What makes a good strategy for nonprofits - Professor Jesper B. Sørensen - Stanford Business School.

1. Strategy and Industry Analysis
for Non-Profits
Professor Jesper B. Sørensen
Robert A. and Elizabeth R. Jeffe Professor of Organizational Behavior

2. 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?

3. Stanford Graduate School of Business
What is Strategy for Non-Profits?
Mission
Strategy
Organizational
Design
Social Logic
Economic Logic
Organizational
Logic

4. Stanford Graduate School of Business
Mission does not dictate strategy!
MISSION: END EXTREME POVERTY
Strategy A Strategy B
Org’n A Org’n B

5. Stanford Graduate School of Business
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

6. 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

7. Stanford Graduate School of Business
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

8. Stanford Graduate School of Business
Buyers
You as Producer
Suppliers
Willingness
to Pay
Value
Created
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?

9. Stanford Graduate School of Business
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

10. 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

11. Stanford Graduate School of Business
Willingness to Pay
Willingness to Sell
Value
Created
Price
Cost
Value
Captured
by Industry
Value Capture
Rivalry
Powerful
Buyers
Potential
Entrants
Powerful
Suppliers
Rivalry

12. Stanford Graduate School of Business
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?

13. 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)

14. 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