Strategy and Industry Analysis for Non-Profits

Professor Jesper B. Sørensen Robert A. and Elizabeth R. Jeffe Professor of Organizational Behavior

Stanford Graduate School of Business

What is Strategy for Non-Profits?

Mission What is the social value that the organization is trying to create?

Strategy How does the organization secure its prosperity in the face of competition ?

Organizational Design

How should people be recruited, organized and motivated to achieve the strategy and mission?

Stanford Graduate School of Business

What is Strategy for Non-Profits?

Mission

Strategy

Organizational Design

Social Logic

Economic Logic

Organizational Logic

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Mission does not dictate strategy!

MISSION: END EXTREME POVERTY

Strategy A Strategy B

Org’n A Org’n B

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Analysis and Intuition

If the strategy is not given by the mission, how do you decide on a strategy?

Need to identify:

•  Primary external obstacles to accomplishing your mission

•  Primary insights, skills and resources that you bring to the table, and how they will help overcome the obstacles you face

The craft of strategy formulation lies in balancing analysis and intuition

•  All strategies are hypotheses. You can only discover what will work. Intuition plays an important role in formulating the strategic hypothesis.

•  Analysis of external environment and strategic logic helps to

-  discipline intuition (reality check)

-  rule out bad hypotheses before you commit resources to them

-  better understand why things are or are not working

Stanford Graduate School of Business

What Makes a Good Strategy?

“Strategy” is not a synonym for “success.” A good strategy has four elements:

•  Identification of the opportunity

•  Diagnosis of obstacles to realizing the opportunity

•  An argument explaining how the obstacles will be overcome

•  Coherent action

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Why Industry Analysis?

A good Industry Analysis identifies the main challenges to securing the resources needed to accomplish your mission

Two key elements of industry analysis:

1.  How much economic value is created by our product or service? Is this something people will devote economic resources too? What are the main drivers of value creation?

2.  What are the obstacles to capturing value? Can we can convert the economic value that people place on our product or service into earned income or donations? Or will others benefit instead?

A well-formulated strategy addresses the problems posed by the external environment

Stanford Graduate School of Business

Buyers

You as Producer

Suppliers

Willingness to Pay

Valu

e C

reat

ed

Value Creation: Gap between Willingness to Pay and Willingness to Sell

How much do buyers value your product/service?

Willingness to Sell

What is the supplier’s best alternative to selling to you?

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Value Creation: Drivers

Value creation is the wedge between the maximum that buyers are willing to pay for your product, and the minimum that suppliers are willing to sell you their products

When value created is small, organizations have difficulty securing economic resources needed for survival

Value creation is driven by

•  Size of population with positive willingness to pay

•  Availability and pricing of substitute products (e.g., film vs. live theater)

•  Demand for complementary products (e.g., air travel and carbon offsets)

Non-profits’ mission can often influence ability to create value (volunteers, socially conscious buyers), but creating social value is no guarantee of creating sufficient economic value

Stanford Graduate School of Business

Value Capture

Even if potential earnings are high, actual earnings for industry incumbents will be limited if:

•  Rivalry with existing organizations is intense (i.e., customers/donors can easily be induced to switch), thereby either

-  Driving down your realized prices

-  Increasing your costs (marketing, etc.)

•  Entry into the industry is easy, such that if you raise prices new rivals will emerge

•  Suppliers have the power to restrict availability of needed inputs and drive up their prices

•  Buyers have the power to bargain hard and drive down your revenue

-  Power derives from high level of dependence on buyer/supplier and/or ability of buyers/suppliers to act as one

In combination, these forces can make survival difficult even if the industry creates a lot of value

Stanford Graduate School of Business

Willingness to Pay

Willingness to Sell

Valu

e C

reat

ed

Price

Cost

Value Captured

by Industry

Value Capture

Rivalry Powerful Buyers

Potential Entrants

Powerful Suppliers

Rivalry

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A Coherent Business Strategy Clearly Identifies:

Scope: What are we doing? •  Who are our customers? What�s our product?

•  What activities do we perform?

Competitive advantage: How will we create and capture value? •  Who are our main competitors for customers / donors?

•  What makes customers / donors choose to support us?

Logic: Why will our organization prosper? •  How do our policies address the main challenges posed by the

external environment?

Stanford Graduate School of Business

Strategic Logic

“… until one is able to articulate how the goals, scope, and competitive advantage come together to provide a coherent and convincing case for firm success, you only have a list of elements, not a strategy.”

“Strategy evaluation is testing whether the logic is compelling.”

-- Saloner, Shepard and Podolny, Strategic Management (2005)

Stanford Graduate School of Business

Final Thoughts

Strategy should guide leaders in allocating scarce resources (time and money)

A good, explicit strategy teaches you to say �No�

•  Do not raise and spend money on projects simply because it is easy to raise money for those projects

•  Projects not consistent with strategy are at best a diversion and at worst (and often) a significant drain on resources

Strategy should create basis for prioritizing resource allocations •  Reinforcing competitive advantage is highest priority