Not for Profit Organization

Concept and Nature of Not for Profit Organization The not for profit sector of an economy is

important for several reasons1. Society desires certain goods and services that

profit making firms cannot or will not provide. These goods are known as public or collective

goods Paved roads, police protection,museums,and

schools are examples of public goods. Once a public good is provided anyone can use

or enjoy it

Certain aspects of life do not appear to be served appropriately by profit making business firms.

These aspects include areas in which society as a whole benefits from a particular service.

2. A private nonprofit organization tends to receive benefits from society that a private profit making firm cannot obtain.

The not for profit organization can get tax advantage from the government tax authorities.

We use term patient,student,client,case or simply the public instead of customer as in profit organizations.

Importance of revenue sources 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 depends heavily on dues,assessments,or donations from its membership, or on funding from a sponsoring agency, 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 products or service from the not for profit.

It can come from people who do not even receive the services they are subsidizing.

The following are the revenue sources1. Donations2. Government grants3. Service fees/ Client charges4. Membership fees/dues5. Sponsors

Patterns of influence on strategic decision making

The pattern of influence on an organization’s strategic decision making derives from its sources of revenue.

A private university (B) is heavily dependent on student tuition and other client generated funds.

The students desires are likely to have a stronger influence on the university’s decision making.

A public university (C) is more heavily dependent on outside sponsors.

Student tuition and other client generated funds from a small percentage of total revenue.

The university’s decision making is heavily influenced by the sponsors and only marginally influenced directly by the students.

The client has the no direct influence on the organization because the client pays nothing for the services received (D).

The organization (D) 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 achieves its objectives within the dollar contributions it has received from its sponsors.

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.

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.

Prentice Hall, 2004 Chapter 13Wheelen/Hunger 9

The Effects of Sources of Revenue on Patterns of Client-Organization Influence

Usefulness of strategic management concepts and techniques

Some strategic management concepts can be applied to not for profit organizations as business organizations

The concept of portfolio approach under which client satisfaction and revenues are linked.

Industry analysis and competitive strategy are primarily relevant to not for profits that obtain most of their revenue from user fees rather than from donors or taxpayers.

A not for profit can be said to have institutional advantage when it performs its tasks more effectively than other comparable organizations.

SWOT, mission statements, stakeholders analysis and corporate governance are relevant as profit organizations.

Portfolio analysis is also used The BOD will prepare the good mission

statement so as to attract donors and volunteers

Limitations of Strategic Management Not profit organizations’ concepts,

techniques and recommendations do not lend themselves to situations where sponsors, rather than the marketplace determine the revenue.

The concept of strategic management will be more useful when these organizations would become more market oriented.

Strategic piggybacking It refers to the development of a new activity that

would generate the funds needed to make up the difference between revenues and costs

The new activity should have any link with the mission

Its primary purpose is to help subsidize the primary service programs.

It likes concentric diversification and is involved in money generating value

It is also social entrepreneurship and not for profit organization starts a new venture to achieve social goals

The End