HOW NONPROFIT ORGANIZATIONS FIGHT OFF COMPETITION
By Barry D. Friedman, Ph.D.
A. Nonprofits as Economic Organizations
The halo that appears to float over nonprofit institutions--providing them with an aura of altruism--distracts attention from the basic fact that nonprofits are, first and foremost, economic institutions. Herrington Bryce writes:
. . . [T]he most fundamental change in perspective that is needed to improve the management of nonprofits is to view them as economic institutions with the charitable missions of improving the public or community welfare, rather than as charitable institutions with charitable missions. As an economic institution, revenues must be raised and managed [sic]; costs must be identified and constrained. Whatever the mission, the organization has to pay its bills.
As an economic institution, a nonprofit operates within the broader market system and aims at earning revenues to the extent that market conditions, the nonprofit’s mission, and the law allow. . . .
Nonprofits are economic institutions because nonprofits are productive units. Such units acquire inputs or land, labor, and capital and transform them through a productive process into goods and services that have value to society.1
Similarly, Burton A. Weisbrod observes that many of the activities of nonprofit organizations are virtually indistinguishable from the activities of profit-seeking corporations.
[One] position regarding whether the private nonprofit institution is or is not socially desirable [states] that it is no different from a proprietary firm! In the nursing-home industry, one writer asserts, "The roughly 15 percent of American nursing homes classed as nonprofits are not significantly different from their profit-making (proprietary) brethren." And in the hospital industry, "there is little distinction between a for-profit institution and a not-for-profit institution."2
That the distinction between nonprofits and profit-seeking corporations has blurred is also apparent in decisions by courts and the Internal Revenue Service to confer charitable status on nonprofits that concentrate on commercial activities.
The IRS has granted charitable status to an organization specializing in making loans to minority businesses that are located in a distressed area and that are unable to get loans from regular commercial sources. Similarly, charitable status was awarded to an organization located in a rural area that made development loans to businesses unable to get loans from normal commercial sources and that were located in distressed parts of rural communities.3
Some of the better known commercially oriented nonprofit organizations include Blue Cross/Blue Shield and Underwriters Laboratories, Inc. Blue Cross and Blue Shield evolved from small, voluntary plans for prepaid medical expenses, the largest such plan founded in 1929 by Baylor University Vice President Justin Ford Kimball, in response to his observation that a large proportion of debts that went bad at Baylor’s medical facilities was associated with local schoolteachers.4 Only in recent years, as other insurance companies complained about the difficulty of competing with the tax-exempt Blue plans and--in may cases--conceded health insurance entirely to the Blue plans, have state governments exhorted Blue Cross and Blue Shield organizations to reorganize as for-profit corporations. Commercial testing laboratories that compete with Underwriters Laboratories have similarly complained about their inability to challenge UL in the marketplace because of UL’s tax-exempt advantage.5
B. The Basis for Competition
The fact that resources are scarce inevitably places every consumer of resources in competition, essentially, with every other consumer of resources. Philip Kotler and Alan A. Andreasen express the problem bluntly.
An organization-centered marketer naturally defines the competition as "other organizations like us." Yet if one begins with customers, the definition of competition can become very different. Competition, in its most basic sense, really becomes whatever the customer thinks it is. Thus, if certain customer segments think of treating a particular medical problem themselves, then that is a hospital or clinic’s competition. If a potential donor thinks that money given to the United Way is money that could have gone for a "needed" weekend ski vacation, then that vacation is the competition. If going to the symphony competes with working in the garden or having friends over for pizza in front of the TV, then those activities are the competition. If giving up drugs appears to mean giving up "the gang life," this must be addressed.6
Bryce adds that the competition that nonprofit organizations encounter does not merely resemble competition that profit-seeking entities face, but instead the competition may be more severe.
While nonprofit managers may at times be oblivious to it, they are often more exposed to competitors than for-profit firms. The capital requirements, technology, licensing, and regulations that affect the rate of entry of new firms in the for-profit market do not exist to the same extent in the nonprofit sector. To see this, list the number of organizations that cater to your different attributes such as age, sex, income, religion, political identification, job, residence ad infinitum.7
Higher education is an arena where competition has become extremely brisk. ". . . [D]emand has shrunk relative to supply, so institutions that once peacefully coexisted are now fighting among themselves for a large share of a shrinking pie."8
C. Structure of Competition
One need only retrieve her mail from the mailbox on any given day to appreciate the intensity of the competitive environment in which nonprofit organizations operate. A plethora of eleemosynary organizations solicit donations from any particular individual. Making one donation brings four other charities out of the woodwork, and the solicitations continue to multiply.
Managers of nonprofit organizations understand that the survival of the organizations depends on the managers’ ability to secure a generous constituency. Success in this arena tends to require techniques that rival the efforts of the corporate sector in terms of professionalism and determination. For example, Bryson advises nonprofit organizations "to be clear about what makes them distinctive or unique, or they . . . may find themselves at a competitive disadvantage. The world has become increasingly competitive, and those organizations that cannot point to some distinct contribution may lose out."9
Barry has described strategies that are used by many nonprofits in this competitive arena. They include:
D. Controversies Arising from Competition by Nonprofits
1. ADVANTAGES ARISING FROM TAX-EXEMPT STATUS AND OTHER CONDITIONS
Nonprofit organizations have a significant advantage over for-profit corporations and small businesses that becomes noticeable when both of them are offering the same goods and services. The advantage results from several conditions:
Bennett and DiLorenzo add:
All nonprofits are largely insulated from the competitive pressures of the marketplace because there is no bottom line, or profit motive. There are no shareholders who have a financial stake that might be threatened if the organization were poorly managed. Furthermore, the "customers" of health charities are not their principal source of revenue, as is the case with for-profit firms. Donors typically do not receive the services of the charities to which they contribute, and contributions are often given for purely emotional reasons.
Consequently, health charities often have much more latitude to engage in self-serving behavior than private, competitive businesses do, and the potential for the misuse and abuse of funds is far greater.15
The result of these conditions is that the nonprofit organization is able to charge a below-market price and still realize a surplus, while the for-profit competitor would lose money if it sells at the same price. These circumstances may be beneficial when nonprofit organizations provide "public goods" (i.e., goods or services having "positive externalities" where providing the goods or services to one segment of the population delivers benefits to other segments that are not participating in the arrangement). However, these circumstances are not particularly desirable when a nonprofit organization is providing goods and services that are already provided, or that would otherwise be provided, by profit-seeking corporations.16 Another result is that inefficient methods used by the management of a nonprofit organization do not impair the continued functioning of the nonprofit organization; the infusion of donations and free labor provide "slack" for the organization, while, in theory, profit-seeking corporations can ill afford "slack." As Jack Anderson reported on February 14, 1992, "the United Way board ‘took a resounding vote of confidence’ for United Way President William Aramony" as reports circulated about how the organization’s headquarters was draining $30 million out of the annual nationwide collections of $3 billion and providing "perks" to "double-dipping executives." Hawks reports:
[The new 10-story headquarters of the American Association of Retired Persons on K Street in Washington, D. C.]--leased for approximately $16 million a year--has been dubbed the Taj Mahal by neighbors. Described by the architectural critic of the Washington Post as "a knockdown surprise," the building boasts a turret, a start-of-the-art radio and TV broadcast studio, a marble lobby, and office lights operated by motion sensors. The building is filled with stained-glass windows, dozens of mahogany bookcases (reported cost: $1,800 each), and other furnishings that cost the seniors organization $29 million when the building opened in 1990. That same year, AARP spent $14 million on programs aimed directly at assisting poor and indigent Americans aged fifty and older.17
The industriousness of the Girl Scouts organization in the sale of cookies is legendary. In 1995, the Girl Scouts sold more than 180 million boxes of cookies with tax-free revenue of $420 million. More than $370 million was confiscated by the national organization for "operating expenses." Hawks reports:
The cookie sale is the pinnacle of the organization’s national fund-raising efforts--measures that support more than four hundred staffers at the headquarters of the Girl Scouts of the U. S. A. on Fifth Avenue in New York, $127 million in total assets, and a $35-million surplus in 1995.18
The advantages disturb business executives and proprietors. "Nonprofit groups have cultivated these competitive strengths for many, many years, and they have launched a deliberate assault on tax-paying, for-profit businesses," said Kenton Pattie, executive director of the Business Coalition for Fair Competition. The criticism arises from "food-service outlets, testing laboratories, bookstores, computer dealers, travel agencies, tour companies, recreation centers, plant nurseries, day-care centers, hearing-aid technicians, veterinarians, blood banks, consulting engineers, medical-equipment suppliers, pencil manufacturers, specialty advertisers, hotels, printers, construction companies, laundries, janitorial services, waste haulers, and electrical, plumbing, heating, and air-conditioning contractors." More than 1000 delegates to a 1995 White House Conference on Small Business adopted a resolution asking the president and Congress to "enact legislation that would prohibit government agencies and tax-exempt and antitrust-exempt organizations from engaging in commercial activities in direct competition with small businesses."19
2. ACQUISITION OF INFLUENCE THROUGH LOBBYING AND GOVERNMENT REGULATION
Many nonprofit organizations have set into motion an interesting vicious circle, in which they lobby the government for funds and then use some of the funds to lobby the government for more funds. Officially, using federal subsidies to lobby and to engage in other forms of political activity is illegal. However, in so far as money is fungible, it is feasible for a nonprofit to claim to use the federal money for charitable purposes and other money for lobbying without impairing the organization’s ability to do whatever it wishes. In 1997, Republican members of the U. S. House of Representatives complained, according to a report in The New York Times, "that eight groups, including the American Association of Retired Persons, the United Auto Workers, and AFL-CIO and the Sierra Club [sic], received $99.9 million in federal grants in 1994, then spent $5.5 million ‘attacking Republican members and lobbying against GOP legislative proposals.’" Early in 1977, the House passed a "Truth-in-Testimony" rule that would require organizations that receive government funding to disclose the arrangement whenever it testifies before Congress.20
Nonprofit organizations have sought legislation from Congress and state legislatures and decisions by federal and state officials to limit the activities of competitors. The American Cancer Society, for example, persuaded Pennsylvania Attorney General Ernie Preate Jr. to sue the Cancer Fund of America with the accusation that it was confusing donors.21
Another strategy used by nonprofit organizations is to arrange for regulatory agencies to obstruct the entry and involvement of competitors. An effective approach is to prevail upon the agency to obstruct entry of competitors (e.g., through a franchise arrangement or through the denial to a hospital of a "certificate of need") on the principle that services should not be duplicated.22
Bennett and DiLorenzo describe similar efforts by health charities to secure legislation to obstruct the efforts of competitors.
In 1989, representatives of the Big Three [American Cancer Society, American Heart Association, and American Lung Association] all testified at congressional hearings that their organizations were being harmed by deceptive or fraudulent fund-raising by look-alike organizations. Clear-cut examples of deceptive fund-raising were commingled with whining about "illegitimate" fund-raising by look-alikes. "Fund-raising by the look-alike organizations . . . ought to be stopped," said Keith A. Greiner, chairman of the American Cancer Society, at the hearings. "The best interests of the public are not being served by what look-alikes do, and therefore, some legislation ought to be in order."
This blanket condemnation and call for legislation assumes that government should put all so-called look-alikes out of business. But a closer examination of some of the specific complaints made by the Big Three reveals that their claims are motivated more by a desire to have the government grant them monopoly status than to advance the cause of public health or the public interest.23
3. DISCREDITING COMPETITORS
Some nonprofit organizations compete by attempting to discredit their competitors. I was intrigued, in 1989, to hear a debate on a radio program involving Kenneth Jernigan, the late executive director of the National Federation of the Blind, and a counterpart at the American Federation for the Blind. Jernigan was clearly agitated as he denounced the competitor because it was controlled by sighted individuals, unlike Jernigan’s group (Jernigan himself was blind). Subsequently, on December 13, 1989, Jernigan wrote to me:
This will reply to and thank you for your letter of November 28, 1989, inquiring about the National Federation of the Blind. The other organization you had in mind was undoubtedly the American Federation for the Blind. This organization, located in New York City, has an endowment of probably forty million dollars. It is not a membership organization and is national only in the sense that it has regional offices and a paid staff (close to 300) throughout the country. Nominally it is governed by a board, but actually the staff runs it. As with anybody, one of their prime concerns has to be their salaries, their prestige, and other perqs.
On the other hand, the National Federation of the Blind is an organization with more than 50,000 members, having chapters in every state and most communities of any size. Members of local and state chapters are automatically members of the national body, which holds a convention each year. About 3,000 people (most of them blind) attend the annual convention. While it has a small paid staff, the organization is administered by elected officers, who receive no salary. They must find some other way to make a living.
For its part, the American Cancer Society’s Manual for Dealing with Look-Alike and Sound-Alike Organizations, submitted as evidence in congressional hearings about look-alike organizations, boasts, "No other private organization can match the reputation the American Cancer Society has earned." This manual instructs ACS employees to write letters to the editor of local newspapers that criticize organizations that compete for funds with ACS. (The manual also advises the employees to conceal their status as employees of the society.) The sample letters describe the look-alikes as "cheaters" and "flim-flam men." Joyce White, deputy managing director for administration of the American Lung Association, denounced look-alike organizations "who would deliberately mislead and deceive the American public."24
A far more extensive effort to discredit competitors has been maintained over the years by the American Red Cross, which has worked relentlessly to discredit other blood banks, especially blood banks that pay blood donors for donating. The ARC has insisted that blood from unpaid donors is safer than blood from paid providers.
Under no circumstances will the Red Cross pay blood donors. Donors who give blood for reasons other than benevolence could potentially compromise the safety of the blood supply.25
Blood banks that paid people to donate blood repeatedly insisted that there was inconclusive evidence that volunteer blood was safer than paid blood; in fact, those blood banks warned that there was more danger associated with a shortage of blood. However, the repeated insinuations by the Red Cross that volunteer blood is safer than paid blood put the paid blood banks on the defensive, and most of them disappeared because they could not compete successfully in the hostile environment that ARC had created for them.
4. APPLYING DISINCENTIVES FOR CLIENTS TO COOPERATE WITH COMPETITORS
In extreme cases, nonprofit organizations may attempt to undermine competition by creating difficulties for clients who are motivated to do business with competitors. Aaron Zitner of the Boston Globe described the lamentations of an Atlanta hospital that objected when the ARC refused to fill an emergency order for blood products.
For Gloria Lucchese, the latest skirmish with the American Red Cross came when a young woman was on an operating table and there was an unexpected need for blood. As the emergency drained the blood stocks that Lucchese maintains at St. Joseph’s Hospital in Atlanta, her staff called the Red Cross in town to ask for blood platelets--pronto.
But the Red Cross refused, Lucchese said, even though it had the platelets. Ever since St. Joseph’s had started buying much of its supply from another blood bank, the Red Cross stance was to take care of its other customers first, she said.
Once again, Lucchese thought, the business of blood had jeopardized the care of a patient. . . .
Getting blood is sometimes so problematic, Lucchese said, that Red Cross staffers had to bypass managers during the young woman’s emergency surgery March 11. After they turned down St. Joseph’s request once, she said, Red Cross staffers had the hospital say the needed platelets were for a different patient: a relative of a Red Cross employee. The agency sent blood right away, said Lucchese, the hospital’s blood bank manager.
Zitner concludes that this competition has taken on a peculiar ferocity that may imperil patients.
Founded as nonprofit social service agencies, many [blood banks] are acting more like cutthroat businesses--poaching one another’s donors, undercutting one another’s prices and shuffling alliances with hospitals in ways that some doctors believe has put patients at risk.26
E. The Alternatives of Competition and Cooperation
Bryce analyzes the options that are available to nonprofit organizations when they are confronted with competition. When two nonprofits focus on the same target market with the same product or service, such that an increase in the quantity supplied by one must come at the expense of the quantity supplied by the other, they are involved in a zero-sum game. Says Bryce, "Options may be active, passive, defensive, or aggressive." Nonprofit managers may need to anticipate and account for the consequences of counterstrategies of the other competing organizations.27
Contrarily, nonprofits operating in an environment with multiple qualified service providers may endeavor to develop a nonzero-sum game involving cooperative strategies. These strategies, involving other nonprofits or involving for-profit firms, include the following:
Co-production. Co-production refers to the cooperative involvement of multiple actors in the environment--a private or public foundation, public officials, private-sector leaders, clients, and other individuals.
. . . [T]he core of the co-production activity . . . is the interaction among the client, the private operating foundation, and nonprofit.
. . . [C]o-production brings the central producer, the nonprofit, under the influence not only of its external constraints, but under those of all co-producers.28
Transactions. A for-profit firm and a nonprofit organization may be able to develop a transaction that has financial advantages for both.
A nonprofit may use its fund-raising advantage to construct a building. It can then sell that building to a for-profit firm and rent space within the same building. The deal involves the nonprofit getting a low rent and getting back the capital it invested in the building and an additional amount of money representing a gain from the sale. The for-profit buyer gets rental income from the building from the nonprofit and other tenants. The taxes on the rental income are reduced by the deduction for interest, depreciation, and investment tax credit, when it applies. If the depreciation is sufficiently high to represent a paper loss for tax purposes, the for-profit investor is also able to shelter income from other sources from taxes. Both parties gain by utilizing their comparative advantages. These sale-leaseback arrangements are profitable for both parties when appropriately structured.29
Joint ventures. Kendyl K. Monroe identified five types of joint ventures between universities and corporations.
Partnerships. A partnership arises when a nonprofit organization and a non-profit partner establishes a separate organization to carry out a business activity. This separate organization has its own identity and staff.31
F. Conclusion
The perception that nonprofit organizations are small, fragile, and nonthreatening enterprises in an otherwise hostile economic environment conceals their actual size, power, and competitive determination. One of the theoretical assumptions of economics is that consumers have complete information. However, the mythology of the nonprofit sector and the self-portrayal by nonprofit organizations as entities motivated solely by altruism misinform the public and allow nonprofits to amass significant fortunes that are frequently used to ensure a continued flow of salary and benefits for their managers and the preservation of the managers’ power and status. In order to level the playing field, it is necessary that consumers become aware that nonprofits have real self-interests and that the rule of caveat emptor applies even more importantly to transactions with nonprofits than it does to marketplace transactions. Typically, when one engages in a marketplace transaction, one receives something tangible in return. On the other hand, most individuals conduct transactions with nonprofit organizations based entirely on faith. Such transactions are lamentable when one party is talking altruism but seeking self-interest. Who will protect generous--and gullible--donors?
NOTES
1 Herrington Bryce, Financial & Strategic Management for Nonprofit Organizations, 2d ed. (Upper Saddle River, N. J.: Prentice Hall, 1992), pp. 71‑72.
2 Burton A. Weisbrod, The Nonprofit Economy (Cambridge, Mass.: Harvard University Press, 1988), p. 24. The first embedded quotation is from Mary Adelaide Mendelsohn, Tender Loving Greed (New York: Vintage Books, 1975), p. 195. The second embedded quotation quotes Donald McNaughten, chairman of Health Corporation of America, on “The MacNeil‑Lehrer News Hour,” November 3, 1983.
3 Bryce, Financial & Strategic Management for Nonprofit Organizations, pp. 73‑74.
4 Sylvia A. Law, Blue Cross: What Went Wrong? 2d ed. (New Haven, Yale University Press, 1976), p. 7.
5 See, e.g., Weisbrod, The Nonprofit Economy, p. 119.
6 Philip Kotler and Alan R. Andreasen, Strategic Marketing for Nonprofit Organizations, 5th ed. (Upper Saddle River, N. J.: Prentice Hall, 1996), p. 54.
7 Bryce, Financial & Strategic Management for Nonprofit Organizations, p. 168.
8 Christopher H. Lovelock and Charles B. Weinberg, “Planning and Implementing Marketing Programs in Nonprofit Organizations,” in The Nonprofit Entrepreneur, ed. Edward Skloot (New York: The Foundation Center, 1988), p. 65.
9 Bryson, Strategic Planning for Public and Nonprofit Organizations, p. 78.
10 Bryan W. Barry, Strategic Planning Workbook for Nonprofit Organizations (St. Paul, Minn.: Amherst H. Wilder Foundation, 1986), cited in Bryson, Strategic Planning for Public and Nonprofit Organizations, p. 282.
11 See Weisbrod, The Nonprofit Economy, p. 109.
12 Bryson, Strategic Planning for Public and Nonprofit Organizations, p. 208.
13 Ibid., p. 212.
14 Ibid.
15 James T. Bennett and Thomas J. DiLorenzo, Unhealthy Charities: Hazardous to Your Health and Wealth (New York: BasicBooks, 1994), p. 8.
16 Bryce, Financial and Strategic Management for Nonprofit Organizations, p.208.
17 John Hawks, For a Good Cause? How Charitable Institutions Become Powerful Economic Bullies (Secaucus, N. J.: Birch Lane Press, 1997), p. 73.
18 Ibid., p. 79. Hawks relates the story of Beth Denton, a Girl Scout troop leader in West Haven, Conn., who publicly raised questions about the large proportion of proceeds confiscated by the national headquarters. “Eventually, her inquiries resulted in an investigation of the local council by the Connecticut attorney general’s office. However, Denton was ultimately drummed out of the movement for causing the stir.”
19 Ibid., pp. 95‑96.
20 “Truth about ‘nonprofit’ lobbies,” The Atlanta Journal, January 21, 1997, p. A8.
21 Bennett and DiLorenzo, Unhealthy Charities, p. 215.
22 Paul C. Nutt and R. Hurley, “Factors Affecting Capital Expenditure Review Decisions,” Inquiry (Summer 1981): 151‑164, and Paul C. Nutt and Robert W. Backoff, Strategic Management of Public and Third Sector Organizations: A Handbook for Leaders (San Francisco: Jossey-Bass Publishers, 1992), pp. 31‑32. Bryce observes that the points of access for nonprofit organizations to be stymied by regulation are multiple: “There is no pretense that some sectors of the nonprofit world have barriers to entry. Schools, hospitals, and day-care centers must meet zoning and licensing requirements, for example.” Bryce, Financial & Strategic Management for Nonprofit Organizations, p. 190 (fn. 4).
23 Bennett and DiLorenzo, Unhealthy Charities, p. 208.
24 Ibid., pp. 210‑214.
25 American Red Cross Web Site, “1‑800‑GIVE‑BLOOD – American Red Cross,” at http://www.redcrossdonor.org/donation.html .
26 Aaron Zitner, “Red Cross stirs up a backlash by competing for blood supply,” reprinted in The Atlanta Journal‑Constitution, March 24, 1996, p. 13. Zitner provided this response from the ARC: “Beth Greenberg, chief operating officer for the Red Cross in Atlanta, contested Lucchese’s version of events but would not look for records in the case. ‘Every emergency order for St. Joseph’s has always been filled,’ she said.”
27 Bryce, Financial & Strategic Management for Nonprofit Organizations, p. 169.
28 Ibid., p. 175.
29 Ibid., pp. 212‑213.
30 Kendyl K. Monroe, “Collaboration between Tax-Exempt Research Organizations and Commercial Enterprises—Federal Income Tax Limitations,” Taxes—The Tax Magazine 62 (No. 5: May 1984): 297‑316, cited in Bryce, Financial & Strategic Management for Nonprofit Organizations, p. 213, from which the five categories are directly quoted in Bryce’s words.
31 Ibid., p. 214.
********************
Presented at the
Panel on "The Changing Face of Competition" at the Southeastern Conference on
Public Administration, St. Petersburg, Florida, on October 7, 1999. An
abridged version of this paper appeared in the May 2004 edition of the PA
Times (pp. 5-6). Copyright © 1999-2004.
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