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Eight times a day, the Reverend Bernard McCoy solemnly chants prayer in
Latin in the monastery chapel. He then goes back to his computer and telephone to manage LaserMonks. McCoy and four other monks at The Cistercian Abbey of Our Lady of Spring Bank in Sparta, Wisconsin, sell refilled inkjet and laser printer cartridges from their Internet site and telephone mail order center. LaserMonks offers the refills at prices 30% to 90% lower than offered at retail stores. Says McCoy, You get quality products at great savings. We do good work with the extra income. Plus, the monks pray for you. I dont think Staples ever offered to do that. Sales increased from $2,000 during their first year of business in 2002 to $500,000 in 2003, with a profit of $30,000. After expenses are paid for the business and the monastery, the money pays for everything from a defibrillator for the local fire department to providing free computer training for orphans in Vietnam. Worried about the monasterys not-for-profit status, LaserMonks was established as a profit-making corporation owned by the abbey. According to McCoy, through charitable, legal means, we channel money to the abbey, which is how we dont jeopardize our tax-exempt status. . . . We pay business taxes like everybody else. Responding to the concern that a monastery should not be involved in business activities, McCoy states, Were not selling God; were selling black dust and ink so we can give our profits away to good causes. But you do have to walk a fine line in your marketing and not be offensive to God, yourself, or any other groups that have various relations to divine things.1 LaserMonks is an example of strategic piggybacking, a not-for-profit strategy that is as old as Girl Scout cookies and museum gift shops. Todays not-for-profits are using profit-making ventures as a way to diversify their revenue streams in tight financial times.2 Piggybacking is a way for not-for-profits to earn money in a secondary business activity to support their primary mission, which may be raising orphans or providing a free educational experience. By the mid-1990s, most not-for-profit organizations were turning to strategic management and other concepts from business to ensure their survival. According to Cynthia Massarsky, Deputy Director of the Yale School of ManagementThe Goldman Sachs Foundation Partnership on Nonprofit Ventures, Nonprofits are looking to be more efficient in the way they do

Learning Objectives
After reading this chapter, you should be able to:
{

Identify the types of not-for-profit organizations Explain how sources of revenue influence not-for-profit strategic decision making

Compare and contrast the strategic management of profit-making with notfor-profit organizations Discuss popular strategies being used by not-for-profit organizations

things. By taking a few lessons from the business world, perhaps theyve learned how to operate a little more efficiently.3 This is a significant change from past attitudes because most not-for-profit managers have traditionally felt that business concepts were not relevant to their situation. According to Peter Drucker: Twenty years ago, management was a dirty word for those involved in nonprofit 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 discipline of the bottom line.4 A knowledge of not-for-profit organizations is important if only because they account for an average of 1 in every 20 jobs in nations throughout the world. A study by the Johns Hopkins University Institute for Policy Studies found that in nine countries between 1990 and 1995, nonprofit jobs grew by 23% compared to 6.2% for the whole economy.5 Not-for-profits employ over 25% of the U.S. workforce and own approximately 15% of the nations private wealth.6 In the United States 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, more than 100,000 private and public elementary and secondary schools, and almost 350,000 churches and synagogues, plus many thousands of charities and service organizations.7 Typically, not-for-profit organizations (NFP) include private nonprofit 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 nonprofit or governmental organizations. This, however, is changing. Increasing numbers of not-for-profit organizations are adopting strategic management.

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Other Strategic Issues Scholars and practitioners are concluding that many strategic management concepts and techniques can be successfully adapted for not-for-profit organizations.8 Although the evidence is not yet conclusive, there appears to be an association between strategic planning efforts and performance measures such as growth.9 The purpose of this chapter is, therefore, to highlight briefly the major differences between profit-making and notfor-profit organizations, so that the effects of their differences on the strategic management process can be understood.

C.1

Why Not-for-Profit?
The not-for-profit sector of an economy is important for several reasons. First, society desires certain goods and 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. Paved roads, police protection, museums, and schools are examples of public goods. A person cannot use a private good unless he or she pays for it. Generally, once a public good is provided, however, anyone can use or enjoy it. Certain aspects of life do not appear to be served appropriately by profit-making business firms yet are often crucial to the well-being of society. These aspects include areas in which society as a whole benefits from a particular service but in which a particular individual benefits only indirectly. It is in these areas that not-for-profit organizations have traditionally been most effective. Libraries and museums are examples. Although most people do not visit libraries or museums very often, they are usually willing to pay taxes and/or donate funds to support their existence. They do so because they believe that these organizations act to uplift the culture and quality of life of the region. To fulfill their mission, entrance fees (if any) must be set low enough to allow everyone admission. These fees, however, are not profitablethey rarely even cover the costs of the service. The same is true of animal shelters managed by the Humane Society. Although few people want abandoned pets running wild through city streets, fees charged for the adoption of these animals cannot alone pay the costs of finding and caring for them. Additional revenue is neededin the form of either donations or public taxation. Such public or collective services cannot generate a profit, yet they are necessary for any successful civilization. Which aspects of society are most suited to being served by not-for-profit organizations rather than by profit-making business organizations? This is an issue that governments face when they privatize what has previously been provided by the state. See the Global Issue feature to learn more about this development. A second reason why the not-for-profit sector is important is that a private nonprofit organization tends to receive benefits from society that a private profit-making firm cannot obtain. Preferred tax status to nonstock corporations is given in section 501(c)(3) of the U.S. Internal Revenue Service code in the form of exemptions from corporate income taxes. Private nonprofit firms also enjoy exemptions from various other state, local, and federal taxes. Under certain conditions, these firms also benefit from the tax deductibility of donors contributions and membership dues. In addition, they qualify for special reduced-cost mailing privileges.10 These benefits are allowed because private nonprofit organizations are typically service organizations, which are expected to use any excess of revenue over costs and expenses (a surplus rather than a profit) either to improve service or to reduce the price of their service. This service orientation is reflected in the fact that not-for-profit organizations do not use the term customer to refer to the recipient of the service. The recipient is typically referred to as a patient, student, client, case, or simply the public.

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GLOBAL

issue
WHICH IS BEST FOR SOCIETY: BUSINESS OR NOT-FOR-PROFIT?
{ { { { { {

Many nations throughout the world are attempting to privatize state-owned enterprises to balance their budgets. Privatization is (1) the selling of state-owned enterprises to private individuals or corporations or (2) the hiring of a private business to provide services previously offered by a state agency. The British government, for example, sold British Airways, its state-owned airline, to private investors. In the United States, many city governments now allow private companies to collect and dispose of trashsomething that had previously been done by the city. Problems can result, however, if privatization goes too far. For example, in converting from a communist-oriented, centrally managed economy to a more democratic, freemarket economy, Eastern European countries are finding that profit-making business firms are unable to satisfy all of societys needs. What used to be provided by the state free of charge (but tax-supported) in Russia and other countries may now be provided only for the rich or not at all. The same problem is evident in the United States in the controversies over the provision of health care, retirement benefits, and private versus public education. Some of the aspects of life that cannot easily be privatized and are often better managed by not-for-profit organizations are as follows:

Religion Education Charities Clubs, interest groups, and unions Health care Government

The privatization of state-owned business enterprises is likely to continue globally because most of these enterprises must expand internationally in order to survive in the increasingly global environment. They cannot compete successfully if they are forced to follow inefficient, socially oriented policies and regulations (emphasizing employment over efficiency) rather than economically oriented, international practices (emphasizing efficiency over employment). The global trend toward privatization will probably continue until each country reaches the point where the efficiency of business is counterbalanced by the effectiveness of the not-for-profit sector of the economy. As political motives overcome economic ones, government will likely intervene in that decision.

C.2

Importance of Revenue Source

The feature that best differentiates not-for-profit organizations from each other as well as from profit-making corporations is their source of revenue.11 A profit-making firm depends on revenues obtained from the sale of its goods and services to customers, who typically pay for the costs and expenses of providing the product or service plus a profit. A not-for-profit organization, in contrast, depends heavily on dues, assessments, or donations from its membership, or on funding from a sponsoring agency, such as the United Way or the federal government, to pay for much of its costs and expenses.

SOURCES OF NOT-FOR-PROFIT REVENUE

Revenue is generated from a variety of sourcesnot just from clients receiving the product or service from the not-for-profit. It can come from people who do not even receive the services they are subsidizing. One study of Minnesota nonprofits found that donations accounted for

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almost 40%, government grants for around 25%, and program service fees for about 35% of total revenues.12 In other types of not-for-profit organizationssuch as unions and voluntary medical plansrevenue comes mostly from the members, the people who receive the service. Nevertheless, the members typically pay dues in advance and must accept later whatever service is provided, whether they choose it or not and whether it is what they expected or not. The service is often received long after the dues are paid. In profit-making corporations, there is typically a simple and direct connection between the customer or client and the organization. The organization tends to be totally dependent on sales of its products or services to the customer for revenue and is therefore extremely interested in pleasing the customer. As shown in Figure C1, a profit-making organization (organization A) tries to influence the customer (through advertising and promotion) to continue to buy and use its services. Either by buying or not buying the item offered, the customer, in turn, directly influences the organizations decision-making process. The business is thus market-oriented. In the case of a typical not-for-profit organization, however, there is likely to be a very different sort of relationship between the organization providing and the person receiving the service. Because the recipient of the service typically does not pay the entire cost of the service, outside sponsors are required. In most instances, the sponsors receive none of the service but provide partial to total funding for the needed revenues. As indicated earlier, these sponsors can be

Revenue

The Effects of Sources of Revenue on Patterns of ClientOrganization Influence

FIGURE C1

Source of Revenue 100% Sponsor Generated

Customer/Client Generated 0% (A) Profit-Making Organization (B) Private University (C) Public University (D) Charity, Government Welfare Agency NFP* Organization

Profit-Making Organization

NFP* Organization

NFP* Organization

Customer/ Client (A) Total Funding by Recipient of Service

Sponsor

Client

Sponsor

Client

Sponsor

Client

(B) Heavy Funding by Recipient of Service

(C) Partial Funding by Recipient of Service

(D) No Funding by Recipient of Service

*NFP=Not-for-profit SOURCE: Thomas L. Wheelen and J. David Hunger, The Effect of Revenue Upon Patterns of ClientOrganization Influence. Copyright 1982 by Wheelen and Hunger Associates. Revised 1991. Reprinted by permission.

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the government (using taxpayers money) or charitable organizations, such as the United Way (using voluntary donations). As shown in Figure C1, a not-for-profit organization can be partially dependent on sponsors for funding (organizations B and C ) or totally dependent on the sponsors (organization D). The less money it receives from clients receiving the service or product, the less market-oriented is a not-for-profit organization.

PATTERNS OF INFLUENCE ON STRATEGIC DECISION MAKING

The pattern of influence on an organizations strategic decision making derives from its sources of revenue.13 As shown in Figure C1, a private university (organization B) is heavily dependent on student tuition and other client-generated funds for about 70% of its revenue. Therefore, the students desires are likely to have a stronger influence (as shown by an unbroken line) on the universitys decision making than are the desires of the various sponsors such as alumni and private foundations. The sponsors relatively marginal influence on the organization is reflected by a broken line. In contrast, a public university (organization C) is more heavily dependent on outside sponsors such as a state legislature for revenue funding. Student tuition and other client-generated funds form a small percentage (often less than 40%) of total revenue. Therefore, the universitys decision making is heavily influenced by the sponsors (unbroken line) and only marginally influenced directly by the students (broken line). In the case of organization D, however, 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 and achieve its objectives within the dollar contributions it has received from its sponsors. In contrast to other organizations in which the client contributes a significant proportion of the needed revenue, organization D actually might be able to increase its revenue by heavily lobbying its sponsors while reducing the level of its service to its clients! Regardless of the percentage of total funding that a client generates, the client may attempt to indirectly influence a not-for-profit organization through the sponsors. This is depicted by the broken lines connecting the client and the sponsor in organizations B, C, and D in Figure C1. Welfare clients or prison inmates, for example, 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 recipients 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 and 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 AND TECHNIQUES

Some strategic management concepts can be equally applied to business and not-for-profit organizations, whereas others cannot. The marketplace orientation underlying portfolio analysis, for example, does not translate into situations in which client satisfaction and revenue are only indirectly linked. Industry analysis and competitive strategy are primarily relevant to not-forprofits that obtain most of their revenue from user fees rather than from donors or taxpayers. For example, as hospitals find themselves relying increasingly on patient fees for their revenue, they use competitive strategy to gain advantage versus other hospitals. Smaller not-for-profit hospitals

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stress the high touch of their staff over the high tech of competitors that have better diagnostic machinery. The concept of competitive advantage is less useful to a 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.14 SWOT analysis, mission statements, stakeholder analysis, and corporate governance are, however, just as relevant to a not-for-profit as they are to a profit-making organization.15 Portfolio analysis can be very helpful but is used very differently in not-for-profits than in business firms. (See the section on strategic piggybacking later in the chapter.) As with any corporation, nonprofits usually have boards of directors whose job is to ensure that the paid executive director and staff work to fulfill the organizations mission and objectives. Unlike the boards of most business firms, nonprofit boards are often required, however, to take primary responsibility for strategic planning and fund-raising. Many nonprofits find that a well-crafted mission statement not only helps in finding donors but also in attracting volunteers. Take the example of the mission statement of a local animal shelter:
To shelter and care for stray, lost, or abandoned animals and to responsibly place animals in new homes and enforce animal laws. We are also here to better educate people in ways to be solutions to animal problems, not causes.16

Strategic management is difficult to apply when an organizations output is difficult to measure objectively, as is the case with most not-for-profit organizations. Thus it is very likely that many not-for-profit organizations have not used strategic management because its concepts, techniques, and prescriptions do not lend themselves to situations where sponsors, rather than the marketplace, determine revenue. The situation, however, is changing. The trend toward privatizing public organizations, such as converting subsidized community hospitals to independent (nonsubsidized) status, usually means that the clients/patients pay a larger percentage of the costs. As these not-for-profits become more market oriented (and thus client oriented), strategic management becomes more applicable and more increasingly used.17 Nevertheless, various constraints on not-for-profits mean that strategic management concepts and techniques must be modified to be effective.

C.3

Impact of Constraints on Strategic Management

Several characteristics peculiar to a not-for-profit organization constrain its behavior and affect its strategic management. Newman and Wallender list the following five constraints on strategic management: 1. Service is often intangible and hard to measure. This difficulty is typically compounded by the existence of multiple service objectives developed to satisfy multiple sponsors. 2. Client influence may be weak. Often the organization has a local monopoly, and clients payments may be a very small 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 organizations internal management. Such contributors include fund contributors and government. 5. Restraints on the use of rewards and punishments may result from constraints 1, 3, and 4.18

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It is true that several of these characteristics can be found in profit-making as well as in notfor-profit organizations. Nevertheless, as Newman and Wallender state, the frequency of strong impact is much higher in not-for-profit enterprises.19

IMPACT ON STRATEGY FORMULATION

The long-range planning and decision making affected by the listed constraints serve to add at least four complications to strategy formulation: 1. Goal conflicts interfere with rational planning: Because a not-for-profit organization typically lacks a single clear-cut performance criterion (such as profits), divergent goals and objectives are likely, especially with multiple sponsors. Differences in the concerns of various important sponsors can prevent management from stating the organizations mission in anything but very broad terms, if they fear that a sponsor who disagrees with a particular, narrow definition of mission might cancel its funding. For example, a study of 227 public Canadian hospitals found that more than half had very general, ambiguous, and unquantified objectives.20 According to Heffron, an authority in public administration, The greater openness within which they are compelled to operatethe fishbowl atmosphereimpedes thorough discussion of issues and discourages long-range plans that might alienate stakeholders.21 In such organizations, it is the reduced influence of the clients that permits this diversity of values and goals to occur without a clear market check. For example, when a city council considers changing zoning to implement a strategic plan for the city, all sorts of people (including the press) will demand to be heard. A decision might be made based on pressure from a few stakeholders (who make significant contributions or who threaten to stir up trouble) to the detriment of the community as a whole. 2. An integrated planning focus tends to shift from results to resources: Because notfor-profit organizations tend to provide services that are hard to measure, they rarely have a net bottom line.22 Planning, therefore, becomes more concerned with resource inputs, which can easily be measured, than with service, which cannot. Goal displacement (explained in Chapter 11) becomes even more likely than it is in business organizations.23 3. Ambiguous operating objectives create opportunities for internal politics and goal displacement: The combination of vague objectives and a heavy concern with resources allows managers considerable leeway in their activities. Such leeway makes possible political maneuvering for personal ends. In addition, because the effectiveness of a notfor-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. University administrators commonly say that people will donate money for a new building (which will carry the donors name) but not for other more pressing needs, such as the maintenance of existing buildings. In this situation, powerful department heads might wine and dine the donor, hoping to get the money for their pet projects. This problem is compounded by the common practice of selecting people to boards of trustees/ directors not on the basis of their managerial experience but on the basis of their ability to contribute money, raise funds, and work with politicians. (A major role of a not-for-profit board is to ensure adequate resourcesusually translated to mean fund-raising.24) Directors usually receive no compensation for serving on the board. Their lack of interest in overseeing management is reflected in an overall not-for-profit board-meeting attendance rate of only 50%, compared with 90% for boards of directors of business corporations. This is one reason why boards of not-for-profits tend to be larger than are boards of business corporations. Eckerd College, for example, has a 52-member, extremely passive board of directors.25 Board members of not-for-profit organizations tend to ignore the task of determining strategies and policiesoften leaving that to the

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paid (or sometimes unpaid) executive director. The larger the board, the less likely it is to exercise control over top management.26 4. Professionalization simplifies detailed planning but adds rigidity: In not-for-profit organizations in which professionals play important roles (as in hospitals or colleges), professional values and traditions can prevent the organization from changing its conventional behavior patterns to fit new service missions tuned to changing social needs. This rigidity, of course, can occur in any organization that hires professionals. The strong service orientation of most not-for-profit organizations, however, tends to encourage the development of static professional norms and attitudes. As not-for-profits attempt to become more business-like, this may be changing. One study of Minnesota nonprofits revealed that 29% of the program directors and 15% of the staff had degrees or experience in business administration.27

IMPACT ON STRATEGY IMPLEMENTATION

The five constraining characteristics also affect how a not-for-profit organization is organized in both its structure and job design. Three complications to strategy implementation in particular can be highlighted: 1. Decentralization is complicated: The difficulty of setting objectives for an intangible, hard-to-measure service mission complicates the delegation of decision-making authority. Because of the heavy dependence on sponsors for revenue support, the top management of a not-for-profit organization must be always alert to the sponsors view of an organizational activity. This necessary caution leads to defensive centralization, in which top management retains all decision-making authority so that low-level managers cannot take any actions to which the sponsors may object. 2. Linking pins for externalinternal integration become important: Because of the heavy dependence on outside sponsors, a special need arises for people in buffer roles to relate to both inside and outside groups. This role is especially necessary when the sponsors are diverse (revenue comes from donations, membership fees, and federal funds) and the service is intangible (for instance, a good education) with a broad mission and multiple shifting objectives. The job of a Dean for External Affairs, for example, consists primarily of working with the schools alumnae and raising funds. 3. Job enlargement and executive development can be restrained by professionalism: In organizations that employ a large number 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. Enriching a nurses job by expanding his or her decision-making authority for drug dosage, for example, can cause conflict with medical doctors who believe that such authority is theirs alone. Because a professional often views managerial jobs as nonprofessional and merely supportive, promotion into a management position is not always viewed positively.

IMPACT ON EVALUATION AND CONTROL

Special complications to evaluation and control arising from the constraining characteristics also affect how behavior is motivated and performance is controlled. Two problems, in particular, are often noticed: 1. Rewards and penalties have little or no relationship to performance: When desired results are vague and the judgment of success is subjective, predictable and impersonal feedback cannot be established. Performance is judged either intuitively (You dont seem

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to be taking your job seriously) or on the basis of whatever small aspects of a job can be measured (You were late to work twice last month). 2. Inputs rather than outputs are heavily controlled: Because its inputs can be measured much more easily than outputs, a not-for-profit organization tends to focus more on the resources going into performance than on the performance itself.28 The emphasis is thus on setting maximum limits for costs and expenses. Because there is little to no reward for staying under these limits, people usually respond negatively to such controls. Because of these and other complications, not-for-profits can waste money in many ways, especially on administrative costs and expenses. Because of this, it is becoming increasingly common to calculate ratios comparing total support and revenue with the amounts spent on specific service activities. For example, analysts become concerned when the total spent on the mission of the organization (e.g., community service) is less than 50% of total income received from sponsors and activities. Other rules of thumb are that a not-for-profit should not spend more than 35% on administrative expenses and that the costs of fund-raising should not account for more than 15% of total income.29

C.4

Not-for-Profit Strategies
One of the issues in the strategic management of not-for-profit organizations is the tendency of nonprofits to make program decisions based on a mission rather than on a strategy. Kasturi Rangan points out that many nonprofits dont have a strategy at all; instead, they rally under a particular cause, such as Fight homelessness or Save the children.30 Because that cause is so worthwhile, nonprofits tend to support any program thats even slightly related to the mission, so long as there is money available (at least in the beginning) to support the new program. Without a clear long-term strategy, this will eventually stretch the not-for-profits core capabilities into unintended directions and create a budget with more expenses than revenues. The need to attract additional donors forces not-for-profits to go after grants or donations that fit within their broadly defined mission but only slightly fit their existing capabilities. The problem is that such a grant usually contains restrictions that the funding be spent on a particular program or initiative. Starved for money, not-for-profits accept these restrictions in order to obtain the funding. Because the funds barely cover the direct costs of the additional activity, unanticipated indirect costs force the not-for-profit to look for more funding, each time as a larger, less focused, and more cash-starved organization. The result is an organization with large bureaucratic overhead but not enough professionals to carry out all its programs effectively. This leads to increasing pressure to reduce costs and to use more volunteersboth of which may reduce the quality of service to clients. Professional employees become demoralized because of increasing service demands, less support, and marginal pay raises. The organizations executive director is usually too busy administering a convoluted bureaucracy, dealing with bickering professional employees, and fund-raising to do any serious strategic planning. It is therefore usually left to the board of directors to call a stop to this activity trap. The board must define achievable objectives and propose a strategy to make them happen. It must decide not only what the organization will do but also what it will not do. Given that the primary mission is sacrosanct, the board should develop a narrow operational mission with measurable objectives and a strategy to go with them.31 Once this is done, the organization is free to decide which programs to support and which to curtail. If a not-for-profit organization has established an operational mission and measurable service objectives, it can consider various ways to support its priority programs without having to accept mission-extending donor requirements. Increasingly, not-for-profits are choosing the strategies of strategic piggybacking, mergers, and strategic alliances.

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STRATEGIC PIGGYBACKING
Coined by Nielsen, the term strategic piggybacking refers to the development of a new activity for a not-for-profit organization that would generate the funds needed to make up the difference between revenues and expenses.32 The new activity is typically related in some manner to the not-for-profits mission, but its purpose is to help subsidize the primary service programs. It appears to be a form of concentric diversification, but it is engaged in not as part of the mission but only for its money-generating value. In an inverted use of portfolio analysis, the organization invests in new, safe cash cows to fund its current cash-hungry question marks and dogs. It is a type of social entrepreneurship, in which a not-for-profit organization starts a new venture to achieve social goals. Although strategic piggybacking is not new, it has recently become very popular. As early as 1874, for example, the Metropolitan Museum of Art retained a professional to photograph its collections and to sell copies of the prints. Profits were used to defray the museums operating costs. More recently, various income-generating ventures have appeared under various auspices, from the Girl Scouts to UNICEF, and in numerous forms, from cookies and small gift shops to vast real estate developments. A study by the U.S. General Accounting Office revealed that the amount of funds resulting from income-producing activities of not-for-profits has significantly increased since the 1970s. Hospitals are offering wellness programs, ranging from meditation classes to aerobics. Some 70% of colleges and universities now offer auxiliary services, such as bookstores, conference rooms, and computer centers, as sources of income.33 The American Cancer Society earns millions annually by allowing its name to appear on products sold by private drug companies, such as GlaxoSmithKlines Nicorette chewing gum. The Metropolitan Museum of Art now has 16 stores outside the main museum and a fast-growing web siteall of which generate money. The Baptist Hospital of Nashville, Tennessee, built and operates a $15 million, 18-acre office and training-field complex, which it rents to Nashvilles professional football team. The U.S. Small Business Administration, however, views this money-making activity as unfair competition. The U.S. Internal Revenue Service (IRS) advises that a not-for-profit that engages in a business not substantially related to the organizations exempt purposes may jeopardize its tax-exempt status, particularly if the income from the business exceeds approximately 20% of total organizational revenues. The IRS requires not-for-profits to pay an unrelated business income tax on commercial activities that dont relate to the organizations central mission. So far, not-for-profits are still considered tax exempt if their businesses are staffed by volunteers or if almost all their merchandise is donated. According to Marcus Owens, Director of Tax-Exempt Organizations for the IRS, The ultimate question is should these institutions continue as tax-exempt entities. And its being raised more than ever before.34 This has caused many not-for-profits such as The Cistercian Abbey mentioned earlier to establish two separate entities. Doing all the separate bookkeeping, accounting, and cost allocations can be a bit burdensome, time-consuming and distracting, says Jeffrey Tanenbaum, a lawyer specializing in representing nonprofits.35 Although strategic piggybacks can help not-for-profit organizations self-subsidize their primary missions and better use their resources, according to Nielsen, there are several potential drawbacks.36 First, the revenue-generating venture could actually lose money, especially in the short run. Second, the venture could subvert, interfere with, or even take over the primary mission. Third, the public, as well as the sponsors, could reduce their contributions because of negative responses to such money-grubbing activities or because of a mistaken belief that the organization is becoming self-supporting. Fourth, the venture could interfere with the internal operations of the not-for-profit organization. To avoid these drawbacks, a notfor-profit should carefully evaluate its resources before choosing this strategy. See Strategy Highlight C.1 to see the resources needed for a piggyback.

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STRATEGY

highlight C.1
RESOURCES NEEDED FOR SUCCESSFUL STRATEGIC PIGGYBACKING
Childrens Television Workshop began licensing its Sesame Street characters to toy companies and theme parks, many people criticized it for joining business in selling more things to children. 4. Entrepreneurial attitude: Management must be able to combine an interest in innovative ideas with business-like practicality. 5. Venture capital: Because it often takes money to make money, engaging in a joint venture with a business corporation can provide the necessary startup funds as well as the marketing and management support. For example, Massachusetts General Hospital received $50 million from Hoechst, the German chemical company, for biological research in exchange for exclusive licenses to develop commercial products from particular research discoveries.

Based on his experience as a consultant to not-for-profit organizations, Edward Skloot suggests that a not-for-profit should have five resources before engaging in strategic piggybacking: 1. 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 organizations primary activity. Repackaging the Boston Symphony into the less formal Boston Pops Orchestra created a way to subsidize the deficitcreating symphony and provide year-round work for the musicians. 2. Critical mass of management talent: Enough people must be available to nurture and sustain an income venture over the long haul. This can be very difficult, given that the most competent not-for-profit professionals often dont want to be managers. 3. Trustee support: If the trustees have strong feelings against earned-income ventures, they could actively or passively resist commercial involvement. When the

SOURCE: Reprinted by permission of the Harvard Business Review. From Should Not-for-Profits Go into Business? by E. Skloot, JanuaryFebruary 1983. Copyright 1983 by the Harvard Business School Publishing Corporation; all rights reserved.

The U.S. National Association of College and University Business Officers predicts that within a few years, more than 90% of colleges and universities in the United States will be using strategic piggybacks.37 A similar trend is expected for other not-for-profits that heavily rely on donations and taxpayer support for their revenue.

MERGERS
Dwindling resources are leading an increasing number of not-for-profits to consider mergers as a way of reducing costs through economies of scope and reducing program duplication and raising prices because of increased market power.38 For example, the merger of Baptist Health Systems and Research Health Services created Health Midwest in Kansas City. The New York HospitalCornell Medical Center and ColumbiaPresbyterian Medical Center combined to form the New York and Presbyterian Hospitals Health Care System. Since 1990, more than 45% of U.S. hospitals have been involved in mergers and acquisitions.39

STRATEGIC ALLIANCES
Strategic alliances involve developing cooperative ties with other organizations. Not-for-profit organizations often use alliances as a way to enhance their capacity to serve clients or to acquire resources while still enabling them to keep their identities.40 Services can be purchased and provided more efficiently through cooperation with other organizations than if they were

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PART 6

Other Strategic Issues

done alone. For example, four Ohio universities agreed to create and jointly operate a new school of international business. Alone, none of the business schools could afford the $30 million to build the school. The Collaborative Ventures Program of the Teagle Foundation has given more than $4 million in grants to help colleges set up money-saving collaborations. While only a handful of consortia existed in 1995, by 1998 there were at least 21, representing 125 colleges and universities.41 Strategic alliances and mergers are becoming commonplace among not-for-profit organizations. The next logical step is strategic alliances between business firms and notfor-profits. Already, business corporations are forming alliances 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 and to maintain expensive labs. Such alliances of convenience are being criticized, but they are likely to continue.

End of Chapter SUMMARY

Not-for-profit organizations are an important part of society. Understanding their reasons for existence and their differences from profit-making corporations is therefore important. The lack of profit motive often results in vague statements of mission and unmeasurable objectives. Coupled with a concern for maintaining funding from sponsors, these factors can cause a lack of consideration for the very clients the organization was designed to serve. Programs that have little or no connection with the organizations mission may develop. Nevertheless, not-for-profit organizations are usually established to provide goods and services judged valuable by society that profit-making firms cannot or will not provide. Judging their performance simply on the basis of economic considerations is dangerous because they are designed to deal with conditions under which profit-making corporations could not easily survive.

INFO-BITS

Countries with the highest number of people in prison per 100,000 population are the United States (707), Russia (638), Belarus (554), Kazakhstan (522), Turkmenistan (489), Bermuda (447), Suriname (437), Bahamas (416), Ukraine (416), and South Africa (404).42

Countries with the most hospital beds per 1,000 population are Japan (17.0), Norway (14.0), Russia (13.1), Moldova (12.9), Estonia (12.0), Belarus (11.8), the Netherlands (11.5), Martinique (10.7), Georgia (10.5), and Kirgizstan (10.4).43

DISCUSSION QUESTIONS
1. Are not-for-profit organizations less efficient than profitmaking organizations? Why or why not? 2. How does the lack of a clear-cut performance measure, such as profits, affect the strategic management of a notfor-profit organization? 3. What are the pros and cons of strategic piggybacking? In what way is it unfair competition for not-for-profits to engage in revenue generating activity? 4. What are the pros and cons of mergers and strategic alliances? Should not-for-profits engage in alliances with business firms? 5. A number of not-for-profit organizations in the United States have been converting to profit making. Why would a not-for-profit organization want to change its status to profit making? What are the pros and cons of doing so?

WEB CHAPTER C

Strategic Issues in Not-for-Profit Organizations

C-14

STRATEGIC PRACTICE EXERCISES

1. Read the Global Issue feature in this chapter. It lists six aspects of society that it proposes are better managed by not-for-profit organizations than by profit-making organizations. Do you agree with this list? Should some aspects be deleted from the list? Should other aspects be added? 2. Examine a local college or universityperhaps the one you may be currently attending. What strategic issues is it facing? Develop a SFAS Matrix (see Figure 61) of strategic factors. Is it attempting to use any strategic management concepts? If so, which ones? What sorts of strategies should it consider for continued survival and future growth? Is it currently using strategic piggybacks to obtain additional funding? What sorts of additional piggybacks should it consider? Are strategic alliances with another college or university or business firm a possibility?

KEY TERMS
complication to evaluation and control (p. C-9) complication to strategy formulation (p. C-8) complication to strategy implementation (p. C-9) constraint on strategic management (p. C-7) defensive centralization (p. C-9) institutional advantage (p. C-7) not-for-profit organization (p. C-2) pattern of influence (p. C-6) private nonprofit corporation (p. C-2) privatization (p. C-4) profit-making firm (p. C-4) public governmental unit or agency (p. C-2) public or collective good (p. C-3) social entrepreneurship (p. C-11) strategic piggybacking (p. C-11)

NOTES
1. R. Imrie, Ink Venture Reaps Profits for High-Tech Monks, Des 2. 3. 4. 5. 6.
Moines Register (February 27, 2004), p. 3D; G. Williams, Charity Begins at Work, Entrepreneur (December 2005), p. 40. C. Penttila, Heart of Gold, Entrepreneur (September 2004), pp. 1922. Ibid., p. 22. P. F. Drucker, What Business Can Learn from Nonprofits, Harvard Business Review (JulyAugust 1989), p. 89. The Non-Profit Sector: Love or Money, The Economist (November 14, 1998), pp. 6873. G. Rudney, The Scope and Dimensions of Nonprofit Activity, in The Nonprofit Sector: A Research Handbook, edited by W. W. Powell (New Haven, CT: Yale University Press, 1987), p. 56; C. P. McLaughlin, The Management of Nonprofit Organizations (New York: John Wiley & Sons, 1986), p. 4. M. ONeill, The Third America (San Francisco: Jossey-Bass, 1989). K. Ascher and B. Nare, Strategic Planning in the Public Sector, International Review of Strategic Management, Vol. 1, edited by D. E. Hussey (New York: John Wiley & Sons, 1990), pp. 297315; I. Unterman and R. H. Davis, Strategic Management of Not-for-Profit Organizations (New York: Praeger Press, 1984), p. 2. P. V. Jenster and G. A. Overstreet, Planning for a Non-Profit Service: A Study of U.S. Credit Unions, Long Range Planning (April 1990), pp. 103111; G. J. Medley, Strategic Planning for the World Wildlife Fund, Long Range Planning (February 1988), pp. 4654. J. G. Simon, The Tax Treatment of Nonprofit Organizations: A Review of Federal and State Policies, in The Nonprofit Sector: A Research Handbook, edited by W. W. Powell (New Haven, CT: Yale University Press, 1987), pp. 6798.

11. B. P. Keating and M. O. Keating, Not-for-Profit (Glen Ridge,

NJ: Thomas Horton & Daughters, 1980), p. 21.

12. K. A. Froelich, Business Management in Nonprofit Organiza13.

tions, paper presented to the Midwest Management Society (Chicago, 1995). J. D. Hunger and T. L. Wheelen, Is Strategic Management Appropriate for Not-for-Profit Organizations? in Handbook of Business Strategy, 1989/90 Yearbook, edited by H. E. Glass (Boston: Warren, Gorham & Lamont, 1989), pp. 3.13.8. The contention that the pattern of environmental influence on the organizations strategic decision making derives from the organizations source(s) of income agrees with the authorities in the field. See R. E. Emerson, Power-Dependence Relations, American Sociological Review (February 1962), pp. 3141; J. D. Thompson, Organizations in Action (New York: McGrawHill, 1967), pp. 3031, and J. Pfeffer and G. R. Salancik, The External Control of Organizations: A Resource Dependence Perspective (New York: HarperCollins, 1978), p. 44. M. Goold, Institutional Advantage: A Way into Strategic Management in Not-for-Profit Organizations, Long Range Planning (April 1997), pp. 291293. K. Ascher and B. Nare, Strategic Planning in the Public Sector, International Review of Strategic Management, Vol. 1, edited by D. E. Hussey (New York: John Wiley & Sons, 1990), pp. 297315; R. McGill, Planning for Strategic Performance in Local Government, Long Range Planning (October 1988), pp. 7784. Lorna Lavender, Supervisor of Ames (Iowa) Animal Shelter, quoted by K. Petty, Animal Shelter Cares for Homeless, ISU Daily (July 25, 1996), p. 3. E. Ferlie, The Creation and Evolution of Quasi Markets in the Public Sector: A Problem for Strategic Management, Strategic

7. 8.

14. 15.

9.

16. 17.

10.

C-15

PART 6

Other Strategic Issues 29. J. P. Dalsimer, Understanding Nonprofit Financial Statement: A 30. 31. 32.
Primer for Board Members, 2nd ed. (Washington, DC: National Center for Nonprofit Boards, 1997), p. 17. V. K. Rangan, Loft Missions: Down-to-Earth Plans, Harvard Business Review (March 2004), pp. 112119. Ibid., p. 115. R. P. Nielsen, SMR Forum: Strategic PiggybackingA SelfSubsidizing Strategy for Nonprofit Institutions, Sloan Management Review (Summer 1982), pp. 6569; R. P. Nielsen, Piggybacking for Business and Nonprofits: A Strategy for Hard Times, Long Range Planning (April 1984), pp. 96102. D. C. Bacon, Nonprofit Groups: An Unfair Edge? Nations Business (April 1989), pp. 3334; Universities Push Auxiliary Services to Generate More Revenue, Wall Street Journal (April 27, 1995), p. A1. M. Langley, Nonprofit Hospitals Sometimes Are That in Little but Name, Wall Street Journal (July 14, 1997), p. A1. See also D. Brady, When Nonprofits Go After Profits, Business Week (June 26, 2000), pp. 173178; E. Skloot, Should Not-for-Profits Go into Business? Harvard Business Review (JanuaryFebruary 1983), p. 21; E. Felsenthal, As Nonprofits Add Sidelines, IRS Takes Aim, Wall Street Journal (May 3, 1996), p. B1. C. Penttila, Heart of Gold, Entrepreneur (September 2004), p. 22. R. P. Nielsen, Piggybacking Strategies for Nonprofits: A Shared Costs Approach, Strategic Management Journal (May June 1986), pp. 209211. Universities Push Auxiliary Services to Generate More Revenue (Business Bulletin), Wall Street Journal (April 27, 1995), p. A1. R. A. Krishnan, S. Joshi, and H. Krishnan, The Influence of Mergers on Firms Product-Mix Strategies, Strategic Management Journal (June 2004), pp. 587611. Ibid. K. G. Provan, Interorganizational Cooperation and Decision Making Autonomy in a Consortium Multihospital System, Academy of Management Review (July 1984), pp. 494504; R. D. Luke, J. W. Begun, and D. D. Pointer, Quasi-Firms: Strategic Interorganizational Forms in the Health Care Industry, Academy of Management Review (January 1989), pp. 919. More Colleges Are Opting for Mergers, The (Ames, IA) Daily Tribune (August 12, 1998), p. B3. Pocket World in Figures 2004 (London: Economist and Profile Books, 2003), p. 95. Ibid., p. 83.

18. 19. 20. 21. 22. 23. 24. 25.

26.

27. 28.

Management Journal (Winter 1992), pp. 7997. Research has found that profit-making hospitals have more mission statement components dealing with principal services, target customers, and geographic domain than do not-for-profit hospitals. See R. Subramanian, K. Kumar, and C. C. Yauger, Mission Statements of Hospitals: An Empirical Analysis of Their Contents and Their Relationship to Organizational Factors, Journal of Business Strategies (Spring 1993), pp. 6378. W. H. Newman and H. W. Wallender III, Managing Not-forProfit Enterprises, Academy of Management Review (January 1978), p. 26. Ibid., p. 27. The following discussion of the effects of these constraining characteristics is taken from pp. 2731. J. Denis, A. Langley, and D. Lozeau, Formal Strategy in Public Hospitals, Long Range Planning (February 1991), pp. 7182. F. Heffron, Organization Theory and Public Administration (Upper Saddle River, NJ: Prentice Hall, 1989), p. 132. V. K. Rangan, Lofty Missions, Down-to-Earth Plans, Harvard Business Review (March 2004), pp. 112119. F. Heffron, Organization Theory and Public Administration (Upper Saddle River, NJ: Prentice Hall, 1989), pp. 103115. R. T. Ingram, Ten Basic Responsibilities of Nonprofit Boards, 2nd ed. (Washington, DC: National Center for Nonprofit Boards, 1997), pp. 910. A. C. Smith, Endowment Use Overlooked, St. Petersburg Times (June 23, 2000), p. 3B. Eckerds board was strongly criticized because it had tolerated improper financial practices on the part of the president and had allowed the colleges endowment to dissipate. I. Unterman and R. H. Davis, Strategic Management of Not-forProfit Organizations (New York: Praeger Press, 1984), p. 174; J. A. Alexander, M. L. Fennell, and M. T. Halpern, Leadership Instability in Hospitals: The Influence of BoardCEO Relations and Organizational Growth and Decline, Administrative Science Quarterly (March 1993), pp. 7499. K. A. Froelich, Business Management in Nonprofit Organizations, paper presented to the Midwest Management Society (Chicago, 1995), p. 9. R. M. Kanter and D. V. Summers, Doing Well While Doing Good: Dilemmas of Performance Measurement in Nonprofit Organizations and the Need for a Multiple-Constituency Approach, in The Nonprofit Sector: A Research Handbook, edited by W. W. Powell (New Haven, CT: Yale University Press, 1987), p. 163.

33.

34.

35. 36. 37. 38. 39. 40.

41. 42. 43.