Typically Not-for- Profit organizations include private non- Profit

Corporations (Such as hospitals, institutes, private colleges and organized

charities) as well as Public Governmental Units or agencies (such as
welfare departments, prisons and state universities). Traditionally studies
in strategic management have dealt with profit- making firms to the
exclusion of non-profit or governmental organizations.

Why Not-for- Profit organizations : Because :

(a)Society desires certain goods & services that profit- making firms
cannot or will not provide. These are referred to as public or collective
goods because people who might not have paid for the goods receive
benefits from them.
b) Certain aspects of life do not appear to be served appropriately by
rofit- making business firms yet are often crucial to the well-being of
ociety. These aspects include areas in which society as a whole benefits
rom a particular service, but in which a particular individual benefits
nly indirectly. Example, museum & library.

c ) A private non profit organization tends to receive benefits from

ociety that a private profit- making firm cannot obtain. It gets exemption
rom corporate income taxes & various other central, State & local taxes.
Even the donors to some of these organizations receive tax benefits.
ome state governments provide land at reduced rates.
Importance of Revenue Sources : The Sources of Revenue is the main
base for differentiating NFP from profit- making corporations.

Revenue for profit- making Sale of its goods & services

organization to customers who pay=
(cost & expenses + margin)

Not- for- profit organizations Fees charged from users Membership

Depend on fee, donations, funding from a
sponsoring agency & support from
state or federal government.
The Effects of sources of Revenue on Patterns of Client- organization
influence :

Source of Revenue
100%

Sponsor
Revenue

Generated
50%

Customer/ Client
Generated
0%
(A) (B) (C ) (D)
Profit-making Private Public Charity,
Organization University University Govt. Welfare
Agency
 Patterns of Influence :

Profit- Making NFP* NFP* NFP*

Organization Organization Organization Organization

Customer/ Sponsor Client Sponsor Client Sponsor Client

Client
(A) (B) (C) (D)

Total Funding Heavy Funding Partial Funding No Funding

by Recipient of By Recipient of By Recipient of By Recipient of
Service Service Service Service
The pattern of influence on the organization’s Strategic Decision Making
derives from its Sources of Revenue.

•A private university (organization B) is heavily dependent on student

tuition & other client generated funds for about 70% of its revenue.
Therefore, the students desires are likely to have a stronger influence
(shown by unbroken line) on the university’s decision making than a
the desires of the various sponsors such-as alumni& private
foundations. The sponsor’s relatively influence on the organization i
reflected by a broken line.

•A public university (organization C) in move heavily dependent on

outside sponsors such as a state Legislature for revenue funding
student tuition & other client- generated funds from a small % (< 40
of total revenue. Therefore, the university’s decision making is heav
influenced by the sponsors (unbroken line) & only marginally
influenced directly by the students (broken line)
In the case of organization D, the client has no direct influence on the
organization because the client pays nothing for the services received.
In this situation, the organization tends to measure its effectiveness in
terms of sponsor satisfaction. It has no real measure of its efficiency
other than its ability to carry out its mission & achieve its objectives
the contributions it has received from its sponsors. In contrast to other
organization in which the client contributes a significant proportion of
the needed revenue, organization D actually might be able to increase
its revenue by heavily lobbing its sponsors while reducing the level
of its service to its client.
Regardless of the percentage of total funding that the client
generates, the client may attempt to indirectly influence the not-
for- profit organization through the sponsors. This is depicted by
the broken lines connecting the client & the sponsor in organizations
B, C & D.

Welfare clients or prison inmates may be able to indirectly improve

the services they receive if they pressure government officials by
writing to legislators or even by rioting. Students at public
universities can lobby state officials for student representation on
governing boards.
The key to understanding the management of a not-for-profit
organization is thus learning who pays for the delivered services. If
the recipient of the service pay only a small proportion of the total
cost of the service, strategic managers are likely to be more concerned
with satisfying the needs & desires of the funding sponsors or agency
than those of the people receiving the service. The acquisition of
resources can become an end in itself.
 Usefulness of Strategic Management Concepts & Techniques

Some strategic management concepts can be applied to not-for-profit

organization where as others cannot.

The market place orientation underlying portfolio analysis does not

translate into situations in which client satisfactions & revenue are
only indirectly linked.

Industry analysis & competitive strategy are primarily relevant to not

-for-profits that obtain most of their revenue form user fees rather th
donors or tax payers.
The concept of competitive advantage is less useful to the typical not-
for-profit than the related concept of institutional advantage, which
sets aside the profit-making objective of competitive advantage. A
not-for-profit can be said to have institutional advantage when it
performs its tasks more effectively than other comparable organizations.

SWOT analysis, Mission Statement, Stakeholder analysis & corporate

governance are just as relevant to a not-for-profit as they are to a
profit-making organization.

Portfolio analysis can be very helpful, but is used very differently from
business firms.
NFPs have B.O.D whose job is to ensure that the paid executive
director & staff work to fulfill the organization’s mission & objective
unlike the boards of most business firms, NFP boards are often
required, however, to take primary responsibility for strategic planning
& fund- raising. Many NFPs are finding a well- crafted mission
statement not only helps in finding donors, but also in attracting
volunteers.

Strategic management is difficult to apply when the organizations

output is difficult to measure objectively, as is the case with most NFPs
organization. Thus, it is likely that many NFP organization have not
used Strategic management because its concepts, techniques &
prescriptions do not lend themselves to situations where sponsors,
rather than the market place determine revenue.
But situation are changing, the trend towards privatizing public
organizations means that the client/ customer/ beneficiary pay a
larger percentage of the costs. As these NFPs become more market
oriented, strategic management becomes more applicable & more
increasingly used.
 Impact of Constraints on Strategic Management

Several characteristics peculiar to the NFP organization constrain its

behavior & affect its strategic management Newman & Wallender gives
5 constraints on strategic management.

1.Service is often intangible & hard to measure & there are multi service
objectives to satisfy multiple sponsors.
2.Client influence may be weak often organization has a local Monopoly,
and clients payments may be a very smell source of funds.
3.Strong employee commitments to professions or to a cause may
undermine allegiance to the organization employing them.
4.Resource contributors may intrude on the organization’s internal
management such contributors include fund contributors & govt.
5.Restraints on the use of rewards & punishments may result from
constraints1,3, & 4
 Impact on Strategy Formulation

The long- range planning & decision making affected by the listed
constraints serve to add following complications to strategy formulation:

•Goal conflicts interfere with rational planning :

With multiple sponsors divergent objective & lack of a single clear-cut

performance criterion (such as profits) exists.
Difference in concerns of various important sponsors can prevent
management from stating the organization’s mission in specific or
narrow terms. It finally ends up having very broad mission so as to
include each sponsor’s concern.
A decision might be made based on pressure from a few stakeholders
(who make significant contributions or who threaten to stir up troub
to the determent of the community as a whole
An integrated planning focus tends to shift from results to resources :

As NFPs tend to provide services that are hard to measure, they rarely
have bottom line.
Planning becomes more concerned with resources inputs (can be easily
measured) than with service (can’t be measured)

Ambiguous operating objectives create opportunities for internal

politics & goal displacement. :

The combination of vague objectives &a heavy concern with resources

allows managers considerable leeway in their activities.
Such leeway makes possible political maneuvering for personal ends.
Because the effectiveness of the not-for-profit organization hinges on
the satisfaction of the sponsoring group, management tends to ignore
the needs of the client while focusing on the desires of a powerful
sponsor.
Professionalization simplifies detailed planning but adds rigidity:

In NFPs organizations in which professionals play important roles,

professional values & traditions can prevent the organization from
changing its conventional behavior patterns to fit new service mission
tuned to changing social needs.

The strong service orientation of most NFPs tends to encourage the

development of static professional norms & attitude.
 Impact on Strategy Implementation

The 5 constraining characteristics also affect how a not-for-profit

Organization in both its structure & job design. The complications to
Strategy implementation are :

(a)Decentralization is Complicated :

The difficulty of setting objective for an intangible, hard-to-measure

service mission complicates the delegation of decision-making
authority.

Top management is always alert to sponsor’s view of an organizational

activity because of the heavy dependence for revenue support.
b) Linking pins for external- integration become important :

Because of the heavy dependence on outside sponsors, a special need

rises for people in buffer roles to relate to both inside & outside groups.
This role is necessary when the sponsors are diverse & the service is
intangible with a board mission multiple shifting objective.

) Job enlargement & executive development can be restrained by

professionalism.

In organization that employ a large no. of professionals, managers

must design jobs that appeal to prevailing professional norms.
Professionals have rather clear ideas about which activities are, and
which are not, within their province.
Because a professional often views managerial jobs as non-professional
& merely supportive promotion into a management position is not
always views positively.
Impact on Evaluation & Control :

Constraining characteristics affect how behavior is motivated &

Performance is controlled.

•Rewards & penalties have little or no relation to performance :

When desired results are vague & the judgement of success is

subjective, predictable & impersonal feed back can not be establishe

Performance is judged either intuitively (“You don’t seem to be taking

job seriously”) or on the basis of whatever small aspects of a job can
be measured (You were late to work twice last month)
Inputs rather than outputs are heavily controlled :

Because its inputs can be measured much more easily than outputs,
the not-for-profit organization tends to focus more on the resources
going into performance than on the performance itself.

The emphasis is on setting maximum limits for costs & expenses.

Because there is little or no reward for staying under those limits,
people usually respond negatively to such controls.

Because of these & other complications, NFPs can waste money in many
ways, esp. on administrative costs & expenses. Because of this, it is
becoming increasingly common to calculate ratios comparing total
support & revenue with the amount spent on specific service activities.
Popular Strategies for NFPs
Because of various pressures on NFPs organization to provide more
services than the sponsors & clients can pay for, these organizations are
developing strategies to help them meet their desired service objectives.
In addition to a heavy use of volunteers to keep costs low, NFPs are
choosing the strategies of Piggybacking, Mergers & Strategic Alliances.
Strategic Piggy Backing :
Refers to the development of a new activity for the NFP organization
that would generate the funds needed to make up the difference
between revenue & expenses.

The new activity is related, in some manner, to the NFPs mission, but
its purpose is to help subsidize the primary service programs. It appea
in the form of concentric diversification, but it is engaged in only for
its money-generating value.

Example : Hospitals are offering wellness programs like Meditation &

Aerobics classes.
Universities offer auxiliary services- book stores, canteens, conference
Rooms, computer centers & self financing programmes.
Drawbacks of the strategy :

•Revenue generating venture could actually lose money, esp. in short

run.

•The ventures could subvert, interfere with, or even take over the
primary mission.

•The public, as well as the sponsors, could reduce their contribution

because of negative responses to such Money-grubbing activities or
because of a mistaken belief that organization is becoming self-
supporting

•The venture could interfere with the internal operations of the NFP
organization.
Resources Needed for Successful Strategic Piggybacking
NFPs should have 5 resources before engaging in strategic piggybacking.

•Something to Sell : The organization should assess its resources to

see if people might be willing to pay for goods or services closely
related to the organization’s primary activity.

•Critical Mass of Management Talent : Enough people must be

available to nurture & sustain an income venture over the long haul
This can be very difficult, given that the most competent NFP
professionals often don’t want to be managers.
Trustee Support : If the trustees have strong feelings against feeling
against earned- income ventures, they could actively or passively
resist commercial invdvement.

Entrepreneurial Attitude : Management must be able to combine an

interest in innovating ideas with business like practicality.

Venture Capital : Because it often takes money to make money,

engaging in a Joint Venture with a business corporation can provide
the necessary start- up funds as well as the marketing & management
support.
Mergers : Dwindling resources are leading an increasing number of
NFP to consider mergers as a way of reducing costs.

Strategic Alliance : Involve developing cooperative ties with other

organizations. Alliance are often used by NFP organizations as a way
To enhance their capacity to serve clients or to acquire resources while
Still enabling them to keep their identity. Services can be purchased &
Provided more efficiently through cooperation with other organizations
if they were done alone.
Strategic alliance & mergers are becoming common place among NFP
organizations. The next logical step in strategic alliances between
business firms & NFPs. Already business corporations are forming
alliance with universities to fund university research in exchange for
options on the results of that research.

Business firms find it cheaper to pay universities to do basic research

than to do it themselves. Universities are in need of research funds to
attract top professors & to maintain expensive labs. Such alliance of
convenience are being criticized, but they are likely to continue.