Strategic Management in Nonprofit, Governmental, and Small Firms

Nonprofit organizations are basically just like for-profit companies except for two major differ­ences: (1) nonprofits do not pay taxes and (2) nonprofits do not have shareholders to provide cap­ital. In virtually all other ways, these two types of organizations are like one another. Nonprofits have employees, customers, creditors, suppliers, and distributors as well as financial budgets, income statements, balance sheets, cash flow statements, and so on. Nonprofit organizations embrace strategic planning just as much as for-profit firms, and perhaps even more, because equity capital is not an alternative source of financing. Nonprofits also have competitors that want to put them out of business.

The strategic-management process is being used effectively by countless nonprofit and governmental organizations, such as the Girl Scouts, Boy Scouts, the Red Cross, chambers of commerce, educational institutions, medical institutions, public utilities, libraries, gov­ernment agencies, zoos, cities, and churches. The nonprofit sector, surprisingly, is by far the largest employer in the United States. Many nonprofit and governmental organizations outper­form private firms and corporations on innovativeness, motivation, productivity, and strategic management.

Compared to for-profit firms, nonprofit and governmental organizations may be totally dependent on outside financing. Especially for these organizations, strategic management provides an excellent vehicle for developing and justifying requests for needed financial support. Nonprofits and governmental organizations owe it to their constituencies to gar­ner and use monies wisely; that requires excellent strategy formulation, implementation, and evaluation.

1. Educational Institutions

The world of higher education is rapidly moving to online courses and degrees. The American Council on Education, an association for higher education presidents, is considering allowing free, online courses to be eligible for credit toward a degree and eligible for transfer credit. Educational institutions are more frequently using strategic-management techniques and con­cepts. Richard Cyert, former president of Carnegie Mellon University, said, “I believe we do a far better job of strategic management than any company I know.” Population shifts nationally from the Northeast and Midwest to the Southeast and West are but one factor causing trauma for educational institutions that have not planned for changing enrollments. Ivy League schools in the Northeast are recruiting more heavily in the Southeast and West. This trend represents a sig­nificant change in the competitive climate for attracting the best high school graduates each year. Online degrees are a threat to traditional colleges and universities. “You can put the kids to bed and go to law school,” says Andrew Rosen, chief operating officer of Kaplan Education Centers, a subsidiary of the Washington Post Company. Reduced state and federal funding for higher education has resulted in more aggressive fund raising by colleges and universities. President Obama’s call for free community college education for all could also erode attendance in four- year colleges’ 100 and 200-level courses. All institutions of higher learning need an excellent strategic plan to survive and prosper.

2. Medical Organizations

Declining occupancy rates, deregulation, and accelerating growth of health maintenance organiza­tions, preferred provider organizations, urgent care centers, outpatient surgery centers, diagnostic centers, specialized clinics, and group practices are other major threats facing hospitals today. Many private and state-supported medical institutions are in financial trouble as a result of tradi­tionally taking a reactive rather than a proactive approach in dealing with their industry. Originally intended to be warehouses for people dying of tuberculosis, smallpox, cancer, pneumonia, and infectious disease, hospitals are creating new strategies today as advances in the diagnosis and treatment of chronic diseases are undercutting that previous mission. Hospitals are beginning to bring services to the patient as much as bringing the patient to the hospital; health care is more and more being concentrated in the home and in the residential community rather than on the hospital campus. Current strategies being pursued by many hospitals include creating home health services, establishing nursing homes, and forming rehabilitation centers. Backward integration strategies that some hospitals are pursuing include acquiring ambulance services, waste disposal services, and diagnostic services. Millions of people annually research medical ailments online, causing a dramatic shift in the balance of power between doctor, patient, and hospitals.

3. Governmental Agencies and Departments

Federal, state, county, and municipal agencies and departments, such as police departments, cham­bers of commerce, forestry associations, and health departments, are responsible for formulating, implementing, and evaluating strategies that use taxpayers’ dollars in the most cost-effective way to provide services and programs. Strategic-management concepts are generally required and thus widely used to enable governmental organizations to be more effective and efficient.

Strategists in governmental organizations operate with less strategic autonomy than their counterparts in private firms. Public enterprises generally cannot diversify into unrelated busi­nesses or merge with other firms. Governmental strategists usually enjoy little freedom in altering the organizations’ missions or redirecting objectives. Legislators and politicians often have direct or indirect control over major decisions and resources. Strategic issues get discussed and debated in the media and legislatures. Issues become politicized, resulting in fewer strategic choice alter­natives. There is now more predictability in the management of public sector enterprises.

Government agencies and departments are finding that their employees get excited about the opportunity to participate in the strategic-management process and thereby have an effect on the organization’s mission, objectives, strategies, and policies. In addition, government agen­cies are using a strategic-management approach to develop and substantiate formal requests for additional funding.

4. Small Firms

“Becoming your own boss” is a dream for millions of people and a reality for millions more. Almost everyone wants to own a business—from teens and college students, who are signing up for entrepreneurial courses in record numbers, to those older than age 65, who are forming more companies every year. However, the January 3, 2015, issue of the Wall Street Journal (page A1) reported that the percentage of people under age 30 who own private businesses has reached a 24-year low in the United States, to about 3.6 percent, down from 10.6 percent in 1989. The ste­reotype that 20-somethings are entrepreneurial risk-takers is simply false, as millions of young adults struggle in underpaid jobs to maintain their own household, rather than living with their parents. Reasons for the decline vary, but reduced bank lending for small business startups, more indebtedness among young people, and increasing numbers of competitors due to the Internet, all contribute to a more risk-averse, under-30 age group for becoming entrepreneur strategists.

The strategic-management process is just as vital for small companies as it is for large firms. From their inception, all organizations have a strategy, even if the strategy just evolves from day-to-day operations. Even if conducted informally or by a single owner or entrepreneur, the strategic-management process can significantly enhance small firms’ growth and prosperity. However, a lack of strategic-management knowledge is a serious obstacle for many small busi­ness owners, as is a lack of sufficient capital to exploit external opportunities and a day-to-day cognitive frame of reference. Research indicates that strategic management in small firms is more informal than in large firms, but small firms that engage in strategic management generally outperform those that do not.

Academic Research Capsule 5-2 reveals the key attributes of great entrepreneurs, many of whom never went to college and never were an expert at their trade.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).