Non-profits, social innovation and competitive advantage

22 December 2015 06:30 pm Views - 1927

Around 10 years ago, I interviewed the founder of an Australian non-profit organisation that was established to provide housing to the intellectually disabled children. He was a dedicated social worker who had many years of experience behind him and was passionate about the project. The project was initially started with government funding but with no more long-term funding commitments in sight, the founder was compelled to look for alternative funding models to sustain the project. 

As the founder related, “At that stage, parents of the children told me they could help finance a new housing facility but they would like to have the facility in a location close to them so that they can take care of the children, particularly those needed day-to-day parental care.” That paved the way for the Singleton Equity Housing Ltd, where the parents who invested money and the residents became the shareholders and the entity was to be managed by a board of directors with professional experience.

The new business model provided greater flexibility in accessing finances for future expansions. Their new legal status enabled them to access bank finances while continuing to receive government and other donor funding because of its social mission. This type of business model innovations, that was rare a decade ago, is now extensively evident in many entrepreneurial non-profits all over the world. 

Non-profits were founded to look after those falling through ‘the cracks of the capitalist system’ such as the poor and the disadvantaged who had no access to basic care needed in a human society. Whilst their contribution to the economy is well known today, their expertise is sought to solve global issues that are known as ‘wicked problems’ such as the effects of environmental degradation, poverty and malnutrition.  

 
Be innovative or perish!
In spite of the notable contribution non-profits make to the societal wellbeing, today they are operating in a highly competitive and constrained environment. With the ‘re-inventing government’ initiatives that started a decade ago, governments are increasingly contracting out many services and non-profits are not getting the preference in awarding these contracts as occurred before. 

On the other hand, with the proliferation of non-profits that has intensified competition for donor funding and voluntary labour, they have become resource constrained as well. All these developments force them to be competitive and entrepreneurial and most importantly be innovative in all their operations if they are to build financially viable and sustainable organisations that will continue to deliver greater social value to the targeted communities. Remember, in an economic downturn such as the last global financial crisis (GFC), they are the first to go! 

Early non-profits had their roots in religious organisations and their leaders such as mother Theresa were known for their virtuous behaviour. Today many successful non-profits are led by highly pragmatic ‘social entrepreneurs’ and non-profits are increasingly known as ‘social enterprises’.


Innovation dynamics
With their dual challenge of being innovative and financially sustainable, they have been forced to target two primary strategic areas—capital raising and the delivery of services to targeted clients—and a reflexive relationship exists between these two strategies in that if you are successful in capital raising only can you deliver more services to your targeted communities. 

This is a substantial contrast from commercial organisation where the primary focus is on satisfying customers with innovative market offerings. In a non-profit setting, customers or beneficiaries are passive recipients such as the poor and the disadvantaged. Therefore, a greater emphasis is placed on adopting innovative strategies to attract donors whose support is critical for the sustenance of enterprise. A major thrust of this strategy is to build highly visible brands that differentiate the focal non-profit from others. 

Many large non-profits with resources in hand engage in building, revitalising and repositioning their brands when there are substantial demographic shifts in their donor base. A classic example can be the Surf Life Saving Australia (SLSA), which has historically provided beach safety over 100 years. In 2003, a brand perceptions study they undertook revealed that the public value their bravery in saving lives at the beaches and perceive them as a caring organisation. In response, the SLSA launched a marketing campaign where it positioned its beach life guards as heroes that resulted in increased donor support. 
The brand image is also important to attract volunteers who provide valuable human resources to the enterprise. Large non-profits have around 14,000 volunteers who go door-knocking to collect funds such as the winter appeal annually launched by the Salvation Army Australia, which supports the poor and homeless.


Business model innovation
Most prominent development in this highly vibrant and fast-growing field is extensive business model innovation. Many non-profits today engage in for-profit type enterprises to support their social mission. For example, Social Ventures Australia has undertaken to repair the computer equipment of a large commercial bank to provide training to the young ones with low socio-economic background. 

The globally well-known Grameen Bank initiatives in Bangladesh by Professor Muhammad Yunus and SEKEM social venture in Egypt by Dr. Ibrahim Abouleish in 1977 today are multi-faceted businesses. The latter was instrumental in reducing pesticide use by 90 percent in Egyptian cotton fields and has created institutions such as schools, a university, an adult education centre and a medical centre.   


Continuous innovation
Another notable feature is that many non-profits do not stick to the same fundraising campaign every year. A good example is Mirabel Foundation, a small-scale non-profit that was founded to look after children of the drug addicted parents. As the founder Jane Rowe reflects, “If you come with an innovative successful fundraising idea this year, it will be quickly imitated by others.” Some of their highly successful campaigns in the past include participating in Melbourne comedy festival and publishing a collection of celebrity recipe cook books.


Must not lose sight of financial sustainability 
Social entrepreneurs are pragmatic leaders who want to be innovative but understand the need to work within their means. As the Mirabel Foundation founder Jane Rowe indicated, “It’s imperative … [but] there’s no point being innovative just for the sake of being innovative. You don’t have to reinvent the wheel.… We have to get the funding first. There is no way I will start a project without the money in the bank. It’s crazy!” Therefore, the need for financial sustainability is of paramount importance. 

There are many examples all over the world where entrepreneurial non-profit leaders have initiated viable funding models. A case in point is the well-known Arvind Hospital in the neighbouring India, which was founded by the dedicated eye surgeon Dr. Venkataswamy to provide eye-care services and cataract surgery to the poor at a small fraction of the cost of such services in the developed world. The proceeds received from high-income earners are used to provide free or subsidized service for those who cannot, which help the Aravind balancing financial viability and their social mission. 


Getting ready for social innovation
Innovation is the application of new knowledge to your value creating activities. Many successful social entrepreneurs who actively pursue innovative strategies acquire new knowledge from multiple sources. First of all, learning from ‘markets’, which is to gain a deeper understanding of the behavioural trends and aspirations a broader group of stakeholders, whom they wish to appeal to in their marketing campaigns, such as donors and volunteers. Some large firms periodically undertake marketing research and branding audits to monitor client perceptions about their brands. They also actively monitor what their competitors do. 

The second knowledge source is experimental learning through extensive pilot testing which is somewhat similar to research and development (R&D) in commercial organisations. As the founder of Singleton Housing related, “We bought four two-bedroom units and on a trial basis we put people with [different] disabilities in each unit, so they had their own rooms, their own house but on a block so it allowed them to be separate, but together.” 

Another critical source of knowledge is learning from your external networks. An interesting example is The Churches of Christ Care, a large aged care provider based in Brisbane. Its CEO frequently visits successful aged care organisations in Europe and the US and some years ago he visited the Virtual Retirement Community in Boston USA. This novel concept was born to address the increasing number of elders who prefer to remain in their homes instead of being herded to a retirement home complex. The new concept creates cooperative society styled network where the elderly can interact and extend mutual support -- most importantly move away from social isolation, which is supposed to be the biggest killer of the elderly! The Churches of Christ Care now trials this concept in Brisbane.    


Innovation and competitive advantage
Being entrepreneurial and innovative is the key to gaining competitive advantage. However, out of the two competitive advantages suggested by competitive advantage guru – Michael Porter, namely ‘cost advantage’ and ‘differentiation advantage’ I did not find evidence for cost advantages in non-profits. Basically cost advantages need a large volume of sales which cannot be seen in social purpose organisations. However, irrespective of the size of the organisation all not-for-profits (NFPs) actively try their best to differentiate their cause from others so that they can attract more donor support, higher volunteer participation and government funding. This is where branding and other marketing innovations matter.


Competition, collaboration and co-opetition
Whilst being competitive through greater innovation, they are also compelled to collaborate with others. For example, when the government agencies call for bids for a large variety of services in a particular region, a single non-profit organisation may not have the capacity to deliver multiple services needed. In such situations, they have to work together. There are many benefits of collaboration such as negotiate with supplier for better deals when they buy office equipment, etc. This creates a unique situation, which is known as ‘co-opetition’ (cooperative competition).

Overall, whilst non-profits or social enterprises are well positioned to play a key role in social issues that are growing every day, they must build economically viable organisations if they are to continue to deliver greater social value to their targeted communities. As observed in this article, this requires a greater entrepreneurial and innovative approach to access stakeholder support and undertake their value creating activities. 

(Professor Jay Weerawardena of UQ Business School University of Queensland Australia can be contacted at j.weerawardena@business.uq.edyu.au)