Friday February 20th 2015

How Nonprofit Strategy is Different


Nonprofits are bombarded with books (and consultants!) presenting a range of approaches to strategy development, many of them in the form of boiler plate templates imported from the for-profit sector. But lest we throw out the baby with the bathwater, let’s acknowledge the value to nonprofits of the traditional for-profit approaches to strategy.




For-profit strategy reminds us of the importance of such concepts as core competencies, markets, and profit margins. Too many nonprofits for far too long eschewed discussions about profitability and market penetration for fear that it might taint the purity of the nonprofit mission (“if I wanted to focus on money, I would have gone to work for a for-profit company”…sound familiar?). Granted, nonprofits are just as capable as any for-profit company of selling out their mission just to stay alive. For both sections, the reality is that strategy does require reasoned and deliberate trade-offs between missions and margins.




But the wholesale application of for-profit strategy to nonprofits is not the solution. Doing so creates the proverbial square peg being forced into the round hole which, we can assume, never works without the modification of one or the other. It is my contention that in order to help nonprofits, the square peg of traditional strategic planning needs to be modified to fit the round hole that is the nonprofit sector.




More to the point, the very nature of nonprofit strategy differs from for-profit strategy because they operate on a different set of basic assumptions. For example:




Nonprofit growth is both driven and constrained by a social mission. The overriding goal of a for-profit company is to stay in business, usually by expanding markets and increasing profits. I am in no way suggesting that for-profits companies are heartless and have no concern for the common good. But for all the social good that may be created by for-profit businesses, the fact remains that they are unencumbered in their desire to shift products and services when a market opportunity presents itself. This is not the case for nonprofits, which operate under the influence of a governor of sorts, its social mission, which keeps the organization from straying too far from its founding purpose.




Nonprofits do not operate within the traditional open market. The reality is that nonprofits exist because the traditional open market exchange between buyer and seller does not work in this setting (ever wonder why for-profit providers don’t compete for the opportunity to serve the homeless?). For example, you will know if there are too many gas stations in your town because the market will let you know. That is, “too many” occurs when there is not enough consumer demand to keep all of the gas stations in business. Whereas consumer demand alone will support a for-profit, a nonprofit must have both client need (e.g., adults in need of literacy skills) and outsiders willing to pay the nonprofit to meet the demand.




It is difficult for a nonprofit to create new market space for itself. This is related to the previous point but warrants additional emphasis. The inability of a nonprofit to survive on the traditional buyer/seller transaction changes the entire strategic equation. An entrepreneur may decide to open a new convenience and attract paying customers through niche offerings, superior quality, or lower prices. But for all the wisdom of the pioneering approach to market expansion, “blue oceans” exist for nonprofits only if those metaphorical waters are populated with potential clients and willing third-party payers.




Bigger is not always better. The economic reality is that many nonprofits lose money on every client served (which is why the traditional market will not support the work and consequently why fundraising is so important). For these nonprofits, reaching more people, a common strategic goal, means losing even more money. Strategic growth, a more appropriate goal, may mean doing less, perhaps for few people, but with greater precision and intensity. Greater mission impact is always better.




Nonprofits flourish by complementing rather than competing. You may dismiss me at this point for my seemingly Pollyannaish views on the purity of the nonprofit motive. But I stand by the assertion that the nonprofit sector is stronger, and individual nonprofits more viable, when each nonprofit is able to identify its place in the larger system – and stay within its lane. This does require that individual nonprofits differentiate themselves from similar providers, much like for-profit companies. But the purpose of differentiation for a nonprofit is not to put the other providers out of business. Rather, nonprofit marketing should be aimed at clarifying to potential clients, funders, and collaborators how its work fills a void or fits in with (i.e., how it complements) the work of others.




In contrast, consider the Apple Corporation. The iPod was not brought to market because no one was providing digital music players Rather, Apple introduced the iPod as a higher-quality, more hip alternative (its means of differentiation) for consumers. Apple’s hope, we can presume, is to sell as many devices as it can to as many people as it can in what is ultimately a zero-sum game (there is a reason the phenomenon is referred to as “stealing market share”). For Apple, differentiation of the iPod is aimed at driving out the competition.




Let me be clear about the last point: I don’t begrudge Apple for doing what it needs to do to increase profits for its shareholders. Further, I believe that some nonprofits are better than others and that a nonprofit that delivers inferior service should go out of business. Indeed, if you believe your agency can serve the homeless better than the current service provider, by all means, you should bid on that contract. But in general, the difference between the actions of a nonprofit and those of Apple is motive: Apple believes it can generate greater profits by diminishing the completion; you believe that the community is served better by an organization that delivers greater mission impact.




Conclusion: What, then, is a nonprofit to do? Is there an approach to strategy that is sensitive to the differences between them and the for-profit businesses? That is the subject of the next article. Stay tuned.