Week 5 - Assignment: Analyze a Case Study on Supervising Employees and Week 8 - Assignment: Create a Brochure on Organizational Planning

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Home >Business & Finance homework help >Management homework help >Week 5 - Assignment: Analyze a Case Study on Supervising Employees and Week 8 - Assignment: Create a Brochure on Organizational Planning

PART ONE

UNDERSTANDING, ENVISIONING, AND CREATING

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Tschirhart, M., & Bielefeld, W. (2021). Managing nonprofit organizations. ProQuest Ebook Central <a onclick=window.open('http://ebookcentral.proquest.com','_blank') href='http://ebookcentral.proquest.com' target='_blank' style='cursor: pointer;'>http://ebookcentral.proquest.com</a> Created from ncent-ebooks on 2021-10-18 17:29:56.

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CHAPTER ONE

UNDERSTANDING NONPROFIT ORGANIZATIONS

I t all starts with the mission. Nonprofi t organizations have a distinct man-

date to be good stewards of the resources they receive toward the pursuit

of their mission, whether those resources come in as philanthropic dollars,

government contracts and grants, membership dues, or earned income

through revenue-generating activities. In this book we focus primarily on

how nonprofi ts pursue their missions in the general social, cultural, legal,

historical, and economic context of American life. We offer some examples

from other countries and believe much of what we offer is applicable to

international contexts. Still, this is a book about leadership and manage-

ment and thus needs to be embedded in a particular place and time.

The importance of context becomes clear when we look at the compe-

tencies proposed in November 2011 for nonprofi t managers and leaders

by the Non-Profi t Management Education Section of NASPAA (National

Association of Schools of Public Affairs and Administration). Members

of this NASPAA section suggest that students pursuing nonprofi t careers

should be able to apply knowledge and understanding of

1. The history, values, ethics, and philosophies of nonprofi t organizations,

and the need for transparency in nonprofi t management practices to

maintain the public trust

2. The current legal frameworks for operating a nonprofi t organization,

and the process of forming an incorporated nonprofi t organization

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4 Managing Nonprofi t Organizations

3. The fundamental principles and concepts of fi scal management, rev-

enue generation, and fundraising, and the ethical imperative to be a

good steward of the fi nancial resources of the nonprofi t sector

4. The leadership challenges of the sector as they relate to the strategic

management of nonprofi t organizations, which requires integrating

the roles, responsibilities, and relationships of the board of directors,

the executive director, the employees, the volunteers, and all stake-

holders in meeting the mission of the organization

5. The human resource and volunteer management principles necessary

to manage a nonprofi t organization’s core services and functions

6. The standards for accountability, performance measurement, and

program evaluation, and the appropriate techniques for using both

quantitative and qualitative methods to measure the performance of

nonprofi t organizations

The contents of this book can serve as a foundation for these six com-

petency areas. We go beyond building knowledge and understanding in

each area and add additional topics to enhance leadership and manage-

ment capacity. To orient readers and provide a roadmap of what is to come,

we offer a quick overview of each part and chapter.

A Roadmap Through the Chapters

Our comprehensive approach to excelling at managing and leading non-

profi ts is built around competency and curriculum guidelines developed by

NASPAA and by NACC (Nonprofi t Academic Centers Council). A summary

of the NACC guidelines appears in the Appendix, where they are mapped to

the chapters in this book. The six NASPAA competency guidelines have been

given earlier in this chapter. Both NASPAA and NACC recognize the impor-

tance of understanding the historical development of the nonprofi t sector

and its values base. These issues are touchstones for our chapters. We discuss

how ideas about specifi c management and leadership topics evolved over time

and whether or not they are backed up by theory and empirical evidence.

We repeatedly return to the ways in which values infl uence management and

leadership decisions as well as the behaviors of board members, donors, staff,

volunteers, and others, and how all this affects the effectiveness of a nonprofi t.

As a social psychologist and a sociologist, we are steeped in our respec-

tive disciplinary traditions. However, we draw from additional disciplines

as well to introduce readers to source documents and thought leaders for

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Understanding Nonprofi t Organizations 5

the ideas in the book. All our topics and recommendations for practice are

grounded in the academic literature. In choosing our main examples we

made sure that readers would have enough background information and

in some cases even videos for a further exploration of these cases. We also

provide additional learning tools in the form of questions for discussion

and exercises at the end of each of the main content chapters.

In Part One, we discuss understanding, envisioning, and creating non-

profi t organizations. In Chapter One, after this introduction to the book, we

give a general overview of the nonprofi t sector. In Chapter Two we explore

ways to consider the effectiveness of nonprofi ts and encourage ethical behav-

ior among those working within them. We look at multiple dimensions of

organizational effectiveness: goal achievement, resource acquisition, health

and effi ciency of internal processes, stakeholder satisfaction, and ability to

learn and adapt. In Chapter Three we examine topics important to those

interested in establishing a nonprofi t organization and laying an effective

groundwork for future action. We show the many different origins of non-

profi ts. Drawing on the entrepreneurship literature, we consider how people,

capital, and opportunity come together in nonprofi ts to deliver social value.

We also discuss how to make the case for a new nonprofi t, including writing

the business plan. Chapter Four covers options for organizational structure.

We look at formalization, complexity, and other structural elements that infl u-

ence information processing, and we consider possible structural defi ciencies.

In Part Two we turn to strategizing, resourcing, and aligning, because

throughout their existence nonprofi ts should have a mission and a vision

and should acquire and manage resources to pursue them. Chapter Five

covers the formulation of strategy. Topics include the general strategic

orientations that nonprofi ts adopt and the strategic planning process. We

also consider the emergence of strategies in nonprofi ts. Chapter Six cov-

ers resource acquisition. In this chapter we examine the variety of revenue

sources employed by nonprofi ts, including grants, gifts, and earned income.

We discuss philanthropy, addressing types of gifts and donors, as well as

fund development and grant proposal writing. Chapter Seven reviews fi nan-

cial stewardship and management. We outline best practices for policies,

accounting, budgeting, banking, borrowing, fi nancial risk management,

auditing, and fi nancial analysis. Chapter Eight provides knowledge and

tools for effective marketing. We cover the philosophy of and orientations

to marketing, marketing planning, and branding. In addition we explore

options for the pricing, promotion, and distribution of goods and services.

In Part Three we focus on human resources and discuss leading, man-

aging, and delivering the mission. Chapter Nine covers boards and the

broader topic of governance. We discuss the responsibilities of boards, roles

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6 Managing Nonprofi t Organizations

of executive directors in relation to boards, determinants of board effective-

ness, options for board confi gurations and composition, and tools for facili-

tating governance and managing confl ict. Chapter Ten adds leadership and

executive directors to the mix. We explore the basis of leadership and the

responsibilities of executive directors. We also consider nonprofi t founders,

leadership transition, and leadership development. In Chapter Eleven we

turn our attention to strategic human resource management. We look at

ways to measure and build human resource capacity. We then look at human

resource management through the stages of initial involvement, develop-

ment, maintenance, and separation. As a follow-up to Chapter Eleven, in

Chapter Twelve we explore performance as determined by ability and motiva-

tion. We offer tools to increase ability and to enhance motivation to perform.

Our fi nal section, Part Four, covers evaluating, connecting, and adapting

the nonprofi t. We begin with program evaluation in Chapter Thirteen. We

see an effective program evaluation process as key to accountability man-

agement. We review how to prepare for evaluation, choose an evaluation

approach, apply theories of change and logic models, clarify program goals,

and collect data, all with an eye to meeting the practical challenges to effec-

tive evaluation. Chapter Fourteen covers public and government relations. In

this chapter we look at image and reputation, strategic communication, and

the public relations process. We also cover risk assessment and crisis manage-

ment. Focusing on government relations, we discuss lobbying and advocacy.

Chapter Fifteen covers partnerships, alliances, and affi liations. We examine

reasons for collaboration, types of relationships, the collaboration process,

and ways to promote successful collaborations. Chapter Sixteen introduces

readers to models of organizational change and innovation in nonprofi ts,

external and internal drivers of change, and resistance to change. We lay out

strategies for managing change and innovation processes and include ideas

on how to generate innovations. In Chapter Seventeen, our fi nal chapter, we

consider the future of nonprofi t management. We share both our own and

others’ thoughts on trends in the nonprofi t sector and how they may change

nonprofi t management practices. Our goal is to leave readers with ideas on

how they may develop their leadership skills for an ever-changing world.

The Nature of Nonprofi t Organizations

This book is not about management and leadership in general; it is about

management and leadership in the nonprofi t sector. Yet it may not be clear t what we mean by nonprofit, given the many different types of nonprofits in the United States and the alternative terms used to describe the sector.

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Understanding Nonprofi t Organizations 7

Although none of these terms describe the nonprofi t sector completely, each

emphasizes an important aspect of it. The term voluntary sector emphasizesr that the sector benefi ts greatly from the work of volunteers. The sector has

always been rooted in voluntarism and although the degree of voluntary par-

ticipation in service delivery and management varies across the organizational

types in the sector, all have boards of directors and most do not offer any form

of monetary compensation or reimbursement for expenses to board mem-

bers. Independent sector, or rr third sector, emphasizes that the sector is part of nei-rr ther government nor the business sector, although it may have close relations

with both. Not-for-profi t sector emphasizes the distinction from profi t-focused r enterprises. Charitable sector underscores the sector’s role in providing direct r relief to those in need. Philanthropic sector highlights the fact that many organi-r zations in the sector receive charitable donations. Civil society sector emphasizesr that many organizations in the sector are the embodiment of an engaged

group of citizens with a shared interest in improving their communities. Tax- exempt sector points out that these organizations are eligible for exemptionsr from most taxes. These exemptions are granted to promote activities benefi t-

ing the public. Social sector captures the role of the sector in enhancing ther social fabric. Other countries use yet other terms to describe the organiza-

tions that people in the United States call nonprofi ts. Popular names include

nongovernmental organizations (NGOs) ands civil society organizations. Throughout this book, we use the term most commonly used in the

United States, the nonprofi t sector. It does not mean that the organizations in rr the sector cannot make a profi t. Organizational growth may rely on obtain-

ing more resources than are needed to cover current expenses. What the

term nonprofi t stresses here is that these organizations do not exist to maket a profi t to enrich private owners, as businesses do. In fact, nonprofi ts do

not have owners or stockholders who are legally entitled to a share of the

organization’s profi ts. Any profi ts made should be allocated toward the

accomplishment of the organization’s mission.

Diversity in the Nonprofi t Sector

In the United States the common feature of all nonprofi t organizations is

that they qualify for tax-exempt status under the U.S. Internal Revenue

Code.1 Of the close to 1.6 million registered nonprofi ts in the United States,

the majority are public charities, about 1 million. This group, exempt under Section 501(c)(3) of the tax code, includes but is not limited to churches, hos-

pitals, clinics, schools, day-care centers, all manner of human service organi-

zations, museums and theaters, and a variety of neighborhood organizations.

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8 Managing Nonprofi t Organizations

Members of this group have broad public support, rather than funding

from a single source, and are considered public-serving organizations. In g Chapter Three we go into more detail on the qualifi cations an organization

must meet to be classifi ed as a public charity. Public charities employ over

7 percent of the country’s paid workforce.

The U.S. tax code recognizes twenty-fi ve types of nonprofi ts, including

public charities, the most common type. About 100,000 nonprofi ts are clas-

sifi ed as private foundations. These nonprofi ts make grants to support worthy causes and may operate their own programs using funding from a single

source or a small number of sources. Over 500,000 tax-exempt organiza-

tions are classifi ed as other types of nonprofi ts, such as chambers of com-

merce, fraternal organizations, social and recreational clubs, and business

leagues. These nonprofi ts provide valued services and attract resources as

mutual benefi t (member-serving) organizations. Overall in 2009, registered gg nonprofi ts in all Internal Revenue Service (IRS) categories accounted for

9 percent of the wages and salaries paid in the United States.

There is no precise, accurate count of the number of organizations mak-

ing up the U.S. nonprofi t sector. The U.S. government does not require

churches and other religious places of worship to register as nonprofi ts, so it

is diffi cult to get a handle on how many exist. One estimate is that there are

close to 280,000 religious congregations in the country, all eligible for the

benefi ts given to 501(c)(3) nonprofi ts.2 There are also many grassroots orga-

nizations that are not legally incorporated and thus left uncounted. These

may be local, volunteer organizations that have a political change agenda

or that rely on volunteer workers to care for and help others using little

fi nancial capital or physical infrastructure. David Horton Smith suggests that

the nonprofi t sector also contains what he refers to as deviant nonprofi ts,

such as gangs, cults, covens, and quasi-underground organizations such as

the Ku Klux Klan. These organizations operate outside normal conventions

and are not legally recognized or tax exempt, but they are like nonprofi ts

in not being organized to make a profi t.3

A variety of factors account for the existence of this diverse set of orga-

nizations.4 In the early history of the United States, voluntary action was the

primary way things got done in communities. Lacking an extensive govern-

ment and with limited private wealth, citizens voluntarily banded together to

deal with social problems. Some nonprofi ts were established to provide ser-

vices that neither government nor businesses would or could effectively pro-

vide. Nonprofi ts often function in areas where markets are lacking, such as

the provision of food and shelter to those without money to pay for them. In

addition, nonprofi ts provide services that government, with its reliance on

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Understanding Nonprofi t Organizations 9

voter mandates, cannot. For example, nonprofi ts provide public health ser-

vices and education that government is unable to fund with public dollars.

Nonprofits serve a number of other functions. They are an impor-

tant feature of the U.S. political landscape, providing vehicles for com-

bining people’s individual voices and pushing their desires for action.

Advocacy nonprofi ts can be found on all sides of political issues. In this

way they contribute to pluralism in the U.S. political system. Nonprofi ts

may also provide people with places to meet and to relate to others who

share their interests and values. This gives individuals ways to have fun

and to enjoy activities such as sports competitions or cultural festivals. In

this way nonprofi ts contribute to the establishment of social capital and

the solidarity of American society, helping individuals to form bonds of trust

and reciprocity with others. These bonds make it easier for community

members to jointly address matters of common concern. When commu-

nity members trust each other and can rely on each other to help when

needed, joint actions such as community watch programs are more effec-

tive. Nonprofi ts also help with personal development needs. They allow

individuals to express their spirituality, creativity, and altruistic impulses

and to develop social and leadership skills. At their core, nonprofi ts nur-

ture and sustain the values and identities of their participants.

Between September of 2009 and September of 2010, 26.3 percent of

Americans over sixteen years of age volunteered through or for a nonprofi t.

In 2010, nonprofi t organizations received $290.9 billion in charitable con-

tributions (of which $211.8 billion came from individuals). These fi gures

attest to the importance of nonprofits to the social fabric of American

life. Couple this with the fi nancial scope of the nonprofi t sector and non-

profi ts’ importance increases. In 2009, the nonprofi t sector’s share of the

gross domestic product (GDP) was 5.4 percent. In that year, public chari-

ties reported over $1.41 trillion in revenues. They also held $2.56 trillion

in total assets.

Leading and Managing in the Nonprofi t Sector

Leaders and managers of nonprofi ts face a variety of challenges. One of

the most important is to keep the mission in mind in all decision making.

Nonprofi ts must operate to fulfi ll their mission and are limited in their

engagement in activities far afi eld from it. In addition they must keep in

mind that the real owner of a nonprofi t is the public.5 It is the public to

whom they are ultimately accountable. There are no designated sharehold-

ers or owners to please. Nonprofi ts are subject to the claims, and possible

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10 Managing Nonprofi t Organizations

control, of many stakeholders, including donors, clients, board members,

staff, volunteers, government at all levels, and community members. The

expectations of these stakeholders can vary widely and leaders must bal-

ance competing demands.

Lester Salamon and others describe a number of additional challenges.6

Many nonprofi ts face fi scal diffi culties, some starting with government cut-

backs in the 1980s in areas where nonprofi ts were active. Government assis-

tance has became more targeted and tied to stricter requirements. Not all

nonprofi ts experiencing losses in government funding have been able to

offset those losses with growth in private giving or earned income. There

is growing competition as more for-profi ts move into areas traditionally

served by nonprofi ts, such as health care, higher education, and employ-

ment training. The rise of B corporations, which are required to make deci-

sions good for society, not just their shareholders, adds to the continuing

erosion of sector boundaries.7 In addition nonprofi ts are under pressure

from funders who are demanding more evidence that the nonprofi ts they

fund are making a measurable positive impact, with some funders seeing

themselves as investors with rights to infl uence strategic decisions.

The legitimacy of the nonprofi t sector has been challenged on a num-

ber of fronts. One challenge is presented by those who feel this sector is

part of an expanding government welfare state and is serving as an instru-

ment of government. Another comes from those who feel it is too profes-

sionalized and out of touch with those it serves. These criticisms, coupled

with a number of high-profi le scandals, have raised public concerns about

the nonprofi t sector. This confronts nonprofi ts with a distinctiveness impera-s tive.8 Nonprofi ts need to reinforce their identity and their worthiness for

the benefi ts and discretion afforded them.

As this short summary of challenges illustrates, today’s nonprofi t lead-

ers must navigate turbulent waters in the pursuit of their organization’s

mission. As part of a larger network of actors, some with contradictory views

and approaches to pressing social problems, nonprofi ts are shaping our

current reality and our future. Innovations that emerge and are tested in

nonprofi ts will contribute to fundamental debates about what is possible

and how to achieve it or avoid it.

We wrote this book with the sincere hope that it will not only provide

information and tools to enhance the capacity of nonprofi t managers and

leaders but also inspire individuals to consider careers in the nonprofi t

sector. Whether serving in a paid position, as a board member, or as a vol-

unteer, individuals working in the nonprofi t sector have the opportunity to

act on their values and promote their vision for a better world.

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CHAPTER TWO

EFFECTIVE AND ETHICAL ORGANIZATIONS

T he Chicago Association of Neighborhood Development Organizations (CANDO) Tclosed its doors in 2002 after suffering disagreement about its mission, diffi culty TT gaining fi nancial support, and disengagement by its members.1 Even its leaders ques- tioned the need for CANDO by the end of its last strategic planning process. What happened to this organization after almost twenty-three years of serving neighborhood development agencies and advancing policy benefi ting them? On some dimensions the organization was effective. It membership had grown from 20 agencies to over 220. However, this growth may partially explain its downfall as it tried to serve more and more diverse interests. Also, individual member agencies were becoming more powerful, partly due to the successful efforts of CANDO to get them legitimacy and resources. As they became more self-reliant, they had less need for CANDO. Many CANDO members pursued contracts from the City of Chicago, making them reluctant to support CANDO’s efforts to aggressively lobby the city for resources and changes. Over time a new generation of leaders, with less fi re in their bellies for advocacy and community organizing, took charge of CANDO. Expectations for quantifi able results grew, both for CANDO and its member agencies. In the end, CANDO’s lack of focus and expansive, noncontroversial programming left it with apathetic board members, staff, and external stakeholders who lacked the desire to fi ght for its survival.

The Baptist Foundation of Arizona (BFA) closed after over fi fty years in exis- tence, but not due to the apathy of those associated with it. In this case, fraudulent behavior led to fi nes and jail sentences for top leaders. When it fi led for bankruptcy in 1999, BFA had $530 million in liabilities despite its claims of $70 million in assets.

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12 Managing Nonprofi t Organizations

The BFA had been founded as a fi nancial institution that promised market returns to participants entrusting their assets to the nonprofi t to manage. The idea was that BFA would help worthy ministries with resources and expertise while investing par- ticipants’ funds. However, to maintain an attractive facade for participants, it hid its bad loans and debts; misrepresented its certifi cates of deposit, thus harming the fi nancial status of elderly clients purchasing the CDs; used a Ponzi scheme, which allowed early investors to make a profi t but required a continual infl ux of new inves- tors to pay earlier ones; sold only the right to occupy property to elderly clients who thought they were buying the property itself; and inappropriately infl ated the value of properties. At least one inappropriate transaction personally benefi ted specifi c BFA leaders engaged in the activity. Leaders’ unethical efforts to keep the nonprofi t afl oat resulted in losses for many BFA investors.2

◆ ◆ ◆

This chapter addresses the question of what makes a good nonprofi t. Our

opening cases illustrate the diffi culty of ensuring that nonprofi t organiza-

tions are effective and ethical. Multiple stakeholders can pull a nonprofi t

in different directions and lead to compromises that keep it from excelling.

Questions can arise concerning which stakeholders’ interests should have

the greatest priority and how to handle confl icts of interest. A nonprofi t

can experience mission drift. In this chapter we explore how to evaluate

nonprofi ts and avoid these diffi culties.

Nonprofi t organizations directly or indirectly infl uence many aspects of

our lives, including our education, health, spirituality, recreation, security,

news and information, safety, consumer behavior, and housing. Nonprofi ts

make signifi cant contributions to the economic well-being of neighborhoods

through employment and other activities. The tax and other government

benefi ts they may receive are drawn from public resources. Many nonprofi ts

attract philanthropic dollars from individuals and institutions. Some compete

with for-profi t businesses for contracts and clients.

Because of the central role of nonprofi ts in people’s lives and communi-

ties, as well as the government and philanthropic funds they receive, non-

profi ts have a heightened responsibility to operate in an effective and ethical

manner. Nonprofi ts that are seen by stakeholders as acting inappropriately

or ineffectively are unlikely to be able to attract support. Scandals can raise

concerns about the nonprofi t sector as a whole, not just the individual non-

profi ts involved in them.

Given the importance of effective and ethical behavior for nonprofi t

organizations, we use this chapter to set some foundational ideas for

later chapters of the book. First, we examine the multiple dimensions of

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Effective and Ethical Organizations 13

organizational effectiveness, and then we look at the context for ethical

decision making at the personal, professional, organizational, and societal

levels. These overarching views lead to implications for leaders who wish to

ensure that their nonprofi t is perceived as being good as well as doing good.

In later chapters we elaborate on the basic concepts presented here. For

example, in Chapter Thirteen we go into detail on the technical process for

evaluating programs and in Chapter Seven we offer guidance for fi nancial

management to avoid fraud and other unethical behaviors.

Multiple Dimensions for Evaluating Effectiveness

In the simplest terms, effective organizations are the ones that accomplish

their missions. However, there are numerous reasons why this calculation

is often not feasible in evaluating the effectiveness of nonprofi ts. It may be

hard to quantify the achievement of a mission, especially if the nonprofi t’s

purpose relates to intangible quality issues or addresses complex social prob-

lems. It is diffi cult to judge the effectiveness of some nonprofi ts in the short

term. Are nonprofi ts that are attempting to alleviate poverty or fi nd a cure

for cancer ineffective because poverty and cancer have not been eradicated?

Can we determine if a nonprofi t whose mission is to develop youths for pro-

ductive roles in society is effective before these youths become adults? We

may even disagree on what it means to be a productive member of society.

Assessment of nonprofi t organizational effectiveness requires multifaceted

approaches that acknowledge the challenges of achieving complex, diffi -

cult, long-term missions. We also need to recognize that effectiveness assess-

ments may come from multiple stakeholders with different perspectives and

potentially competing interests. What looks like an effective nonprofi t to

one stakeholder may not look nearly as effective to another stakeholder.

We draw from the academic literature to focus on fi ve general and

complementary approaches to judging effectiveness that can help non-

profi t leaders identify their organization’s strengths and weaknesses.3 The

fi rst, the goal accomplishment approach, examines organizational outputs.

The second, the resource acquisition approach (sometimes called the sys-

tem resource approach) focuses on inputs needed by the organization. The

third, the internal processes approach, assesses the health and effi ciency

of internal dynamics as inputs are transformed into outputs. The fourth,

the stakeholder approach, looks at the satisfaction of stakeholders inside

and outside the organization. The fi fth approach examines how well the

organization adapts over time.

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Goal Accomplishment

One approach to evaluating a nonprofi t is to consider how well it meets

or exceeds its goals. Goals may be set to encourage a certain level of outputs,

such as number of clients served, programs delivered, or service sites added.

Unlike the business sector, which can comfortably use profi t as a metric for

success, the nonprofi t sector should be careful to treat the amount of revenue

generated or donations received as an input, not a goal.4

In the case of CANDO, the nonprofi t was a victim of its own success in

reaching its early goals to bring more resources for neighborhood develop-

ment activities to its member organizations and to increase its number of

members. As the members became more diverse and less dependent on

CANDO, their motivation to support the nonprofi t diminished. CANDO

struggled to set new goals and fi nd ways to measure its success in reaching

them. Members disagreed on CANDO advocacy goals, given their desire to

avoid offending the City of Chicago in order to preserve the city’s goodwill

toward their own organizations. In the end CANDO was unable to demon-

strate that it should be kept alive.

Achievement of goals may not indicate achievement of mission. If goals

are set and rewards tied to them, staff may change their behavior to achieve

the goals and even compete against one another, ignoring the more fun-

damental mission, and ultimately resulting in the folly of achieving one

outcome while hoping for another.5 For example, a nursing home’s goals

to build a new facility and expand its number of beds may be met, but

the emphasis placed on expansion may undermine the home’s mission

of providing high-quality care to its current patients. Teachers’ desire to

meet goals set for student satisfaction ratings may result in teachers who

are popular but students who are not well educated.

A nonprofi t should set goals that are highly likely to align with its mis-

sion. Chapter Thirteen offers a logic model approach that can be helpful

in linking goal-related outputs to mission-related outcomes. We recom-

mend that goals be

• Measurable. There should be clear evidence available to show whether or not a goal has been met. A goal to provide households with educa-

tional materials on nutritious diets is easily measureable, but a goal to

change eating behaviors of members of those households is not mea-

sureable without extensive research.

• Time bounded. It should be clear how long the nonprofi t has to achieve the goal. For example, a goal to reduce obesity among young adults cannot

be accomplished in a day or even a week. The timeline should be realistic.

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Effective and Ethical Organizations 15

• Accepted. Goals need to be clearly understood and accepted by those held accountable for their achievement as well as by those who will be

using goal achievement to judge a nonprofi t’s effectiveness. Consensus on

goals can be achieved through strategic planning and performance review

processes, as discussed in Chapters Five and Thirteen.

• Challenging but feasible. When goals are too easy or impossible, they are unlikely to be taken seriously by stakeholders. A classic goal statement is

President John F. Kennedy’s address to Congress announcing the goal

of sending a man to the moon and back before the end of the decade.

Another example of the power of challenging but feasible goals is found in

the achievements of the March of Dimes, an organization that started with

a mission to eradicate polio and that then, when that goal was reached,

set a less concrete but more ambitious goal of preventing birth defects.

• Prioritized. Setting parameters on how to pursue multiple goals helps to make clear the policies and codes of conduct that are not to be vio-

lated and the resources that will be available for the pursuit of certain

goals versus others. For example, a foundation may set a goal to build

the capacity of youth-serving nonprofi ts through its grantmaking but

may also limit its reach to a specifi c geographical area or to what can be

funded after other program priorities are addressed.

Resource Acquisition

In addition to looking at goal-related outputs, a nonprofi t can evaluate

effectiveness in terms of the extent to which it has acquired the inputs

needed to accomplish its mission. Following are examples of types of inputs

that nonprofi t leaders may wish to use as partial indicators of effectiveness:

• Human resources: number and quality of staff, volunteers, and board members

• Financial resources: number and size of donations, grants, contracts, and sponsorships

• Capital resources: facilities, equipment, and materials

• Knowledge resources: expertise, information from needs assessments and evaluations, and consulting services

• Program resources: participants, waiting lists, referrals, collaborators, partners, technology, programs, and products

• Community-based resources: positive media attention, endorsements, and public goodwill toward nonprofi t

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16 Managing Nonprofi t Organizations

Counts of resources attracted say little about how those resources are

used once they are obtained or what it cost to attract them. Therefore this

type of evaluation is best used when the level of a resource brought into an

organization can be linked to its actual results. For example, the effective-

ness of a health clinic may be judged by its ability to attract top doctors.

The quality of the doctors is an indicator of the quality of care received by

the patients. A federated funder like the United Way may be evaluated on

the amount of gifts it attracts from private donors, because the input of

donations directly translates into how much fi nancial support the United

Way can provide to other nonprofi t agencies.

We can see from the case of the Baptist Foundation of Arizona that a

nonprofi t’s ability to attract inputs is insuffi cient evidence to demonstrate

that it is an effective organization. In the pursuit of inputs, BFA violated

sound banking and investment practices. Its inputs were insuffi cient to

cover its outputs, as shown by its liabilities exceeding its assets. It gave out

loans that were not repaid or were repaid below the level BFA needed to stay

afl oat. In the interest of attracting more investments and deposits, this non-

profi t misrepresented its products, putting the buyers in fi nancial jeopardy.

It is often easy and expected for a nonprofi t to count and report inputs.

The inputs may serve as an indicator that those providing the inputs see the

nonprofi t as legitimate and that the nonprofi t has suffi cient means to per-

form well. Annual reports may include number of volunteer hours, amount

of donations, length of client waiting lists, and other input measures to show

effectiveness. Some nonprofi ts offer comparative data, reporting how their

inputs stack up against those of similar organizations or benchmark standards.

Tracking inputs can reveal trends that leaders may want to investigate further.

For example, a decline in donations may be examined to see if it is due to fewer

new donors than in the past, smaller donations than in the past, or the dissat-

isfaction of donors with how past gifts were used, or is due to other reasons.

Therefore we conclude that inputs provide a useful but limited perspective

that can be complemented with other approaches to evaluating effectiveness.

Internal Processes

In addition to evaluations of outputs and inputs, nonprofi ts may be judged

on the effi ciency, harmony, and ethics of their internal operations. Does

the nonprofi t have any bottlenecks that interfere with its delivery of ser-

vices or production of goods? Are there dysfunctional confl icts? Is there a

high undesired turnover of workers due to frustration with assignments,

poor morale, or concerns about ethics? Criteria related to this aspect of

effectiveness deal with how well the organizational systems are working.

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Effective and Ethical Organizations 17

Evaluation using internal process criteria may be especially useful when

a nonprofi t relies heavily on teamwork or has complicated technology. In

these cases, disruptions to the fl ow of work can have especially large nega-

tive effects on the pursuit of the organization’s mission.

The case of BFA shows the importance of having checks in organiza-

tional systems to catch ineffective and unethical policies and practices. A

few BFA board and staff members were able to engage in bad asset man-

agement activities for many years without being stopped. Not all BFA lead-

ers agreed with the strategies being used to hide the nonprofi t’s fi nancial

status, but they were unable or unwilling to push for changes. Even Arthur

Andersen, the accounting fi rm auditing BFA, did nothing to reveal or stop

the practices and ended up offering $217 million to investors hurt by BFA,

to spare itself from further court proceedings.6 The internal processes of

BFA led to its eventual bankruptcy.

A close look at the internal operations of a nonprofi t can uncover areas

for improvement as well as opportunities for praise. Audits are one means

to get a picture of fi nancial operations but, as in the case of BFA, they may

be insuffi cient. Organizational development consultants can provide more

comprehensive diagnostics for examining the internal functioning of non-

profi ts. For nonprofi ts that cannot justify using external reviewers, toolkits

for self-assessment are available online and in print. In addition to revealing

ethical concerns, internal reviews can reveal opportunities for improving

effi ciency—in other words, reducing the inputs needed to generate outputs.

However, it is important to see effi ciency not as an end in itself but rather as

something that should be pursued to carefully steward resources to better

achieve the nonprofi t’s mission. For example, a hospital may be effi cient in

performing surgeries in that it uses operating rooms and physicians at low

cost, but at some point, too much of this effi ciency can undermine patients’

recovery, which is the outcome of more interest in judging effectiveness.

Nonprofi t leaders who wish to demonstrate their nonprofi t’s effective-

ness on this dimension should focus on highlighting good internal man-

agement practices. Some nonprofi ts, such as hospitals and universities, may

be eligible to go through certifi cation or accreditation reviews to show

that their organization, program, or product meets industry standards

or codes. Nonprofi ts can also compete for awards such as the Malcolm

Baldrige National Quality Award, given to U.S. organizations for perfor-

mance excellence. Evaluation scores, such as cleanliness ratings for res-

taurants, or formal recognitions, such as a declaration that a nonprofi t is

a role model for best practices, may also be available to show effectiveness

in internal operations. Nonprofi ts may also offer tours or demonstrations

to show off how well they function.

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18 Managing Nonprofi t Organizations

Stakeholder Satisfaction

Numerous parties, such as client groups, employees, volunteers, board

members, unions, government regulators, the press, suppliers, customers,

donors, contractors, collaboration partners, and competitors may infl uence

or be infl uenced by a nonprofi t organization. These stakeholders have vary-

ing degrees of legitimate claims and power to infl uence the organization’s

behavior. The relative level of satisfaction of these stakeholders is an addi-

tional gauge of an organization’s effectiveness.

When we look at CANDO and BFA we see problems with important

stakeholders. Without members willing to invest in the nonprofi t, CANDO

was unable to survive. BFA got into trouble with the government and its

investors, who lost an estimated $570 million. Both these nonprofi ts were

able to satisfy key stakeholders in their early years. For example, CANDO

helped to improve the economic condition of residents of Chicago neigh-

borhoods, and BFA helped Baptist ministries with funds and expertise. But

in the end, the appreciation of what they did for these stakeholders was

inadequate for their continued existence.

Some nonprofi ts’ primary function is to provide an outlet for partici-

pants’ ideas and beliefs. The nonprofi t allows volunteers, staff, and donors

to express their values, commitments, or faith through their involvement

in the nonprofi t. For these nonprofi ts, having high internal effi ciency may

undermine this part of their purpose. It is less important for a Habitat

for Humanity volunteer to use only the number of nails required than for

the volunteer to be hammering and thus serving others. Far fewer nails

would be used if only experienced construction crews were used on house-

building projects. Similarly, community theaters may fi nd a job for all who

wish to participate, even if the quality of a production suffers. Advocacy

and religious organizations may ask all to join in song at events, even those

who sing out of key. The benefi t is in the act of joining a community and

sharing a common purpose. For these types of nonprofi ts, stakeholders’

satisfaction with their involvement in the nonprofi t can be a highly relevant

effectiveness criterion.

Using a stakeholder satisfaction approach for evaluating effectiveness

becomes more complex as the number and diversity of stakeholders that

need to be considered grows. Stakeholders can have confl icting interests

and make competing demands on an organization. For example, employ-

ees may want higher wages and a nicer work environment, whereas donors

may want more of the budget to go to direct program services rather than

to administrative overhead and labor and facilities costs.

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Effective and Ethical Organizations 19

Stakeholder mapping is a technique nonprofi t leaders can use to iden-

tify and strategize about stakeholders.7 Each stakeholder can be profi led to

summarize the nature and strength of its interests or stake in a nonprofi t,

the legal and ethical claims it can make on the nonprofi t, and its relative

power. In addition a map can help in exploring what the nonprofi t needs

from a particular stakeholder that it can or cannot get from other stake-

holders. The map also can be used to show relationships among stake-

holders in order to better develop strategies for managing groups that

share interests and perspectives. Figure 2.1 is a simple stakeholder map

with examples of possible priorities for communicating with different stake-

holder groups.

FIGURE 2.1. EXAMPLE OF A SIMPLE STAKEHOLDER MAP

Source: KnowHow NonProfi t, “Example Stakeholder Map,” http://www.knowhownonprofi t.org/ campaigns/communications/effective-communications-1/stakeholdermap.jpg/view. Reprinted by permission of KnowHow NonProfi t.

S ta

ke h

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Stakeholder Interest in Nonprofit

Key Players Service users

Major funders

Local authority

Local MP [Member of Parliament]

Trustees

Local media

Staff

Keep Satisfied Housing minister

National media

Partner organizations

Keep Informed Other funders

Local community

Monitor Wider general public

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20 Managing Nonprofi t Organizations

Growth, Learning, and Adaptation

As a complement to the other approaches, evaluation can also focus on a non-

profi t’s ability to respond to internal and external changes as well as its ability to

grow and continuously improve. Survival is a crude measure of effectiveness,

as is growth in size of staff, budget, and services. Certainly a nonprofi t’s failure

to remain relevant to stakeholders, as in the case of CANDO, may result in clo-

sure, but there may be other reasons. For example, a family foundation may

decide to spend down its assets rather than use smaller payouts that would

prolong its existence. If a nonprofi t successfully completes its mission, as the

March of Dimes did in its fi ght against polio, its leaders may choose to change

the nonprofi t’s mission or perhaps, just as appropriately, choose to close.

The ability to adapt in order to capture new opportunities and reduce

vulnerabilities and ineffi ciencies is a better indicator of effectiveness than

mere survival but is more challenging to measure. It may be diffi cult to eval-

uate whether a change resulted in better outcomes than maintaining the

status quo would have produced. With this approach, criteria for effective-

ness include having a readiness for change and an ability to learn, making

continuous improvements in quality and effi ciency, and taking advantage

of opportunities for innovations. This suggests that a decrease in assets

should not by itself be taken as a sign of failure, just as an increase in assets

should not be assumed to mean that the assets are being used effectively.

A decrease in assets might occur because there is less need for funds due

to the nonprofi t’s success in achieving its mission or because innovations

resulted in greater effi ciency in services and thus decreased resource needs.

Taking a Balanced Approach

Balanced scorecards and other assessment tools speak to the need to keep

multiple aspects of an organization in mind when judging effectiveness

and looking for areas to improve. One simple model that can help leaders

see the need to make changes in their nonprofi t without overemphasizing

any one dimension of effectiveness is a triangle that identifi es three com-

ponents of an organization: mission and mandates, internal capacity, and

external support (Figure 2.2).8 Focusing too much on any one point of the

triangle puts a nonprofi t out of balance. For example, if an organization

focuses too much on gaining external support, it may experience mission drift, chasing money or other forms of external support like public acco-t lades rather than pursuing its true purpose. If it emphasizes its mission and

mandates without having the needed internal capacity, it may overprom-

ise what it can deliver. If it focuses on building internal capacity beyond

what the community needs, it is wasting resources. Preceding its closure,

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Effective and Ethical Organizations 21

CANDO was weak on all three corners of the triangle, but its mission was

arguably its weakest point. It failed to fi nd a purpose that had adequate

meaning for its members, resulting in their withdrawal of support and

reducing the organization’s capacity.

There are many tools to help nonprofi ts keep the triangle in balance.

For example, perhaps a careful needs assessment would have helped

CANDO better align its mission with the interests of potential supporters.

The BFA struggled to gain the external support and internal capacity to

handle the demands of its asset management services, but if it had had

better internal fi nancial controls, and a more feasible strategic approach

to growth, perhaps it could have avoided its fi nancial losses.

◆ ◆ ◆

Nonprofi t leaders need to manage inputs, processes, outputs, and stake-

holders’ satisfaction as the organization grows, learns, and adapts to chang-

ing internal and external conditions. Use of the various approaches to

judging effectiveness helps nonprofi t leaders to uncover aspects of a non-

profi t that need improvement, such as internal capacity, mission focus, and

external support. Choices related to methods of understanding, pursuing,

evaluating, and advertising effectiveness may involve ethical dilemmas.

Therefore we turn our attention next to ethics for the nonprofi t sector.

Ethics for Nonprofi ts

The news media are full of stories of unethical behavior in nonprofit

organizations. The public hears about embezzlement, infl uence buying,

exploitation of vulnerable clients, and other abuses. Rates of misconduct

by nonprofi t staff were reported to be higher in 2007 than in the previous

Mission and Mandates

Internal Capacity External Support

FIGURE 2.2. TRIANGLE OF ORGANIZATIONAL FOCI FOR BALANCING

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22 Managing Nonprofi t Organizations

six years, approaching but not quite matching the frequency reported

for the government and for-profi t sectors.9 A 2008 study suggested that

nonprofi t employees engage in lying more than their counterparts in for-

profi t businesses do. The study author suggested that the higher preva-

lence of lying in nonprofi ts might be due to less bureaucracy combined

with more discretionary authority, the pressure to accumulate fi nancial

resources for the organization, and the limited career mobility found in

nonprofi ts.10

Unethical behavior is not always premeditated or understood to be

wrong by everyone involved. Nonprofi t leaders may fail to see that their or

their organization’s actions are inconsistent with others’ values and norms

or even the law. Ethical dilemmas abound: Is growth for growth’s sake OK

when the inputs needed for growth could go to other nonprofi ts? Should

nonprofi ts take donations from institutions that do not express the same

values or are working at counter-purposes? How much transparency is

appropriate in revealing client or donor information? How should confl icts

of interests of board members and staff be handled? What is appropriate

compensation for work performed? When is it OK to fi re a volunteer or

end a program? Should a nonprofi t accept funding for a program that is

in danger of closing or that is less effi cient or effective than one offered

by another provider? These are just some of the ethical judgments that

nonprofi t leaders may face.

Ethical minefi elds within the nonprofi t sector have led to calls for

greater accountability, government regulation, protection of whistle-blow-

ers, and codes of conduct, all in the interest of ensuring that nonprofi ts act

appropriately and according to established standards or accepted values.

What, then, are the duties and obligations of nonprofi ts? What, from an

ethical standpoint, should take precedence as a guide for organizational

action? To begin to address these questions, we look at four levels of eth-

ics: personal, professional, organizational, and societal. At each level there

are actors that serve as standard setters, moral guides, and watchdogs. As

we proceed through the chapters, we will present resources available to

keep nonprofi ts on an ethical path and to identify ethical dilemmas.

Personal Ethics

Everyone has a personal sense of right and wrong that he or she brings

to the workplace. Individuals’ values and beliefs about appropriate and

desired behaviors are developed through interactions with caregivers, teach-

ers, entertainers, media, family, religious institutions, peers, and others.11

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Effective and Ethical Organizations 23

Ethical behavior tends to be linked to an individual’s demographic and

personality characteristics.12 Youths tend to have less well-developed per-

sonal morality systems than adults do and tend to be more infl uenced by

their peers. Researchers have long examined how personality affects ethical

decision making. For example, they have found that individuals with an

internal locus of control are more likely than those with an external locus

of control to consciously make ethical decisions and to resist societal and

authority pressures to harm another person. Locus of control refers to how l much control and responsibility individuals believe they have over what

happens to them. Those with a stronger internal locus of control believe

they personally have more control and take greater personal responsibility

for the consequences of their actions. Individuals with Machiavellian char-

acter traits believe that the ends justify the means and are more likely to

do whatever it takes to achieve desired results, even if it involves deception

and manipulation of others for personal gain. A lesson from the research

on what predicts personal morality is that leaders should not assume that

because someone is involved with a nonprofi t he or she is trustworthy and

will know and follow what the nonprofi t leader accepts as ethical guide-

lines. The moral codes of the organization should be made clear to all

to whom they apply, and organizational systems should be put in place to

prevent and catch unethical behavior.

In some cases, moral codes may be controversial. For example, the Boy

Scouts of America makes all Scouts memorize the organization’s oath and

repeat this oath at Scout events:

On my honor I will do my best

To do my duty to God and my country

and to obey the Scout law;

To help other people at all times;

To keep myself physically strong,

Mentally awake, and morally straight.

The Boy Scouts of America has come under fi re for its statements requir-

ing belief in God and its position against homosexuality and its policy of

expelling Scouts and troop leaders for lack of conformance. In Boy Scouts of America et al. v.ll Dale, the U.S. Supreme Court, pointing to the right of freedom of association, held that the organization could exclude homo-

sexuals as adult leaders, a reversal of a lower court decision. The nonpro-

fi t’s decision to interpret its code to allow exclusion of some individuals,

despite public and legal protests, highlights how nonprofi ts may exercise

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24 Managing Nonprofi t Organizations

their right to adhere to moral codes within the limits of the law, even if this

means excluding individuals who are unwilling to accept the established

interpretations of the organization’s code.

The work context can affect individual ethical conduct, so it is impor-

tant for nonprofit leaders to explain and reinforce what is and is not

acceptable behavior. Even when individuals are exposed to the organiza-

tional leaders’ value systems, their greatest allegiance tends to be to their

personal values. For example, even if everyone else in a workplace is get-

ting benefi ts from being dishonest, an individual’s personal belief that dis-

honesty is wrong can be enough to override any temptation to lie.13 Given

the likely variation in personal morality among individuals in an organiza-

tion, nonprofi t leaders should evaluate the work setting to see if unethical

behavior is being encouraged by overly high demands on workers that

lead them to take inappropriate shortcuts, poor role models for ethical

decision making, or compensation systems that make them feel it is OK to

take resources from the organization because the pay is too low or because

others do so without being sanctioned. The likelihood that employees will

behave unethically increases when they perceive that the reward system is

unfair, they are under excessive pressure to meet performance objectives,

they are part of a group that is benefi ting from acting unethically, or they

think their leaders do not have a commitment to ethical standards.14 When

some individuals are seen to suffer no consequences from acting unethi-

cally, it may also infl uence others to be unethical, particularly if they do not

have a strong internal value system.

Some nonprofi ts provide tools and training to shape ethical thinking

and provide guidance for ethical dilemmas. Reminding workers and board

members of professional, organizational, and societal standards and codes

can help keep unethical behaviors in check. Though individuals have predis-

positions to evaluate the ethics of a situation in a certain way, they are open

to being infl uenced by company guidelines, value statements, and codes of

conduct.15 The goals of training should be to

• Build moral awareness. Help workers recognize situations involving ethi- cal issues.

• Frame moral decision making. Give workers tools to use in making deci- sions about whether or not actions are ethically sound.

• Clarify moral intent. Promote the values that should take priority in making decisions.

• Encourage moral action. Explain the consequences of compliance and noncompliance with ethical codes.16

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Effective and Ethical Organizations 25

Kenneth Blanchard and Norman Vincent Peale offer a simple way

to encourage ethical behavior.17 Adapting their ideas, nonprofi t workers

should ask themselves three general questions about a proposed action:

1. Is it legal? (Am I violating any laws or organizational policies?)

2. Is it balanced and fair to all concerned? (Will my action create a win-

win situation?)

3. How will it make me feel about myself? (Will I be proud of what I have

done and willing to tell others what I did?)

If an employee can give positive answers to these questions, the action

has passed a very basic ethics test. Nonprofi ts can further help workers judge

whether an action will be acceptable by providing them with more detail

on what issues to look at and how to look at them. For example, the World

Wildlife Fund (WWF) guides workers’ ethical conduct in relation to its var-

ious stakeholders by elaborating on its code of conduct for employees in

order to address behaviors toward other employees, the public at large, gov-

ernments and organizations, the media and opinion infl uencers, corporate

partners, suppliers and consultants, and the WWF institution.18 Focusing on

specifi c behaviors—similar to the ones discussed in this book—the WWF

code makes it clear that it is wrong to accept bribes, favor personal connec-

tions in awarding contracts, be dishonest in working with corporations, fail

to share credit with partners, discriminate against or prejudge others, or be

disrespectful.

Professional Ethics

Some nonprofi t employees and volunteers are professionals, with a set of

norms and rules that obligate them to act in certain ways as members of

their specifi c professions. In the case of certifi ed professionals, breaking

professional codes may cause them to lose their credentials and ability

to legitimately practice their professions. In the United States, for exam-

ple, doctors, lawyers, and certified public accountants must adhere to

codes for professional practice or risk losing their licenses. Membership

in some professional associations is voluntary, and nonprofi t workers who

join these groups may have a choice of whether or not to be certifi ed by

them. For example, not all members of the Association of Fundraising

Professionals have earned a CFRE designation (certifi ed fundraising execu-

tive). Members with that designation agree to follow the Donor Bill of

Rights (see Exhibit 2.1) and the CFRE program accountability standards.

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26 Managing Nonprofi t Organizations

EXHIBIT 2.1. THE DONOR BILL OF RIGHTS

Philanthropy is based on voluntary action for the common good. It is a tradition of giving and sharing that is primary to the quality of life. To ensure that philanthropy merits the respect and trust of the general public, and that donors and prospective donors can have full confi dence in the nonprofi t organizations and causes they are asked to support, we declare that all donors have these rights:

I. To be informed of the organization’s mission, of the way the organization intends to use donated resources, and of its capacity to use donations effectively for their intended purposes.

II. To be informed of the identity of those serving on the organization’s governing board, and to expect the board to exercise prudent judgment in its stewardship responsibilities.

III. To have access to the organization’s most recent fi nancial statements. IV. To be assured their gifts will be used for the purposes for which they were given. V. To receive appropriate acknowledgement and recognition. VI. To be assured that information about their donation is handled with respect and

with confi dentiality to the extent provided by law. VII. To expect that all relationships with individuals representing organizations of

interest to the donor will be professional in nature. VIII. To be informed whether those seeking donations are volunteers, employees of

the organization or hired solicitors. IX. To have the opportunity for their names to be deleted from mailing lists that an

organization may intend to share. X. To feel free to ask questions when making a donation and to receive prompt,

truthful and forthright answers.

Source: Association of Fundraising Professionals, “Donor Bill of Rights” (n.d.), www.afpnet.org/ ethics. Copyright © 2011, Association of Fundraising Professionals (AFP), all rights reserved. Reprinted with permission from the Association of Fundraising Professionals.

This means that they agree to resign from any organization that attempts

to force them to violate codes of conduct for the fundraising profession.

As more certifi ed professionals trained in ethical conduct for their

professions enter the nonprofi t sector, we may see professional norms and

standards spilling over to other job functions. Nonprofi t leaders can ben-

efi t from identifying the sets of professional ethics that are applicable to

their nonprofi t’s operations. By integrating professional standards for ethi-

cal conduct into their organization’s behavioral codes, they can avoid con-

fl icts across standards and deepen the guidance they provide to workers.

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Effective and Ethical Organizations 27

Organizational Ethics

Nonprofi t leaders can foster organizational cultures that reinforce ethi-

cal behavior. One of the most infl uential methods may be to use values-

based leadership. Top leaders can be role models for ethical behaviors

and ensure that key values are infused into organizational policies and

practices. Thomas Jeavons suggests that there are fi ve core attributes of

ethical nonprofi t managers: integrity, openness, accountability, service, and

charity.19 By personally demonstrating these attributes, leaders set the tone

for the rest of the organization.

• Integrity: honesty writ large; full and accurate representation in all mat- ters; adherence to professed principles

• Openness: transparency about rationales, approaches, actions, and outcomes

• Accountability: readiness to explain choices and answer for behaviors

• Service: commitment to serve the public good and to the fulfi llment of the organizational mission over personal interests

• Charity: actualized concern for the welfare of others; treatment of others with love and respect

If leaders refl ect these values, and encourage others in their organiza-

tions to do the same, they can build and maintain trust in their nonprofi ts

and demonstrate a strong commitment to ethics. Consider the example of

the Detroit Zoo. When the zoo director was found to have lied about hav-

ing a doctoral degree in zoology, the zoo’s board decided to let him keep

his job if he apologized on the zoo’s Web site and accepted the board’s

decision to dock him for a month’s pay of a little over $16,000. The zoo

director wrote, “I accept the board’s sanctions with the seriousness with

which they were given, and hope that my performance going forward will

justify that they made the right decision.”20 What message about values

and ethical expectations did this send to the rest of the organization?

A variety of organizational structures and systems can be used to

encourage ethical behavior and signal accountability. Large nonprofi ts may

benefi t from having an ethics committee or ethics ombudsperson to serve

as the point of contact and to open an avenue for refl ection and debate on

possible ethical dilemmas or violations. Job application materials can be

screened to weed out candidates with tendencies toward misrepresentation

and fraud. Formal policies to support and protect whistle-blowers may help

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28 Managing Nonprofi t Organizations

workers feel comfortable with raising concerns and challenging what they

view as unethical policies or practices. Reward and punishment systems that

are aligned with desired ethical behaviors may help to constrain bad behav-

iors and motivate good ones. Training programs and orientation manuals

along with ethical codes can give guidance on how to handle situations

and decisions with ethical implications. Paid employees, volunteers, and

board members can be asked to sign confl ict-of-interest statements, reveal-

ing those areas where their personal interests may confl ict with organiza-

tional interests. Internal controls can be used to check for compliance with

ethical codes: for example, supervisors can occasionally review how and to

whom services are provided to make sure that all those who are eligible and

able to be served receive appropriate attention from workers.

Societal Ethics

Nonprofi ts, especially public charities, bear heavy expectations for ethical

behavior. These organizations exist because the public and the government

expect them to contribute to the public good. Self-serving behavior is anti-

thetical to their roots as counterbalances to for-profi t corporations. Societal

pressures encourage nonprofi ts, and those working within them, to go beyond

the letter of the law in the ethical level of their governance and operations.

Watchdog groups set standards for the nonprofi t sector and monitor

behavior. By posting reports on how well nonprofi ts are meeting these stan-

dards, the watchdogs can encourage practices they believe to be good behav-

ior. These groups exist with a focus on particular fi elds as well as on the sector

as a whole. The National Charities Information Bureau, Charity Navigator,

the American Institute of Philanthropy, insideGOOD, and the Better Business

Bureau Wise Giving Alliance are just a few of the organizations that try to

keep nonprofi ts in check by informing potential donors, volunteers, employ-

ees, and others about nonprofi ts’ inputs, processes, and outcomes.

The legal environment for nonprofi ts also serves as a check on unethical

behavior. Nonprofi ts are subject to many of the same laws that restrict for-

profi t businesses and have additional rules that address their charitable, tax-

related, and lobbying activities. At the federal level, the government attempts

to control nonprofi ts through a range of mechanisms including disclosure

and reporting requirements, registration of lobbyists, employment-related

laws, tax structures, and federal funding and contracting rules. States may

also use tax structures, registration and reporting requirements, contracting

rules, employment and lobbying laws, as well as insurance requirements,

licensing, fundraising laws, and accounting and audit rules. At the local

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Effective and Ethical Organizations 29

level, nonprofi ts may need to be in compliance by obtaining permits, such

as parade or gaming permits, and honoring zoning and other codes. They

may be subject to local probate court rulings regarding charitable bequests,

cy pres petitions to change the giving mandates of a grantmaking foundation,s and other matters. Lack of compliance with laws and court rulings at the

federal, state, and local levels can result in fi nes and revocation of benefi ts.

There is continued debate about the need for more regulation to

encourage nonprofi t accountability. Demonstrating this concern, in 2004 the

Finance Committee of the U.S. Senate began holding hearings and asked for

proposals for stricter regulation. In 2005, the Panel on the Nonprofi t Sector

presented a report to Congress promoting the idea of enhanced self-regula-

tion by the sector over increased government regulation and oversight, and

in 2007, the panel produced a report with principles for good nonprofi t gov-

ernance and ethical conduct.21 The topics covered in the report fi t four main

categories: legal compliance and public disclosure, effective governance,

strong fi nancial oversight, and responsible fundraising.

The enthusiasm and capacity for self-regulation by members of the non-

profi t sector is mixed. Principles of practice developed by organizations serv-

ing as a voice for the sector, such as the independent sector, have not been

widely adopted. State-level efforts have seen more success. For example, the

Standards for Excellence: An Ethics and Accountability Code for the Nonprofi t Sector, established by the Maryland Association of Nonprofi t Organizations, has many adherents.22 It has served as a model for other states’ efforts

to promote ethical practices and accountability. Some trade associations

offer accreditation and certifi cation programs for nonprofi ts.23 Although

they may produce codes of conduct and ask their nonprofi t members to

adhere to them, monitoring and enforcement mechanisms are usually weak.

Though nonprofi ts may prefer to be responsible for keeping their houses

clean, studies showing erosion of public confi dence in the nonprofi t sector24

may be the forbearer of increased government scrutiny and legislation.

Countries vary in the extensiveness of their regulatory landscape for

nonprofi ts. The scope and composition of the nonprofi t sector in each

country varies widely, as do the rules under which that country’s govern-

ment asks nonprofi ts to operate. In some countries, nonprofi ts are under

a heavy government hand, as in Egypt where government employees are

often assigned to work at nonprofits.25 The requirements for establish-

ment and operations tend to be more rigorous in developed countries and

countries where nonprofi ts get more advantages from government. Some

countries, such as the Netherlands, have taken on the task of accrediting

nonprofi ts and encouraging donors to give only to the accredited ones.

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30 Managing Nonprofi t Organizations

Their hope is that nonprofi t accountability will be improved when there

is a threat of lost donations from lack of compliance with accreditation

standards.26 In some regions the nonprofi t sector is being reborn, and with

it the legal structures that encourage and constrain it. Eastern Europe,

for example, is seeing a revival of interest in nonprofi ts, as organizations

once discouraged in the communist regime acquire renewed legitimacy.

The country setting does not affect just the legal environment for non-

profi ts, it also infl uences values, norms, and expectations. For example,

gift exchange among business partners is considered good manners in Asia

but may be interpreted as a bribe in the American context.27 Nonprofi t

leaders operating in diverse cultural contexts are likely to fi nd a variety of

interpretations of the ethics of situations and should be sensitive to cross-

cultural differences.

Concluding Thoughts

This chapter has reviewed effectiveness and ethics for nonprofi t organiza-

tions. We have argued for a multidimensional approach to judging non-

profi ts. By looking at nonprofi t effectiveness from multiple angles, we gain

complementary insights to guide practice and policies. Also, by identify-

ing multiple levels of infl uence on ethics, we can see how ethical deci-

sion making may be shaped by nonprofi t leaders. Personal, professional,

organizational, and societal values and norms should all be considered in

establishing codes of conduct and compliance systems within a nonprofi t.

The next chapter explores the founding of nonprofi ts and the busi-

ness case. Effective and ethical behaviors are shaped from the fi rst day that

a nonprofi t is envisioned, and as the organization operates, value systems

may become more and more ingrained. Understanding the complexity

of judgments of effectiveness and ethics can help nonprofi t founders and

their successors to identify and address organizational weaknesses and to

celebrate achievements.

Questions for Consideration

1. Nonprofi ts are increasingly being called on to be accountable for the

resources and discretion they receive in order to operate. Given the mul-

tiple dimensions of effectiveness and the long-term, hard-to-quantify mis-

sions of many nonprofi ts, when should we feel confi dent that a nonprofi t

is doing enough good to justify the resources and discretion given it?

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Effective and Ethical Organizations 31

2. What basic ethical standards do you think employees should uphold?

Are these standards different for people who are working in a nonprofi t

compared with people in a for-profi t organization? Why or why not?

3. What types of information do you think nonprofi ts should provide

to the public in annual reports? What information should watchdog

agencies provide on the nonprofi ts they are monitoring? Can any of

this information be misleading in judging a nonprofi t’s effectiveness?

Exercises Exercise 2.1: Rough Stakeholder Map

One approach to evaluating effectiveness is to look at the satisfaction of

stakeholders. To get a sense of how a particular nonprofi t is likely to be

viewed by its stakeholders

1. Pick a nonprofi t organization and review its mission. List fi ve stake-

holders (individuals, organizations, or institutions) that are likely to

infl uence or be infl uenced by the nonprofi t. Be sure to include at least

one internal and one external stakeholder.

2. Create a table with the columns shown in Table 2.1 and as many

rows as you need, and fi ll it out for each stakeholder on your list of

stakeholders.

3. Now, place each stakeholder into a simple stakeholder map like the

one shown in Figure 2.1, showing your designation for that stakeholder

(keep satisfi ed, monitor, keep informed, or key player).

4. Discuss the weaknesses of your analysis and the potential value of a

more comprehensive stakeholder audit for a nonprofi t.

TABLE 2.1. STAKEHOLDER’S VIEW OF THE NONPROFIT

Stakeholder What Might This Stakeholder Want from the Nonprofi t?

What Does the Nonprofi t Want from This Stakeholder?

Type and Degree of Infl uence This Stakeholder Has over the Nonprofi t?

What Effectiveness Criteria Is This Stakeholder Likely to Use to Evaluate the Nonprofi t?

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32 Managing Nonprofi t Organizations

Exercise 2.2: Annual Report Analysis

Find an annual report of a nonprofi t.

1. What dimensions of effectiveness are covered in the report?

2. What measures are used to demonstrate effectiveness on each of these

dimensions?

3. Are these good measures?

4. Does the annual report convince you that the nonprofi t is effective?

Why or why not?

Exercise 2.3: Situations for Ethical Analysis

Thomas Jeavons argues that nonprofi t leaders should demonstrate integ-

rity, openness, accountability, service, and charity. For each of the following

situations, consider which of these fi ve values, if any, might be an issue, and

describe how the potential issue should be addressed.

1. A nonprofi t signs a business contract with the fi rm owned by one of its

board members. The contract was given without competitive bidding,

and it is unclear whether the nonprofi t could have received the same

services with the same quality at a better price from another fi rm. It is

not illegal in the state where this nonprofi t is incorporated for board

members to have self-dealings (for example, to make a contract with a

board member’s fi rm).

2. Volunteers for a nonprofit have access to personal information on

donors and are sharing this with individuals outside the organization.

They have revealed that a major donor listed as anonymous in the

annual report is actually a well-known philanthropist in the area.

3. The annual report for a nonprofi t includes photos of individuals who have

no association with the organization, but the placement of these photos

makes it appear that these individuals were served by the nonprofi t.

Exercise 2.4: Multilevel Ethical Infl uences

Find an article about a nonprofi t scandal or controversy, or interview a non-

profi t leader about an ethical issue the leader faced. How did the ethical stan-

dards and values of each of the levels discussed in this chapter—personal,

professional, organizational, and societal—come into play in the situation?

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CHAPTER THREE

FOUNDING NONPROFITS AND THE BUSINESS CASE

F eatured as one of twelve high-impact nonprofi ts in a best-selling business book,F 1

Teach For America is a poster child for a successful nonprofi t. What may be sur-FF prising is that the idea for the organization was developed in 1989 by a student at Princeton University for her undergraduate thesis. Founder Wendy Kopp didn’t treat her thesis just as an academic exercise. She raised $2.5 million in start-up funding, fi lled out the paperwork to legally establish the nonprofi t, and in 1990, began the organization’s work with a small staff. Today, Teach For America reaches more than 400,000 students across the country. Kopp’s idea that top college students would choose to teach in public schools if they thought they could make a real difference had resonance with a wide range of supporters and with the college students she succeeded in recruiting and developing into leaders for education reform. Kopp put in long hours to grow the organization, wondering at times if it would survive and adapting it to meet a series of challenges. It is now the largest source of teachers for low-income communities. She has written two books that help tell the story of Teach For America and its founding impulse to eliminate educational inequity in the United States.2

As a well-known social entrepreneur, Wendy Kopp has been a speaker at numerous seminars where she has encouraged others to pursue their ideas for new nonprofi ts. In a YouTube video she gives advice to entrepreneurs including “embrace your inexperi- ence” and “search for allies.” 3

◆ ◆ ◆

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34 Managing Nonprofi t Organizations

Many nonprofi ts are started every year, a small percentage of them by college

students who, like Wendy Kopp, develop their ideas in courses or through

service-learning experiences. In the United States the nonprofi t sector is

growing faster than the government or business sector.4 Data from other

countries also indicate the popularity of the nonprofi t form of organization.5

How do nonprofi t organizations get started? What is the business case

for them? What factors support or hinder social entrepreneurs? What steps

need to be taken to successfully launch a new nonprofi t organization? This

chapter will address these and related questions. More details on the entre-

preneurial process and social entrepreneurship in relationship to program

and process innovations are covered in Chapter Sixteen, on organizational

change and innovation. Here we focus on the entrepreneurial move to cre-

ate a new nonprofi t organization.

Organizational Founding

Nonprofi ts, unlike biological entities, do not always have a clear birth date.

An organization may receive legal recognition years after it began to serve

the public. Legal recognition might also come before a nonprofi t has car-

ried out any mission-related activities, held its fi rst board retreat, or opened

a bank account. In this chapter we explore organizational founding, that

is, birth, as one of the key stages of a nonprofi t’s existence.6

What happens when an organization is fi rst established can shape its

nature for its entire existence. A founder may imprint norms and values that

are hard to change, even after that founder leaves.7 Founders may determine

how and to what extent the original mission can be altered. The governing

board, initially chosen by the founder, may be more committed to the founder

than to the organization and unwilling to challenge the founder’s wishes. The

identity of the organization may become tied to the founder, making it diffi -

cult for a successor to be accepted or to change the ways in which the founder

managed or led the nonprofi t. Over time the founder may actually harm the

long-term health of the organization because of his or her central role and

inability to give up control, a problem sometimes called founder’s syndrome.ee Also, new nonprofi ts shape the collaborative and competitive envi-

ronment around them. Other organizations may need to adapt in

response to this new entrant in their fi eld of activity. The entrant may be

an innovator organization, introducing new ideas to the fi eld, or a repro- ducer, replicating what others are already doing.rr 8 Teach For America was an innovator, changing the way college students got involved in teaching,

and pushing a school reform agenda. As a consequence of its presence as

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Founding Nonprofi ts and the Business Case 35

a source of teachers, schools changed their practices in order to capture

and leverage this new resource. Reproducers are new nonprofi ts that

follow an established model, such as new additions to the Habitat for

Humanity chapter network, private schools that are part of a national

chain, and nonprofi ts that are similar in missions and approaches to

other nonprofi ts that already exist in their communities.

Organizations can be founded in a number of ways. For example, orga-

nizations may be created by an individual entrepreneur with a new idea act-

ing outside any existing organization, as in the case of Teach For America.

They may be established through legislative action, as in the case of the

American Red Cross, which was founded in 1881 by Clara Barton and a

circle of her acquaintances and modeled after the International Red Cross.

One of the oldest nonprofits in the United States, Harvard University,

was established in 1636 by a vote of the Great and General Court of the

Massachusetts Bay Colony. Nonprofi ts may be spun off from a larger, par-

ent nonprofi t, as in the case of churches that spring from a parent con-

gregation, or federated associations that set up chapters or affi liates. The

American Cancer Society, for example, established local chapters and then,

years later, transformed these local chapters into regional organizations.9

Some organizational transformations are so profound and radical that

it can appear that one organization died and a fundamentally new one

was born, though the original name and legal status may be retained. For

example, Anthony Filipovitch describes the transformation of a volunteer-

run community crisis care center into a community medical clinic.10 The

organization moved from crisis care to chronic care, volunteers to paid

staff, paper records to an integrated management information system,

and per-visit medical care to an integrated case management system. Very

little of the old organization was retained.

A number of environmental and individual factors are necessary for

organizational founding and initial survival.11 Supportive environments

offer resources, technology, rules, norms, and beliefs that allow a nonpro-

fi t’s establishment.12 Research that examines the founding process through

an entrepreneurship lens highlights helpful personal dispositions, traits, or

attributes of entrepreneurs (founders) as well as what makes a nurturing

context for the entrepreneurial process.13 In general this research reveals

that founders are most successful in creating and keeping their organi-

zations alive in infancy when they can access needed resources, operate

under supportive government policies, and employ the discretion that

comes with having a purpose and approach perceived by the public as

legitimate. It is also helpful if they recognize and adopt strategies appropri-

ate for the nonprofi t’s environmental conditions.14

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36 Managing Nonprofi t Organizations

Entrepreneurship for Social Benefi t

Although the term entrepreneurship was fi rst defi ned in the 1700s, to date there p is no single widely accepted defi nition of the term. The economist Richard

Cantillon (circa 1730) defi ned entrepreneurship as self-employment. Followingp this orientation, Jean Baptiste Say, in 1816, defi ned the entrepreneur as one r who uses all means of production to create profi t through the value of the

products thereby produced. The focus of these and related defi nitions is on

the savvy businessperson seeking to exploit an opportunity to make a profi t.

An alternative orientation to entrepreneurship was put forth by Joseph

Schumpeter in the 1930s. Schumpeter’s focus was on the entrepreneur as an

innovator, on the creative drive itself, and on the impacts of entrepreneur-

ship on industry and the economy, particularly on the “creative destruction”

of industries and their replacement by new ones. This macro interpretation

is especially important in that the goal of many social entrepreneurs is to

address and correct major social problems by means of innovations that have

large-scale, transformative social impacts.

In 1986, Dennis Young helped turn attention to entrepreneurship in

the nonprofi t sector. He distinguished nonprofi t entrepreneurs from other

nonprofi t managers by the entrepreneurs’ engagement in breaking new

ground and going beyond customary managerial practices or ordinary deci-

sion making.15 Thus, entrepreneurs are those innovators who found an orga-

nization, develop or expand programs and services, create new methods,

or redirect the mission of a nonprofi t. Consistent with Young’s conceptual

treatment, entrepreneurship can occur within organizations (sometimes

referred to as intrapreneurship), through the creation of partnerships among existing organizations, or through the founding of a new organization. Our

focus in this chapter is on organizational creation. More specifi cally, we are

interested in nonprofi ts emerging through social entrepreneurship.

Social Entrepreneurship

The term social entrepreneurship became popular in the 1980s. It refers to the cre-p ation of products, organizations, and practices that yield and sustain social ben-

efi ts, and it captures the simultaneous pursuit of social and fi nancial returns on

investment. Social entrepreneurs are change agents who pursue social objec-

tives with innovative methods. In 2006, Paul Light noted the limitations of defi -

nitions that focused narrowly on social entrepreneurs as individuals and social

entrepreneurship as a reliance on business methods in a nonprofi t context. As

Light explains, a social entrepreneur can be any individual, group, network,

organization, or alliance of organizations that seeks large-scale change through

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Founding Nonprofi ts and the Business Case 37

pattern-breaking ideas about the ways in which governments, nonprofi ts, and

businesses can address signifi cant social processes.16

Social trends and developments in the nonprofi t sector during the

1980s and 1990s provided the impetus for a growing interest in social entre-

preneurship. Attention was spurred by

• Concerns that traditional approaches to basic social needs were ineffective

• An interest in innovative solutions bringing sustainable improvements

• An openness to market-based and businesslike approaches to social problems

• The privatization of public services and government contracting

• Outcomes-based rather than needs-based approaches to grantmaking

and contracting

• Engaged, strategic approaches to corporate involvement in social and

community issues17

Social entrepreneurs can learn from their purely profi t-seeking busi-

ness counterparts (commercial entrepreneurs)18 by adapting Sahlman’s PCDO model19 showing the importance of integrating people, context, deal, and ll opportunity in entrepreneurial ventures. Drawing from the PCDO model,y Austin, Stevenson, and Wei-Skillern offer a social entrepreneurship frame-

work (Figure 3.1) that shows the overlap of people and capital withl opportunity to create a social value proposition in an environmental context of tax, regula-t tory, sociocultural, demographic, political, and macroeconomic infl uences.

People and Capital The social entrepreneurship model emphasizes the people who actively par-

ticipate in the venture. The motivations of the people involved in commer-

cial entrepreneurship on the one hand and in social entrepreneurship on the

other are likely to be signifi cantly different. Economic self-interest is likely to

play less of a role in social entrepreneurship than in commercial entrepreneur-

ship. For example, Wendy Kopp was not motivated to create Teach For America

to increase her personal wealth nor was personal gain a motive for her original

investors. The people component is critical to Teach For America’s unique

approach to a social problem. This nonprofi t selects “promising future leaders”

from a range of educational backgrounds, rather than experienced and certi-

fi ed teachers. This choice of whom to involve refl ects a long-term social reform

agenda that is as important, if not more important, than a short-term focus on

classroom effectiveness. Also, as mentioned in this chapter’s opening scenario,

Kopp sees the work of fi nding allies as critical to the success of a venture.

One of Kopp’s greatest challenges was fi nding the fi nancial resources to

persevere. Early in her efforts to build the organization she wondered if she

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38 Managing Nonprofi t Organizations

would be able to pay the monthly payroll. Capital is a critical component of

entrepreneurial ventures. One of the newest options for capital for some

social entrepreneurs is social impact bonds. Started in the United Kingdom

and now gaining interest in the United States, this fi nancing mechanism is

built on the idea of paying for performance. The government makes pay-

ments to private and philanthropic investors for projects that demonstrate

measurable success. The goal is to save the taxpayers money and attract new

fi nancing to address social problems.20

Context Contextual elements outside the control of the entrepreneur infl uence

success or failure. Commercial and social entrepreneurship ventures may

be subject to different regulatory, fi nancing, tax, sociopolitical, and other

infl uences. The nonprofi t Teach For America, for example, has to rely on

its alumni base to accomplish its school reform agenda. It also has to rely on

schools to accept its teachers and allow them to be effective. Unlike for-profi t

Social Value

Proposition

Opportunity

CapitalPeople

Regulatory

Socio-C ultu

ral

Ta x

Political M

ac ro

ec o n

o m

yD em

o g raphics

FIGURE 3.1. SOCIAL ENTREPRENEURSHIP FRAMEWORK

Source: From James Austin, Howard Stevenson, and Jane Wei-Skillern, “Social and Commercial Entrepreneurship: Same, Different, or Both?” in Entrepreneurship Theory & Practice, vol. 30, issue 1, e 1–22. Copyright © 2006 John Wiley & Sons, Inc. Reprinted with permission.

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Founding Nonprofi ts and the Business Case 39

fi rms, it can accept donations that qualify the givers for tax deductions. Once

Teach For America teachers get to the classroom, and especially once their

term of service ends, there is little the nonprofi t can do to manage their

activities. As the Teach For America Web site states: “Armed with the experi-

ence, conviction, and insight that come from leading children to fulfi ll their

potential, our alumni are working from all sectors to shape our schools,

policies, and investments in low-income communities.”21 The alumni and

philanthropic contexts, among others, are critical to the achievement of the

Teach For America mission. Other nonprofi ts as well have unique contex-

tual factors that affect their ability to achieve their mission.

Social Value Proposition A project’s or organization’s social value proposition addresses the reasons

why individuals will choose to be involved in a particular effort over other

alternatives. For Teach For America, it explains why college students are

willing to forgo larger salaries to devote time to teaching in schools serving

low-income neighborhoods when teaching is not their long-term career

objective, why schools will accept Teach For America teachers over more

experienced and certifi ed instructors, and why donors are willing to share

their resources in exchange for a promise that the nonprofi t will work

to close students’ achievement gap. The social value proposition typically

speaks to fundamental values that the people involved in an enterprise’s

transactions hold dear, such as the importance of social equity, justice,

spiritual well-being, honesty, self-respect, freedom, and integrity.

Opportunity For a social entrepreneurship enterprise to be successful, enough individuals

need to believe that it has a chance to achieve a desired future state. This creates

the opportunity for the enterprise to have the needed market for the venture.

Social entrepreneurs identify something they can do that others are not doing

because it is not viable within existing commercial markets. Teach For America,

for example, took advantage of the opportunity to put people with its agenda

into low-resourced schools needing teachers. By doing so, it could encourage

greater passion for school reform and create future leaders to drive change. It

also could help schools that otherwise might not be able to afford to increase

capacity to improve students’ educational experiences. A defi cit of teachers

combined with individuals’ latent interest in short-term teaching experiences

created the opportunity for an organization such as Teach For America.

◆ ◆ ◆

If any of the major elements in Austin, Stevenson, and Wei-Skillern’s model

are not adequately aligned, the entrepreneurial venture is likely to fail. For

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40 Managing Nonprofi t Organizations

example, if a new law were to be passed requiring that all high school teach-

ers have an education degree (context), the types of individuals selected by

Teach For America would need to change (people), requiring more fi nan-

cial resources for hiring (capital), eventually affecting the nonprofi t’s chance

to nurture future leaders for education reform through fi rsthand classroom

experience in low-income schools (opportunity), and ultimately making it

more challenging to close the achievement gap (social value proposition).

Consideration of the differences between social entrepreneurship and

commercial entrepreneurship involves a number of implications for prac-

tice. Social entrepreneurs, more than commercial entrepreneurs, need to

pay attention to

• Centrality of social value. This must be the first and foremost consideration.

• Organizational and environmental alignment. Alignment with the social interests of external supporters may be needed to deliver social value.

For example, social entrepreneurs operating under nonprofi t status

cannot tap into the same capital markets as commercial entrepreneurs,

given that they cannot distribute surpluses to investors.

• Organizational boundaries. Boundaries may need to be more fl exible. For example, Ashoka Fellows pursue their social entrepreneurship

visions while receiving support both fi nancially and professionally from

Ashoka. They may even join together to leverage the impact of their

individual organizations. Their entrepreneurial efforts cross organiza-

tional boundaries.

• Cooperation. Social value may be enhanced by cooperation instead of competition. Decisions may be made to allow another organization to have

more commercial profi t in order to maximize the overall social benefi t.

Social entrepreneurs may recognize that they can have a greater social

impact if they work as part of a coalition rather than as independent actors.

Entrepreneurial Process

The entrepreneurial process involves all the functions, activities, and

actions that are associated with perceiving and pursuing opportunities. It

has the following components:22

• Formation of an idea that is recognized as an opportunity

• Decision to start a new organization to pursue the opportunity

• Development of plans

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Founding Nonprofi ts and the Business Case 41

• Determination of resource needs and acquisition of initial capital

• Development and implementation of strategies for market entry

• Acquisition of resources for growth and development of growth strategies

• Launch and growth

• Harvest (that is, achievement of benefi ts)

Entrepreneurial success is infl uenced by a combination of individual,

social, organizational, and environmental factors.23 Personal attributes

interact with environmental opportunities and role models to infl uence

the innovation (idea creation) stage. These and other personal factors,

such as job dissatisfaction or commitment, social factors, such as networks

and family, and environmental factors, such as resources and competition,

may infl uence the decision to launch the venture. Market, resource, and

other environmental factors; personal managerial talent; and organiza-

tional capabilities will likely infl uence the planning, initial implementa-

tion, growth, and end stages. Recent research has concluded that there

is no set of psychological or behavioral attributes that can definitively

differentiate entrepreneurs from other individuals.24 Although not con-

clusive, studies have, however, found high levels of locus of control and

risk taking and a need for independence and achievement to be related to

entrepreneurship.25

Recognition of an Entrepreneurship Opportunity

Where do ideas for entrepreneurship come from? Arthur Brooks suggests

that changes in technology, public policy, public opinion, tastes, or society

and demographics can inspire entrepreneurial activity.26 Peter Drucker lists

seven spurs for innovative idea creation:27

• The unexpected in an organization, including success, failure, or some

other event

• An incongruity between reality as it actually is and reality as it is assumed

to be or as it “ought to be”

• The changing needs of internal organizational processes

• Surprising changes in industry or market structure

• Demographic changes

• Changes in perception, mood, or meaning

• New knowledge (both scientifi c and nonscientifi c)

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42 Managing Nonprofi t Organizations

Each nonprofi t’s founding story is unique. For example, the founders

of Alcoholics Anonymous rejected the prevalent idea that alcoholism was

a personal moral failing and wanted to create an organization that would

help alcoholics fi nd a greater power to overcome their problem. One of

the founders had a spiritual awakening that led him to work the rest of his

life to bring freedom and peace to other alcoholics.

The World Wildlife Fund was created by sixteen of the world’s leading

conservationists out of a shared understanding that the expertise to protect

the world environment existed but fi nancial resources were inadequate

to support the conservation movement on a worldwide scale. They deter-

mined that a new organization was needed to fundraise internationally and

collaborate with existing organizations.

The March of Dimes was created by President Franklin Roosevelt, who

struggled with polio during a time when that disease was on the rise. He

wanted to use the organization to raise money to fi ght polio and deliver

aid to those suffering from it.

Share Our Strength began in response to the 1984 to 1985 famine in

Ethiopia, with the idea that everyone can contribute to the global fi ght

against hunger and poverty and that sustainable solutions lie in sharing

everyone’s strengths. The founders were correct in thinking that they could

create an organization to mobilize industries and individuals to use com-

munity wealth for lasting change.

Jerry Kitzi offers some advice for those wishing to identify new opportuni-

ties.28 He suggests looking at a service or product through a different lens to see

what value could be added. For example, do users view and experience a ser-

vice differently from the way volunteers or staff do? He also suggests challeng-

ing old assumptions. For example, do new technologies change what can be

offered and how? And he recommends brainstorming with current colleagues,

competitors, and customers to develop new ideas. Rather than operating under

the adage “If it isn’t broken, don’t fi x it,” an entrepreneur searching for an

opportunity may wish to pursue the question “How can we make it better?”

Making a Business Case for a New Nonprofi t

New ideas for providing social benefits or making social improvements

need to be evaluated before these ideas are judged to be opportuni-

ties. Once they are so judged, the entrepreneurship process moves into the

organization-creating stage. Jerry Kitzi presents an opportunity assessment

framework for social entrepreneurship.29 The idea for a new organization

can be assessed on three dimensions:

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Founding Nonprofi ts and the Business Case 43

• Social value potential. Does it have strategic alignment, achievable out- comes, partnership or alliance potential, and organizational benefi t?

• Market potential. Does it tap user needs and desires, generate funder interest, and have the ability to capture market share?

• Sustainability potential. Can the idea be developed and implemented to have more benefi ts than costs, as well as adequate income potential,

organizational capacity, and funder interest?

Figuring out the social value, market, and sustainability potential of

a new nonprofi t is critical to the development of a written business plan.

A business plan can help the idea originator and potential supporters

evaluate the feasibility and needs of a new nonprofi t. The plan includes an

assessment of the environment and lays out the business concept, helping

to justify investments in the organization’s development. The business plan

should include fi nancial projections, program objectives, and operational

goals, along with a timeline to help leaders defi ne and measure progress.

The business plan differs from the strategic plan in its purpose and

content. The strategic plan explains how an organization will achieve its

objectives over a specifi ed period of time. It provides an internal road-

map for obtaining and using resources to achieve the mission. Typical

elements of the strategic plan are a vision statement, mission statement,

goals, objectives, action plans, risk analysis and contingency plans, com-

petitive analysis, and fi nancial outline.30 Strategic plans change over time

in order to give timely guidance for running the organization so as to pur-

sue agreed-upon goals. The use and development of strategic plans will

be discussed in more detail in Chapter Five, on formulation of strategy.

In contrast the business plan is written for an external audience, rather

than as guidance for internal workers (employees, volunteers, and board mem-

bers). It explains to outsiders the fundamentals of the nonprofi t organization,

showing why those involved think that it is viable and serves a useful purpose.

The business plan positions the nonprofi t in the larger environment. It may be

shared with an outsider to raise money, fi nd a partner, get a loan, attract new

leaders, and check assumptions about the viability and value of the nonprofi t.

The following is a generic outline of the topic headings for a business plan:

• Title page. Gives the title of the document, the name of the organization, the names of the board members and the executive director, and contact

information.

• Table of contents. Lists the topics covered in the plan.

• Executive summary. Summarizes the content of the plan.

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44 Managing Nonprofi t Organizations

• Mission and organizational description. Gives an overview of the organi- zation, answering basic questions about its purpose, history, form, size,

accomplishments if any, and capacity.

• Market analysis and environmental assessment. Shows the reader that there is suffi cient demand and willingness to cover costs for the

product or service, and describes the competitive and collaborative

environment.

• Services or products to be offered. Explains what will be offered and why; goes into depth on the mission and vision of the organization and

on its objectives.

• Operations. Describes how the service or product will be produced and delivered.

• Marketing plan. Explains how the product or service will be positioned in the market and promoted to attract clients and consumers.

• Board of trustees. Explains who has governing authority in the organiza- tion and describes the board structure and bylaws; may include résumés.

• Membership. Explains qualifi cations for membership (if the organiza- tion has members) and any dues structure; describes benefi ts and rights

given to members based on their membership classifi cation.

• Management and personnel. Describes the executive team and the other personnel who will be running the day-to-day operations of the organi-

zation; includes a discussion of the volunteer program, if applicable;

includes résumés of key staff members.

• Funds required and their expected use. Explains what is needed for the organization to be set up and to thrive; shows donors and investors how

their contributions fi t into the organization and how contributions will

be solicited and stewarded.

• Financial statements and projections. Gives detailed financial state- ments, budgets, cost estimates, and revenue projections.

• Appendices and exhibits. Provides supporting documents and supple- mentary information.

Business plans do not need to be long, elaborate documents. They

should concisely and clearly state what business the nonprofi t is in and

the social value proposition. It should be clear who is being served and

how, avoiding jargon specifi c to the industry. The reader should be able

to clearly ascertain what the organization is providing to the target market

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Founding Nonprofi ts and the Business Case 45

and why the market would fi nd this product or service desirable. The fi nan-

cial statements should be realistic and consistent with other sections of the

business plan. Sample business plans can be found on the Internet as well

as in some texts on nonprofi t entrepreneurship.31

Exhibit 3.1 displays the table of contents and executive summary for

NPower Basic’s business plan submitted in 2005 to the Yale School of

Management, Goldman Sachs Foundation, and Partnership on Nonprofi t

Ventures.32 NP-Basic is a workforce development program involving disenfran-

chised youth from underserved communities who have received training in

delivering computers and technical support to resource-strapped nonprofi ts.

The business plan lays out how every dollar invested in NP-Basic returns six-

teen dollars to the community in the form of jobs and nonprofi ts that are more

productive after receiving computing equipment and technical assistance.

Nonprofi t Vision and Mission Statements

Perhaps the most important elements of the business plan are the vision and

mission statements. The vision statement expresses a nonprofi t’s ultimate goal,

and the mission statement guides the actions of the organization and inspires

employees and investors. The mission statement should convey the nonprofi t’s

essential purpose, approach, and values, distinguishing it from other organiza-

tions. Its words are often the ones most repeated to explain why the nonprofi t

exists. It should be concise and jargon-free so that it is easy to understand for

those who are not familiar with the nonprofi t and easy to use as a touchstone

for those most connected to the nonprofi t. Following are a few one-sentence

mission statements that address purpose, approach, and values:

United Way improves lives by mobilizing the caring power of communi-

ties around the world to advance the common good.

St. Vincent Hospital is a medical institution dedicated to providing qual-

ity patient care with unrelenting attention to clinical excellence, patient

safety, and an unparalleled passion and commitment to assure the very

best healthcare for those we serve.

The National Trust for Historic Preservation provides leadership, educa-

tion, and advocacy to save America’s diverse historic places and revitalize

our communities.

The mission of the Urban League movement is to enable African Americans

to secure economic self-reliance, parity, power and civil rights.

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46 Managing Nonprofi t Organizations

EXHIBIT 3.1. NPOWER BASIC BUSINESS PLAN, APRIL 2005

Table of Contents

1. Executive Summary 1

2. Description of Social Business Venture 3

2.1 Rationale 3

2.2 Mission 4

2.3 Target Market 4

2.4 Business Model 4

2.5 Value Proposition 6

2.6 Social Return on Investment 7

2.7 Business Objectives 9

2.8 Track Record 9

2.9 Leadership Team 10

2.10 Critical Success Factors 10

3. Industry and Market Analysis 11

3.1 The Target Market for NP-BASIC 11

3.2 Segment Analysis 12

3.3 Market Acceptance 13

3.4 Competitive Analysis 14

3.5 Summary of Major Competitors 15

3.6 Competitive Advantages 16

3.7 Summary of Competitive Advantages 17

4. Marketing Plan 17

4.1 Marketing Objectives 17

4.2 Product 18

4.3 Placement and Distribution 19

4.4 Pricing 20

4.5 Promotions Plan 22

4.6 Performance Milestones 22

5. Management Plan 22

5.1 NP-BASIC Team (Year One) 23

5.2 Commitment and Coordination with Parent Nonprofi t (NPower NY) 24

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Founding Nonprofi ts and the Business Case 47

6. Operations Plan 25

6.1 Staffi ng 25

6.2 Implementation 25

6.3 Ongoing Services 26

6.4 Internal Operations and Continuous Improvement 27

6.5 Sales Management and Oversight 27

7. Financial Plan 28

7.1 Pro Forma Statement of Activities 28

7.2 Pro Forma Statement of Financial Position 30

7.3 Pro Forma Statement of Cash Flows 31

8. Risk Assessment, Sensitivity Scenarios, and Contingency Plan 31

9. Appendices 36

Executive Summary

NPower Basic (“NP-Basic”) combines a successful workforce development program for disenfranchised youth with an all-in-one technology service that uses a “hub and spoke” model to meet the basic technology needs of nonprofi ts. Staffed in part with graduates of NPower’s workforce development program, the service offers a network of preconfi gured and software-loaded desktop computers and provides installation, monitoring, maintenance, remote support, a help desk, and onsite technical assis- tance visits. NP-Basic offers critical products and state-of-the-art support at low prices by achieving economies of scale and receiving direct donations of expensive software and hardware from Microsoft and Cisco.

The service’s social value is reinforced by its commitment to hire staff from New York City’s underserved communities. NP-Basic recruits entry-level staff from a workforce development program known as the Technology Service Corps (TSC), which is run by its parent organization NPower NY. TSC is a twelve-week intensive training program that teaches urban young adults aged eighteen to twenty-four a unique combination of technical and professional skills, and provides mentoring by NPower NY’s senior consult- ing staff and hands-on service to the nonprofi t community. Since 2002, TSC has gradu- ated and found jobs for nearly one hundred out-of-school youth who were previously in low-wage, dead-end jobs or who were unemployed, incarcerated, or even homeless. TSC has been the ticket to a meaningful future for these individuals and a path to a lifelong career. Typically wages rise approximately 133 percent to over $26,000 post- program and on an hourly basis, post-TSC wages ($12.75/hour) are 113 percent higher than minimum wage ($6/hour) in New York City.

NP-Basic’s social return on investment is 16. This means that for every dollar invested in NP-Basic, more than $16 is returned to the community in the form of more productive nonprofi ts and more jobs for previously disenfranchised youth.

(continued)dd

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48 Managing Nonprofi t Organizations

Earned income for this venture is generated by charging low setup and mainte- nance fees for each installation. NP-Basic’s target customers are the decision makers at the nearly 3,500 small New York City nonprofi ts that have fewer than ten staff and operating budgets of less than $1 million. Organizations ranging from small community-based social service organizations to local performing arts groups will be the initial target audience for NP-Basic.

Key Objectives

• To help resource-strapped nonprofi ts obtain the technology support they need while saving money that can be applied to further their organizational missions.

• To gain a 3 percent market penetration of the initial target market for NP-Basic by Year Three (approximately one hundred New York City nonprofi ts). The total spending power of these one hundred nonprofi ts is $50 million to $100 million, and together they employ three hundred to fi ve hundred people.

• To provide a supportive work environment for graduates of NPower NY’s workforce development program, TSC. NPower Basic will provide 221 six-month rotations through its help desk for TSC graduates.

By leveraging potential underwriting, corporate affi liations, and TSC, NP-Basic delivers a critical high-quality service at an affordable cost with important community benefi ts.

Potential competitors include Dell, value-added resellers (VARs), other man- agement service providers, consultants, small organizations offering information technology (IT) services ancillary to their primary missions, and savvy internal staff who by default, or in rare cases by design, have taken on an IT management responsibility.

NP-Basic enjoys key competitive advantages over these alternatives including: (1) access to broader resources available through NPower NY such as software and product donations, foundation support for technology capacity building, and a steady labor pool of entry-level technicians from its TSC program; (2) proven experience and strong relationships with small nonprofi ts through NPower NY’s four years of success- ful and well-regarded service to these customers; (3) the lowest pricing available to this segment; (4) a comprehensive service offering that includes hardware, software, and services; (5) technologically advanced information protection through state-of- the-art server backups; (6) a strong history of customer service that focuses exclusively on nonprofi t organizations; and (7) a compelling social value through its incorpora- tion of TSC and provision of affordable technology services to nonprofi t organizations.

The marketing plan for NP-Basic is designed to acquire new customers through a combination of print and electronic media, including advertising, sponsorship of technology events, and promotion through its Web site. NP-Basic also will target the NPower NY client base, its foundation supporters, additional foundations that support small non profi ts, umbrella nonprofi ts, and nonprofi t incubator groups to market the service.

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NP-Basic is run by the Director of Services and Strategy who has more than thirteen years of managerial, service, and operational experience. In addition, the Senior Manager of Service Delivery has nineteen years of technical and business expertise, having worked at prominent private sector technology companies includ- ing Microsoft, EDS, and Razorfi sh. NP-Basic also benefi ts from a strong commitment from NPower NY’s board of directors and senior management, who bring a successful fundraising track record, sales expertise, workforce development skills, and technical leadership, as well as critical shared resources for marketing, fi nance, and human resources that keep operating costs at a minimum.

NP-Basic operations take place in three places: shared space at NPower NY head- quarters, its client sites, and most signifi cantly, cyberspace. Typically the process is as follows: nonprofi ts place orders with an NP-Basic salesperson, an on-site assessment is done, computers and other hardware are ordered and confi gured with software, the system is installed at the client site, and services start immediately with constant monitoring, maintenance, and customer support through a help desk and via remote support. From start to fi nish this process can take as little as seven days, although the processing of the donations may lengthen it somewhat. The team meets on a weekly basis to review key metrics and goals.

NP-Basic projects a three-year Pro Forma Statement of Activities indicating earned revenue growth of 61 percent in its second year and 103 percent in Year Three reaching revenues of $500 thousand in Year Three. Major risks include not being able to reach sales targets, higher-than-anticipated costs, being unable to sustain the service at a price that small nonprofi ts can afford, providing inconsistent quality of service, and being unable to retain a high-performing management team. Careful growth, management, and cost control will mitigate each of these risks and allow the venture to remain sustainable and successful even while managing multiple and, oftentimes, unpredictable risks.

Source: Adapted from NPower Basic Business Plan April 2005, http://faculty.maxwell.syr.edu/ acbrooks/pages/Courses/Documents/Soc%20Ent/NPowerNY.pdf. Reprinted with permission.

Establishment Process

Entrepreneurs have a range of options for proceeding with their idea of creat-

ing a new nonprofi t. This section outlines the choices and steps that move this

idea into reality in the legal environment of the United States. In other coun-

tries with other laws and regulations, options for form and process may vary.

There are many reasons to formally establish a nonprofi t. Once formal-

ized, it takes on an identity beyond that of its founders. This is helpful in

limiting the liability of individuals associated with the nonprofi t and help-

ing to ensure that the organization continues after the founders leave.

Once it has gained legal recognition, the nonprofi t has the ability to take

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50 Managing Nonprofi t Organizations

out loans, make contracts, and keep property and other assets in the orga-

nization’s name. It also acquires added credibility, making it more likely to

be able to attract donations and other support. In addition, the nonprofi t

can get benefi ts that are specifi c to its chosen legal form.

One of the fi rst options is whether to set up the nonprofi t as an unin- corporated association, charitable trust, or tt nonprofi t corporation. Unincorporated associations are the simplest legal form; they can have a bank account in their

name and contributions to them are tax deductible. They have few other

benefi ts but also minimal record-keeping requirements. The charitable trust

is a common legal form in many other countries but has relatively limited use

in the United States. In the United States, this form tends to be used by orga-

nizations whose purpose is to make grants. The most common type of legally

recognized nonprofi t in the United States is the nonprofi t corporation.

Nonprofi t corporations may be either public benefi t organizations or t mutual benefi t organizations. Public benefi t organizations are primarily pub-t lic serving. They fi t into the IRS (Internal Revenue Service) classifi cation

system as 501(c)(3) and some of the 501(c)(4) organizations. Mutual ben-

efi t organizations are primarily member serving and consist of some of the

501(c)(4) organizations and the other nonprofi t tax classifi cations, except

for the (c)(3)s. See Exhibit 3.2 for a listing of all the IRS classifi cations used

for organizations that may qualify for tax exemptions.

When we think of nonprofits, most individuals think of 501(c)(3)

organizations. These nonprofi ts are defi ned by the IRS as “religious, edu-

cational, charitable, scientifi c, literary, testing for public safety, to foster

certain national or international amateur sports competition, or pre-

vention of cruelty to children or animals organizations.” The appeal of

becoming a 501(c)(3) organization is that the nonprofi t gains increased

receptivity to appeals for support, tax deductibility for donors, eligibil-

ity for low-cost mailing permits, exemption from some taxes, ability to

apply for gambling permits in some states, eligibility for government and

foundation contracts and grants, and discounts from some businesses.

However, once established as a 501(c)(3) organization, the nonprofi t is

not allowed to engage in political campaigning, is subject to limits on lob-

bying and unrelated business activity, must ensure that social activities for

participants are insubstantial if they are unrelated to its mission, and must

also ensure that no excess benefi ts or inurements go to staff or board mem-

bers or to their relations. More information on restrictions is provided in

Chapter Fourteen, on public and government relations.

The (c)(3) classifi cation is not available to all nonprofi ts. Some entre-

preneurs who wish their organizations to engage heavily in advocacy choose

to pursue a 501(c)(4) rather than a 501(c)(3) classifi cation. As a (c)(4) the

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Founding Nonprofi ts and the Business Case 51

EXHIBIT 3.2. ORGANIZATIONS THAT MAY QUALIFY FOR TAX EXEMPTIONS UNDER IRA RULES

501(c)(1) Corporations Organized Under Act of Congress (including Federal Credit Unions)

501(c)(2) Title Holding Corporation for Exempt Organization 501(c)(3) Religious, Educational, Charitable, Scientifi c, Literary, Testing for Public

Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations

501(c)(4) Civic Leagues, Social Welfare Organizations, and Local Associations of Employees

501(c)(5) Labor, Agricultural, and Horticultural Organizations 501(c)(6) Business Leagues, Chambers of Commerce, Real Estate Boards, etc. 501(c)(7) Social and Recreational Clubs 501(c)(8) Fraternal Benefi ciary Societies and Associations 501(c)(9) Voluntary Employee Benefi ciary Associations 501(c)(10) Domestic Fraternal Societies and Associations 501(c)(11) Teachers’ Retirement Fund Associations 501(c)(12) Benevolent Life Insurance Associations, Mutual Ditch or Irrigation

Companies, Mutual or Cooperative Telephone Companies, etc. 501(c)(13) Cemetery Companies 501(c)(14) State-Chartered Credit Unions, Mutual Reserve Funds 501(c)(15) Mutual Insurance Companies or Associations 501(c)(16) Cooperative Organizations to Finance Crop Operations 501(c)(17) Supplemental Unemployment Benefi t Trusts 501(c)(18) Employee Funded Pension Trust (created before June 25, 1959) 501(c)(19) Post or Organization of Past or Present Members of the Armed Forces 501(c)(21) Black Lung Benefi t Trusts 501(c)(22) Withdrawal Liability Payment Fund 501(c)(23) Veterans Organization (created before 1880) 501(c)(25) Title Holding Corporations or Trusts with Multiple Parents 501(c)(26) State-Sponsored Organization Providing Health Coverage for High-Risk

Individuals 501(c)(27) State-Sponsored Workers’ Compensation Reinsurance Organization 501(c)(28) National Railroad Retirement Investment Trust 501(d) Religious and Apostolic Associations 501(e) Cooperative Hospital Service Organizations 501(f) Cooperative Service Organizations of Operating Educational Organizations

Note: Other organizations that may qualify for exemption, such as 501(c)(24)s and farmers’ cooperative associations that fall under section 521, are not included in this IRS organization reference chart. Source: Derived from Internal Revenue Service, Tax-Exempt Status for Your Organization, IRS Publication 557 (October 2010).

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52 Managing Nonprofi t Organizations

nonprofi t can do more lobbying. Other classifi cation choices are well suited

to associations that primarily work to serve their members, such as labor

unions(c)(5), recreational clubs (c)(7), and industry and trade groups(c)(6).

In establishing a 501(c)(3) it is necessary to determine whether the

organization is a private foundation or a public charity. The organization

will be deemed a private foundation unless it fi ts one of the exception

areas or can meet the tests to be a public charity under Section 509(a) of

the Internal Revenue Code. There are two types of private foundations:

operating and nonoperating. Nonoperating foundations do not administer

substantial programs or services other than their grantmaking operations.

Private foundations must not self-deal (contract with staff or board mem-

bers’ businesses) and must meet minimal requirements for distributing

their assets, abstain from excess business holdings, and refrain from certain

expenditures. Public charities get more tax exemptions, less burdensome

reporting requirements, and additional fundraising opportunities.

A nonprofi t is considered a public charity if it is any of the following:

• A church, or convention or association of churches

• A school

• A hospital, cooperative hospital service organization, or medical research

organization operated in conjunction with a hospital

• A government unit as described in section 170(c)(1) of the Internal

Revenue Code

• An organization operated solely for the benefi t of a government-owned

college or university

• A recipient of substantial support in the form of contributions from a publi-

cally supported organization, a government unit, or the general public

• An organization that normally receives not more than a third of its sup-

port from gross investment income and more than a third from contri-

butions, membership fees, and gross receipts from activities related to

its exempt functions (subject to exceptions)

Once the founder decides what legal form to pursue, an application

can be made to the federal government for a defi nitive ruling, based on sup-gg port the organization has received to date, or an advance ruling, based on gg support the organization will receive during its fi rst fi ve tax years.

However, instead of pursuing an IRS designation for a new nonprofi t,

a founder may pursue fi scal sponsorship for his or her product or service,

establishing it as a program under an existing nonprofi t, or the founder

may have the new venture’s fi nances and donations administered through

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Founding Nonprofi ts and the Business Case 53

a donor-advised fund of a community foundation, thus negating the need

for a more advanced form of legal recognition as an unincorporated cor-

poration, independent charitable trust, or nonprofi t corporation.

A founder may take other steps to formalize a nonprofit besides

applying for recognition of tax exemption from the IRS and obtaining a

defi nitive or advance ruling. One of the fi rst steps is to obtain an employee identifi cation number. This number is particularly important if the nonprofi t rr will be hiring employees. Some nonprofi ts, such as hospitals and universi-

ties, may need to obtain consents to operate from state and local authori-

ties. Consents may be required if a government is trying to restrict the

number of nonprofi ts of a certain type in a geographical area.

At the state level it is necessary to prepare and submit articles of incorpo-

ration. The articles of incorporation tend to be a very simple document that

describes basic facts about the organization—the founders, contact infor-

mation, and basic purpose. Bylaws that describe the rules under which the

board of the nonprofi t will function are also needed and should be fi led with

the state. Bylaws are described in greater depth in Chapter Nine, on boards

and governance. In some states it is necessary to register to fund raise and

lobby, and to apply for exemption from state income and property taxes.

After their nonprofi t’s formal incorporation, founders need to have the

mind-set that the nonprofi t is no longer their organization. It exists to serve

a public purpose. The founder cannot deduct business-related expenses on

his or her personal taxes. It is also important that the founder set up a system

of checks and balances so that no one person can gain too much power and

control in the organization. For this reason a founder should not serve as

both the executive director and a member of the board of directors. Board

members should be chosen for their ability to govern the organization and

should show loyalty to the organization, not the founder.

Starting a Nonprofi t from an Existing Organization

As mentioned at the beginning of this chapter, in addition to being started

from scratch, new nonprofi ts can arise from existing organizations. We

briefl y describe some of the possibilities in the following sections.

Spin-Offs

The term spin-off refers to the creation of a new organization from an f existing organization. A nonprofi t may spin off another nonprofi t or a

for-profi t operation. Depending on the motivations behind them, we can

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54 Managing Nonprofi t Organizations

distinguish between restructuring-driven, entrepreneurial, and mission-

driven spin-offs.33

Restructuring-driven spin-offs are initiated by the parent company for stra- tegic or operational motives, often arising from a restructuring or refocus-

ing of the parent. These motives may involve fi nancial issues (equity and

debt considerations), regulatory relief (the requirement of a government

agency), or the fi t and focus of various internal business activities or units.34

The less strategically important and connected to core operations an activ-

ity is, the more likely it is to be spun off by a parent.35

The diversity of motivations for spin-offs is suggested by these exam-

ples. The Ludwig Institute for Cancer Research (LICR) is a nonprofi t that

conducts laboratory and clinical research to improve the control of cancer.

It has spun off commercial enterprises so that these enterprises can hold

the licenses for technologies developed by LICR and potentially turn them

into diagnostic or therapeutic applications. LICR does not have the capa-

bility to turn its discoveries into commercially viable products, and it can

retain its research focus by turning market development activities over to

these spin-off companies. The Nature Conservancy spun off NatureServe,

which collects and manages data on species and ecosystems. After more

than twenty years of providing professional staff, databases, and scientifi c

and technical support to a network of partners for this work, the Nature

Conservancy decided it was best to have an independent nonprofi t serve

as a membership organization for the network, rather than for the conser-

vancy to continue to host it as a tangential activity. Leaders Thru Literacy is

another example of a nonprofi t that emerged from an existing nonprofi t.

Board members of the parent nonprofi t, the Quaqua Society, did not want

to dilute the society’s focus and thus felt a spin-off was appropriate.36

Entrepreneurial corporate spin-offs are driven by one or more individu-s als in existing organizations who are frustrated when their ideas are not

endorsed by top management or who want to exploit an unused potential

related to their experience and knowledge built within the parent company.37

Entrepreneurial spin-offs are bottom-up processes, where the entrepreneur is

both the originator of the spin-off decision and the driver of the process. In

the case of nonprofi ts, this spin-off could also involve a dissenting faction of a

nonprofi t, such as a sect of a cult or church. One study found that people who

were very satisfi ed with their jobs were 75 percent less likely to become entre-

preneurs than those who were unsatisfi ed and that the propensity to leave

and start a new organization decreased the more the employee was paid.38

There are numerous examples of nonprofi ts that were started by those

who developed their ideas while affi liated with an existing nonprofi t. Yale

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Founding Nonprofi ts and the Business Case 55

University, originally called the Collegiate School, was started by a group

of religious conservatives who were unhappy with Harvard University’s

break from the infl uence of the church.39 Millard Fuller started the Fuller

Center for Housing in 2005 after being ousted by the board from Habitat

for Humanity International, the nonprofi t he cofounded in 1976. A for-

mer Church of Scientology member started FACTNet and was eventually

stopped from illegally sharing unpublished and copyrighted documents

taken from the church.40

Mission-driven spin-offs are created as means to help fulfi ll the core pur-s pose of a nonprofi t. For example, the parent nonprofi t’s mission may be to

create new enterprises for economic development, job training, empower-

ment of a disadvantaged group, increased diffusion of green technologies,

or facilitation of sustainable demonstration projects.

One instance of this type is Smart Roofs. This limited liability for-profi t

company was created by a nonprofi t group, Sustainable South Bronx, that

teaches job skills—in this case, how to install and maintain vegetative gar-

dens on rooftops. Another nonprofi t, Women’s Action to Gain Economic

Security, helps low-income women create housecleaning cooperatives that

use environmentally safe cleaning products.41 The Vera Institute of Justice

has spun off more than sixteen nonprofit organizations that started as

demonstration projects, such as the Police Assessment Resource Center,

Center for Alternative Sentencing and Employment Services, Legal Action

Center, Esperanza, J ob Path, and New York City Criminal Justice Agency.

The institute now offers a toolkit for spin-offs.42

Companion Organizations

Nonprofi ts sometimes facilitate the creation of new companion organizations, with which they plan to closely associate. For example, a group of organiza-

tions might create a trade association that allows them to work together to

obtain bulk discounts and support their shared lobbying interests. An inde-

pendent 501(c)(3) organization might set up a foundation to fund raise for

a museum or school. Given that tax deductibility of donations is not a benefi t

for all categories of nonprofi ts, it might make sense for a nonprofi t lacking

this benefi t to create a separate nonprofi t that will be attractive to donors

seeking tax deductions. The NAACP, one of the country’s oldest civil rights

organizations, has made use of a variety of companion organizations, includ-

ing a for-profi t organization that produces its magazine; branch chapters that

are 501(c)(4) organizations; its national headquarters, which is a 501(c)(3);

and a special contributions fund organization that is also a 501(c)(3).

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56 Managing Nonprofi t Organizations

Subsidiaries

As found in the case of the NAACP, there are situations where one organization

(the parent) can exercise operational control over another (the subsidiary). This relationship is generally established by the parent so that it can receive

benefi ts from the subsidiary. A subsidiary of a nonprofi t is a corporation owned

or controlled in whole or in part by the nonprofi t.43 The subsidiary may be a

nonprofi t or a for-profi t. Other terms for a subsidiary include affi liate,ee support corporation, and title holding company. Each of these terms refers to a specifi c type of subsidiary. Subsidiaries can be formed for a variety of reasons, including

protecting the parent’s tax-exempt status; protecting the parent from debts

and liabilities from certain activities; attracting grants, contributions, or equity

and debt fi nancing; or helping the parent overcome organizational capac-

ity defi ciencies, enhance community image, offer incentive compensation, or

transfer ownership of activities to employees or other parties.44

Parent nonprofi ts exercise control over subsidiaries via a subsidiary’s

articles of incorporation, bylaws, and board of directors. For example:

• The parent may prepare the articles of incorporation and bylaws. The

articles may provide that the parent has the right to approve any amend-

ments. The bylaws may provide that the parent has the right to appoint

the board of directors and to remove directors without cause and the

right to approve any amendments.

• The governing document of the subsidiary may require it to be bound

by the decisions of the parent.

• Representatives of the parent may be board members, offi cers, or execu-

tive staff of the subsidiary and may have voting power to cause or prevent

action by the subsidiary.

• The subsidiary may be a membership organization, with the parent as

the only member.

Although the subsidiary can be controlled by its parent, it is impor-

tant to note that the subsidiary needs to be established and recognized

by the parent, and also recognized by third parties, as an independently

incorporated organization managed by a board of directors. The par-

ent should not manage the day-to-day affairs of the subsidiary. Even

though the boards of the parent and subsidiary may overlap, it is rec-

ommended that the subsidiary board also include outside directors.

The parent and the subsidiary should maintain separate books and

records, bank accounts, meetings and minutes, stationery, and tax returns,

and each should sign documents in its own corporate name.

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Founding Nonprofi ts and the Business Case 57

Franchise Relationships

According to Sharon Oster, “The franchise relationship is a kind of half-

way house between the freestanding entrepreneurial enterprise and the

branch offi ce.”45 It is characterized by four traits, which are established by

contractual agreement (as opposed to ownership control):

• The franchiser gives the franchisee the right to use the franchiser’s

trademark or sell its products.

• The franchisee pays the franchiser for this right.

• The franchiser gives some assistance and maintains some control over

the way the business is operated.

• Any residual profi ts or losses go to the franchisee.

Franchises are restricted to certain industries in the corporate world

(for example, fast-food outlets and automobile dealers); however, fran-

chises are relatively prevalent in the nonprofi t world. They include well-

known organizations such as Goodwill, the United Way, the Red Cross, the

Boy Scouts of America, and the American Cancer Society. When a nonprofi t

sets up a franchise, its franchisees may be either for-profi ts or nonprofi ts.

For example, the National Football League is a 501(c)(6) unincorporated

nonprofi t association. The Green Bay Packers team is a nonprofi t corpora-

tion and part of the NFL system. In contrast, the Detroit Lions team is a for-

profi t NFL franchise owned by William Clay Ford Sr. In 1990, over half of

the top one hundred charitable nonprofi ts were franchise organizations.46

Should a nonprofi t establish a subsidiary or a franchise? Oster com-

pares the advantages and disadvantages of having a branch offi ce (wholly

owned satellite) and having a franchise. She concludes that a satel-

lite is good whereas a franchise is only fair at protecting the nonprofi t’s

reputation or brand and at coordinating fundraising efforts. A franchise is

good whereas the satellite is poor at improving access to capital, reducing

managerial shirking, and encouraging volunteer efforts.47 We can extend

these conclusions by considering where subsidiaries would fall in Oster’s

framework. In situations where a parent exercises a great deal of control

over a subsidiary, the subsidiary would have the same benefi ts and draw-

backs as the branch offi ce. Subsidiaries characterized by lesser control

would fall somewhere in between the branch offi ce and the franchise in

terms of their pros and cons.

Relationships with affiliate organizations may not always proceed

smoothly. The affi liate may resist control by its parent or act in ways that

harm the larger network due to confl icts of interest. For example, the San

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58 Managing Nonprofi t Organizations

Antonio chapter sued Habitat for Humanity International after HFHI

asked its chapters to sign a new membership agreement. The San Antonio

chapter wanted to continue to use the Habitat name without signing the

agreement.48 The national Girl Scout organization, Girl Scouts of the USA,

wanted to consolidate, effectively eliminating local councils including the

Manitou Girl Scout Council, which went to court. The councils are orga-

nized as separate legal entities, though the national organization charters

them to sell cookies and other merchandise under the Girl Scout trade-

mark. A Wisconsin circuit judge ruled that the national organization could

not eliminate the council as part of a reorganization.49 It is important for

nonprofi t leaders considering affi liate agreements to consider which levels

and types of control will be held by the affi liate and which by the parent.

Concluding Thoughts

The entrepreneurial impulse helped to shape the nonprofi t sector as we

experience it today. Due to the efforts of social entrepreneurs, innova-

tive approaches are continually being tested to address social problems

that cannot viably be addressed by commercial markets. With the support

of well-conceived missions and well-thought-out business plans, founders

who have identifi ed an opportunity and the people and capital to pursue

it may create a nonprofi t that can thrive. Whether a nonprofi t emerges as

a spin-off, subsidiary, or franchise or is established outside of an existing

organization, its social value proposition will likely frame its fundamental

approach and the types of supporters it can attract.

In the next chapter we elaborate on structure and design choices for

nonprofi t organizations. These choices may change in the different stages

of a nonprofi t’s existence. Still, what a founder establishes as operating

principles and values may limit what choices are considered. Knowing

the founding story of a nonprofit may help to explain how it appears

years later.

Questions for Consideration

1. What ideas do you have for a new nonprofi t? How would you go about

fi nding out if your idea is worth pursuing? Are there sources of support

for social entrepreneurship ventures in your community that might be

helpful in exploring your idea?

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Founding Nonprofi ts and the Business Case 59

2. What factors do you think explain the growth of the nonprofi t sector in the

United States over the past decade? Do you expect more or less growth in

the next ten years? Why or why not?

Exercises

Exercise 3.1: Social Entrepreneurship Model

Analyze a nonprofi t business plan, and apply the social entrepreneurship

model to it. Who are the key people, and what are the capital, opportunity,

social value proposition, and context outlined in the plan? You may use the

online NPower business plan that is the source for Exhibit 3.1 or another

nonprofi t’s business plan.

Exercise 3.2: The Founder’s Story

Select three nonprofit organizations, and read the organizational his-

tory provided on each one’s Web site. The history is often provided in an

“About Us” section of the site. What importance is given to the founder in

each history? Compare and contrast the three histories. In what ways are

they similar, and in what ways are they dissimilar?

Exercise 3.3: Mission Analysis

Find a nonprofi t’s mission statement. Identify the words in the statement

that indicate the nonprofi t’s purpose, approach, or values. What are the

strengths and weaknesses of the mission statement? What recommenda-

tions do you have for improving it?

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CHAPTER FOUR

ORGANIZATIONAL STRUCTURE

S outhend Community Services (SCS) was founded in 1974 to serve the residents S of one of the most disadvantaged neighborhoods in Hartford, Connecticut, and S developed a strong track record as a provider of quality programs for clients of all developed a strong track record as a provider of quality programs for clients of all ages.1 s In 2000, the city obtained a multimillion dollar, fi ve-year Youth Opportunities

ogrant from the U.S. Department of Labor and chose SCS as the key contractor to -provide services. The program was designed to keep in-school youth on track, lead out- rof-school youth back to school or alternative ways to earn a diploma, and help older

youth make transitions to college or full-time employment.2 S The contract allowed SCS gto expand its work with at-risk youth, and by 2004, the organization was running nmultiple programs for young children, youth, and the elderly throughout the city. In -2005, however, it faced the expiration of the Youth Opportunities money, with no pos- rsibility of renewal. This would eliminate 40 percent of the organization’s budget. After san analysis of community needs and the organization’s internal strengths, it was bdetermined that the organization would be most effective if it focused only on youth job straining programs and eliminated services to young children and the elderly. Services sfor youth were reorganized into fi ve separate tracks, created to meet the circumstances rand needs of discrete participant groups, and the organization was renamed Our ePiece of the Pie. It was also determined that more and better performance data were yneeded to expand reach and results, and consequently a new information technology rsystem was acquired. Three of the programs not focused on youth were moved to other eorganizations or spun off. A fourth program, child care, was refocused to support the dyouth job program. After the reorganization, an extensive public information and -education campaign was launched to secure new funding, and by 2008, the organi-

zation had replaced the lost contract dollars as well as the money previously brought zation had replaced the lost contract dollars as well as the money previously brought in by its other three programs.3 Figure 4.1 shows the reorganization of the programs.

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Organizational Structure 61

Southend Community Services

Youth services Elder services

Grow preschool care capabilities to meet youth participant childcare needs

• Senior Center

• Elderly Support Services

Case management

Training/employment

• Our Piece of the Pie ®

• Youth Chore

• Hartford AmeriCorps

Educational services

• Former YO! services

Support services

•

Childcare

• Preschool Childcare

• After-School Childcare

SCS decided to adapt one of its non-youth programs to support the new mission and to exit the remaining three.

Exit

FIGURE 4.1. REORGANIZATION OF SOUTHEND COMMUNITY SERVICES

Source: “Our Piece of the Pie (formerly Southend Community Services): Making the Biggest Difference in Hartford,” April 2006. Reprinted by permission of The Bridgespan Group.

As the experience of Southend Community Services and Our Piece of the Pie

shows, nonprofi t organizations need to fi gure out how best to deliver their pro-

grams and services. These decisions will have effects on the arrangement and

operations of the various units and other elements that make up the organiza-

tion. A nonprofi t’s structure is designed and created during the founding of the

organization and then evolves, or is reorganized, continuously from that point

on. At times, in fact, reorganization may be critical for a nonprofi t’s success or

survival. As a result, nonprofi t managers must understand the structure of their

organizations, the consequences of this structure for their organizations, and

the structural alternatives available should the need for reorganization arise.

In this chapter we examine an important aspect of nonprofi ts, the confi gu-

ration and design of their structures. Many nonprofi t organizations have an

organizational chart, such as the one shown for Southend Community Services

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62 Managing Nonprofi t Organizations

in Figure 4.1. These charts show the various units or departments that make

up the organization and indicate how they are related to each other. We can

think of this as a simple visual representation of the organization’s structure

that helps to answer the question, How should we organize ourselves to get

our work done? This is far from a simple question, and organizational struc-

ture goes far beyond the organizational chart. This chapter reviews the many

dimensions of structure that affect how a nonprofi t’s work gets done. We take

the position that nonprofi t organizations operate in many different contexts

and engage in an almost endless array of activities. Therefore we would expect

that they will take on a wide variety of organizational structures, with no one

structure being “typically” nonprofi t.

What Is Organizational Structure?

In the most general sense, structure provides a way for organizations to meet

two confl icting needs—the need to differentiate and the need to integrate.

As Henry Mintzberg states: “The structure of an organization can be defi ned

simply as the sum total of the ways in which it divides its labor into distinct

tasks and then achieves coordination among them.”4 In any but the smallest

organizations with the simplest output, the operation and work of an orga-

nization needs to be broken up into separate tasks and functions. This is the

organization’s division of labor. Once separated, however, these diverse and

disparate tasks and functions need to be coordinated and integrated for an

organization to achieve effi ciency and effectiveness. The greater the division

of labor, the more need there may be for mechanisms for integration.

Organizational structure designates formal reporting relationships,

including the number of levels in the hierarchy and the span of control

of managers and supervisors.5 It also identifi es the grouping together of

individuals into departments, and departments into the total organization.

Finally, it includes the design of systems to ensure effective communica-

tion, coordination, and integration of effort across departments. By doing

so, the organizational structure supports the production of outputs and

achievement of organizational goals, minimizes or at least regulates the

infl uence of individual variation on the organization, and provides the set-

ting within which power is exercised and decisions are made.6

Nonprofit structure does not exist in a vacuum of course, and it is

important to understand its relationship to other aspects of the organiza-

tion. Most of the writing about organizations, by both practitioners and

academics, is organized around the essential elements of all organizations,

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Organizational Structure 63

including structure. As Figure 4.2 shows, structure (formal and informal)

connects to goals and strategy, work and technology, and people. Each ele-

ment has reciprocal infl uences on the others and on the structural design,

and the environment infl uences all of the elements, demonstrating the

complexity of the management and analysis of nonprofi t organizations.

These elements can be described as follows:7

• Environment. This encompasses all the signifi cant elements outside the organization that infl uence its ability to survive and achieve its ends.

These include physical, technological, cultural, fi nancial, and social

factors.

• Strategy. This term describes the choices an organization makes about which markets or clients it intends to serve. It includes the specifi c tac-

tics the organization employs and the output goals it sets for itself.

• Work and technology. Work involves the tasks the organization needs to accomplish given the goals it has set for itself. Technology is the way

in which work is accomplished and the techniques and process used to

transform inputs into outputs.

• Formal organization. This is the more or less explicit codifi cation of how the work of the organization is done and how its parts relate to each

other. It includes elements such as human resource practices, the design

of jobs, and the overall organizational structure.

Environment

Strategy and Goals

Work and Technology

Informal Organization

Formal OrganizationPeople

FIGURE 4.2. ELEMENTS OF ORGANIZATIONS

Source: Adapted from W. Richard Scott and Gerald Davis, Organizations and Organizing: Rational, Natural, and Open System Perspectives (Upper Saddle River, NJ: Pearson Prentice Hall, 2007).s

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64 Managing Nonprofi t Organizations

• Informal organization. This describes the emergent characteristics of the organization that affect how it operates. It includes culture, norms

and values, social networks inside and outside the organization, power

and politics, and the actions of leaders.

• People. These are the organizational participants who make contributions to the organization in exchange for inducements, using their knowledge

and skills to match their preferences to the needs of the organization.

Dimensions of Structure

There are seven core dimensions of structure: formalization, complexity,

centralization, specialization, standardization, professionalism, and hier-

archy of authority.8 Nonprofi t leaders need to consider how much of each

dimension is needed for an effective and ethical organization.

• Formalization is the amount of written documentation in an organiza- tion. This could include job descriptions, procedures, regulations, codes

of conduct, employment contracts, board bylaws, and policies. The more

formalized a nonprofi t, the less workers need to invent new procedures

to get work done and the less uncertainty they have in their daily tasks.

The price is that they also have less fl exibility.

• Complexity is determined by the number of different activities or sub-y systems in an organization. Vertical complexity refers to the number of y hierarchical levels of the organization. The Wikimedia Foundation orga-

nizational chart displayed in Exhibit 4.1 shows four levels, differenti-

ated by the intensity of the shading of the boxes. Horizontal complexity refers to the number of units at similar levels. Wikimedia has fi ve units

at the chief offi cer level. Geographical complexity describes the spatial dis-y tribution of the organization. For example, Amnesty International in

the Unites States is divided into fi ve regions, each with its own staff:

Southern, Mid-Atlantic, Northeast, Midwestern, and Western. Some non-

profi ts have complex parallel structures with two executive directors. For

example, arts organizations sometimes have an artistic director and an

administrative director, with distinct structures beneath each of them.

• Centralization is determined by the hierarchical level that has the author-n ity to make decisions. In centralized organizations decisions are made

primarily at the top level of the organization. Organizations are decen-

tralized when decisions affecting the whole organization are also made at

lower levels of the organization. In nonprofi ts, centralization issues can

come into play in deciding what decision-making discretion to give the

board versus the staff, and staff versus volunteers. Nonprofi t member-

ship associations often give legal rights to make certain decisions to their

members, helping to decentralize the organization.

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Organizational Structure 65

• Specialization is the degree to which organizational tasks are subdivided into separate jobs. If specialization is extensive, each employee performs

only a narrow range of tasks. If specialization is low, employees perform

a wide range of tasks in their jobs. Specialization is sometimes referred

to as the division of labor. In organizing a nonprofi t the designer needs

to ask whether the workforce should be made up of specialists, general-

ists, or a combination of both.

• Standardization is the extent to which similar work activities are per- formed in a uniform manner. In highly standardized organizations,

such as prisons, work content is described in detail, and similar work is

performed the same way at all locations. Some standardization may be

needed to comply with government regulations and contracts.

• Professionalism relates to the level of formal education and training of employees. Professionalism is considered high when employees require

long or specialized periods of training to hold jobs in the organization

or need certifi cation or accreditation. Having professional workers—for

example, certifi ed social workers—is often a requirement to obtain gov-

ernment funding. Volunteer-based organizations or those that use mutual

support models often consider sharing similar experiences with clients to

be more important than professional training. The use of professionals

in a nonprofi t can be threatening or off-putting to those who have been

working in nonprofi ts in similar roles without the professional training.

• Hierarchy of authority describes who reports to whom and the span of control for each manager, as covered previously in our discussion of

organizational charts.

Types of Structure: Two Ideal Types

In the development of thinking about organizational structure, several ideas

and formulations have been particularly important and useful. One of the

most infl uential formulations about organizational structure was Max Weber’s

description of bureaucracy.9 A bureaucratic organization has features such as a hierarchy of authority, limited authority, a relatively high level of special-

ization and division of labor, technically qualifi ed personnel, positions sep-

arated from position holders, procedures for work, rules for incumbents,

and differential rewards. These features were seen by Weber as enhancing

organizational rationality and effi ciency, especially as compared with orga-

nizations run on the basis of favoritism or family or political connections.

Weber’s description was presented as an ideal type, meaning that actual

organizations would be found to be more or less bureaucratic. Bureaucratic

features tend to increase with organizational size and age. As organizations

grow they may fi nd that the bureaucratic features that once enhanced their

efficiency now impede it. At that point they may seek to reduce the level

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66 Managing Nonprofi t Organizations

of bureaucracy in the organization. Some examples of organizations with

bureaucratic characteristics are credit unions with their specialized person-

nel for different client needs, hospitals with their numerous departmental

divisions, and nonprofi t social service providers with their documentation

requirements and strict procedures for dealing with a vulnerable clientele.

Exhibit 4.1 shows the hierarchical organizational chart for a nonprofi t,

the Wikimedia Foundation, Inc., which is “a nonprofi t charitable organiza-

tion dedicated to encouraging the growth, development, and distribution

of free, multilingual content, and to providing the full content of these wiki-

based projects to the public free of charge.”10 The chart shows the reporting

relationships and the divisions of the foundation. The chief fi nancial and

operating offi cer reports to the deputy director, as does the chief technical

offi cer. Two individuals report to the chief fi nancial and operating offi cer

and each of them has one person directly reporting to him or her. Contrast

this with the chief technical offi cer who has a much larger span of control,

with fourteen direct reports. There are many possible reasons why there is

such a difference in span of control in this organization. It may be that the

chief technical offi cer can give his or her direct reports great discretion

over their job tasks, reducing the supervisory control needed. Alternatively,

there may be technologies that help to control and integrate the work of

the technical division so that it can effectively accommodate more sub-

groups with only one division head to oversee them. The complexity of the

work of direct reports may be such that it is relatively easy for their supervi-

sors to monitor it and funnel it to other divisions. The structure may also

have simply evolved without strategic attention to what the most effective

structure would be to accomplish the mission of the organization.

Looking at their organization’s chart, nonprofi t leaders should ask

these questions:

• Does the organizational chart accurately depict the formal reporting

relationships? If not, should the chart or the reporting relationships be

changed? Ultimately, they should be aligned.

• Are the spans of control reasonable? In other words, does anyone have

too many or too few people to manage given the needs of those being

managed? Supervisors should have the time, skills, and systems needed

to perform the human relations and work coordination functions

related to each person reporting to them.

• Are the individuals operating at the same hierarchical level of the orga-

nization relatively equivalent in terms of their discretion, authority, and

responsibility within the nonprofi t? If not, they should be depicted above

or below their current peers.

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Head of Communications

Communications Officer

Head of Business Development

General Counsel

Human Resources Manager

Accounting Manager and Financial Analyst

Accounting Specialist

Head of Office Administration

Office IT Manager

Executive Director

Deputy Director

Executive Assistant

Chief Technical Officer

Lead Front-End Developer - UX

Software Developer - UX

Software Developer - Multimedia Usability

Product Manager - Multimedia Usability

Researcher - UX

Head of Community Giving

Stewardship Associate

Head of Major Gifts

Head of Public Outreach

Education Programs Manager

Outreach Officer

Project Manager- Bookshelf

Head of Reader Relations

Volunteer Coordinator

Development Associate

Head of Partnerships and Foundation Relations

Senior Product ManagerIT Manager

Software Developer

Networking Coordinator

Code Maintenance Engineer

System Administrator

Software Developer and Office IT Support

Engineering Program Manager

Software Developer- Fundraising

Software Developer- Mobile

Data Analyst

Chief Community Officer Chief Global Development

Officer Chief Human Resources

Officer - OPEN Chief Financial and Operating Officer

EXHIBIT 4.1. ORGANIZATIONAL CHART FOR THE WIKIMEDIA FOUNDATION

Source: Wikimedia Foundation, Organizational Chart (July 2010), http://en.wikipedia.org/wiki/File:Wikimedia_Foundation_organization_chart.png.t

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68 Managing Nonprofi t Organizations

A second major infl uential formulation was the description of the dis-

tinctions between mechanistic and organic structures developed by Tom

Burns and G. M. Stalker.11 In a study of industrial fi rms in England, they

identifi ed two types of internal management structures. In stable environ-

ments they found fi rms that were more formalized and centralized, with

most decision making occurring at top levels of the organization. These

fi rms were quite similar to Weber’s bureaucracies. Burns and Stalker char-

acterized these structures as mechanistic. However, in rapidly changing environments they found a structure that was less rigid and more fl exible,

with fewer rules and more reliance on informal adaptation. Decisions were

made at lower levels of the organization and authority was more widely

dispersed. They termed these structures organic. Table 4.1 summarizes the differences between these two structures.

Many nonprofi ts exemplify the organic structure type because it appeals

to values regarding the desirability of shared power, permeable organiza-

tional boundaries to facilitate collaboration, easy movement of members

into and out of the organization, and an ability to be innovative and to

mobilize quickly to address needs. Joyce Rothschild-Whitt describes an ideal

type of a collectivist-democratic nonprofi t organization whose features are

the polar opposite of the bureaucratic organization.12 Authority resides in

the collectivity as a whole and compliance follows the consensus of the col-

lective. Rules are minimal. Social controls are based primarily on personal

or moral appeals. Employment is based on friendships, sociopolitical values,

TABLE 4.1. CHARACTERISTICS OF MECHANISTIC AND ORGANIC STRUCTURES

Mechanistic Structure Organic Structure

Tasks are broken down into specialized, separate parts.

Tasks are shared by employees.

Tasks are rigidly defi ned. Tasks are adjusted and redefi ned through teamwork.

Authority and control are hierarchical. Less hierarchy of authority and control.

Many rules. Few rules.

Knowledge and control of tasks are centralized.

Knowledge and control of tasks can be located anywhere in the organization.

Communication is vertical. Communication is horizontal.

Source: Adapted from Richard Daft, Organization Theory and Design, 9th ed. (Mason, OH: Thomson South-Western, 2007).

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Organizational Structure 69

personality attributes, and informally assessed knowledge and skills. The

concept of career advancement is not meaningful, and there is no hierarchy

of positions. There is a minimal division of labor, and jobs and functions

are general and fl exible. Finally, the primary incentives for participating in

the organization are intrinsic (doing something that fi ts one’s values and

preferred social benefi ts), and extrinsic incentives (material benefi ts such

as fi nancial compensation) are secondary.

These features are characteristic of community and grassroots organiza-

tions.13 Such organizations are composed mostly or completely of volunteers

or members. Grassroots organizations are often locally oriented, focused on

what is happening in participants’ neighborhoods. They may be associated

with social movements or engaged in advocacy. Some examples are legal

collectives, alternative media collectives, food cooperatives, neighborhood

beautifi cation or watch groups, self-help groups dealing with diseases, citizen

action committees, and recreational clubs. Exhibit 4.2 shows the organiza-

tional chart for the Oregon Organic Coalition, a nonprofi t trade association

with an organic structure that operates with rotating and fl uid roles. It was

founded to advance the development and growth of the organic industry and

community in Oregon. For example, it advocates for using food from local

farms in Oregon schools and for federal funding for research on organic

crops. The work of the organization is conducted by volunteers, who partici-

pate in the leadership council, advisory committees, and task forces. There

are no formal members in the legal sense or paid staff. The numerous oppor-

tunities participants have to give input and shape the activities of the organi-

zation make sense given that it exists to support those participants’ interests.

Common Organizational Confi gurations

Besides these ideal types, we can identify a number of common types of

structures. The overall confi guration of structural elements indicates how

work activities are divided, what the reporting relationships are, and how

distinct units or departments are grouped relative to each other. Grouping

is used to bring people and units together to facilitate work accomplish-

ment. The confi guration establishes the general principles for dividing

work, breaking tasks into subtasks, and coordinating activities.14 It specifi es

the overall units that are the basis for making decisions and communicating

within the organization. The content and direction of information fl ows

within the organization depend in part on the organization’s confi guration.

A number of different bases can be used for nonprofi t departmental group-

ing. It is also likely that changing conditions will lead to new confi gurations

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EXHIBIT 4.2. EXAMPLE OF AN ORGANIC STRUCTURE: OREGON ORGANIC COALITION ORGANIZATIONAL CHART

Source: Oregon Organic Coalition, Procedures Manual (2006), http://www.oregonorganiccoalition.org/pdf/orgchart.pdf. Reprinted by permis-l sion of Oregon Organic Coalition.

Executive Committee Handles the administration of

the organization 1) Conducts business on behalf of OOC 2) Provides direction for “Facilitated Electronic Consensus Building” 3) Creates additional subgroups of the OOC should the structure of the organization need to be modified 4) Serves as the officers of the nonprofit corporation

Task Force Groups

Structure

Function 1) Convened by the Executive Committee or an Advisory Committee, with approval of Leadership Council 2) Work on specific projects of limited duration.

Ad hoc groups vary in number

Communications Coordinator Structure

Function

Supports decision-making process through “Facilitated Electronic Consensus Building” system

• Manages the process of e-mail communications • Receives and incorporates comments on each issue

Resource Associates Structure

• Participate in discussions without decision-making authority • Provide information, advice, resources, and contacts

Function

Representatives of agencies and organizations working to support the organic industry, but who are not direct stakeholders

Advisory Committees

11 Advisory Committees represent the participating stakeholder groups.

1) Develop ideas for projects and activities for submission to the Leadership Council for approval for OOC endorsement; 2) Foster communications about issues relevant to their sector and suggest action items for consideration by the Leadership Council; 3) Form and oversee Task Force Groups to work on specific projects for specific periods, as approved by the Leadership Council; and 4) Select the committee’s representative to the Leadership Council.

Function

Structure

Function

Leadership Council

Act as a focal point for development of proactive plans for advancing and developing organic agriculture in Oregon;

Prioritize and decide on actions and activities to be undertaken by the OOC, particularly those originating from the Advisory Committees;

Form, maintain, and support Advisory Committees for communication among participants in their designated sectors;

Facilitate development of projects and activities through collaboration and networking with other related regional and national advocacy groups;

Raise funds to support the OOC;

Develop a strategic plan for the organization and its projects; and

Serve as the Board of Directors of the nonprofit corporation.

Structure 16 Stakeholder Members (Voting)

• 3 Farmers (crops/horticulture, livestock) • 1 Farmworker • 1 Processer • 1 Wholesaler • 1 Retailer • 2 Consumers

• 1 Organic policy analyst • 1 Scientist • 1 Environment and health • 1 Organic certifier • 3 At-large representatives

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Organizational Structure 71

within a nonprofi t. The common departmental grouping options discussed

in the following paragraphs include functional, divisional, matrix, geo-

graphical, horizontal, and virtual network structures.

In a functional structure activities are grouped together into units ore departments by types of work skills and tasks—common functions such

as fundraising, marketing, and service provision. This structure can facili-

tate economies of scale because the organization needs only one unit for

each function. Also, grouping all the knowledge and skills for one func-

tion together can promote the development of functional expertise.

The Wikimedia Foundation is an example of a functional structure, with

groupings around technology, community, global development, human

resources, and fi nances. This structure functions best when little horizon-

tal coordination is needed, as horizontal communication or coordination

between functional departments will be diffi cult. Communication between

two departments will need to go through a higher organizational level so

that decision making can be centralized, with upper-level units deciding

on matters that cut across functions in addition to matters that affect the

organization as a whole. This communication and coordination pattern

can create burdens for the top levels of the organization, resulting in slow

response time in changing environments, poor horizontal coordination,

and reduced innovation. This structure is therefore best for organizations

with relatively few products and working in relatively stable environments.

In a divisional structure in contrast, unit grouping is based not on e functions but on organizational outputs or products. Each division is

organized by the product it produces. Also, the functional departments

needed to produce each division’s output are contained in that division.

This allows for decentralized decision making at the divisional level, free-

ing the top level of the organization to concentrate on overall decision

making and on decisions on issues spanning divisions. For example,

top leadership can play the role of organizational banker, deciding the

level of resources allocated to divisions. Southend Community Services is

an example of a divisional structure, with youth services, child-care, and

elderly services divisions. Decentralized decision making and coordina-

tion of functions within divisions allows the organization to react quickly

to environmental changes, including shifts in customer desires or mar-

ket conditions. This structure is appropriate for larger organizations with

multiple products or services. The major weakness of this structure is that

economies of scale within functions are not possible. For example, each

division might have a fundraising or marketing department. In addition,

coordination across divisions (product lines) may be diffi cult and would

have to be done by higher-level units.

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72 Managing Nonprofi t Organizations

The principle in a geographical structure is to organize in terms of the e location of the organization’s users or customers. With this grouping the

organization can address and respond to customer wants and needs that

may vary by location (different regions of one country or different coun-

tries). For example, large nonprofi ts such as the Girl Scouts or Boy Scouts,

United Way, and Goodwill use semiautonomous local units and a national

headquarters. This structure can be extended globally, with nonprofits

such as Heifer International having operations in various nations around

the globe. A number of options are possible.15 Multinational organizations

have their operations in each country acting as divisions in a decentralized

structure. Global organizations, in contrast, centralize knowledge in their

headquarters and implement actions through national units, similar to a

functional structure. International organizations have hybrid frameworks,

with some activities centralized and some decentralized. Finally, transna-

tional organizations are complex structures, with assets and capabilities dis-

persed, interdependent, and specialized. National units are integrated into

a worldwide system.

A number of structures have been designed for situations calling for

extraordinary fl exibility. A matrix structure simultaneously uses aspects of bothe the functional and divisional structures. This is a complex structure, because it

features two types of management and three types of units. Functional manag-

ers have responsibility for employees with various skills and expertise, whereas

product managers have responsibility for producing outputs. Employees are

under the authority of both types of managers. They are assigned by functional

managers to various product units, where they are supervised by product man-

agers. For example, a nonprofi t providing housing assistance may have

• Functional units organized around expertise in (a) construction,

(b) client counseling, (c) fi nancing, or (d) law and policy.

• Product units that may include (a) new house construction, (b) exist-

ing housing rehabilitation, (c) fi nancial assistance to home owners, or

(d) advocacy.

• Projects that may involve community development in different areas of a

city. Some areas may need new housing, others may need rehabilitation,

and still others may need action by the city. For each project the best

mix of personnel from the functional and product units is chosen for

the project team. The team is disbanded after the project is completed.

The matrix structure is appropriate under a variety of conditions,

including those where pressure exists to share scarce resources across

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Organizational Structure 73

product lines, environmental pressure exists for two or more critical out-

puts (such as in-depth technical knowledge and frequent new products),

or the environment is both complex and uncertain.16 Under these circum-

stances, vertical (functional) and horizontal (team) authority are both

given recognition. The advantage of the matrix structure is that it is fl exible

in terms of both human resources and products. This makes it particularly

useful in rapidly changing environments. It is best suited to medium-sized

organizations with multiple products. The structure, however, has a num-

ber of weaknesses. Employees are responsible to two managers, which vio-

lates the principle of the unity of authority. This can cause frustration for

employees and managers and requires individuals with good interpersonal

skills and a willingness to work in a shifting and ambiguous work setting.

Disputes over authority relations are more likely to arise here than in other

structures, and time and effort must be expended in resolving them.

Finally, an emerging form termed the virtual network structure extendse the concept of horizontal coordination and collaboration beyond the

boundaries of the traditional organization. This structure is characterized

by the outsourcing, or contracting, of some of an organization’s functions

or activities. With the advent and growth of increasingly extensive and

sophisticated electronic communication systems, a network of outside

specialists can be located anywhere and coordinated by the core, or cen-

tral, organization. This allows the core organization to take advantage of

the specialized expertise of any number of partner organizations. The

organization decides which functions it will outsource and how much

control it will maintain or allocate to the partner organizations. This

structure gives an organization worldwide access to talent, resources, and

capabilities without the need to invest in its own facilities or employees.

This reduces overhead and makes the organization highly fl exible and

responsive to changing environments. For example, the housing non-

profi t in the previous example may decide to expand its impact nation-

ally. It has the capacity to use a matrix structure to complete a wide variety

of projects locally. Outside of this, however, it may be able to provide

only Web-based client education for a national constituency. In order to

provide its other services, it could establish partnerships with other non-

profi ts. In each locale the partners could be linked into a network and

coordinated via electronic media. The primary weakness of this structure

is the increased diffi culty of maintaining control over far-fl ung partners,

including the need to make contracts with these partners and monitor

contract compliance. The organization is also dependent on partner per-

formance and potentially vulnerable to partner failure.

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74 Managing Nonprofi t Organizations

Major Infl uences on Organizational Structure

Many factors have a role in infl uencing the structure of a nonprofi t, includ-

ing information processing needs and political, cultural, and institutional

infl uences.

Structure and Information Processing

One of the primary activities in an organization is to provide informa-

tion when and where it is needed in order for the organization to accom-

plish its tasks. Information needs are contingent on a number of factors,

including the technology used to accomplish tasks, the organization’s

environment, and the organization’s strategy. Technology here is broadly y defined, referring not only to the machines and hardware used to per-

form work but also to the skills and knowledge of workers. John Galbraith

has provided a formulation that holds that information needs are a func-

tion of three dimensions of technology: complexity, uncertainty, and

interdependence.17 Information needs increase as the complexity, uncertainty,

and interdependency involved in accomplishing tasks increase. Moreover,

their infl uence is multiplicative in that the effect of any one dimension is

much greater when another is also present.

• Complexity is a function of the number of different items or elements y that must be dealt with simultaneously in task accomplishment. It can

be measured by the variety of inputs or the degree of customization of

outputs. For example, a fundraising event has greater complexity when

it involves donors with diverse interests and giving potential. More infor-

mation needs to be considered and communicated to coordinate an

event suited to a wide range of donors.

• Uncertainty refers to the variability of the items or elements on whichy work is performed. This can be measured by the number of exceptions

encountered during the production of outputs. A fundraising event

scheduled to be held outdoors has uncertainty related to weather con-

ditions. Contingency plans need to be developed in case of bad weather.

• Interdependency is the extent to which items or elements on which work y is performed or the work processes themselves are interrelated, requir-

ing information sharing. James Thompson relates information use to

types of interdependence.18 The fundraising event, for instance, may

have pooled interdependence because the program and development staff e need to work together as a team to create a report to donors on the

organization’s achievements. It may have sequential interdependence in that e

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Organizational Structure 75

someone must fi rst secure the venue before the food and entertainment

can be arranged. Task accomplishment of one person or unit is depen-

dent on the output of another. It may also have reciprocal interdependence, ee with units posing critical contingencies for each other that have to be

resolved before action can be taken. For example, tickets cannot be sold

until prices are determined, which may depend on estimated costs and

revenue goals and an assessment of the market base and opportunities

for sponsorships.

In addition, organizational information needs have been linked to orga-

nizational environments and strategy.19 In addition to increasing for techno-

logical reasons, information needs increase with increasing environmental

uncertainty, complexity, and change. Strategy affects the way an organiza-

tion is run, which affects organizational structure and decision making. This

in turn can affect the degree of information processing needed. As the

example of Southend Community Services/Our Piece of the Pie shows, a

change of strategy can lead to an increase in the amount of information the

organization needs to gather and process.

When information fl ow in a nonprofi t is inadequate, a number of prob-

lems can arise. The people who need information may not get it. Or they

may get too little information, too much information, or information of the

wrong type. In all these cases, job performance will be negatively affected. A

nonprofi t’s structure is key to proper information fl ow. The design challenge

is to create structures that match the demands for information processing.

Information needs to fl ow horizontally as well as vertically through an orga-

nization in order to link employees, work units, and organizational levels.

As information processing needs increase, an organization can respond by

increasing the information handling capacity of its structure. This can be

done by increasing the capacity of vertical and horizontal linkages.

Vertical Linkages Vertical linkages can be used to coordinate activities between the various levels of s a nonprofi t and are primarily used for control. They ensure that lower levels

of the nonprofi t are aligned with goals set at higher levels and higher levels

are informed of the activities of lower levels. A variety of structural mecha-

nisms can be used to support a nonprofi t’s vertical linkage requirements.

They are ranked here in order of increasing information handling capability:

• Rules, schedules, and plans can be used when problems, issues, or deci-

sions between levels are routine or repetitious. This alleviates the need

for direct communication for coordination.

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76 Managing Nonprofi t Organizations

• Hierarchical referral is used when members of a unit (or several units) at

one level can’t resolve a problem or make a decision. The matter is referred

to, or passed to, decision makers at the next higher level in the hierarchy.

• Vertical information systems include periodic reports, written informa-

tion, and computer-based communications distributed between levels

of the hierarchy.

Horizontal Linkages Horizontal linkages can be used to ensure coordination between units at thes same level of a nonprofi t, such as divisions or departments within a division

(fundraising, marketing, production, and the like). Without horizontal link-

ages, information sent from one unit to another would have to fl ow up vertically

to a higher unit that oversees both of the lower-level units and then be routed

down to the recipient unit. A number of structural alternatives are available to

support horizontal information fl ow. These are ranked here in order of increas-

ing information fl ow. However, that ranking is inversely related to the cost of

the time and human resources needed to establish and maintain each linkage.

• Horizontal information systems can be used to exchange informa-

tion between units (workgroups, departments, divisions, and so on).

Routinized and computerized information systems can provide periodic

information about activities and information about problems, opportu-

nities, and needed decisions.

• Direct contact can be established between managers or employees

affected by a problem, opportunity, process, or decision. For example,

a liaison role may be played by a person in one unit who is given the

responsibility of communicating with another unit in order to enhance

coordination and cooperation.

• Task forces are useful when linkage is needed between more than two

departments. A task force is a temporary group composed of representatives

of the units needing to be linked. Each member represents the interests of

his or her unit and can carry information about the task force’s activities

back to that unit. Task forces are typically disbanded after the tasks they

were formed to address have been accomplished.

• A full-time integrator differs from a liaison in several respects. This is a posi-

tion created to link several units. Also, the integrator’s position is outside

the units being linked. The integrator has the responsibility to coordinate

the units. His or her title may be product or program manager when a prod-

uct’s or program’s accomplishment requires several units to coordinate.

• A project team is the strongest horizontal linkage, more signifi cant than

a task force. Project teams are used when activities among units require

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Organizational Structure 77

extensive and relatively long-lasting coordination, such as when organiza-

tions have a large-scale project or are exploring a major innovation or new

product line.

Political, Cultural, and Institutional Infl uences on Structure

Organizations, including nonprofi ts, seek to be rational and to design their

structures for effi ciency and effectiveness. Organizational design, however,

is a far from simple process with predictable outcomes. According to Hall

and Tolbert, “Organizational design does affect structure, but not in the

simple, overly rational manner suggested by the authors of prescriptive

solutions for organizations.”20 Organizational structure is also affected by

the politics of strategy formation and cultural and institutional factors.

Although these topics will be covered in detail in other chapters, it is use-

ful here to mention their relationship to organizational structure.

The strategic choices organizations make are infl uenced by bounded

rationality and the politics of the decision-making process.21 Organizational

choices are made by dominant coalitions. Various interest groups within orga- nizations each have preferences for organizational goals. No one inter-

est group is normally powerful enough to impose its preferences on the

organization. Consequently it needs to form a coalition with other interest

groups who can agree to cooperate (each giving up some part of its pref-

erences in order to form the coalition). The power of a coalition comes

from combining the power held by the various parties in the coalition. The

power of a dominant coalition is greater than that of other coalitions in the

organization. This coalition will form the power center of the organization.

Decision makers in the dominant coalition engage in a political process to

select those parts of the environment with which the organization will be

concerned, strategies to deal with the environment, technologies, and roles

and relationships (structure) to control the technologies and implement

strategy. In nonprofi t organizations such political struggles over strategic

choices may be especially pervasive, given the wide variety of stakeholders

who might claim to be legitimate members of coalitions.

National culture will also infl uence organizational structure. Organi-e zations are located in national cultural contexts, and organizational cul-

tures will be a refl ection of the larger culture.22 National culture can be

reflected in how organizations structure authority relations; decision-

making responsibility; control and communication systems; and employee

training, recruitment, evaluation, and promotion. This is important for

understanding nonprofi ts, as they may be structured and operated very

differently in different national culture settings. Similarly, the operations

of nonprofi ts with global scope or working in international settings such as

development may be structured differently across national cultures.

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78 Managing Nonprofi t Organizations

Organizational culture is the set of key values, beliefs, understandings, e and norms shared by organizational participants. It underlies the behavior

of the organization as a whole and of the participants. It affects ethical

behavior, management commitment to employees, employee commit-

ment to the organization, and the relative importance placed on effi ciency

or customer service. An organization’s culture is unwritten but can be

observed in organizational stories, slogans, ceremonies, dress, and offi ce

layout. Such cultures are relatively stable and long lasting and are a con-

text within which structures are formed. Culture can affect preferences,

such as those for centralization or decentralization, and it interacts with

other contextual factors. Nonprofi ts can have distinct cultures that affect

all aspects of their structures and operations. These cultures can be based

on mission, a service or client orientation, management preferences, or

workplace arrangements. They may also be ideologically based, such as

with a focus on feminism, holistic medicine, or environmentalism.

Finally, DiMaggio and Powell note that organizations exist in fi elds composed of other organizations providing the same societal function.23

Within these fi elds, social pressures exist for organizations to become

homogeneous. This process is termed institutional isomorphism and is m the result of three possible forces. Coercive isomorphism occurs when lessm powerful organizations conform to the wishes of other, more powerful

organizations. For example, funders and regulators can compel non-

profi ts to adopt particular structures, such as evaluation units. Mimetic isomorphism is the result of organizations in uncertain environments copy-m ing the structures of organizations perceived to be more successful. For

example, a nonprofi t may establish a marketing research department if it

feels that this has contributed to the success of other similar nonprofi ts.

Finally, normative isomorphism is due to the spread and adoption of ideasm about appropriate structures that is fostered by professional management

schools and consultants. For example, consultants may advise nonprofi ts

to establish accepted models of good governance that specify a particular

board structure and way of operation. In each of these cases, nonprofi ts

adopt the structures and processes of other nonprofi ts in their fi eld.

Structural Defi ciency

Nonprofi ts use valued time, effort, and money designing and redesigning

their structures in an effort to enhance their effectiveness and keep abreast

of changes inside and outside the organization. The previous discussion

reveals that this is far from a simple task and that trade-offs often need

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Organizational Structure 79

to be considered. The consequences of inattention to structural needs or

inappropriate structural design can, however, be quite serious. A number

of symptoms of structural deficiency have been identified. They mani-

fest themselves when organizational structures are out of alignment with

organizational needs.24 When they occur, nonprofi t managers must move

quickly to diagnose and correct any underlying structural problems.

• Decision making is delayed or lacking in quality. When this occurs deci-

sion makers may be overloaded because the hierarchy funnels too many

problems and decisions to them. Delegation to lower levels may be insuf-

fi cient. Information may not reach the right people because horizontal

or vertical information linkages may not be adequate.

• The organization does not respond innovatively to a changing environment.

In this situation departments may not be coordinating horizontally. The

organizational structure also has to specify departmental responsibilities

that include environmental scanning and innovation.

• Employee performance declines and goals are not being met. Employee

performance may decline because the structure doesn’t provide clear

goals, responsibilities, and mechanisms for coordination. The structure

should refl ect the complexity of the environment and be straightforward

enough for employees to work effectively within it.

• Too much confl ict is evident. In this case the structure may need to allow

confl icting departmental goals to combine into a single set of goals for

the entire organization. When departments act at cross-purposes or are

under pressure to achieve departmental goals at the expense of organi-

zational goals, the structure is often at fault. Horizontal linkage mecha-

nisms are not adequate.

Concluding Thoughts

Nonprofi t organizational structure is both a consequence and a cause. It

is a consequence of the nonprofi t’s external context as well as its work

processes and strategy. In turn structure infl uences many of the internal

features of the nonprofi t, such as information fl ow, authority relations, and

hierarchy. In addition it has both deterministic elements and fl exibility. On

the one hand a nonprofi t organization cannot survive if its structure is too

far out of line with important external or internal contingencies. On the

other hand nonprofi t organizations usually have a range of design options

for accomplishing their tasks.

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80 Managing Nonprofi t Organizations

Given the nature of organizational structure and the diversity of the envi-

ronments that nonprofi ts operate in, their missions and strategies, and their

internal and external stakeholders, it is not surprising that nonprofi t struc-

tures take many different forms. For instance, nonprofi ts may provide public

or private goods, get funds from sales or donations, and use employees or

volunteers. Each option has several structural implications. Depending on

these and other factors, nonprofi ts may look structurally much like business

fi rms or public agencies, or they may take on hybrid or unique forms. They

may also be located in rapidly changing and unpredictable environments,

which will have other structural ramifi cations. All these factors make the

structural design tasks for nonprofi t organizations continuously challenging.

In the next chapter we consider strategy formation. It is important to

remember that this process, as well as the others to follow in subsequent chap-

ters, is intimately interrelated with structure. On one hand the organizational

actions required by a strategy that is out of line with existing structure will not

be possible. On the other hand a nonprofi t may change its structure to facili-

tate the accomplishment of a new strategic direction. In these ways structure

will both infl uence and be infl uenced by strategy in a dynamic manner.

Questions for Consideration

1. Nonprofi ts are sometimes said to have “too much” structure or “too

little” structure. Explain what each condition means, how it may come

about, and what it might lead to.

2. How might a nonprofi t’s structural design be infl uenced by factors

outside the organization? How might the design be infl uenced by fac-

tors inside the organization? How might a nonprofi t balance these two

infl uences on its structure?

Exercises

Exercise 4.1: Dimensions of Structure

Think of a large nonprofi t hospital on the one hand and a small garden

club that meets monthly at a member’s house for discussions on the other.

Describe how these nonprofi ts are likely to differ in terms of

1. Formalization

2. Complexity

3. Centralization

Why might you expect them to differ on these dimensions?

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Organizational Structure 81

Exercise 4.2: Structural Design

Organizational structure needs to be aligned with the organization’s tech-

nology, environment, and strategy. Assume you want to organize one of

the following types of nonprofi t. After you pick one, answer the questions

that follow.

• An agency providing food and clothing to the poor

• A year-round camp for young people

• An art museum and gallery

1. What might your organization’s mission statement be?

2. What tasks need to be done to provide its services?

3. Using your answers to the previous questions and information in this

chapter, draw an organizational chart illustrating a functional structure

for this organization.

4. Draw another organizational chart showing how this organization

would look with a divisional structure.

5. What are the pros and cons of these alternative structural confi gurations?

6. Under what circumstances might it be useful for your organization to

have a matrix structure?

7. Under what circumstances might your organization employ a virtual

network structure?

Exercise 4.3: Structure and Information

Looking further at the nonprofi t you described in Exercise 4.2, discuss its

probable information processing needs, and describe the horizontal and

vertical information linkages that might meet these needs.

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PART TWO

STRATEGIZING, RESOURCING, AND ALIGNING

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CHAPTER FIVE

FORMULATION OF STRATEGY

I n 1981, the Flinn Foundation in Arizona was focusing its grants on advancing medi-IIcal education, biomedical research, and a few community health projects.II 1 Several years later, sparked by a doubling of bequests, the foundation expanded to support programs in education and the arts. By 2001, it was funding 100 to 150 grants per year for matters as diverse as pregnant teenagers, cross-border issues with Mexico, art exhibitions, scholarships, and endowed chairs. Several factors led the foundation to reevaluate and change this scat- tered approach, including new board members who questioned it, outside criticism of some of the projects the foundation was supporting, and an economic downturn in Arizona. In response the foundation’s leaders began a strategic planning process. They reexamined the foundation’s mission and the donors’ intent and came to the conclusion that the founda- tion’s money should be spent for the benefi t of future generations and long-term systemic changes and not for short-term charitable goals. The board identifi ed three broad areas of focus: health policy, community health, and bioscience research. The board then asked staff and consultants to develop scenarios in each of these areas that would lead to action plans. After a review of these scenarios and a vigorous debate, the board decided to focus on biosci- ences. A consulting fi rm was hired to assess the state of biomedical research in Arizona and develop a plan and goals to make Arizona more competitive in biotechnology within ten years. As a result of this strategic planning, Flinn was able to focus its grantmaking on several key strategies—in particular, building the research infrastructure and a thriving bioscience industry. It made fewer but larger grants and now averages about fi ve grants a year. In addition, the foundation acts as a champion for the biosciences and as a coalition builder in this area. Arizona has since seen dramatic increases in jobs, research funding, businesses, and wages in the bioscience sector, and the Flinn Foundation is credited by state leaders with having been instrumental in changing the state’s bioscience landscape.

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86 Managing Nonprofi t Organizations

The story of the Flinn Foundation illustrates the key role that strategic

planning plays in directing and focusing the activities of nonprofi t organi-

zations as they seek to meet their missions and enhance their impact. What

is a strategy? How should nonprofi ts formulate strategies? What factors can

make strategic planning more successful? In this chapter we examine the

nature of strategy. We present common strategy-related tools and outline

a strategic planning process. We also discuss a number of options for

thinking about and formulating strategy.

Business Strategy: A Starting Point for Nonprofi t Strategy

Strategy is often defi ned as a plan designed to achieve a particular long-termy aim or goal. The word derives from the Greek strategia, or “generalship.” Sun Tzu’s The Art of War, written around 500rr b.c., is generally acknowl- edged to be the earliest existing systematic and extensive discussion of

military strategy and is still cited as useful reading for managers.2

We begin by taking a brief look at the extensive literature on busi-

ness strategy in order to place nonprofi t strategy in perspective. Nonprofi t

scholars and practitioners have drawn from the frameworks developed for

businesses. They have in addition created their own tools for strategic plan-

ning, as we will see later in this chapter.

A Brief History of Business Strategy

Strategic planning in American business can be traced to the adoption of

a scientifi c approach to management in the early decades of the 1900s.

Scientifi c management’s central tenets were rational planning and organi-s zational design based on corporate objectives established by top leaders.3

Strategy got a big boost in the post-World War II period, when American

industry underwent a major expansion, and long-term planning and con-

trol became key priorities of large fi rms wishing to develop new markets.4

In this business environment, strategy and strategic planning began to take

center stage in business thinking. Along with this, prominent academic

writers in the 1960s, such as Alfred Chandler and H. Igor Ansoff, insisted

that all companies needed an overall corporate strategy.5

Alfred Chandler, writing in 1962, is credited with the fi rst use of the term

strategy in the business context. He provided the classic defi nition of y strategic man- agement as “the determination of the basic long-term goals and objectives of an t

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Formulation of Strategy 87

enterprise and the adoption of courses of action and the allocation of resources

necessary for carrying out these goals.”6 These and other foundational statements 6

promulgated a view that strategy is about top organizational leaders developing

long-range objectives and plans based on the company’s desired position in the

market.7 Henry Mintzberg characterizes the thinking in this early period as fol-7

lows: “When strategic planning arrived on the scene in the mid 1960s, corporate

leaders embraced it as ‘the one best way’ to devise and implement strategies that

would enhance the competitiveness of each business unit. . . . Planning systems

were expected to produce the best strategies as well as step-by-step instructions

for carrying out those strategies so that the doers, the managers of business,

could not get them wrong.”8

The highly rational and analytical models and practices of strategy for-

mation began to be challenged in the mid-1970s.9 In academia, theorists

were developing a variety of less rational or nonrational models of organi-

zations. These models painted a picture of organizational decision making

infl uenced by environmental and social factors. The implications of this for

strategy formation were fi rst highlighted in the early 1970s, when research

by Henry Mintzberg found that managers were less likely to use analytical

planning tools than previously assumed.10 It was also in the 1970s that the

fi rst oil crisis revealed the strategic plans of American businesses to be

fl awed in that they did not address the possibility of such a crisis in their

corporate visions of the future. Around the same time, Japanese companies

were experiencing dramatic success despite putting less effort into strategic

planning than U.S. companies did. These challenges to formal strategic

planning led to a barrage of alternative defi nitions, models, and practices.

Contemporary Business Strategy

The shifts in thinking that have occurred throughout the history of busi-

ness strategy have led to a diverse range of theories and models. A 1998

review by Henry Mintzberg, Bruce Ahlstrand, and Joseph Lampel con-

cluded that a variety of general defi nitions of strategy could be identifi ed

in the literature.11 The dominant view was to see strategy as a plan—a guide nn or course of action into the future or a path to get from here to there. In

addition, however, strategy was described in other ways: for example, as a

pattern of consistent behavior over time, as the n position of particular prod-n ucts in particular markets, as an organization’s perspective or fundamentale way of doing things, or even as just a ploy or specifi c maneuver intended toy outwit an opponent or competitor. These defi nitions of and approaches

to strategy are not conflicting, and they emphasize the different roles

that strategy can play in an organization. They also usefully distinguish

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88 Managing Nonprofi t Organizations

between strategies and plans. As these defi nitions suggest, nonprofi ts may

have a strategy with no plan to achieve it or have plans that are not part

of any overall strategy. In addition, Mintzberg and his colleagues identify

a number of models of strategy formation.12 The models usually found in

textbooks and the practitioner literature explain how to develop a strate-

gic plan by completing a series of prescribed steps and using particular

tools. We discuss these steps in detail later in the chapter. These models

are based on rational planning in which clear and unique strategies are

formulated through a deliberate process of matching internal and external

organizational situations. A rigorous set of steps is used. The organization

is placed in the context of its industry, and an analysis examines how the

organization can improve its strategic positioning in that industry.

An alternative model that is receiving increasing attention is based on orga-

nizational learning and holds that strategy formation is an emergent process.

In this model, management pays close attention to what does and does not

work and incorporates lessons learned into an overall plan of action. Moreover,

because the world is too complex for strategies to be developed all at once, they

must emerge in small steps as an organization adapts or learns. A vigorous (and

at times vitriolic) debate developed in the 1990s between advocates of the more

rationally oriented planning models and the emergence model. The result has

been an acknowledgment that strategy can result from planning or can emerge

without planning and that the increasingly complex world dictates that classical

planning approaches need to be adapted to practical circumstances.

Nonprofi ts and Strategic Planning

Against the backdrop of strategy in business, we next look at strategic plan-

ning in the nonprofi t context. Formal strategic planning began to appear

in the nonprofi t sector in the mid- to late 1970s. A number of commenta-

tors have noted the differences between nonprofi ts and for-profi ts that

might infl uence strategic planning.13 For nonprofi ts:

• Service is intangible and hard to measure, and a nonprofi t may have

multiple service objectives.

• Customer infl uence may be weak.

• Employees may be strongly committed to a profession or to a cause.

• Resource contributors may intrude into internal management.

• There may be constraints on the use of rewards or punishments.

• A charismatic leader or the mystique of the enterprise may be the means

of resolving confl ict.

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• The existence of multiple stakeholders means that leaders need people

skills in addition to or instead of planning skills.

• A nonprofi t’s ability to change may be limited.

These differences have led some researchers to conclude that nonprofi t

organizations exist in environments that differ sharply from the environments

of for-profi t fi rms and that nonprofi ts have more values-based goals and mis-

sions.14 This is certainly true for some nonprofi ts, such as advocacy groups

and many environmental and civic organizations, and it limits the usefulness

of for-profi t rational planning models for these organizations. However, other

nonprofi t organizations, such as hospitals, day-care organizations, and nurs-

ing homes, operate in environments more similar to for-profi t environments.

For these organizations, adapting business sector strategic planning models

can be useful. The benefi ts of strategic planning for nonprofi ts include iden-

tifi cation of important internal and external infl uences, the generation of

viable options, and understanding of potential effects of strategies on stake-

holders.15 To understand strategic planning in nonprofi ts, we will fi rst con-

sider a number of general strategic orientations that nonprofi ts could adopt.

General Strategic Orientations

In this section we look at orientations to organizational strategy. We begin

by focusing on strategic positioning.

Strategic Positioning

A nonprofi t organization may have a generic overarching strategy, termed its

strategic position, under which more specifi c strategies fi t. Much work in the corporate and nonprofi t strategy fi eld has been devoted to identifying such

generic strategies.16 One of the best-known formulations of strategic positions

is Michael Porter’s view that there are three generic strategies: cost leader-

ship, differentiation, and focus.17 In a cost leadership strategy, an organization p focuses on using effi ciency, standardization, and high volume to reduce costs

through economies of scale. The organization thrives by selling at a low price

to a large customer base. For example, Goodwill Industries is a leader in the

secondhand clothing industry with its extensive network of retail stores.

A differentiation strategy, in contrast, involves positioning the organization n to offer unique products for select buyers in a broad market. Specialization

can be based on a number of factors, including but not limited to

product design, technology, features, dealers, and customer ser-

vice. These features allow the company to charge a premium price,

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90 Managing Nonprofi t Organizations

which buyers (or donors) are willing to pay as long as they perceive

added value in the product. Brand loyalty is a critical factor for contin-

ued success. Harvard University offers a good example in the nonprofi t

sector of adopting a differentiation strategy. Finally, an organization

with a focus strategy relies on a narrow market focus as opposed to the s broad market scope of the previous strategies. The organization posi-

tions itself to succeed by developing a high level of knowledge and

competence in its limited market segment. Competitive advantage can

be obtained through innovation and marketing. Among nonprofi ts, holistic

or alternative health clinics may exemplify this strategy.

Raymond Miles and Charles Snow offer another popular framework, in

which they differentiate four generic strategy types: defender, prospector,

analyzer, and reactor.18 The most appropriate choice among these strate-

gies depends on an organization’s environment, technology, and structure.

Defenders are mature organizations in mature and stable industries. They seek stability and to protect their market position through effi cient

production, strong control mechanisms, continuity, and reliability. For

example, a long-established nonprofi t hospital may emphasize doing well

what it already does and keeping out new competitors, rather than seeking

new entrepreneurial opportunities.

Almost the opposite of defenders, prospectors seek to exploit new oppor-s tunities in products, services, or markets. A prospector’s strength is in inno-

vation and fl exibility. This strategy is most appropriate in dynamic and

turbulent environments. When Habitat for Humanity began, it was a classic

prospector. Its mission of helping low-income individuals build their own

homes gave it a unique place in the marketplace.

Analyzers are organizations that seek to minimize risk while maximizings profi t through innovation. They typically concentrate on a limited range of

products and try to outperform others. This is most appropriate in a chang-

ing but not turbulent environment. Some nonprofit schools that delved

heavily into distance learning may be seen as analyzers. They fi gured out how

to use their existing strengths profi tably to deliver online courses in ways that

did not undermine their existing programs delivered in a traditional format.

Finally, reactors are organizations that exert little control over their s environment. They do not adapt to competition and do not have a sys-

tematic strategy, design, or structure for responding to changes in the

environment. For example, nonprofi ts that fi nd their mission is no lon-

ger relevant to existing conditions may become reactors. Rather than

redefi ne themselves, they may wait to see if and when conditions might

change back in their favor. If conditions do not shift, they risk los-

ing resources and being forced to close their doors. Lack of capacity to

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Formulation of Strategy 91

monitor the environment or initiate changes in the organization may also

lead to a reactionary stance. A small grassroots nonprofi t that has lost most

of its members may fi nd itself in this situation.

MacMillan’s Framework

Porter’s and Miles’s and Snow’s frameworks were developed for for-profi ts.

Ian MacMillan has developed a portfolio approach to identifying generic

strategic alternatives for nonprofit organizations.19 MacMillan’s frame-

work is based on the assumptions that nonprofit organizations must

compete for scarce community resources, that duplication of services

should be avoided except when a safety net is needed, and that com-

munities are best served by a high-quality service provider. One implica-

tion of these assumptions is that some nonprofi t providers or programs

should be terminated if they do not provide optimal benefits for

the community, opening the way for more effective providers or programs.

That is, community benefi t should be the primary consideration in choos-

ing whether a nonprofi t should collaborate, compete, or end a program.

MacMillan’s framework has three dimensions. Each program that a non-

profi t offers can be evaluated on these dimensions. Program attractiveness is the s degree to which the nonprofi t sees a program as congruent with a number

of positive factors including mission, goals, resources, benefi ts to clients, and

potential to generate revenues or other benefi ts for the nonprofi t. Program

attractiveness is classifi ed as high or low. Competitive position has to do with how n well the nonprofi t serves its clients with a program compared to other non-

profi ts serving those clients with a similar program. Competitive position is

classifi ed as strong or weak and may be a function of a nonprofi t’s resources,

skills, locational advantage, or other advantages. Finally, alternative coverage is an e important dimension because it allows a nonprofi t’s strategy to take commu-

nity needs and resources into account by considering whether there are many

or only a few alternatives that clients could use to obtain the benefi ts provided

by the nonprofi t’s program. If few alternatives to a particular service are avail-

able and clients and the community need it, a nonprofi t might consider pro-

viding that service even though it may not be the most attractive option for the

nonprofi t. Conversely, when there are many alternative providers, community

resources may not be put to best use by supporting the nonprofi t’s provision of

that service, especially if the nonprofi t is not in a strong competitive position.

MacMillan’s framework leads to eight possible types of strategies that

a nonprofi t could consider in determining an approach to a particular pro-

gram.20 Table 5.1 displays these strategy types. The numbered specifi c actions

in the table correspond to the numbered strategies in the following list.

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92 Managing Nonprofi t Organizations

TABLE 5.1. A MODEL FOR IDENTIFYING AN APPROPRIATE STRATEGIC ORIENTATION: BASED ON MACMILLAN’S COMPETITIVE

STRATEGIES FOR NONPROFITS

High Program Attractiveness to Nonprofi t’s Stakeholders

Low Program Attractiveness to Nonprofi t’s Stakeholders

High Alternative Coverage

Low Alternative Coverage

High Alternative Coverage

Low Alternative Coverage

Nonprofi t Has Strong Competitive Position

1. Aggressively compete with other providers.

2. Aggressively grow provision.

5. Collaborate to provide or build up best competitor in order to eventually stop providing.

6. Keep if needed as safety net, strengthen other providers so nonprofi t can stop providing if others can be effective providers, fi nd support for pro- vision; or limit scope of provision to make it more attractive for the nonprofi t.

Nonprofi t Has Weak Competitive Position

3. Stop providing.

4. Decide with other providers who should provide. If cho- sen to continue, strengthen provision.

7. Stop providing.

8. Consider collabo- rating to improve offering, encourage other providers, and stop providing when no longer needed.

Source: Adapted from Ian MacMillan, “Competitive Strategies for Not-for-Profi t Agencies,” in Advances in Strategic Management, vol. 1, ed. Robert Lamb (Greenwich, CT: JAI Press, 1983), 69–72.t

1. Aggressive competition. The nonprofi t is among the best at this pro- gram and the program is highly attractive to it. Many others are also

providing this service, indicating that community resources may be

dispersed too widely. Consequently, the nonprofi t should compete in

order to weed out the weaker providers.

2. Aggressive growth. The nonprofi t is among the best at this program and the program is attractive to it. The presence of few alternatives

is an indication that growth is possible in this area, and the nonprofi t

should pursue it.

3. Aggressive divestment. The nonprofi t is in a weak competitive position, and there are many alternative program providers. Even though the

program is attractive, there is no good organizational or community

reason to keep providing the service.

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4. Build strength or sell out. Again, the program is attractive, but the nonprofit is in a weak competitive position. In this case, however,

few alternative providers are available. It might therefore benefit

the community if the nonprofi t sought to become a better provider.

Alternatively, the nonprofi t should step aside and let others, who are

better at it, provide the service.

5. Build up best competitor. The nonprofi t is among the best at this ser- vice, but it is not an attractive program for the organization. Given that

there are a multitude of other providers for this service, the nonprofi t

should consider helping the next best organization to take over or

share the service.

6. Soul of the agency. The nonprofi t is among the best at this service. It fi nds the program unattractive, but there are few alternative provid-

ers and the community could suffer if the nonprofi t stops providing

the service. It is important to understand what makes the program

unattractive. If it is a matter of fi nances, then the nonprofi t should

seek other ways to fi nance the program. If it is not a good fi t with the

mission, then more serious consideration should be given to program

termination or the risk of mission drift will increase.

7. Orderly divestment. This is not an attractive program, the nonprofi t is not good at it, and many alternative providers exist. There are no

reasons to keep the program.

8. Joint venture. This is not an attractive program, and the nonprofi t is not good at it. In this case, however, few alternative providers exist and the

community could suffer with the loss of a provider. The nonprofi t could

consider joining with one of the other providers to benefi t the community.

The Strategic Planning Process

In this section we will outline the strategic planning process and present

a number of tools that nonprofi ts have found to be useful. In the general

strategic planning model, the strategic plan is the critical link between

abstract aspirations and concrete operations, as shown in Figure 5.1.

Mission and Vision Strategic Planning

and Strategy to Advance the Mission

Operational Plans to Accomplish the Strategy

FIGURE 5.1. GENERAL STRATEGIC PLANNING MODEL

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Formal strategic planning generally involves a series of steps that

include getting ready to plan, assessing the situation facing the nonprofi t,

linking relevant internal and external factors, identifying strategic issues,

and forming strategies designed to address those issues. In this section,

we describe how a nonprofi t organization takes these steps. We provide

examples of what might transpire at each step by walking through a hypo-

thetical strategic planning process for the American Red Cross.

Preparing to Plan

To prepare for strategic planning, nonprofi ts should answer these questions:21

• What is the purpose of the planning effort?

• What will the planning process be?

• What reports will be produced, and when?

• Who will be involved, and what are their roles?

• What are the resources available?

The board and CEO will play a major role in answering these questions.

As shown in the example of the Flinn Foundation at the beginning of

this chapter, the decision to initiate the planning process is likely to

come from these top decision makers. Similarly, in a Red Cross chapter,

the board, after a review of performance, may decide that current strat-

egy should be reevaluated. A key question then is whether consultants

will be used to guide part or all of this process. Consultants will be use-

ful when specific technical or environmental knowledge is needed.

In addition, they may have expertise in the strategic planning process

that is lacking in the nonprofi t. They may also provide impartial input

to the process. Another key question concerns the desired degree of

involvement of staff from the operations or service delivery portions

of the nonprofi t. Although staff will have detailed operational knowledge,

they may also feel that they have a stake in the status quo or in an alter-

native. In general it is important to consider who needs to buy into any

strategies developed, including stakeholders from outside the nonprofi t.

For example, a neighborhood organization would benefi t from the input

of neighborhood residents. This may dictate who should be involved in

the planning process.

Early in the process, limitations and boundaries to planning should be clar-

ifi ed. Mandates and restrictions may put signifi cant bounds on the process or

its outcome. For example, changing service locations or collaborating with spe-

cifi c organizations may be off the table. Existing grant-related commitments to

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Formulation of Strategy 95

deliver specifi c services may need to be honored. As well, funds and personnel

time may be limited or otherwise committed. For example, a Red Cross chap-

ter may need to continue to provide local emergency response services, as this

has been the mandate of the American Red Cross since its founding in 1881.22

Another key part of the planning process is to review the nonprofi t’s mis-

sion and values. These should be referred to throughout the planning pro-

cess, and indeed, one of the results of the process may be to refi ne or revise

them. On the one hand a review of the mission and values can help planners

to reach agreement on the general direction of the nonprofi t and the prin-

ciples that guide its activities. This in turn can limit possible changes and help

planners in giving consistent justifi cations for new strategies. For example,

after reviewing the Flinn Foundation’s original mission, the board recognized

that the mission had drifted, and it decided to refocus its efforts on creating

long-term systemic change, rather than delivering short-term charity. On the

other hand a review may show that the mission is appropriate. For example,

the Red Cross’s mission states that “the American Red Cross, a humanitarian

organization led by volunteers and guided by its Congressional Charter and

the Fundamental Principles of the International Red Cross Movement, will

provide relief to victims of disasters and help people prevent, prepare for and

respond to emergencies.”23 This is unlikely to be seen as needing revision.

Situation Analysis: Assessment of External and Internal Environments

The typical next step in strategic planning is a situation analysis, which

identifi es potentially relevant internal and external factors. At this stage the

goal is to provide a complete list of the factors, not to prioritize them. If a

factor is not identifi ed at this point, it may not be included in subsequent

steps and consequently not be addressed in strategic or operating plans.

A number of tools and techniques can be used for situational analy-

sis. The most common general tool is a SWOT analysis, in which internal factors are identifi ed and determined to be strengths (S) or weaknesses (W) of the nonprofi t, and external environmental factors are identifi ed and determined to be opportunities (O) or threats (T) for the nonprofi t. Exhibits 5.1 and 5.2 outline the factors that a chapter of the American Red

Cross might see as its strengths, weaknesses, opportunities, and threats.

A variety of specifi c techniques are available to identify the external and

internal factors to include in the SWOT analysis.

External Environmental Analysis The external environment of a nonprofi t includes many objective factors

as well as the opinions, needs, and attitudes of important external stake-

holders, including clients, funders, policymakers, regulators, partners, and

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96 Managing Nonprofi t Organizations

EXHIBIT 5.1. EXTERNAL OPPORTUNITIES AND THREATS AT A RED CROSS CHAPTER

An environmental analysis identifi es external opportunities and threats to be consid- ered in a SWOT analysis.

Type of Environmental Factor Opportunity Threat

Industry factors A large decline will occur in the oil and gas extraction component of the state’s economy.

Economic factors State and local government will lose about 6,000 work- ers (3.1%).

Financial factors Financial distress should increase this year due to problems in real estate.

Government factors The Red Cross is well supported by government.

Government and public agencies will become less involved in health issues.

Competition factors Competition exists for fi rst aid, organ donations, safety education, and disaster aid.

Social factors In times of disaster, the Red Cross gets signifi cant support from the public.

Demographic factors Donations to the chapter are higher than the state chapter average.

Future state trends It is expected that the state’s economy will bottom out this year.

Source: Adapted from R. Henry Migliore, Robert E. Stevens, David L. Loudon, and Stan Williamson, “Sample Strategic Plans,” in Strategic Planning for Nonprofi t Organizations (New York: s Haworth Press, 1995), 161–195.

community leaders. Many techniques have been developed to help

nonprofi t organizations describe, explore, and analyze their envi-

ronments24 (see the example in Exhibit 5.1).

A common technique for analyzing the external environment

is described by the acronym PEST. When using PEST, a nonprofi t

looks closely at political, economic, social, and technological aspects

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of the environment that might affect it in a positive or negative way currently

and in the future. Within these categories, factors can range from the spe-

cifi c, such as particular regulations or funding streams, to the general, such

as demographics or overall economic conditions. For example, for the Red

Cross chapter, one of the most important external factors might be the eco-

nomic resources of the local government that could be mobilized to provide

emergency relief. If government resources are lacking, the Red Cross role may

need to become more extensive. In addition, the average age of the popula-

tion and the socioeconomic breakdown of the community may determine the

need for Red Cross services. It is not possible to stipulate in advance which

specifi c or general factors will be relevant for any given nonprofi t and herein

lies the challenge. The technique is only as good as the information avail-

able. Also, as the list of factors to examine increases so does the diffi culty of

the task. Simple environments may be adequately assessed by staff and board

members along with knowledgeable outsiders. In more elaborate, complex,

or turbulent environments, experts may be needed to provide information to

planners. For example, the Flinn Foundation brought in consultants to provide

industry data that staff and board members could not have easily obtained on

their own.

An industry analysis can be used to look at how a nonprofi t is operating in one or more industries.25 The industry analysis is one way in which nonprofi ts

can adopt and adapt a model from the for-profi t world. An initial challenge is

determining what industry to examine. The Flinn Foundation, for example,

could belong to the industry of grantmaking organizations, of community

health advocates, of bioscience research supporters, or a number of other

industries and subindustries. Likewise, besides providing emergency relief, the

Red Cross is also involved in support for military members and their families;

community services that help the needy; the collection, processing, and distri-

bution of blood and blood products; and educational programs that promote

health and safety.26 Each of these can be considered a separate industry.

Once an industry of interest is identifi ed, Sharon Oster offers a use-

ful tool that nonprofi ts can use to identify vulnerabilities and key success

factors.27 Her nonprofi t model expands on Porter’s for-profi t model28 by

including funders and volunteers. It looks at

• Relations among the existing organizations in the industry

• The threat of new entrants

• The threat of new substitutes (competition from alternative services)

• The number and power of user groups

• The power of funding groups

• The power of supplier industries (especially for staff and volunteers)

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Several other techniques may prove useful. Environmental scanning can be used to examine how imminent or distant the positive or negative

impact of an environmental factor is likely to be as well as the magnitude of

the impact. For example, a scan might reveal that a reduction in city social

service budgets may occur in the next fi scal year. This could signifi cantly

affect a nonprofi t’s city funding for its day-care program. Scenario analysis is s a technique for developing scenarios describing possible future situations

(Exhibit 5.1 illustrates some scenarios). Each scenario is evaluated on the

likelihood of occurrence and likely positive or negative impact on the non-

profi t. For example, one scenario resulting from reductions in city funding

would be for the nonprofi t to offset the reduction by imposing fees for its

day-care clients. These two techniques can be combined in an issue impact analysis grid whose cells range from taking priority actions (for cases of high d impact plus high likelihood) to merely tracking (for cases of low impact

plus low likelihood). In the example we are considering, if the scenario

of reduced funding is seen as likely, the nonprofi t might make preparing

for this contingency a priority. This preparation might involve appointing

a task force to evaluate options. Finally, a force fi eld analysis can be used to s consider factors in the environment that may promote or inhibit change.

In our example, it may not be possible to charge low-income clients fees

for services due to their inability to pay. This may make a sliding fee scale

the best option.

Internal Factors Analysis We turn now to the assessment of internal factors, those things inside an

organization that may infl uence strategy. Although all aspects of internal

structure and operations may be considered, a nonprofi t must be sure to

assess its capabilities and resources (see the example in Exhibit 5.2). An

analysis of resources can help planners understand current capabilities,

potential to meet new needs, and resource gaps. Another key factor is the

nonprofi t’s ability to use its resources to successfully run its programs and

meet its mission. The role of resources in helping fi rms attain competi-

tive advantage has been explicitly considered.29 Resources can be tangible

or intangible. Tangible resources are physical assets and include physical

resources (such as buildings, machinery, materials, and productive capac-

ity), fi nancial resources (such as cash balances, debtors, and creditors), and

human resources (such as the numbers and types of personnel and their

productivity). Intangible resources include knowledge and intellectual

resources as well as an organization’s reputation and culture. Intellectual

resources include patents and copyrights. Knowledge resources include

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EXHIBIT 5.2. INTERNAL STRENGTHS AND WEAKNESSES AT A RED CROSS CHAPTER

Continuing the example in Exhibit 5.1, an assessment of internal factors identifi es internal strengths and weaknesses to be considered in a SWOT analysis.

Type of Internal Factor Strength Weakness

Administrative and human resource factors

Volunteers and staff take great pride in their work. The organization has a cul- ture of service. Staff have extensive training and expertise in providing services.

Youth are not adequately recruited or utilized.

Financial factors The fi nancial position is excellent and the fi nancial trend is good.

Income funds are generally dependent on the success of the United Way fund drive.

Equipment and facili- ties factors

The organization has superb, modern facilities. Specialized equipment is available for emergency services.

The organization is absorb- ing expansion areas of the new facility at a faster rate than planned for.

Line-of-ff service factors Disaster services are easily mobilized during times of need.

Compared to other area blood services, the Red Cross carries a high overhead and has a wider area for collec- tion and distribution.

employee knowledge and specialized skills as well as tacit knowledge in the

organizational culture.

Although resources are important, it is their confi guration that pro-

vides organizational competencies. Core competencies provide competitive

advantage. They provide access to markets and are perceived by customers

to provide benefi ts. They are diffi cult to imitate and provide an organiza-

tion with distinctive capabilities. The Red Cross possesses many of these

competencies. It has a strong brand image and reputation for service. It

provides extensive training to employees and volunteers and has a strong

culture of community service. It has specialized facilities for emergency

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100 Managing Nonprofi t Organizations

response (such as buildings, communication equipment, and specialized

vans). These factors make the Red Cross the primary emergency response

organization in most communities.

Internal analysis can use information from a variety of internal sources,

including periodic program or organizational evaluations as well as informa-

tion gathered specifi cally for the strategic planning process by consultants

or staff. A number of techniques are available for the identifi cation of rel-

evant internal factors.

A major way that internal information is gathered is through evalua-

tions. Evaluation of programs and organizational effectiveness are covered

in separate chapters. At this point we stress that periodic evaluations should

be linked to strategic planning. These evaluations should assess progress

toward achieving performance objectives and point to internal factors

enhancing or retarding progress. In addition, organizational assessment

tools, codes of practice, and standards are available for use by nonprofi ts.

Identifi cation of Strategic Issues

Identifi cation of the strategic issues facing the nonprofi t is a key step in plan-

ning. Strategic issues are the small number of very important issues that emerge s from evaluation of internal and external factors that currently are affecting

or are likely to affect an organization. Once the strategic issues are identifi ed,

specifi c strategies can be formulated to address them. If an important issue

is not identifi ed at this stage, strategies may not be formulated to address it.

Strategic issues involve fundamental questions for a nonprofi t. For

example, a question facing the Flinn Foundation was how to have a longer-

term impact on the State of Arizona given the general economic downturn

and the foundation’s dissatisfaction with its current scattershot approach.

Strategic issues might focus on opportunities or challenges. A key point is

that there are likely to be consequences at some point if the organization

does not deal with them. There may be issues that require no organiza-

tional action at present except monitoring, issues that are on the horizon

and will require some action at some point, and issues that require an

immediate response. For the Flinn Foundation the issues were identifi ed

as having moved from the monitoring and horizon stages to requiring

immediate action.

Given the diversity of stakeholders and views and values within nonpro-

fi ts, the process of issue identifi cation will likely require extensive discussion

and may entail confl ict. For example, in a Red Cross chapter, there may be

disagreement on the relative priorities that should be placed on assistance

to military families versus youth education. A systematic process will help

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Formulation of Strategy 101

planners with this stage. John Bryson has identifi ed a variety of procedures

that can be used to identify strategic issues.30 A number of these are quite

straightforward and relatively easy to use, especially in smaller nonprofi ts.

In a direct approach a discussion of mandates, mission, vision, and SWOTh analysis fi ndings leads to the identifi cation of strategic issues, as described

in the following section. All potential strategic issues are then evaluated.

A simplifi ed indirect approach begins with brainstorming to generate a set h of options for action that might be entailed in stakeholder expectations,

SWOT elements, or other relevant material. These options are then evalu-

ated in more detail. A method that can be employed when there is consen-

sus on organizational goals is a goals approach. This technique identifi es and evaluates the issues that need to be addressed to reach the goals. Finally, a

vision of success approach starts with an idea of what success would look likeh and identifi es issues that need to be addressed to reach it.

Using SWOT to Establish Strategic Issues

As noted earlier the SWOT analysis can serve as the basis for establishing stra-

tegic issues. Although the use of SWOT in identifying strategic issues appears

quite straightforward, Kevin Kearns points to the diffi culty of moving from dis-

connected lists of strengths, weaknesses, opportunities, and threats to a succinct

list of prioritized strategic issues, as is required in approaches that rely on SWOT,

such as the direct and indirect approaches just outlined. To address this problem,

Kearns offers a simple process for extending a SWOT analysis to classify strategic

issues.31 His framework systematically links the internal and external elements

of a SWOT analysis. Each internal factor (a strength or weakness) is linked to an

external factor (an opportunity or threat), and each external factor is linked to

an internal factor.

In this way internal and external elements can be mapped into a four-

cell matrix of strategic issue types, as shown in Exhibit 5.3. When opportuni-

ties in the external environment are aligned with organizational strengths

(cell 1), the generic strategic issue is, How can the nonprofi t leverage its strengths to achieve or enhance its comparative advantage, thereby capitalizing on a perceived opportunity? When external opportunities are aligned with internal weak-? nesses (cell 3), the generic issue is, Should the nonprofi t invest its scarce resources in weak programs to become more competitive in relation to a perceived opportunity? When the environment presents a threat but the nonprofi t has strengths con-

nected to that threat (cell 2), the generic issue is, How can the nonprofi t mobi- lize its strengths to avert a perceived threat or even transform it into an opportunity? Finally, when threats and weaknesses are aligned and the nonprofi t lacks

internal capacity or capability to address perceived external threats (cell 4),

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102 Managing Nonprofi t Organizations

EXHIBIT 5.3. USING SWOT ANALYSIS FOR STRATEGIC ISSUE IDENTIFICATION AT A LOCAL RED CROSS CHAPTER

For the Red Cross chapter in our example, a linking of internal strengths and weak- nesses and external opportunities and threats could result in the following matrix. This classifi cation could be followed by discussion of critical choices related to each cell.

Opportunities Threats

Strengths 1. Organization has a

high level of government support.

2. Public agencies will become less involved in health issues.

Weaknesses 3. Youths are not

adequately recruited or utilized.

4. Chapter has high overhead costs.

In cell 1 the general issue is how a nonprofi t can leverage its strengths to take advantage of an environmental opportunity. For example, the support the Red Cross gets from government (an internal strength) could be used to start or expand services (an opportunity in the environment). A specific strategic issue could be framed this way: Should we use government support to start a new service?

In cell 2 the general issue is how can a nonprofi t use its strengths to mitigate an environmental threat? The Red Cross, for example, may have strong programs in health that could in fact benefi t from reduced health services from government.

In cell 3 the general issue is whether a nonprofi t should invest resources to better address an environmental opportunity. For example, should the Red Cross invest in better recruiting from a growing youth market, an area where its recruiting is cur- rently weak?

Finally, in cell 4 the general issue is how a nonprofi t can control or minimize the damage from an environmental threat in an area where the nonprofi t is weak. A stra- tegic issue for the Red Cross chapter in this area could be stated this way: Given our high overhead costs, how can we effectively compete with other organizations who can afford to charge less than we do due to their lower overhead costs?

To add to the value of the matrix as a planning tool, each of its cells can be subdi- vided further. Environmental factors can be subdivided based on their certainty. In this example, it may be uncertain whether government will in fact reduce its involvement in health issues, suggesting that the Red Cross may wish to be cautious about devel- oping new services in affected areas. Strengths and weaknesses can be subdivided based on whether they are actual or potential factors. The chapter may currently have high overhead costs, but it might be that these are likely to come down in the future, turning a current weakness into a potential strength.

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