  • Some concepts are equally applicable for both profit seeking and not-for-profit organizations
  • However, Marketplace orientation underlying portfolio analysis, for example, does not translate into situations where client satisfaction and revenues are only indirectly linked
  • Industry analysis and competitive strategy are preliminary relevant to NFPs relying heavily on client (users fees)
    • Use competitive strategy to win over competitors
      • “high touch” Vs. “high tech” ( Hospital)
  • SWOT Analysis, mission statements, stakeholder analysis and corporate governance are just as relevant to profit seekers.
    • Many NFPs are finding well crafted mission statement as mean for attracting donors and volunteers
      • Ex: To shelter and care for stray, lost, or abandoned animals and to responsibility place animals in new homes and enforce animal laws. We are also here to better educate people to be solutions to animal problems, not causes
  • Strategic Management concepts could be difficult to apply if output is difficult to measure- general problem of NFPs

Popular Not-for-profit Strategies

  • Strategic Piggybacking
    • New activity to back revenue, related activity but aim is to subsidize
    • e.g. Cairo Museum allowing the photographers to sell the photos, bookstores or conference rooms in colleges (like in Shankar Dev college), pooja materials sales centre in temple.
    • The revenue generating venture could go to loss, could overshadow the main objective, contributor may reduce donation, or could interfere the internal operation of NFP
  • Mergers-reduction of cost
  • Strategic Alliances – increase capability
Source: Slides from Respected Saroj Sir for Strategic Issues in Not-for-profit Organizations

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