Profitability is not the goal of a non-profit organization however it should be immediately dismissed out of hand. A non-profit organization needs to ensure that it will be in a position to continue to assist the community, one, three or ten years from now. Using Porter’s Five Forces analysis tool, a non-profit organization can consider likely impacts on the industry and plan accordingly.
The Five Forces analysis, developed by Porter, is a method of determining an industry’s profitability potential through analysing the effect of buyers, suppliers, potential new entrants, substitution and industry rivalry have on industry profitability (Hubbard, 2004)
Threat of New Entrants In Non-Profit Industry
New entrants entering a market can create potential for decreased profits of current market operators however barriers to entry mitigate the chances that new entrants will diminish the current industry profitability (Porter, 2008). In terms of non-profit organisations, new entrants may mean that there is increased competition for memberships and donations which may decrease the amount of money raised by the non-profit organization.
In non-profit organizations providing human welfare services, additional entrants in the market may provide greater choice for government tenders and health insurance providers; which may result in the non-profit organization being forced into providing additional services for the same level of funding.
Suppliers to Non-Profit Industry
Powerful suppliers can force the costs of a business to increase and may make switching suppliers difficult (Porter, 2008). Porter‘s (1980) definition of supplier power includes the scenario where the supplier’s product is an ingredient for success of the buyer’s product.
Dependant on the type of non-profit organization and industry, suppliers may include government organisations and other non-profit organizations that refer clients for services; providers of goods and services such as electricity companies and telephone providers and in the case of food banks and second hand clothing suppliers may include local retailers and the general public.
An analysis of the effects that suppliers may have on the non-profit organization in the future requires an understanding of the industry pressures the supplier is under and the chances of backwards integration taking place. Backwards integration occurs when a company commences working in areas where it would normally obtain supplies, for example a restaurant deciding to purchase and operate a farm in order to supply the restaurant with produce (Johnson, Scholes & Whittington, 2005).
Impacts of Buyers in Non-Profit Industry
Buyers may impact on the profitability of an industry through requiring decreased prices or increased quality (Porter, 1980) and for non-profit organizations the term “buyers” can be defined widely to include consumers, donors, government and philanthropic funders and corporate sponsors and partners.
As with the threat of new entrants, buyers can exert considerable pressures on non-profit organizations and may create a situation where there is increased competition for the same pool of funding. Satisfaction surveys and regular communication with stakeholders are relatively inexpensive and easy methods of measuring buyer satisfaction with the non-profit organization.
Substitution of Products/Services in Non-Profit Industry
The potential for another product to act as a substitute for the industry’s product can limit the potential profits of an industry (Porter, 1980). For example home gaming consoles such as the Nintendo Wii and its Wii Fit game may be a substitute for membership at a neighbourhood sports club. Non-profit sporting organisations should consider the fact that other sports can be a substitute for their sport, for example in Australia membership to a soccer club could be substituted for membership to a rugby league, rugby union or Australian Rules Football club.
Impact of Non-Profit Industry Rivalry
As with any industry, there is competition between non-profit organizations for donors, corporate sponsorship, government grants as well as consumers. A review of the number of competitors offering similar services for example respite services for disabled elderly individuals within the community compared to the number of individuals who may require the services will provide a measure of the industry rivalry.
On a broader aspect, a count of the number of non-profit organizations in the local community compared to the number of people who regularly donate time or money to non-profit organizations can tell a group how concentrated the market is for attracting donors.
Profitability is an important consideration for non-profit organizations as non-profit organizations need to track the changes in society and industry which may impact on their ability to deliver services to the community. Porter’s Five Forces analysis, designed to analyse the profitability of an industry can be used by non-profit organizations to investigate the competition for donations and volunteers and consumers and to ensure that future impacts can be planned for and addressed.
References
Hubbard, G. (2004). Strategic Management: Thinking, Analysis & Action (2nd edition), Frenchs Forest, Pearson Prentice Hall
Johnson, G., Scholes, K. and Whittington, R. (2005). Exploring corporate strategy (7th edition), England: Pearson Education Limited
Porter, M.E. (1980). Competitive Strategy. New York, The Free Press.
Porter, M.E. (2008). The five competitive forces that shape strategy. Harvard Business Review. January 08, 1-19.
Tracey Lloyd - Based in Australia, Tracey Lloyd is experienced in management & strategic development of community projects and non-profit ...
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