The not-for-profit sector which is a subset of the civil society plays a crucial role in the economy. Its structure and institutional existence does not only act to bridge gaps left by the activities of the government and private sector players but also serve as a regulator of their functions. The non-profit sector‘s non-profit seeking tendencies and its inclination voluntary justify it being referred to as the voluntary sector. This non-profit seeking tendency also calls for a different management approach. Kong (2007) states that the conventional strategic management approaches include but are not limited to resource-based view (RBV), industrial organization (IO), balanced scorecard (BSC), and intellectual capital (IC). All these strategic management approaches can be used in both profit and non-profit sectors and yield different results. The intellectual capital (IC) strategic management approach is not only a general strategic management tool but a unique strategic planning conceptual framework that is most suitable for non-profits.
An Assessment of the Applicability of the Five Strategic Management Approaches to the Non-Profit Sector
Industrial Organization (IO)
The industrial organization approach emphasizes on determinants of organizational performance that are perceived to be external to an organization. Organizations that choose to implement the IO strategy are supposed to pick an industry and then position themselves in that industry through either the low cost or product differentiation strategy (Kong, 2007). The IO strategy is, therefore, inappropriate for the nonprofit sector for it would induce NPO’s to demonstrate using one of the two generic on approaches how different their services are from those of their competitors. The primary justification for such a demonstration of differentiation would be the need to convince donors that they deserve to be allocated more resources.
Such an occurrence would be counterproductive in the nonprofit sector for it would result in the creation of a hierarchy in the NPO sector. Such a hierarchy would stimulate competition and in the long run compromise the amorphous goal of NPO’s which is offering intangible services. It is prudent that the success of NGO’s is not measured financially by looking at how closely they stick to their budgets but from a social perspective whereby the impact of their operations is considered (Bhatti & Zaheer, 2014). The IO approach is thus not appropriate for non-profits.
Resource-Based View (RBV)
RBV is also referred to as the core competency-based approach. As Kong (2007) writes, RBV focuses on the attributes that are considered costly to copy as the fundamental drivers of organizational performance. Both the RBV view and the core competency approach concentrate on the internal environment of an organization. They are criticized for their failure to clearly explain how organizations can use resources to create value and gain a competitive edge. When applied to the NPO’s context, RBV fails since it fails to consider any of the unique characteristics of these organizations (Kong, 2007). A good example of features that are ignored by the theory is the combination of volunteers and paid staff. Thus, it is not suitable for strategic management in NPO’s due to its failure to provide a full picture of NGO’s that includes the external environment.
Knowledge-Based View (KBV)
Knowledge has historically held a lot of significance as a planning resource. In the modern economy that is knowledge-based, knowledge plays a significant economic role as a resource, and organizations that can effectively utilize it prosper than their counterparts (Reddy, Krishna, & Rao, 2012). Knowledge as a resource enables organizations to combine and coordinate the utilization of other resources in new distinctive ways that allow them to provide more value for their customers and gain an edge over competitors. KBV is thus a traditional approach to strategic planning.
The main weakness with the KBV is that knowledge resources are objectively quantifiable and can be explicitly defined (Kong, 2007). KBV perceives knowledge to be similar to other physical resources that can be controlled and traded. The reality, however, is that knowledge is not easy to quantify and control due to its tacit nature. It is the main reason why most organizations invest heavily in capturing, analyzing, storing and sharing data between departments. Kong (2007) adds that the major limitation with the application of this approach to NPO’s is that this overemphasis on data leads to over-development of ICT at the expense of other services, which has a constricting effect on their growth.
Balanced Score Card (BSC)
The balanced scorecard approach helps organizations to control and utilize intellectual resources. According to Kong (2003), the BSC approach consists of four metrics to measure performance: internal process measures, financial resources measures, customer relations measures, and learning and growth measures. The balanced scorecard is distinguished from the other approaches discussed earlier by the financial and non-financial measures of the relationships among these four perspectives. The balanced scorecard approach makes it possible for an organization to bridge between its mission and strategy statements. However, despite its strengths, several weaknesses paint the BSC approach as inferior when applied in the context of non-profit organizations.
First, NPOs exist for society betterment, and their mission is thus moral as opposed to absolute. They do not have an economic motive that can be subject to a cost-benefit calculus as in the case of profit organizations (Kong, 2007). Any strategy that sacrifices mission for improvement of profit margins thus becomes untenable. Additionally, the BSC is relatively rigid for the four linked perspectives are limiting. They also do not adequately consider the external environment. The only consideration for the external environment is the customers. The problem is that the managers of NPOs focus on only the four perspectives and ignore other important elements of management (Kong, 2007).
Intellectual Capital and the NPO Perspective
The four perspective analyzed were all found to have some limitations that make them inferior and not adequate to the NPO operating environment. The intellectual capital strategy has several elements that make it suitable for NPOs. The approach focuses on the process through which an organization can improve performance and gain a competitive edge over competitors through investment in intellectual resources which include knowledge, experience, and information (Reddy et al., 2012). Intellectual capital comprises three related components that are the structural capital, human capital, and relational capital. According to Kong (2007), human capital includes all human resource elements such as talents, skills, competencies experience, skills, and innovativeness.
Structural capital, on the other hand, comprises of knowledge and learning that are utilized in the routine activities of an organization (Kong, 2007). It includes the organization culture, process manuals, routines, publications, strategies, and copyrights. It represents an organization’s knowledge reserve after the removal of all elements of human capital. Structural capital acts as supportive infrastructure for human capital.
Similarly, relational capital comprises of the processes and activities that bolster an organization’s relations with all its stakeholders that are considered external (Kong, 2007). Knowledge exchanges between the organization and its external stakeholders are also part of its relational capital. Organizations that effectively utilize their relational capital can multiply their value through a better connection with their external environment.
Through the skillful alignment and balance between the three components of IC, organizations can create the maximum value for organizations. As Kong (2003) notes, IC first emerged as a conceptual framework to be applied in the management of organizational intellectual resources. With time, it has however come to be accepted as a strategic tool due to its effectiveness and particularly in the NPO context. The intelligence capital strategy is best suited to NPOs for it enables them to adapt well to all challenges linked to the external and internal environment in which it operates.
IC further helps NPOs to focus on to intellectual resources and gain a competitive edge in the long run (Kong, 2007). Greater focus on intellectual capital and resources, as opposed to other resources, enables NPOs to squeeze the best from both paid employees and volunteers. This way, they can achieve their primary goal of service provision better. As stated earlier, NPOs do not put a lot of focus on profits but are rather driven by internal initiatives intended to fulfill community needs in a voluntary manner (Kong, 2007). In NPOs, achievement of objectives is more important, unlike profit organizations where profit is the sole language of communication.
In conclusion, several strategic management approaches can be applied to both profit and nonprofit organizations. They include the IO, KBV, RBV, BSC, and intellectual capital. The intellectual capital (IC) strategy which had initially been intended to be a framework for the management of intellectual resources has emerged to be the best strategic management tool for NPOs in general. It enables these NPOs to effectively utilize their intellectual resources while at the same time considering all the external resources.
Bhatti, W. A., & Zaheer, A. (2014). The role of intellectual capital in creating and adding value to organizational performance: A conceptual analysis. Electronic Journal of Knowledge Management Volume, 12(3), 187-194.
Kong, E. (2003). Using intellectual capital as a strategic tool for non-profit organisations. The International Journal of Knowledge, Culture and Change Management, 3. Retrieved from core.ac.uk
Kong, E. (2007). The strategic importance of intellectual capital in the non?profit sector. Journal of Intellectual Capital, 8(4), 721-731. http://dx.doi.org/10.1108/14691930710830864
Reddy, S. A., Krishna, N. S. R., & Rao, R. S. (2012). Intellectual capital: An empirical study of non-profit organizations. Journal of Contemporary Research in Management, 7(1), 1-9.