Non-profit organizations, as a rule, do not aim at gaining a profit, focusing instead on performing social functions. The advantages over competitors are determined in creating a strategy through a competitive analysis of the company and industry. Porter’s model is used to recreate a relatively accurate picture of the current market situation and identify the most popular aspects of the organization’s activities. However, this approach is focused on organizations whose primary goal is to maximize profits. Consequently, the opportunity of applying these principles for enterprises in the non-profit sector should be examined regarding works of Gowdy et al. “How Five Trends Will Reshape the Social Sector” and “How Competitive Forces Shape Strategy” by Porter.
Brief Explanation of Sources
The article of economist Michael Porter called “How Competitive Forces Shape Strategy” was issued in 1979 in the Harvard Business Review. This paper reveals the principles of strategy formation in the for-profit sector of the economy. Competitive analysis is based on comparing a company to its context (Porter, 1979). According to Porter (1979), it is essential to evaluate opponents apart and the industry in which it competes in general. The competition within an area depends on the influence of several competitive forces and actors.
The work “Convergence: How Five Trends Will Reshape the Social Sector”, published in 2009 by Gowdy et al., reveals the emerging trends in the non-profit sector. It focuses on four tendencies such as demographics, innovations, integration and network creation, volunteers (Gowdy et al., 2009). There are no longer apparent differences between for-profit and non-profit sectors (Gowdy et al., 2009). Moreover, special attention is paid to factors that should be enhanced to develop and successfully face global challenges.
There are some differences concerning actors in the competition environment. Porter (1979) identifies new and existing competitors in the industry, companies that offer replacement products, suppliers and buyers. In contrast, the competitive environment of non-profit organizations (NPOs) has two directions and different actors. On the one hand, these organizations compete with other non-profit organizations and commercial companies to provide paid services to the population (Gowdy et al., 2009). On the other hand, there is competition between non-governmental organizations (NGOs) and other groups applying for funding from external sources, including foundations, grant-distributing organizations, commercial and government structures (Gowdy et al., 2009). NPOs should collect information about all target groups, primary beneficiaries and philanthropists (Gowdy et al., 2009). There is a clear difference that more actors are included in the non-profit sector, forming the competitive landscape.
Concerning various forces it is important to determine the competitiveness of the economic position of the company. Porter (1979) clearly stated that competition is influenced not only by direct competitors’ actions but also by the external environment’s features. According to Porter (1979), these are numerous or equal competitors, low growth rates in the industry, high fixed costs, no switching costs, and large increments in production capacity.
It also included a variety of competitors, high rates of success on several firms, and barriers to exit (Porter, 1979). The degree of threat of new competitors entering the industry depends on the existing barriers to entry and competitors’ possible reactions to these actions (Porter, 1979). Porter (1979) considers economies of scale, product differentiation, capital requirements, and cost disadvantages independent of size. It is also influenced by access to distribution channels and government policy.
Compared to the non-profit sector, its possible barriers to entering the social services market are staffing problems, particularly workers’ shortage (Gowdy et al., 2009). Gowdy et al. (2009) emphasize the importance of volunteers; furthermore, these organizations face infrastructure problems, such as a lack of premises and financial support. NPOs actively strive to build their capacity in three areas (Gowdy et al., 2009). The first is leadership and managing; the second is access to advances and technologies (Gowdy et al., 2009). Finally, it is their strategic partnership and organizational structures (Gowdy et al., 2009). There are also potential emotional difficulties for non-profit organizations’ staff against social workers’ backgrounds accustomed to dealing with human problems.
Compared to Porter, an NPO’s success depends on flexibility, technologies, efficiency, and immediate response to the problem. An essential element is innovations, the use of new mechanisms for solving the problem (Gowdy et al., 2009). The significantly lower price is the result of minimized administrative overhead; simultaneously, the labor of highly qualified specialists is often used, but they work on a volunteer basis or are partially employed (Gowdy et al., 2009). In addition, comprehensiveness and an integrated approach are essential, as long as variety and diversity.
Forces Governing Competition
Since non-profit organizations have competitors, consumers, conducting competitive analysis is an integral part of monitoring the current development. With regard to the for-profit sector, Porter (1979) identifies some factors that influence the intensity of competition between already existing companies operating in the industry. Competition strengthens as the number of actors increases and their capacity and capabilities adjust (Porter, 1979).
It becomes unstable and unpredictable when competitor differentials appear in strategies, priorities, and resources (Porter, 1979). This is similar to Gowdy et al. ‘s (2009) position as non-profit organizations perceive competition for philanthropists and volunteers, primarily with organizations with similar goals. However, as long as profit is not the primary goal, non-commercial success depends on the diversification of approach and actions and the precise formation of sustainable goals.
Commercial organizations’ main goal is to make a profit, while non-commercial organizations can engage in entrepreneurial activity in case it serves to achieve the strategic purposes. Porter (1979) claims the most vital competitive forces define the industry profitability. The strategy formulation is the solution to survive in the market (Porter, 1979). According to Porter (1979), the ultimate object of the business is to maximize profits. Companies face the need to plan their activities accurately for the long term.
Regarding the non-profit sector, there is no clear, formalized strategy in NPOs. However, these organizations should have a general idea of the directions of activity and its content. The income goals of an NPO are closely related to its work for the benefit of consumers of social support (Gowdy et al., 2009). Gowdy et al. (200) reveal income sources for NPOs inaccessible to commercial organizations, such as gratuitous donor assistance, charitable contributions of citizens, state targeted subsidies, and tax incentives. An NPO can easily be defined as an organization that does not consider making a profit as the primary goal of its activities.
Porter’s classic approach to strategy formulation in the article “How Competitive Forces Shape Strategy” remains traditional competitive policy development. It is forming a general formula for actions and goals. As long as the non-profit sector’s environment is changing, there might be a possibility that Porter’s model for the for-profit sector can be applied. Gowdy et al., in the article “How Five Trends Will Reshape the Social Sector,” reveal such trends which reflect on the marketization of NPOs. However, there are still fundamental differences at present, especially in determining goals and the mission accompanied by particular activities.
Gowdy, H., Hildebrand, A., La Piana, D. and Campos, M.M. (2009). Convergence: How five trends will reshape the social sector. The James Irvine Foundation.
Porter, M. E. (1997). How competitive forces shape strategy. Harvard Business Review, 75(4), 1–10.