UNIT 20 STRATEGIC MANAGEMENT FOR SOCIAL ENTERPRISE

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1 UNIT 20 STRATEGIC MANAGEMENT FOR SOCIAL ENTERPRISE Unit Structure 20.0 Overview 20.1 Learning Outcomes 20.2 Introduction 20.3 The Characteristics of Strategic Decisions 20.4 Strategic Decision Making Constraints in Not-for-Profit-Organisations (NFPO s) 20.5 Successful Planning and Decision Making in NFPO s 20.6 Comparison between Profit and Non for Profit Organisations 20.7 Models of the Strategic Management Process A Comprehensive Model The Strategic Management Process Six Forces Model Donor Power Power of Funding Groups Supplier Power User Power/Buyer Power Competition from Substitute Products Relations among Existing Organisations/Competitors Risk of Entry Possibilities of New Entrants 20.8 Summary Unit 20 1

2 20.0 OVERVIEW Strategic management is about matching the organisations resources with its environment so as to meet stakeholder expectations. In this Unit, the strategic management process will be described in some detail and a modified approach to the Porter s Five Forces Model will be presented LEARNING OUTCOMES By the end of this Unit, you should be able to do the following: 1. Define strategic management in terms of resources and the environment. 2. Describe the constraints facing organisations in their strategic decision making. 3. Explain how firms can plan successfully. 4. Compare strategic planning in for-profits and not-for-profits. 5. Analyse the strategic management process in a stepwise approach INTRODUCTION Strategic Management (SM) is a major issue in the management of both organisations and voluntary sector organisations because of the nature and frequency of changes in the environment (political, economic, and social framework). SM is necessary to enable organisations to reposition themselves in anticipation of these changes. One definition of strategy according to Ruocco, 1984: A strategy is the pattern or plan that integrates an organisation s major goals, policies and action sequences into a cohesive whole Despite the existence of little empirical evidence, it is reasonable to perceive that NFPO s are only in the initial stages of using SM principles, tools and techniques. However, it may be quite true that many, if not most NFPO s are in fact following an informal process of strategic planning. In the case of NFPO s, decision makers are all too often voluntary, elected participants, who may Unit 20 2

3 view the NFPO s as a secondary focus to their daily work priority or organisation interests and in consequence may lack the time or dedication to manage effectively their secondary priority. The environmental context and changes taking place within that context, to a large degree, determines the perception of the strategic problem confronting organisations at a specific point in time. (Rippon, A.E, 2002). Planning in a changing environment requires some flexibility in adapting continually to changes in legislation, economic downturns and social/technological changes. Different people can perceive these changes differently, however, and take different sets of decisions and directions THE CHARACTERISTICS OF STRATEGIC DECISIONS Before attempting to define strategy, it is necessary to identify the characteristics of strategic decisions. Strategic decisions are concerned with the scope of an organisation s activities. The scope of activities of the Mauritius Wildlife Foundation includes protection of the flora and fauna that are endangered. Has to do with the matching of the activities of an organisation to its environment. NGO s relate their activities with the needs of society. Organisations have to match opportunities with their resource capabilities. PILS may wish a community outreach programme but can lack the required number of volunteers. Strategies are likely to affect operational decisions. Strategy of an organisation will be affected by values and expectations of those in power. If donors are in power, they can influence the NGO to concurrently campaign for their buildings. Strategic decisions will affect the long term direction of an organisation. Unit 20 3

4 This brings us to a comprehensive definition of strategy: Strategy is the direction and scope of an organisation over the long term: ideally, which matches its resources to its changing environment, and in particular its markets customers or clients so as to meet stakeholder expectations". (Johnson, G. & Scholes, K.) Activity 1 Define the Market of Befrienders (Mauritius) STRATEGIC DECISION MAKING CONSTRAINTS IN NOT FOR-PROFIT ORGANISATIONS (NFPO s) NFPO s are often faced with a number of constraints which impede strategic thinking and decision making. - The NFPO often lacks clear cut performance criteria (such as profit). - It may have divergent goals and objectives, for example, paid employees and volunteers may have different levels of motivation. Unit 20 4

5 - NFPO services are difficult to measure, for example, service and, therefore, different objectives in NFPO s being free, beneficiaries rarely judge service quality. - Given the difficulty in measurement (e.g. of performance), delegation of decision-making authority is hampered. - Ambiguous goals give room for internal politics. Volunteers may have personal agendas that clash. - There is a heavy dependence on outside sponsors who can exert power over the NGO and influence decisions. - Volunteers are difficult to motivate given the absence of reinforcement factors like rewards and punishment. Being given the constraints mentioned above, it would seem that since outputs are harder to measure than inputs, NFPO s tend to focus on inputs and processes rather than on output. This lacks sustainability because at some moment in time, the NFPO will have to show accountability to sponsors SUCCESSFUL PLANNING AND DECISION MAKING IN NFPO S While it is recognised that NFPO s are more complex to manage than businesses, it is also realistic to believe that strategic management principles, tools and techniques can be applied to their decision-making processes. Success can be achieved in strategic management, for instance, through: - selection (or democratic election) of a dynamic and proactive leadership with expertise and vision. A democratically elected leadership will have the legitimacy required to implement its vision. - Group interest will take precedence over personal interest in a team approach, downplaying individual objectives. This can be achieved by the establishment of shared objectives with stated performance targets. These could be managed by a professional administration and Unit 20 5

6 management through a dedicated team success can then be sustained by putting into place motivation schemes for stakeholders. - Success will be further consolidated through discipline by setting up rules and regulations and if possible proper Codes of Conduct/Ethics COMPARISON BETWEEN PROFIT AND NON FOR PROFIT ORGANISATIONS Businesses produce more or less tangible goods and services according to customers needs, wants and desires. These are sold to them for a profit. The success of the operation depends on the Quality of the product/service, the perceived price and service level provided (including after sales). These processes critically depend on efficiency and effectiveness of management functions such as Marketing, Human Resource Management, Financial Management, etc. Non profit organisations normally receive sponsorship in advance for a number of intangible services offered to recipients. Sponsors may elect or not to participate in the distribution of services. However, the basic organisation principles do apply, but in a slightly different manner to NFPO s. Financially, NFPO s have to manage sponsors contributions and cash-flow creates reserves from surplus (profit equivalent) to finance growth and rise in operational costs. The more we agree that NFPO s have to be managed with more or less the same principles as applied to FPO s, the more we should be convinced that strategic management is essential for the success and sustainability of NFPO s. Unit 20 6

7 20.7 MODELS OF THE STRATEGIC MANAGEMENT PROCESS A COMPREHENSIVE MODEL Adapted from Scarborough et al The Strategic Management Process One of the most important tasks a leader must perform is to look ahead and then devise a strategy for meeting the challenges and opportunities the future presents. Strategic management, the best way to accomplish this vital task, is a continuous process that consists of nine steps: Step 1 Develop a clear vision and translate it into a meaningful mission statement. Step 2 Assess the organisation s strengths and weaknesses. Step 3 Scan the environment for significant opportunities and threats facing the organisation. Step 4 Identify the key factors for success in the organisation. Step 5 Analyse the competition, if any. Step 6 Create organisation goals and objectives. Step 7 Formulate strategic options and select the appropriate strategies. Step 8 Translate strategic plans into action plans. Step 9 Establish accurate controls. Step 1 : Develop a Clear Vision and Translate It into a Meaningful Mission Statement Vision: The vision touches everyone associated with the organisation employees, volunteers, sponsors, beneficiaries, and community. A vision statement addresses the questions, What do we stand for? and What do we want to become? Or in short: Who we are and Where do we want to be? Unit 20 7

8 Mission: What we plan to do to achieve our vision? It helps create an emotional bond between an organisation and its stakeholders, especially its human resource (employees and its volunteers, beneficiaries and sponsors). Any organisation has to define its desired state and destination, forming a vision of where it needs to be. Developing and defining a mission, the mere right of existence, together with setting goals and objectives has to be in harmony, not only with the organisation s values, but with its immediate environment as well. (Rippon, A.E., 2002). An organisation may have a powerful advantage, but it is wasted unless 1. The leader has communicated that advantage to the HR, who, in turn, are working hard to communicate it to beneficiaries, actual and potential. 2. Beneficiaries are recommending the organisation to their peers because they understand the benefits they are getting from it. That s the real power of a mission statement. Activity 2 Develop a Vision and Mission for an identified local NGO in the Health Sector. Unit 20 8

9 Step 2 : Assessing an Organisation s Strengths and Weaknesses Successful sustainability demands that an organisation has a strategy that is built on and exploits its strengths and overcomes or compensates for its weaknesses. Strengths are positive internal factors that contribute to the accomplishment of an organisation s mission, goals and objectives. Weaknesses are negative internal factors that inhibit the accomplishment of its mission, goals and objectives. An organisation s strengths should originate in its core competencies because they are essential to its sustainability. One effective technique for taking a strategic inventory is to prepare a balance sheet of the organisation s strengths and weaknesses. This balance sheet should analyse all key performance areas of the business human resources, finance, marketing, project development, organisation, and others. This analysis should give leaders a more realistic perspective of their organisation. Step 3 : Scanning the Environment for Opportunities and Threats Opportunities: Opportunities are positive external options that the organisation could employ to accomplish its objectives. When identifying opportunities, social entrepreneurs must pay close attention to new potential recipients. The questions to be asked are: Is there a better way to reach them? Are they requesting new service or any variation? Threats: Threats are negative external forces that inhibit the organisation s ability to achieve its objectives. Threats to the organisation can take a variety of forms, such as a government mandate regulating an NGO s activity, an economic recession, technological changes making an organisation s services obsolete, and many others. Unit 20 9

10 Activity 3 Explain how economic recessions can influence NFPO s? SWOT Analysis and Recommendations Analysis of the internal environment and external environment of the organisation presents the strategic planner with a number of Strengths and Weaknesses & Opportunities and Threats. The SWOT technique is widely used in organisations to get a quick overview of the organisation's strategic situation. The main assumption is that strategies options are going to result from matching an organisation's internal resources with its external environment. Put simply, maximising upon strengths and opportunities and minimising weaknesses and threats can be made to create a good fit. After arranging these within the TOWS matrix, a matching exercise can take place. For example, an organisation whose strength is to possess excess working capital can capture an opportunity to invest in the acquisition of the supplier chain. An NGO serving the physically handicapped and having excess capital can invest in a plant manufacturing wheelchairs. Unit 20 10

11 Activity 4 Attempt the SWOT analysis for a fictitious Diabetes Network NGO in Mauritius. The purpose of the whole exercise is to train students to develop SWOT analysis skills so that they can uncover strategic options for business ideas in a social entrepreneurship perspective. At the end of the group exercise, all students will be involved together in a matching exercise to uncover options/ideas arising. Unit 20 11

12 STRENGTHS S WEAKNESSES W OPPORTUNITIES SO STRATEGIES WO STRATEGIES THREATS - T 1. ST STRATEGIES WT STRATEGIES Unit 20 12

13 Step 4 : Identify the Key Factors for Success in the Organisation Key Success Factors: Identifying, understanding, and manipulating these factors allow an organisation to gain a sustainable advantage in its segment. Sometimes these sources of advantage are based on cost factors such as service cost, distribution cost or development cost. More often these key success factors are less tangible but are just as important, such as level of service quality, after services offered, convenient locations and others. Activity 5 (i) Give examples of after (sales) services in the voluntary sector. (ii) Identify KSF for a few organisations in the voluntary sector. Unit 20 13

14 Step 5: Analyse the Network An intelligence exercise enables organisations to update their knowledge of potential partners/collaborators: Who are your major potential collaborators and where are they located? What distinctive competencies have they developed? How do their cost structures compare to yours? Their financial resources? How do they market their services? What are their key strategies? What are their strengths? How can your organisation benefit from them? What are their primary weaknesses? How can your organisation help them? Are new service providers entering the market? An organisation can collect a great deal of information about potential collaborators through low-cost intelligence methods including the following: - Read publications for announcements from new providers. - Talk to your HR, especially field workers. - Watch for sponsorship ads. - Visit other NGO s periodically to observe their operations. - Join any association of NGO s. Unit 20 14

15 Activity 6 What are the benefits of networking? Apart form network analysis, an analysis of the microenvironment can measure industry attractiveness (see section 20.8 at end of Unit 20). Step 6 : Create Organisation Goals and Objectives Organisation s goals and objectives give targets to aim for and provide a basis for evaluating their organisation s performance. Unit 20 15

16 Goals: Goals are the broad, long-range targets that an organisation seeks to accomplish; they tend to be general and sometimes even abstract. Objectives: Objectives are more specific targets of performance. Common objectives address productivity, growth, efficiency, markets, financial resources, physical facilities, organisational structure, HR welfare, and social responsibility. Well-written objectives have the following characteristics: They are specific. They are measurable. They are realistic, yet challenging. They are timely. They are written down. Step 7 : Formulate Strategic Options and Select the Appropriate Strategies Strategy: A strategy is a road map where an organisation draws up of the actions necessary to fulfil its mission, goals, and objectives. In other words, the mission, goals, and objectives spell out the ends, and the strategy defines the means for reaching them. The plan must be action oriented. Three Strategic Options. In his classic book, Competitive Strategy, Michael Porter defines these strategies: 1. Cost leadership, 2. Differentiation, and 3. Focus. Cost Leadership: An organisation pursuing a cost leadership strategy strives to be a low-cost service provider. This strategy works well when donors are sensitive to financial efficiency and organisations can benefit from economies of scale. Unit 20 16

17 Activity 7 Give an example of a cost leader in the provision of social services. Differentiation: An organisation following a differentiation strategy positions its services in a unique or different fashion. The key to a successful differentiation strategy is to build it on distinctive competencies something the organisation is uniquely good at doing in comparison to other service providers. Common bases for differentiation include special service features, complete service lines, a custom-tailored service, extensive service or market knowledge, and the ability to build longterm, mutually beneficial relationships with beneficiaries. Unit 20 17

18 Activity 8 Name a voluntary sector organisation with such a scope. Focus: A focus strategy recognises that not all markets are homogeneous. In fact, in any given market, there are many different beneficiary segments, each having different needs, wants, and characteristics. The principal idea of this strategy is to select one (or more) segment(s); identify beneficiaries special needs, wants, and interests; and approach them with service designed to excel in meeting these needs, wants and interests. Rather than attempting to serve the total market, an organisation pursuing a focus strategy specialises in serving a specific target segment or niche that larger organisations are overlooking or Unit 20 18

19 underestimating. A focus strategy is ideally suited to very small NGO s, which often lack the resources to reach a national market. Activity 9 Identify a few such small service providers and their markets. An effective strategic plan identifies a complete set of success factors financial, operating, and marketing that, taken together, produce a sustainable advantage for the organisation. Step 8 : Translate Strategic Plans into Action Plans Unit 20 19

20 Implement the Strategy. To make the plan workable, organisations should divide the plan into projects, carefully defining each one by the following: Purpose: What is the project designed to accomplish? Scope: Which areas of the organisation will be involved in the project? Contribution: How does the project relate to other projects and to the overall strategic plan? Resource requirements: What human and financial resources are needed to complete the project successfully? Timing: Which schedules and deadlines will ensure project completion? When putting their strategic plans into action, organisations must exploit all the advantages of their size by: - Responding quickly to beneficiaries needs. - Remaining flexible and willing to change. - Continually searching for new potential market segments. - Remaining entrepreneurial and willing to take risks. - Constantly innovating. Step 9 : Establish Accurate Controls Controlling the Strategy: Planning without control has little operational value. Controlling projects and keeping them on schedule means that the organisation must identify and track key performance indicators. Accounting, project development, project management service delivery, inventory, and other operating records are primary sources of data the leader can use for controlling activities. For example, on a customer service project, performance indicators might include customer complaints. The strategic planning process does not end with the nine steps outlined here; it is an ongoing procedure. With each round, he or she gains experience, and the steps become much easier. It teaches project leaders (and teams) a degree of discipline that is important to their organisation s survival. It helps them to learn about their organisation, its environment, and, most important, its beneficiaries. Unit 20 20

21 Many opportunities are ignored or go simply undetected because decision makers and managers are voluntary and often either attend meetings without preparation or are actually absent due to primary commitments. This eventually affects the long term sustainability of NFPO s. A strategic approach to SM in NFPO s may encompass rethinking the roles and functions of their leaders, being given that SM is critically dependent upon a visionary leadership. One of the first steps may be to convince stakeholders that SM is as important in non for profit organisations as in business Six Forces Model For-profits usually use the Porter s Five Forces Model for the purpose of measuring Industry attractiveness. An adaptation for the Non profits has been proposed by Sharon. M. Oster (1995). The Microenvironment of an organisation is best described by the Six Forces Model after Michael Porter (an adaptation by S. Oster, 1995). Unit 20 21

22 Six Forces Model Risk of entry by potential competitors Bargaining power of suppliers Rivalry Among Established Organisations Bargaining power of buyers/users Power of funding groups Risk from Substitute products An industry is a group of organisations offering products or services that are close substitutes for each other, that is, products or services which satisfy the same needs. Unit 20 22

23 Activity 10 Identify a set of substitute products/services in the NGO sector. According to Porter, the stronger any of the forces mentioned above, the more limited is the ability of the company to reap greater profit or market share. At each step of the analysis of the different forces, the planner will identify a number of strengths and weaknesses arising from its resources and capabilities pertaining to the internal environment. From the same model, it follows that social entrepreneurs need to follow closely changes in the given competitive forces and if possible to alter any of them to their advantage. The Six Forces will now be discussed in detail. Unit 20 23

24 Donor Power Power of Funding Groups A structural analysis determines how much power the donor group has. In general, the more numerous the donors and the less average the gift size, the less power each individual donor has. One substantial donor for many organisations is the government. In the U.S, approximately 25% of all revenues of NGO s come from government. In other countries, government heavily sponsors health organisations. The more government contributes, the more it becomes a partner and the more control it has. Activity 11 Reflect on the dangers with having concentrated donors. Unit 20 24

25 From the above, one may conclude that such non profits have little power relative to government. This is not always the case. Where government badly needs NGO s to provide services as substitutes for government activities, those non profits can wield great power. Such NGO s are constantly being asked to handle new projects that no one else wants to implement. However when they do take a project, they do so on the conditions that they impose, for example. 100% funding Supplier Power Suppliers can exert power by raising their prices or by reducing the quality of the product/service they supply to the organisation. The Questions to be answered are: - How many different suppliers are there? - Does the supplier sell/provide other markets? - How important are you to the supplier? - How important is the supplier to you? Generally, the more alternative suppliers there are on the market, the less their relative power. Furthermore, when suppliers provide a number of clients, they can exert more power on any one of these clients (instead of being a dependent supplier to only one client). The relative importance to each other then become a source of power. In the case of non profits, one main concern on the supply side is the provision of labour (& volunteers). Labour expenses make up a large proportion of expenses of organisations and the price of this expense has a strong influence on the sustainability of the organisations. Quite often, the paid labour force of an NGO consists of professionals and these can exert power because they have alternative employment options. In some countries, teachers salaries can be very high as well as health care workers. Concerning volunteers, the main issue is how to motivate volunteers to join, stay and perform. Unit 20 25

26 Ability (or inability) to recruit and retain paid employees and volunteers presents both strengths and weaknesses to organisations User Power/Buyer Power Businesses whether for profit or non profits vitally need to pay attention to their customers needs and wants. The issues to consider here in terms of relative power are: - the number of buyers/users of goods and services provided for by the organisation. - whether the buyer/user has or can develop the capacity to produce the good/service himself. - how important the good/service is to the buyer/user. In the U.S, the Red Cross sells blood to hospitals. If in a given region, there is only one hospital, the individual hospital may have considerable control. This is different from a museum which has a large variety of visitors (tourists, art visitors, students, etc), where no one particular customer wields much influence. Generally, the more concentrated the clients or customers of a non profit are, the more power they can exert. One measure of concentration can be the proportion of services rendered to the top three or four clients of the organisation. The second issue mentioned above referred to whether the buyer can himself/herself end up producing the goods and services. For example, the hospitals to which the American Red Cross supplies blood may decide to resort to the threat of integrating backward, that is, get involved in the blood collection function. Thirdly, the importance of the good or service to the buyer influences the power of the buyer. If it is perceived to be very important, the buyer will invest more to make sure he/she is well treated. For example, in societies where education is perceived by parents to be important, they become Unit 20 26

27 powerful buyers in the private education market. They become still more powerful if they band together in pressure groups, whereby developing strengths. Inability to collaborate is a weakness that can be overcome by networking. In the U.S, the combined Health Appeal is an Umbrella organisation serving the American Health Association, the American Cancer Society, etc. These can jointly pose a threat that none alone can count on its own Competition from Substitute Products In business, substitutes can be disposable diapers for cloth, air conditioners for fans etc. The availability of substitutes is determinant in the organisation s ability to ask for fees for its goods/services and capacity to raise donations to cover its overhead costs. For example, United Way (US) capitalises on workplace solicitation which can be substituted by solicitation at home or direct mail fundraising. Readily available substitutes negatively affect the organisation s ability to attract and motivate donors or clients and is considered a weakness Relations among Existing Organisations/Competitors The first issue in industry analysis is to identify the other organisations, currently in the market and to assess their characteristics (e.g. strengths and weaknesses). Similarly, as in any business, the market attractiveness decreases with the number of competitors. However, the more diverse are the competitors in their product/service offering, the more the market becomes attractive. Such markets offer more coordination/networking opportunities and avoid head to head competition. Diversity allows organisations to specialise in particular niches. Unit 20 27

28 Activity 12 Identify a few NGO s specialising in niche markets in Mauritius. The above statement, however, does not preclude that organisations competing on the same market cannot cooperate. Administrators of special needs schools can meet to discuss pedagogical issues and share resource persons (as Universities do). On a larger scale, relief organisations like Save the Children and Oxfam often cooperate in airlifts of food for regions in disaster conditions. Identifying weaknesses is an important preliminary step in a strategy to overcome same and to develop strengths from hitherto perceived weaknesses. At the end of this part of industry analysis, the organisation is in a position to assess its relative strengths and weaknesses and to discover areas of collaboration. Unit 20 28

29 Risk of Entry Possibilities of New Entrants At this level of analysis, one concentrates on assessing what competitors are potentially willing and able to enter the market and what their characteristics are. A common reference in business is the barriers to entry. If barriers are high, new entrants will have difficulties entering the market. One major entry barrier is reputation. Organisations gain reputation by engendering trust in donors and clients/customers. Older, well established organisations may have an advantage here. Another entry barrier is the access to distribution channels. In the U.S, United Way has a priviledged access to corporate payrolls. Similarly, relief projects that work through religious organisations have an advantage because they can use the distribution network of religious associations throughout the country. Thirdly, being able to benefit from economies of scale can provide a formidable barrier to entry. Economies of scale arise when an organisation can reduce costs, for example, by expanding the scale of operations. Large community based schools can spread the costs of a library while small schools may not even be able to bear the costs for only a small number of students. Similarly, larger health care NGO s can have access to medical high tech equipment since they can spread the costs over a large number of users. Lastly, government regulation can limit entry in certain areas. For example, in the U.S, government has given the Red Cross monopoly in blood collection in many localities. In other countries, government may restrict fundraising, for instance, from specific donor countries/agencies due to geographical reasons. Height of Entry barriers can therefore present further examples of strengths and weaknesses for organisations. Unit 20 29

30 Internal Analysis is the first part of full analysis of the organisation environment and results in half of the SWOT Analysis (i.e. strengths and weaknesses). External analysis gives rise to the opportunities and threats part SUMMARY A strategic management approach for NFPO s can assist in professionalising these organisations in their mission to uplift the community while remaining cost-effective. In this era of fast changing environments, NFPO s can survive and thrive only if there is total commitment by decision makers (and stakeholders) to a strategic approach to management, in a shared vision of the organisation goals and objectives. Unit 20 30