CHAPTER 13

STRATEGIC ISSUES IN
NOT-FOR-PROFIT
ORGANIZATIONS

13.1 Why Not-for-Profit

The not-for profit sector of an economy is important
for several reasons.
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.
A private nonprofit organization tends to receive
benefits from society that a private profit-making
firm cannot obtain. Private non profit 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.

13.2 Importance of Revenue Source

The feature that best differentiates not-for-profit
(NFP) organizations from each other as well as from
profit-making corporations is their source of revenue.
The 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. The 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 sources-not just from clients

receiving the product or service from the NFP. It can come from people
who do not even receive the services they are subsidizing. In profitmaking corporations, there is typically a simple and direct connection
between the customer or client and the organization.

Patterns of Influence on Strategic Decision Making

The pattern of influence on the organizations strategic decision

making derives from its sources of revenue.
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.

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.
Strategic management is difficult to apply when the
organizations output is difficult to measure objectively, as is
the case with most not-for-profit organizations.

Source of Revenue

100%

Sponsor
Generated

Revenue

Customer/Client
Generated
0%

(A)
Profit-making
Organization

(B)
Private
University

(C)
Public
University

Patterns of Influence
Profit-making
Organization

NFP
Organization

Costumer/Client Sponsor
Client
(A)
(B)
Total Funding by
Heavy Funding by
Recipient of Service Recipient of Service

*NFP = Not-forProfit

NFP
Organization

Sponsor

Client

(C)
Partial Funding by
Recipient of Service

(D)
Charity,
Government
Welfare Agency
N F P*
Organization

Sponsor

Client
(D)
No Funding by
Recipient of Service

Figure 13.1 The effects of sources of revenue on

Patterns of Client-Organization Influence

13.3 Impact of Constraints on

Strategic Management
Several characteristic peculiar to the not-for-profit organization
constrain its behavior and affect its strategic management.
Newman and Wallender lust 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
founds.
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 and
government.

Impact on Strategy formulation

The long-range planning and decision making affected by the
listed constraints serve to add least four complications to
strategy formulation.
Goal conflicts interfere with rational planning.
An integrated planning focus tends to shift from results to
resources
Ambiguous operating objectives create opportunities for
internal politics and goal displacement.
Professionalization simplifies detailed planning but adds
rigidity.

Impact on Strategy Implementation

Three complications to strategy implementation in particular
can be highlighted:
Decentralization is complicated
Linking pins for external-internal integration become
important.
Job enlargement and executive development can be
restrained by professionalism.

13.4 Popular Not-for-profit strategies

Strategic Piggybacking

Coined by Nielsen, the term strategic piggybacking refers to the development of a new activity for the not-for-profit organization that would generate the funds needed to make up the difference between revenues and expenses .
Although this strategy is not new, it has recently become very popular.
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. 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.

Mergers
Dwindling resources are leading an increasing
number of not-for-profits to consider mergers as a
way of reducing costs.
Strategic Alliances
Strategic alliances involve developing cooperative
ties with other organization. Alliances are often used
by not-for-profit organizations as a way to enhance
their capacity.
Services can be purchased and
provided more efficiently through cooperation with
other organizations than if they were done alone.

13.5 Global Issues for the 21st Century

The 21st Century global society feature in this chapter

describes how some aspects of society may best be
provided by not-for-profit organizations than bay business
firms.
The U.S. national association of college and university
business officers predicts that within a few years over
90% of colleges and universities in the united states will
be using strategic piggybacks.
In 1995 the president of the united Way of America was
convicted of misusing the charitys money.
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 increasing global environment.
Strategic
alliances
and
mergers
are
becoming
commonplace among not-for-profit organizations.